How to Handle Changes on Your Board of Directors

Departing Directors

Board members tend to stay with companies for a relatively long time, but, like employees, sometimes it makes sense for a board member to leave.  Here is what I try to do when a board member departs:

Clear resignation

Get a written resignation that makes clear the date of resignation and also includes a resignation from any other roles with the company (officer, committee member, trustee of any benefit plan, etc.)

Indemnity Agreement

Make sure you have a signed copy of the director’s indemnity agreement. This is the agreement in which the company promises to indemnify and defend the director if he or she is pulled into a legal claim related to any decision the director made in the course of providing services as a director.

Vesting of Equity

Figure out any vesting applicable to the person—if the vesting is not crystal clear, it would be appropriate as part of the resignation letter to clarify that all vesting will cease as of that date with respect to all outstanding vesting equity.  Check if there is any acceleration of vesting that might apply to the director, or if the board wants to accelerate any of the vesting.  It is a good idea to be very clear with the person about the number of vested shares as of immediately following termination.

Exercise of Options

Check if the director has any kind of special post-termination exercise arrangement, and make sure he or she is aware of the need to exercise within the applicable window.  If the board wants to give the director more time to exercise than the typical 90 day window, they need to act quickly to do that before the period would otherwise expire.

Incoming Directors

For an incoming director, here are some things that you should consider as part of your on-boarding process:

Appointment or Election

Be sure to carefully document exactly how the director joined the board.  Make sure the board has enough authorized seats, which may require amending a voting agreement or getting a specific preferred stockholder consent if the voting agreement or the company’s certificate of incorporation includes any limitations on the size of the board. Then be sure to understand whether the board has the power to appoint the new director to fill any existing vacancy. Sometimes, the only way to get a new director on will be to have stockholders elect the person directly. In any event, it is a good idea to have the stockholders periodically re-elect the director slate.

Background Check?

Especially if you have dreams of being a public company someday, it may be a good idea to ask the incoming director to provide the type of information you will need to disclose about your directors if you ever become a public company. Your lawyer can probably get you a sample questionnaire that fits the bill. If that disclosure could be uncomfortable or embarrassing to your company, it is better to find that out earlier rather than later. If you have concerns based on the information you receive, or if you have any reason to believe you are not getting complete information, you may want to consider conducting a background check as well.

Equity Grant

Make sure you know what the equity grant is going to be.  Understand if there is going to be any sort of acceleration on a change of control (it is not unusual for an outside director to get full acceleration on a single trigger), as well as whether the person is going to be able to “early exercise” or get an extended post-termination exercise period.

Indemnity Agreement

Have the director sign the company’s standard form of indemnity agreement.  If you do not have a standard form, get one, and make sure all of the directors sign it. It is also a good idea to make sure the form indemnity agreement has been approved by the company’s stockholders.

Confidentiality

Directors have fiduciary duties that require them to keep company information confidential.  Some companies sign new directors up to advisor-type agreements, but if directors are just performing the typical tasks of a director and not also occasionally showing up to work side-by-side with the business or technical teams, you can feel comfortable skipping confidentiality and invention assignment documents for them.

Fiduciary Duties

Most directors have a pretty good understanding of their legal responsibilities.  We occasionally give them short memos on fiduciary obligations, and there are hundreds of such memos easily available from a variety of sources. Be aware, however, that such memos can come across as pedantic and not particularly helpful, since the responsibilities are easy to describe but often more difficult to apply to specific circumstances in the heat of a tough decision.

Getting Up To Speed

I find that a lot of companies want to make sure that the directors get an education about the company’s products and culture, and figure out ways to make sure that the director gets a deep understanding of the business, either through experiencing the products, participating in sales calls, visiting the offices or some other means. None of that is legally required, of course, but worth considering to make sure that the director has an accurate understanding of the business.

Being very clear about exactly who is on your board and when and how each person joined or left your board is important, and mistakes in this regard can call into question other actions and decisions of the board, so we encourage you to work with your counsel to make sure that these transitions are handled the right way.