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What are my duties as a director of my own startup?

DirectorsGovernanceCo-founders

A founder who sits on the board owes the company and its stockholders two duties. The duty of care: make decisions on an informed basis, after gathering what a reasonable director would gather, in the honest belief they are good for the company. The duty of loyalty: put the company's interests ahead of your own, which means no taking of opportunities that belong to the company, no use of its information for yourself, and disclosure of any personal interest in a decision so that the disinterested directors can decide it. A director who does both is protected by the business judgment rule: a court will not second-guess an honest, informed decision that turned out to be wrong. A director who does not can be personally liable, and the liability shield of the corporation does not cover a director's own breach.

Care, in practice

Hold board meetings, on a schedule, with a written consent or minutes for every significant decision. Read the materials before a vote. For a financing, an acquisition or a large contract, take advice and record that you did. Minutes need not transcribe the discussion, but they should show what information the board had and that it considered the question, because in a later dispute the minutes are the evidence that the process happened.

Loyalty, in practice

The founder-director's conflicts are ordinary and constant: their own salary, their own stock, a contract with a company they or a relative own, an opportunity that arrives because of the company but could be taken personally. Each one is handled the same way. Disclose it to the board, leave the room or abstain, and let the disinterested directors approve or reject it with the material facts in front of them. A one-person board cannot do that, and a sole founder-director approving their own compensation should keep it modest, document the reasoning, and expect an investor director to revisit it.

When the company is failing

When a company becomes insolvent, its creditors gain the right to bring the same claims against directors that stockholders could, so a board running out of cash has to think about creditors in the decisions it makes. Paying founders ahead of suppliers, or taking on debt the company cannot service, is where directors of failing companies get sued. That is the moment to take advice rather than to improvise.

Delaware, Nevada and Texas all apply some form of the business judgment rule, and Delaware's charter provisions and indemnification agreements let a company protect its directors from personal liability for breaches of care, though never for bad faith or disloyalty. Our state comparison covers the differences.

Written by the lawyers who built Arabella. This is legal information, not legal advice for your situation, and reading it does not make us your lawyers. For a real dispute or a high-stakes decision, talk to a licensed attorney. More questions.