corporate governance for startups

Corporate Governance: What Founders Need to Know

February 20, 2020

This publication provides general guidance to startups regarding recommended corporate governance practices.  It is intended for corporations incorporated in Delaware and headquartered in California, but many of the guidelines may be generally applicable throughout the United States.

Corporate governance encompasses the system of rules, practices, and processes used to direct and manage an organization. Sound corporate governance principles are necessary to effectively operate an organization and comply with applicable laws. While public companies generally follow more robust governance practices, it is essential for private companies (even startups) to have proper systems in place to effectively operate and grow.

The ultimate responsibility for corporate governance falls to a company’s board of directors (the “Board”), which has a fiduciary obligation to act in the best interest of the company and its shareholders.  The purpose of this publication is to provide practical guidance for founders and Boards of startup companies on sound corporate governance practices.

No person should rely on the content of this article for any legal or tax advice and should consult an attorney or tax professional on any specific questions related to any individual organization.

General Corporate Governance Matters

 

  • Hold regular Board meetings (at least quarterly) where the Board:​

    • discusses matters material to the company and evaluates strategic options

    • gathers sufficient information and consults with management, advisers, and experts as and when appropriate to ensure the Board has adequate information to make informed decisions

    • ensures sufficient diligence is conducted when evaluating any major deals, contracts, new hires, investors, and other material business opportunities

    • discloses potential conflicts of interest of any directors or officers regarding any transaction or activity the company is considering

  • ​Ensure the Board approves all material actions, including:

    • ​major business agreements and transactions, including significant capital expenditures, leases, loans, or any material transaction outside of the ordinary course of business

    • grants of equity-related instruments (whether stock, options, warrants, convertible notes, SAFEs, or other convertible instruments)

    • dividends or other distributions to shareholders

    • borrowing or lending money

    • all transactions with major shareholders, directors, officers, and other “insiders” of the company

    • hiring or firing of the chief executive officer (and in certain cases other key personnel) and increases in salaries, bonuses, and other compensation

    • pension or profit-sharing transactions

    • opening of checking, savings, or other financial accounts

    • amendments to the certificate of incorporation or bylaws

    • matters requiring Board approval by the company’s organizational documents, contract, or law

  • Track material contracts and ensure compliance with outstanding and contingent liabilities

  • Maintain compliance with applicable federal, state, and local laws

  • Maintain adequate insurance, consistent with industry practice taking account of any particular circumstances of the company

  • Register and maintain good standing in each jurisdiction in which the company has a significant business presence

  • Provide proper physical and technology safeguards to protect the company’s IP and other assets

  • Maintain a minute book at the company’s headquarters with:

    • ​the certificate of incorporation and bylaws (including any amendments)

    • records of all meetings of directors and shareholders, including minutes and written consents

    • books and records of accounts

    • current capitalization table showing all authorized, issued, and outstanding equity securities, including all stock, options, warrants, convertible notes, SAFEs, and other convertible instruments

    • list of shareholder names, addresses, and number and class of equity securities held by each holder

 

Annual Corporate Governance Matters

 

  • Hold an annual Board meeting to review the company’s strategic goals, business performance, operations, budget, performance of the CEO and other executive officers, and other major matters, following the notice requirements of the company’s bylaws

  • Consider holding an annual meeting of shareholders to elect directors and discuss other major matters, following the notice requirements of the company’s bylaws

  • Review corporate policies, terms of service with customers, privacy policies, and other similar documents to ensure appropriateness with the business of the company as currently conducted

  • Review insurance, permits, and regulatory obligations related to the business of the company

  • Confirm the company is qualified to do business in any jurisdiction requiring such qualification based on the business of the company as currently conducted

Equity Matters

 

  • Ensure any equity issuances are made in reliance on applicable exemptions under federal and state securities laws

  • Maintain records of all consideration paid for any issuances of equity securities

  • Ensure any equity transfers by shareholders are made in reliance on applicable exemptions under federal and state securities laws and compliant with any transfer restrictions or rights of first refusal in the company’s articles of incorporation, bylaws, or agreements

  • Ensure any options granted are approved in accordance with a valid 409A valuation (which is generally valid for 12 months from the date of the financial statements on which the 409A valuation report is based unless there is an earlier material event that may impact the value of the company)

  • Advise shareholders to consult their tax advisers regarding filing 83(b) elections

Accounting and Tax Matters

 

  • Keep corporate funds separate from personal funds

  • Maintain proper accounting records of all transactions and consider engaging an accountant to ensure compliance with applicable accounting practices and tax obligations

  • Ensure proper payroll practices and consider engaging an outside service provider to comply with withholding and other obligations related to employees

  • File an annual report with Delaware and pay franchise taxes (see link above)

  • File an Information Statement with California and pay franchise taxes (see link above)

  • File tax returns and pay taxes due to the IRS and any applicable state agencies

Employee, Independent Contractor, and Advisor Matters

 

  • Ensure all service providers execute appropriate IP assignments and non-disclosure agreements

  • Ensure all service providers are properly classified as employees or independent contractors under applicable laws and that the company complies with applicable laws regarding such service providers (including minimum wage, benefits, and withholding obligations for employees)

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