When companies are in their earliest stages, the founders and advisors often serve the company as shareholders, directors, and officers. However, each role has distinct responsibilities and it is important for founders to be mindful of the particular hat they are wearing at any particular moment and to observe the appropriate formalities associated with that role.
Shareholders have an ownership interest in the company. Shareholders are required to meet at least once a year to elect directors. Special meetings may be required to approve major transactions, such as selling the company or buying another company, and changes in equity incentive plans. The certificate of incorporation of the company and/or agreements may enumerate specific items that will always require a shareholder vote. Further, the bylaws may provide specific items that require a certain percentage of the shareholder vote. In some instances, Shareholders may act by written consent. Shareholder actions should be memorialized in formal, written resolutions.
Directors are members of the board of directors for the company. The directors make decisions on behalf of the shareholders for the overall benefit of the company by overseeing the company’s activities. Directors are responsible for important business decisions that include: issuing stock; incurring indebtedness; approving option grants; hiring and firing of senior executives; setting dividend policies, executive compensation, and broad goals for the overall success and direction of the company; supporting and advising executives in their duties; approving annual budgets; and ensuring that the resources of the company are well-managed.
Directors are elected by the shareholders and have prescribed fiduciary duties to these shareholders under the relevant state law. Generally, fiduciary duties include the duties of care and loyalty in fulfilling director duties. The “duty of care” requires that, as an individual makes decisions in their role as director, directors act in good faith and in the best interest of the company based on the director’s reasonable belief. The “duty of loyalty” requires that directors act in the company’s best interest and not in their personal interest. Similarly to shareholder actions, board actions should also be memorialized in formal, written resolutions or written consents. Memorializing these actions can provide evidence that the directors performed their fiduciary duties.
Officers are executives of the company who are responsible for the day-to-day operations of the company. Officers usually consist of a president or chief executive officer, vice-president, secretary, and treasurer. It is important that entrepreneurs review the corporate law of the state of incorporation to ensure that all the officer positions that are required by that state are filled. The officers are appointed by the board of directors and serve at the board’s direction. Officers should ensure that the company secures all necessary board and shareholder authorizations and that any actions taken by the company are consistent with such authorizations.
As the company grows, the roles will likely shift and the founders will cede board seats to outside investors and independent industry experts. This is the natural evolution for venture-backed companies and brings with it new insights and perspective and clearer delineations of the various roles. Shareholders and investors in the company may have concerns with how decisions are made and whether the personal interest of a director or officer is interfering with their ability to act in the best interest of the company. Founders may consider allowing the company to evolve by electing new board directors or having the board hire new officers to replace them. These new directors and officers can provide a different perspective that can help the company grow and succeed.