Board Consents For Fundraising: Checklist For US Founders

What Are Board Consents for Fundraising?

When a US startup seeks to raise capital, the board of directors plays a crucial role in authorizing the fundraising process. Board consent is the formal approval given by the board to proceed with a fundraising activity, such as issuing new shares, convertible notes, or SAFEs (Simple Agreements for Future Equity). This approval is typically documented in written resolutions or meeting minutes, and it is a requirement for most corporations and, in many cases, LLCs.

Board consents are not just a procedural step. They ensure the board is aware of, and agrees to, the fundraising terms, the type of securities being offered, and the impact on the company's ownership structure. Without proper board approval, a fundraising round may be invalid, and the company and its officers may face legal and financial risks.

For example, under the Delaware General Corporation Law (DGCL), which governs many US startups, board approval is required to issue new shares or securities. Most other states, such as California and New York, have similar requirements for corporations. For LLCs, the operating agreement typically specifies who must approve fundraising activities. In some states, such as Texas, LLC statutes may require the consent of a majority of members for certain fundraising actions.

In addition to company law, federal and state securities laws apply. The US Securities and Exchange Commission (SEC) regulates the offer and sale of securities. Most startup fundraising rounds rely on exemptions from registration, such as Regulation D. Board consents help document that the company has considered and complied with these requirements, which is important for due diligence and future transactions.

Why Do Startups Need Board Approval for Fundraising?

Board approval is required for several reasons:

• Legal compliance: Corporate statutes like the DGCL and similar state laws require board approval to issue new shares or convertible securities. For example, if your Delaware C-corporation wants to issue Series Seed Preferred Stock, the board must approve the issuance and the terms.
• Fiduciary duties: Directors have a duty to act in the best interests of the company and its stockholders. Approving fundraising terms is part of this responsibility, as it can affect company valuation, control, and dilution.
• Corporate governance: Board oversight ensures that fundraising aligns with the company's business plan and protects existing stockholders from unfair dilution. For example, if a founder wants to raise capital at a low valuation, the board should consider whether this is fair to existing investors.
• Investor expectations: Investors typically expect to see evidence of board approval as part of their due diligence. Many venture capital firms require copies of board consents before closing a deal.

Failing to obtain proper board consent can result in:

• Invalid share issuances, which may need to be unwound or ratified later
• Personal liability for directors or officers who acted without authority
• Difficulty closing future funding rounds, as new investors may require proof of prior approvals
• Problems during an exit or acquisition, as buyers will review company records for proper consents

Some states or company bylaws may add extra requirements. For example, in California, certain transactions may require both board and stockholder approval. Always check your charter documents and consult with a qualified attorney if you are unsure.

For LLCs, the operating agreement is key. In some states, such as Florida, the default rule is that all members must consent to issuing new membership interests unless the agreement says otherwise. This can slow down fundraising if not planned for in advance.

What Should Be Included in a Board Consent for Fundraising?

A board consent for fundraising should be clear, specific, and tailored to the transaction. Key elements typically include:

• Description of the fundraising: Specify the type of securities (e.g., preferred stock, SAFEs, convertible notes), the amount to be raised, and the key terms (such as price per share, valuation cap, or discount rate).
• Approval of offering documents: Authorize the form of the subscription agreement, SAFE, or note purchase agreement. Attach drafts for the board to review.
• Delegation of authority: Name the officers or directors who are authorized to finalize and execute documents. For example, the CEO and CFO may be authorized to sign closing documents.
• Securities law compliance: Confirm that the offering qualifies for a federal and/or state exemption (such as Regulation D Rule 506(b) or 506(c)).
• Cap table update: Approve the updated capitalization table reflecting the new round and any resulting dilution.
• Other approvals: If required, note any stockholder or member approvals needed under state law or the company's governing documents.

Here is a simplified example of a board consent resolution:

For LLCs, the consent may reference the issuance of new membership interests or units, and may require the approval of a majority or all members, depending on the operating agreement and state law.

Be sure to keep signed copies of all board consents in your company records. If your company uses a board portal or electronic signature platform, ensure that consents are properly executed and stored. During due diligence for future fundraising or an exit, investors and buyers will expect to see these documents.

Checklist: Preparing Board Consents for Fundraising

Use this checklist to prepare for your next board consent:

1. Review your charter documents: Check your certificate of incorporation, bylaws, or LLC operating agreement for approval requirements. For example, does your Delaware certificate of incorporation require a supermajority for certain actions?
2. Draft the board consent: Clearly describe the fundraising, the type and number of securities, and the key terms. Use clear language to avoid ambiguity.
3. Attach offering documents: Include drafts of the subscription agreement, SAFE, or note purchase agreement for board review. This allows directors to understand the terms they are approving.
4. Confirm securities law compliance: Identify the applicable federal and state exemptions (see SEC exempt offerings overview). For example, if you are relying on Rule 506(b), confirm that no general solicitation will occur.
5. Update the cap table: Prepare a revised capitalization table showing the impact of the new round. This helps the board and investors understand dilution and ownership changes.
6. Circulate for signature: Send the consent to all directors for review and signature, using electronic signature tools if permitted. Check your bylaws for any requirements about notice or unanimous written consent.
7. Record and store: File the executed consent in your company's official records. Use a secure board portal or cloud storage with restricted access.
8. Notify stakeholders: Inform relevant officers, stockholders, and advisors once the consent is approved. For example, notify your legal counsel and update your investor data room.

For Delaware corporations, you can find more information on board actions and filings at the Delaware Division of Corporations. For California, review the California Corporations Code for any additional requirements. In New York, the Business Corporation Law may impose further notice or filing obligations.

Example: Suppose your startup is a Delaware C-corporation raising a $1 million SAFE round. The board consent should specify the number of SAFEs, the valuation cap or discount, reference the SAFE agreement, delegate authority to the CEO to sign, and confirm that the offering will be made only to accredited investors under Rule 506(b).

Common Issues and Pitfalls in Board Consents

Even experienced founders can make mistakes with board consents. Here are some common issues to watch for:

• Missing or incomplete consents: Failing to document board approval for each fundraising round can cause problems during due diligence or exits. For example, if you raised a friends and family round but never obtained board approval, you may need to ratify the action later.
• Unclear or vague resolutions: Board consents should specify the type, amount, and terms of the securities being issued. Avoid generic language that could be misinterpreted.
• Bypassing required approvals: Some transactions may require both board and stockholder approval. For example, amending the certificate of incorporation to create a new class of shares usually requires both. Check your bylaws and state law.
• Ignoring securities law compliance: Board consents should reference the applicable SEC exemption and confirm compliance with state blue sky laws. For example, some states require notice filings even if you use a federal exemption.
• Outdated cap tables: Failing to update the cap table after a fundraising round can lead to confusion and disputes. Always provide the board with an updated cap table before approving a new round.
• Improper use of electronic signatures: While electronic signatures are generally valid, some states or company documents may impose additional requirements. For example, New York law has specific rules about electronic records for corporations.
• Failure to notify stakeholders: Not informing key stakeholders, such as existing investors or legal counsel, can lead to misunderstandings or missed compliance steps.

To avoid these issues, work closely with your legal and finance advisors. Consider using a board management platform to streamline approvals and record keeping. If you discover a missing or defective consent, consult with your attorney about ratifying the action or obtaining retroactive approval.

Example: A California-based startup issued convertible notes without board approval. When a new investor conducted due diligence, they flagged the missing consent. The company had to hold a special board meeting to ratify the prior issuance, delaying the new round and increasing legal costs.

FAQs

Do all fundraising rounds require board consent?

Most fundraising rounds involving the issuance of new securities require board consent, especially for corporations. This includes equity rounds, convertible notes, and SAFEs. For LLCs, check your operating agreement. Some small or routine transactions may be covered by prior blanket approvals, but it is best practice to obtain specific consent for each round. Some states, such as Delaware, allow for unanimous written consent in lieu of a meeting, but the consent must be properly executed and filed.

Can board consents be signed electronically?

Yes, in most states, board consents can be signed electronically if your bylaws or operating agreement allow it. Electronic signatures are generally valid under the federal ESIGN Act and most state laws. Make sure your records clearly show who signed and when. Some states, such as New York, may require additional steps for electronic records, so check local rules and your company documents.

What happens if a board consent is missing or unsigned?

If a required board consent is missing or unsigned, the fundraising round may be invalid. This can cause issues with investors, regulators, or during an exit. If you discover a missing consent, consult with your legal advisor about ratifying the action or obtaining retroactive approval. Some states, such as Delaware, allow for ratification of prior defective corporate acts under Section 204 of the DGCL.

Do I need stockholder approval as well as board consent?

Sometimes. For example, issuing a new class of shares or amending the certificate of incorporation usually requires both board and stockholder approval. Check your company's charter documents and state law to confirm what is required for your specific transaction. In California, certain major transactions may require approval by a majority of outstanding shares, not just the board.

Where can I find official guidance on securities law compliance?

The US Securities and Exchange Commission (SEC) provides resources on startup securities and exempt offerings. For state-specific requirements, check with your state's securities regulator or consult a qualified attorney. The Delaware Division of Corporations is a good resource for Delaware companies. Many states also have online portals for securities filings and compliance information.

Key Takeaways

• Board consents for fundraising are a legal requirement for most US startups issuing new securities, whether as a corporation or LLC.
• Proper board approval helps ensure compliance with corporate law and federal and state securities regulations, and protects directors and officers from liability.
• Board consents should clearly describe the fundraising, approve the offering documents, confirm compliance with applicable laws, and address any required stockholder or member approvals.
• Keep accurate records of all board consents and update your cap table after each round. Store documents securely for future due diligence.
• Consult with legal and finance advisors to avoid common pitfalls, such as missing consents, vague resolutions, or securities law violations.

For more resources on startups or getting finance, explore our guides or contact our team. If you have questions about board consents for fundraising or need help preparing documents, reach out at (888) 449-8437 or team@sprintlaw.com. Where legal services are required, they are delivered by licensed lawyers at trusted law firm partners through the Sprintlaw platform.