As mentioned in the Startup Legal Checklist blog post, when an entrepreneur comes to us with eyes towards venture capital funding, we recommend incorporating as a Delaware C-Corp. The reason being, that Delaware is a management-friendly state, with plenty of case law to guide the company’s corporate governance decisions, and most investors will require the company to be a Delaware C-corp before handing over any money.
Now that you’re up and running as a C-corp, there are corporate governance formalities that must be fulfilled to keep your company’s limited liability and incorporation status. This blog post includes a brief introduction to the stakeholders that run a C-corp: (1) the officers; (2) the board of directors; and, (3) the stockholders/shareholders.
Officers.
Generally, officers of a company make up the “c-suite” and are the chief executives. These officers run the day-to-day business operations of the company. The officers are the management team that executes the business strategy set forth by the Board of Directors. Under Delaware state law, the only officers that are required include the President and Secretary. In practice, the officers that report to the Board often include the Chief Executive Officer (CEO, often also the President) and the Chief Financial Officer (CFO); however, that doesn’t mean there aren’t other important executives running the day-to-day business.
Board of Directors.
The Board of Directors are elected by the stockholders of the company and must act in the best interest of the shareholders (i.e. make profits). As mentioned above, the Board of Directors (“Board”) is responsible for setting the big picture business strategy, which the officers execute. That is not to say that the Board is not also responsible for any day-to-day operations; however, Delaware state law shields the Board from most of its decisions through the legal doctrine, Business Judgement Rule.
The Board is responsible for making major business decisions on material actions, like: adopting an annual budget; equity grants; material contracts; borrowing money; hiring and firing senior management; and, distributing dividends to stockholders. Startups should use caution on who they elect to serve on the Board and ensure that there are independent actors (i.e. not the CEO or an investor) that the startup trusts. Early stage companies get backlogged because the Board fights over logistical and mostly non-important issues. Typically, directors receive a nominal amount of equity in the startup; however, startups should use caution when assigning a salary to the Board. The money is better spent building the business!
Stockholders.
The people who own equity in the company are stockholders. Stockholders typically have the power to vote on directors; sale of the company; amendments to the governing documents; adoption of stock option plans; adoption of board indemnification agreements; and transactions in which board members have conflicts of interest. Unless a big vote comes up during the middle of the year (i.e. sale of the company), most stockholders are rather passive except for their annual proxy voting.
The below chart summarizes what a typical corporation’s decisions that Board and stockholders have the authority to vote on:
| Board Approval Required: | Stockholder Approval Required: |
| · Amend the Certificate of Incorporation
· Approval large transactions, like: sale of company, merger, sale of substantially all assets of corporation. · Appoint officers like the CEO · Issue securities · Enter into material agreements · Set compensation arrangements with officers (i.e CEO’s salary) |
· Amend the Certificate of Incorporation
· Approval large transactions, like: sale of company, merger, sale of substantially all assets of corporation. · Elect Directors · Approve stock option plans and any amendments · Permit interested director transactions (i.e. Board of Director conflict of interest) |
Thank you for reading! We hope this Corporate Governance 101 blog post provides you with a basic understanding of how corporate governance works in practice.
