After the Certificate of Incorporation and Bylaws, the next step in the formation of your technology startup involves getting all the players situated. There are two documents to get this done:
- Action by Sole Incorporator
- Written Consent of Board in Lieu of First Meeting
Action by Sole Incorporator. When forming a corporation, the incorporator starts the process by adopting the bylaws and appointing the initial directors. This is a purely administrative role just to get the board and bylaws in place. After the directors are appointed, the incorporator is never heard from again. There really isn’t much to this document. The only important item is the list of initial directors. You can have as few as one board member.
SPEEDBUMP: Keep the initial structure of the startup as simple as possible. Be careful about adding advisors or other non-founder individuals as board members from the point of formation unless it really makes sense. I think it is important to keep the board, officers and shareholders to the founders, at least initially, to allow for quick execution of documents and efficient decision making. As the startup grows, you will definitely want to bring in knowledgeable third party advisors but it is not usually necessary at the time of incorporation.
Written Consent of Board in Lieu of First Meeting. Now that we have a corporation with a board of directors, the Written Consent of Board in Lieu of First Meeting is the first document that gets the business of the startup going. Here are a few of the most common resolutions adopted by the newly appointed board:
- Appoints the officers
NOTE: Delaware requires at least a President and Secretary. This can all be the same person or 2 different people. And, obviously, you can have as many additional officers as you want. Most startups should also include some sort of Chief Financial Officer.
- Sets forth the authority of the officers (e.g. signing checks, agreements, etc.)
- Establishes the accounting year
- Establishes the principal office address
- Issues the shares creating the shareholders
After this board consent is signed we now have shareholders and the players are all set. It is important to not overlook the sequential process in the formation of the startup. I think it will give you a lot of insight into the structure of a startup. The incorporator (in a purely administrative function) sets the initial members of the board of directors. The board of directors elect the officers and authorize the number of shares issued to the shareholders. To take us full circle, the last thing to understand is that in subsequent years, the shareholders will elect or re-elect the members of the board.
Knowing this formation process should help you understand the hierarchy of power and control from one group of players to the next. The board must always approve any issuance of securities or common stock to shareholders.
However, once the shares are issued, the shareholders are at the top of the food chain because they elect or remove the board members. The board of directors is second in line because the board elects or removes the officers.
Recognizing the concept of different groups of players (i.e. board, officers & shareholders), and understanding the relationship between each group of players will help the founders better organize their technology startup.
Latest posts by Sam Wu (see all)
- Don’t Pay That Tax Bill (Until You Recalculate) : How to Calculate Your Startup’s Delaware Franchise Tax - February 24, 2017
- Day #2 : Let’s Make It Official – Hashbrown Incorporates - September 15, 2015
- Day #1 : The Launch of Hashbrown - September 1, 2015