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TL;DR: If you’re running a startup, you can’t just move fast and break things, at least not without board approval. Key corporate actions, such as fundraising, issuing stock, hiring executives, granting stock options, or selling the company, legally require board review and sign-off. Understanding when board approval is needed can help you avoid lawsuits, investor backlash, due diligence roadblocks and costly delays.
What Needs Board Approval?
- Issuing or selling company stock
- Financing transactions (debt or equity)
- Hiring C-level executives
- Granting stock options or bonuses
- Amending bylaws or incorporation documents
- Selling the company or major assets
- Entering significant contracts or leases
- Forming subsidiaries or joint ventures
- Related party transactions
- Adopting budgets and benefit plans
- Dissolving the company
As a founder, you wear many important hats, but one of the most overlooked roles is that of corporate fiduciary. A key aspect of your fiduciary duties is knowing when board review and approval are required for significant business decisions.
Good corporate governance isn’t just a legal formality. It helps protect your startup, build investor trust, and keep you and your startup out of legal trouble.
Your Board of Directors plays a crucial role in providing oversight, safeguarding your startup’s long-term interests, and ensuring that decisions comply with laws, policies and fiduciary duties. Some actions and decisions simply cannot move forward without a formal board resolution.
Keep your startup on track by following these recommended board practices.
What Types of Decisions Require Board Approval?
While specific requirements may vary based on your bylaws and jurisdiction, here are some common corporate actions that typically require formal board approval:
- Issuing, selling or granting securities
- Engaging in a financing transaction (debt or equity)
- Hiring C-level executives and senior staff
- Issuing an equity incentive or stock option award
- Amending key corporate governance documents, like the Certificate of Incorporation and the Bylaws
- Selling the company, whether it is a merger transaction or the sale of all or a significant portion of the company’s assets (even exploratory talks with potential buyers should be reported to and approved by the board before signing anything)
- Distributions or dividends to stockholders (not typical for early-stage companies, but critical to flag if your startup is profitable and contemplating a cash payout)
- Big business deals, such as executive compensation packages, long-term office leases, licensing IP, commercial contracts or exclusive deals to a third party
- Creating a subsidiary or joint venture
- Related-party transactions with executives or Board members (e.g., hiring your co-founder’s consulting firm or leasing office space from a board member’s company)
- Adopting or amending the company’s annual budget
- Employee bonus or sales commission plans
- Employee retirement, health and benefit plans
- Winding up or dissolving the company
Although your company may not encounter all of the above situations, it is essential to understand when board approval is required and to step in and ensure proper corporate governance.
Founder Tip 1: If you are not sure whether something needs board approval, then ask yourself: “Would this decision affect the company’s structure, investors, intellectual property, business prospects, key hires or finances?” If yes, then it likely belongs on the board’s radar and should be presented to the board for review and, as needed, approval.
How the Board Approval Process Works
The board approval process typically involves preparing a clear proposal or memorandum that outlines the proposed action. The board meets to review the proposal, engage in discussion and vote.
If approved, a board resolution is drafted, which is a formal written record of a decision made by the board. It usually outlines:
- The specific action being approved
- The context or rationale for the decision
- The outcome of the vote
- The date and signatures from appropriate board members
Early-stage boards are often small, which can help facilitate fast decision-making and approvals if you prepare well. Always give board members the proposal (and any key background information) a few days in advance. A well-organized deck or memo focuses board review and discussion, saving time and money.
To the extent possible, especially during the early stages of your startup, we recommend seeking board approval through written consents. Transparency and deliberation remain key, but using written consents can help save time and money by eliminating many of the corporate formalities before, during and after an in-person board meeting.
Founder Tip 2: Don’t just email the written consent and hope for signatures. Walk your board through the rationale, flag any legal or financial implications, and be transparent about the risks. In this way, you will build and maintain trust among the board directors.
Can a Company Operate Without Board Approval?
Sure, you can operate without board input on minor day-to-day tasks. However, if you push forward with a financing, equity grant or major contract, without proper Board review and approval, then the oversight could:
- Void the transaction
- Trigger disputes with co-founders or investors
- Breach your charter, bylaws or stockholder agreements
- Delay funding or future deals due to governance cleanup
We’ve seen startups lose weeks (and even deals) because board resolutions weren’t properly documented or approved.
Speak & Be Heard:
Do you have doubts about whether a specific business decision requires board approval? Are you unsure about how to create effective board resolutions or enhance your corporate governance framework?
If you don’t know whether a decision needs board approval or if you need help drafting clear and legally sound board resolutions, don’t guess. We have advised hundreds of tech and biotech founders on everything from stock option grants, SAFEs, venture capital financings and mergers and acquisitions. Reach out and let’s make sure your corporate governance is as strong as the startup you’re building.
