fredlaw surge: startup board best practices and tips

John Bergstrom, Riverpoint Investments and experienced public and private company director Ryan Broshar, Managing Director of Confluence Capital Eric Madson, Shareholder, Fredrikson & Byron Kevin Spreng, Shareholder, Fredrikson & Byron

© 2015 Fredrikson & Byron, P.A.

This presentation is about boards of directors of corporations. Corporations are governed by the laws of the state in which they are incorporated and the laws of each state are different, so while some statements herein may be true for some or most corporations, they are not necessarily true for all corporations.

The statements in this presentation are general in nature and there are almost always exceptions to the rules.

References to “Organizational Documents” means Articles of Incorporation or Certificate of Incorporation, and Bylaws.


A board of directors is a creation of the law of the jurisdiction in which the corporation is formed and is comprised of one or more natural persons. In contrast, an advisory board has no basis in law and generally has no formal authority or duties.


In most cases, a board of directors oversees and directs the management of a corporation. The board does not manage the day-to-day operations of the corporation. Day-to-day operations is typically the purview of the CEO and management team.


Development Stage

Typical Total Number of Directors

Typical Mix Governance

Seed / Product / Technology / Service Development

3 – 4

Management 1 – 2 VC 1 – 2 Independent 0 – 1

Typically implemented by the board as a whole

Early Commercialization

4 – 5


Either (a) formally designate specific board members with the responsibility to lead Audit and Compensation Committee functions for the entire board or (b) establish formal Audit and Compensation Committees

Those directors responsibility for (a) or (b) should take responsibility for implementing corporate governance policies.

Late Stage Expansion 5 – 7


Establish formal Audit. Compensation, Nominating/ Governance Committees

Liquidity (IPO or Acquisition) 7 +


Name formal board Chairman/Lead Director (in IPO process)


Initially, directors are appointed by incorporator at formation. Directors are usually elected by shareholders at the annual shareholders’ meeting. A corporation’s Organizational Documents provide the details of how directors are elected. Directors are elected by a plurality of the shares (i.e., the director nominee receiving the most votes cast for an open seat is elected, even if such number of votes is less than a majority of the votes cast). In some cases, shareholders are entitled to cumulate votes in director elections. Directors can be divided into classes and their election allocated to certain separate classes or series of stock. The board can usually appoint a new director to fill a vacancy.


Ask for resignation. Term expires without re-election (often terms expire at next regular meeting of the shareholders). By vote of shareholders, unless Organizational Documents say otherwise. In Minnesota, directors elected by the board can be removed by the board.


Duty of Loyalty – directors must act in the best interest of the corporation and its shareholders and not in the interest of the director or a related party. Duty of Care –directors must act on an informed basis after due consideration of the relevant materials and appropriate deliberation with respect to the issues before them. Directors must use the degree of care an ordinarily prudent person in a like position would exercise under similar circumstances.

Duties owed to all shareholders.


Election and removal of officers Creating committees

Issuance of securities – stock, options, promissory notes Lending money or guaranteeing indebtedness of others

Distributions to shareholders

Share dividends, divisions and combinations Amendments to the Articles of Incorporation or Bylaws

Merger of corporation or a sale or other distribution of all or substantially all of the assets of the corporation


Evaluating and setting compensation of CEO

Adopting an annual budget

Adopting employee benefits plans Approving material agreements

Approving expenditures in excess of established limits or outside of approved budget


A board may appoint committees that have the authority of the board to the extent approved by the board. Common committees include:

Audit Committee

Compensation Committee

Nominating / Governance Committee


By vote of a majority of the directors present at the meetings, assuming a quorum is present (usually a majority). By written action.


Any director may call a board meeting by notice as required by Organizational Documents. Notice need not state the purpose of the meeting. Notice may be given by electronic communication if director has consented. If the date, time, and place of a board meeting was announced at a previous meeting, no notice is required. A director may waive notice.


In a start-up it should always be the CEO. The CEO should: – Set an annual schedule for meetings.

– Prepare and circulate a board presentation, including agenda at least 48 hours before the meeting.

– Establish the ground rules for the meetings, i.e., are directors permitted to check emails.


Usually lasts 2 to 4 hours

Chairman confirms presence of quorum Previews agenda and asks for comments

Approval of prior meeting minutes Other formal resolutions – option grants

CEO Update since last meeting Financial report

Operating reports

Strategic discussions Executive session

Adjourn


http://www.askthevc.com/wp/archives/tag/board-meetings-2


Generally, minutes should be short statements of fact to record the general topic of the board discussion. Formal resolutions need to be more detailed and, in some cases, should be extensive depending upon the action voted upon.


In most states, written consent must be signed by all directors.

In Minnesota, directors can take written action by the same vote that would be required to be taken at a meeting of the board, provided the corporations Articles of Incorporation so provide. In some cases, it is advisable to hold a meeting to ensure thorough discussion.

Written actions (or written consent in Delaware) generally provide background and one or a series of resolutions. See sample.


Unless a corporation’s Organizational Documents provide otherwise, the board may set the compensation payable to the directors.

Investor and employee directors generally are not compensated.

Independent directors often do receive compensation - cash and/or some form of equity award. Start-ups usually limit director compensation to equity awards in order to conserve cash. .25% to 1% per year, subject to vesting.


Any contract between the (i) corporation and (ii) a director or an organization in which the director (or his family) has a material financial interest.


Brad Feld, Startup Boards: Getting the Most out of your Board of Directors

David Teten – http://teten.com/blog/category/startup/board/

Levenshohn Venture Partners Board Governance Whitepapers - http://www.levp.com/news/whitepapers.shtml

Emerging Best Practices for Building the Next Generation of Venture Backed Leadership http://www.cgelbach.com/wp-content/uploads/2013/06/NVCA610.pdf


Form of Board Agenda Form of Minutes of Meeting of the Board of Directors Form of Written Action Form of Bylaws - Minnesota


Eric Madson 612-492-7394

[email protected]

Kevin Spreng 612-492-7395

[email protected]

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fredlaw surge: startup board best practices and tips

Small Business & Entrepreneurship