As a startup founder or executive, understanding the distinction between routine operational decisions and those that require board approval is crucial for effective governance and compliance. The board of directors plays a key role in the strategic direction of your startup, and certain decisions — deemed “material” — need their collective approval. This article delves into the difference between governance and management, what decisions are deemed material, and how to document those decisions.
As each startup is distinct, it’s important to work with counsel to identify material decisions as well as draft board consents that properly document those decisions. If you’re looking for counsel, feel free to reach out to us here.
Governance v. Management
The roles and responsibilities of the board of directors and the officers can sometimes be blurred. However, even in a startup, it’s crucial to maintain a clear distinction between board governance and officer management to ensure effective decision-making and accountability.
Board governance in a startup primarily involves setting the strategic direction, approving major business decisions, ensuring financial stability and managing risk. The board’s primary responsibility is to the shareholders, and they make decisions that will drive long-term growth and increase shareholder value. They weigh in on material actions such as securing funding, entering into large contracts or approving major shifts in the company’s business model.
On the other hand, officers manage the execution of the strategies set by the board and handle the day-to-day operations of the company. The officers, led by the CEO, are responsible for hiring staff, developing products or services, marketing, sales, customer relationships, and other operational activities. They often make decisions that deal with the immediate needs of the business and drive the tactical execution of the company’s vision.
The key difference between board governance and officer management lies in the focus and timeframe of their decisions. Board governance is centered on long-term strategic planning and ensuring the startup’s viability and success in the future. In contrast, officer management focuses on the immediate operational needs of the business, executing the board’s strategy and managing the day-to-day tasks necessary to keep the company running smoothly. Both roles are essential for the success of a startup and need to work collaboratively, with a clear understanding of their distinct responsibilities.
Material Decisions
So, what’s the difference between day-to-day operations and a material action? This will be different in each company. In general, the following actions would be considered material:
- Equity Grants. This includes issuing stock options to employees or consultants, which can dilute existing shareholders’ ownership stakes.
- Hiring or Firing of Key Executives. Decisions regarding the employment of top executives typically need board approval, as these individuals have significant influence over the company’s direction.
- Budget Approval. The board usually needs to approve the company’s annual budget and significant deviations from it.
- Major Contracts. Entering into significant contracts, such as important supplier agreements, partnership agreements or customer contracts, could have a substantial impact on the business.
- Amendments to the Company’s Governing Documents. This includes changes to the Certificate of Incorporation or the bylaws, which define the company’s purpose and operating rules.
- Fundraising and Financing. Decisions regarding fundraising rounds, the issuance of new shares, setting the terms for new stock issuance or taking on significant debt often require board approval.
- Intellectual Property. They decide on filing patents or entering into licensing agreements for key intellectual property.
- Legal Proceedings. The board typically needs to approve decisions to initiate or settle substantial lawsuits.
- Mergers and Acquisitions. Any decisions regarding a potential merger, acquisition or sale of the company must be approved by the board.
- Dissolution or Bankruptcy. They decide whether to wind up the company or file for bankruptcy protection.
As always, these are broad categories, and the specific material decisions requiring board approval may vary based on a company’s circumstances. Consultation with legal counsel can help determine which decisions are considered “material” and require board approval.
Document the Decisions
Drafting board consents to approve board activity is a crucial practice for sound corporate governance. These documents serve as a formal record of the board’s decisions, promoting transparency and accountability. They provide legal protection, offering written proof that the board has acted in accordance with its duties, and are also necessary for certain external transactions as lenders, investors or potential acquirers may require evidence of board approval.
The process of drafting board consents is typically straightforward due to the clear guidelines provided by corporate law, especially in jurisdictions like Delaware. Moreover, template consents from legal counsel should simplify the process further, allowing companies to adapt them to their specific needs.
These board consents will often come under scrutiny during future due diligence processes by investors and their legal teams. Such reviews ensure that the board has made strategic decisions legally and ethically, and in the company’s best interest. Properly drafted and maintained board consents make due diligence processes smoother and build investor confidence in the company’s governance and strategic decision-making.
Don’t neglect your board consents.
Conclusion
In conclusion, maintaining a clear distinction between board governance and officer management is crucial in a startup to ensure effective decision-making and accountability. The board’s focus is primarily on setting the strategic direction, approving major business decisions, ensuring financial stability and managing risk. On the other hand, the officers are responsible for executing the strategies set by the board and handling the day-to-day operations of the company. Material decisions requiring board approval may vary based on a company’s circumstances, but it’s essential to document these decisions to promote transparency, accountability and legal protection. By prioritizing sound corporate governance, startups can build investor confidence and increase their chances of long-term success.
