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Start-Up Board of Directors Best Practices

Discussion Leaders

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.

Notes of caution 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.


What is a board? 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.


What is the purpose of the board? 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.


How many directors should be on the board? 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)


How are directors elected? 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.


How are directors removed? 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.


What are the duties of directors?

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.


What corporate actions must be approved by the board? 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


What corporate actions should the board approve? 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


Can the board delegate decisions?

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


How does the board make decisions? By vote of a majority of the directors

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


How is a meeting of the board called? 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.


Who is responsible for calling and managing board meetings? 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.


What happens at a typical board meeting? 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


What does a typical board presentation look like? http://www.askthevc.com/archives/2012/01/macleod-the-model-board-package.html2


http://www.askthevc.com/archives/2012/01/macleod-the-model-board-package.html

What should be included in minutes of the meeting?

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.


How does a written action of directors work? 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.


Are directors compensated? 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.


What is an interested party / conflict transaction? 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.


Resources 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


http://www.cgelbach.com/wp-content/uploads/2013/06/NVCA610.pdf

http://www.cgelbach.com/wp-content/uploads/2013/06/NVCA610.pdf

Samples Form of Board Agenda Form of Minutes of Meeting of the

Board of Directors Form of Written Action Form of Bylaws - Minnesota


Contact Information

Eric Madson 612-492-7394 [email protected]

Kevin Spreng 612-492-7395 [email protected]

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