What Decisions Need Approval From Your Board of Directors?

If your company is a Delaware corporation, you need a board of directors.

Delaware law provides that the business and affairs of every Delaware corporation shall be managed by or under the supervision of a board of directors.  However, a single director is sufficient and you can serve as a director of your own company (in addition to being the founder and/or the executive officer).  As your company grows and raises capital, your board of directors should grow as well (in terms of the number of directors and their respective areas of expertise).

While the board of directors delegates to officers of a corporation (such as the president) the authority to manage “day-to-day” matters, material actions require prior board approval.

Whether a proposed action is “material” to your business (as opposed to “day-to-day”) will depend on the then current circumstances of your company.  So when in doubt, you should check with your attorney.  While there is no “one-size-fits-all” answer, for an early stage company, the following actions will almost always require prior board approval:

1. amendments to the certificate of incorporation or bylaws;
2. equity grants or transfers (whether stock, options or warrants);
3. distributions to stockholders;
4. borrowing or lending money;
5. adopting an annual budget;
6. hiring or terminating members of senior management (or amending the terms of their employment);
7. adopting employee benefit plans (401(k), profit-sharing, health insurance, etc.);
8. a sale or other distribution of all or substantially all of the assets of the company;
9. a dissolution or winding up of the company; and
10. entering into any agreements that could be of material importance to the company (intellectual property licenses, customer contracts, vendor contracts, consulting agreements, office leases, equipment leases, etc.).

Examples of “day-to-day” matters that typically would not require board approval would be purchasing office supplies, making purchases covered by a budget previously approved by the board of directors, signing non-disclosure agreements, and hiring rank-and-file employees.

It’s not that hard to follow best practices.

The board can take action by adopting resolutions at a duly called meeting of the board (which may be held in person or by video- or telephone conference) or by a written consent signed by all members of the board of directors.  So if you are the sole member of the board of directors of your early stage company, you need only create a written record of your approval of an action by the company prior to the action being taken.  Your attorney can provide you with a simple form of written consent that you can tailor based on the facts and circumstances.  However, as a general rule (and in particular for equity grants and transfers (including stocks, options, warrants)), we recommend that you at least check in with your attorney to ensure no additional corporate action or filings are required.

Don’t be penny-wise and pound-foolish.

You may be asking “what’s the big deal?”, or why should a busy entrepreneur spend valuable time on technicalities such as board approvals rather than simply paying attorneys to clean up any mistakes after your company has raised money (or otherwise generated revenue).   There are at least three reasons why this is all a “big deal.”  First, you could lose the confidence of potential investors during their diligence of your company if they conclude that you do not take corporate governance matters seriously.  After all, your future investors likely will expect to join your board.   Second, it will cost you more to have attorneys fix mistakes rather than simply avoiding the mistakes in the first place.  Finally, and most importantly, there are some mistakes that cannot be fixed, or that can only be fixed at a very high cost.