Startup legal playbook

16 foundational questions about startup boards (with answers)


  • Torys’ Emerging Companies and VC Group

Read this if: you want to set up, operate or better manage the relationship with your board of directors

You might also like: The founder’s guide to startup legal documents

Go deeper: Operating your startup

A board of directors plays an important role in a startup’s management structure. Its members provide strategic guidance and act as a sounding board for founders as they build their company. But some founders struggle at first to manage their relationship with the board. To help founders master this critical relationship, we compiled 16 questions and answers that founders frequently ask about startup boards.

1. When should a startup get a board?

Startups generally build a board at their initial round of VC financing, as it is common for lead investors to ask for seats so that they can provide ongoing guidance. Ensure you fully assess if you are comfortable with investors joining the board before accepting their term sheet. For these and other board members, review the potential value they can offer against the company’s goals to determine if they are a good fit. Board members typically bring to the table items such as industry knowledge, a strong network, or operational experience.

2. How big should a startup board be?

There is no minimum or maximum number for board members, at least in theory. However, directors should add value through their knowledge, skills, and experience and each assigned board seat should strategically add to the company. At the beginning, the board will usually consist of the founder(s)/CEO, the lead investor plus one or two co-investors, if applicable. New board seats may be requested at each new investment round, so it is important to take a deliberate approach to the makeup of your board and use that to guide discussions with existing and incoming board members. Otherwise, your board may grow too quickly or become too large, and won’t operate efficiently.

3. What is a board observer?

Observers are people who attend board meetings but do not have voting rights. As with directors, you should limit the number of observers. Significant investors may ask for a non-voting board observer right. Or, if a board member is being replaced, they may be asked to become an observer so that they can provide insight into the history of the company from an investor standpoint. Strategic investors will likely want to be privy to board discussions, particularly around any potential M&A that can impact the value of their investment. However, as there may be a conflict of interest, they may ask to observe board meetings rather than have an official board seat.

4. How often should I speak to the board?

You should consistently communicate with them. Do not limit your interactions to just board meetings. Share monthly updates about performance, financials, and overall company status. Feel free to ask board members for advice outside of scheduled meetings and solicit their input on key action items ahead of board meetings. This helps you deal with essential issues promptly and ensures board members are not caught off guard by potential problems.

5. How often should I schedule board meetings?

Meetings should take place each quarter and be scheduled three to six months in advance. Additional meetings should be planned on an as-needed basis, as far in advance as possible. If your startup is going through an important transaction, such as material financing or M&A, or is facing critical challenges, more frequent board meetings should be discussed with the directors. The amount of notice needed for a meeting should be set out in your corporation’s by-laws or shareholders agreement. This is particularly important if there will be a discussion or vote on a controversial matter.

6. What if I need an emergency board meeting?

If there is an emergency, you can schedule a meeting without following the notice requirements. While a director’s attendance at the meeting is viewed as them waiving the notice, it is recommended that you get a written waiver of notice from them, such as an email.

7. Who should attend the board meeting?

Board members, observers (if any), and founders should be in attendance. Team managers (often needed to deep-dive on topics such as product or sales) may attend the portion of the meeting relevant to their team. Directors cannot appoint a proxy to attend or vote in their place.

8. What should be discussed during the board meeting?

Sit down in advance with your executive officers and identify key issues that the board should discuss. This should include good and bad news, issues that would benefit from board advice, and items that must be approved by the board. Distribute the list of the key issues to the directors ahead of time and, if any of the key issues may be controversial, have a brief chat with individual members to see if they have concerns. Do not be afraid to be vulnerable in areas where the board can be useful, and don’t be afraid to share bad news. If the information is divisive, then it may be beneficial to call board members in advance to set expectations.

9. How do I prepare for a board meeting?

Prepare an agenda that outlines each discussion topic and allocates time accordingly. Topics should be addressed in order of highest to lowest priority. Often meetings will be split into two—with the first half focused on housekeeping and governance issues and the second portion focusing on strategy and brainstorming. You should also send a board meeting package to the directors to review at least three business days ahead of the meeting. Think about whether you need the board to approve any compensation guidelines around salary, bonus, and options. If yes, drafts of any compensation materials should also be provided (your legal counsel can help you with this) and this should be noted as a discussion item in the meeting agenda.

If you have board observers, check your relevant agreements (e.g., investors’ rights agreement, management rights agreement, side letter) to see if you should send them the same materials. Have your legal counsel take minutes during the meeting. Minutes should be a high-level summary of the meeting and should not contain any confidential information.

10. Does every board member have to be at a board meeting?

Your company by-laws or shareholders agreements will state the minimum number of voting members that should be present at each meeting. This is known as quorum. Pay particular attention to the requirements of which board members need to be present and, if a required board member is not present, when the follow-on meeting should be scheduled for. You should also confirm that the by-laws or shareholders agreement allow for meetings to be held via video or teleconference.

11. What if there are resolutions that require a vote of the directors?

Any resolutions that require a vote of the directors should be raised in the meeting and recorded in the meeting minutes (along with whether it was passed by the board). If any board member has a conflict of interest in respect of a resolution, they generally: 1) must disclose the conflict, 2) may not vote on the resolution, and 3) should leave the room when it is being discussed. The minutes should reflect that the conflict was declared and that the conflicted board member did not vote on the matter.

12. Does the board have the power to make all decisions?

No, they do not. Certain approvals are reserved for the shareholders of the company and cannot be approved by the board of directors (e.g., approving senior classes of securities, approval of board members). You should check with your legal counsel if specific decisions require the approval of certain groups of shareholders, and to confirm if the board has the right to approve all matters intended to be voted on at the meeting. If a director disagrees with a decision being made, and requests that their opinion be recorded, then it should be properly documented in the meeting minutes.

13. How should legal matters be discussed?

Do not discuss legal issues, or any potential liability of board members, with observers or non-board members. Only discuss the issues in a closed session with board members. Ensure that your legal counsel is present (to preserve privilege) and let them know about the legal issue ahead of time so they can prepare accordingly.

14. What to do after a board meeting?

Write down what went well and what could be improved in the way you ran the meeting; consider asking board members for feedback. Send minutes to all the directors shortly after the meeting for their review.

15. How can you leverage your board when fundraising?

They can help you strategize on which investors to reach out to and reach out to their networks to get warm introductions. They can also help you prepare the right fundraising story and pitch.

16. How can you replace a board member?

Replacing board members is a well-known and expected part of the lifecycle of a startup. As you continue to fundraise, you will likely come across terms that dictate what the board makeup should be to close the investment. These terms will trigger a discussion with the board.

Note that this article assumes that the corporation is governed by the Canada Business Corporations Act.

To discuss these issues, please contact the author(s).

This publication is a general discussion of certain legal and related developments and should not be relied upon as legal advice. If you require legal advice, we would be pleased to discuss the issues in this publication with you, in the context of your particular circumstances.

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