Board Consents For Fundraising: Common Founder Mistakes To Avoid

Securing funding is a major step for any US startup, but many founders are caught off guard by the legal and procedural requirements that come with issuing new shares or securities. One of the most overlooked steps is obtaining proper board consents for fundraising. Missing or mishandling this step can lead to invalid share issuances, investor disputes, delays in closing, or even legal liability for directors. This guide is designed to help US founders, operators, and small business owners understand what board consents for fundraising are, why they project, and how to avoid the most common mistakes. We will cover federal and state requirements, practical checklists, and real-world examples to help you prepare for your next fundraising round.

What Are Board Consents for Fundraising?

Board consents are formal approvals from a company's board of directors for significant actions, including issuing new shares, convertible notes, SAFEs (Simple Agreements for Future Equity), or other securities. In most US corporations, the board is legally responsible for managing the company's affairs, and any action that affects ownership or capital structure typically requires board approval.

For example, if your Delaware C-corp is raising a seed round by issuing preferred shares to investors, the board must approve the terms and authorize the issuance. This approval is usually documented in a written board resolution or in the minutes of a board meeting. The same principle applies if you are issuing convertible notes or SAFEs, which are common in early-stage fundraising.

There are two main ways to obtain board consent:

• Written consents: Directors sign a written resolution approving the fundraising. This is common for startups with small boards or when directors are not all in the same location.
• Board meetings: The board meets (in person or virtually), discusses the fundraising, and votes to approve the transaction. The approval is recorded in the meeting minutes.

Failing to obtain proper board consent can result in unauthorized share issuances, which may be void or voidable under state law. This can create problems during due diligence, future fundraising, or an exit event such as an acquisition.

Federal and State Legal Requirements for Board Consents

At the federal level, the Securities and Exchange Commission (SEC) regulates the offer and sale of securities. Most startups rely on exemptions from SEC registration, such as Regulation D (including Rule 506(b) and 506(c)), Regulation CF (crowdfunding), or Regulation A. While the SEC does not require board consents specifically, it expects that all securities are issued in compliance with state corporate law and your company's governance documents.

State law, especially the law of your state of incorporation, sets the rules for how and when board approval is required. Delaware is the most common state of incorporation for US startups, but California, New York, Texas, and other states have their own rules. Here are some key points:

• Delaware corporations: The Delaware General Corporation Law (DGCL) requires board approval for issuing shares or other securities. The board must not exceed the number of authorized shares in the certificate of incorporation.
• California corporations: California law also requires board approval and may require additional filings or notices, especially if you are issuing securities to California residents.
• New York corporations: Board approval is required, and New York law has specific notice and recordkeeping requirements for board actions.
• Texas corporations: Texas law is similar to Delaware but may have different requirements for documenting board actions and for notice to shareholders.

In addition to state law, your company's own documents may impose stricter requirements. For example, your certificate of incorporation may require a supermajority board vote for certain actions, or your bylaws may specify how board consents must be documented. Prior investor agreements, such as voting agreements or investor rights agreements, may give certain investors veto rights or require their consent for new fundraising rounds.

It is also important to remember that state securities regulators (often called "blue sky" regulators) may have their own notice or filing requirements for new securities issuances, even if you are relying on a federal exemption. Failing to comply can result in penalties or rescission rights for investors.

Example: A Delaware startup issues new shares to investors without board approval. During a Series A due diligence process, the lead investor discovers the lack of board consent. The company must scramble to ratify the issuance, obtain signatures from former directors, and file corrective documents with the Delaware Division of Corporations. This delays the closing and creates uncertainty for all parties.

Common Founder Mistakes with Board Consents for Fundraising

Even experienced founders can make mistakes when it comes to board consents for fundraising. Here are some of the most frequent errors, with practical examples and tips to avoid them:

1. Skipping board approval entirely: Some founders assume that if they control the board or have a small team, they can issue shares without formal approval. This can invalidate the issuance and create legal headaches. Example: A founder issues SAFEs to friends and family without board consent. Later, a new investor demands proof of proper approvals, and the founder must retroactively fix the paperwork.
2. Using outdated or incorrect templates: Copying board consent templates from the internet or prior deals without tailoring them to your company's structure, state law, or fundraising terms can cause confusion or omissions. Example: A founder uses a template that refers to Series A Preferred Stock, but the company is actually issuing Series Seed Preferred. This creates inconsistencies in the records.
3. Missing required signatures: Board consents must be signed by all required directors. Missing a signature can make the consent invalid, especially if your bylaws require unanimous approval. Example: One director is traveling and does not sign the consent. Later, the director disputes the fundraising terms.
4. Overlooking investor or stockholder consents: Some prior financing documents require investor or stockholder approval for new fundraising rounds. Failing to obtain these can lead to breach of contract claims. Example: A startup's Series Seed investors have veto rights over new share issuances, but the founder forgets to get their written consent before closing a convertible note round.
5. Not updating the cap table: After board approval and closing the round, founders sometimes forget to update the company's capitalization table. This leads to confusion about ownership and future fundraising complications. Example: A founder promises 10% equity to an investor, but the cap table does not reflect the new shares, causing disputes in the next round.
6. Ignoring state-specific requirements: States like California may have additional notice or filing requirements for securities issuances. Failing to comply can result in penalties or delays. Example: A California startup fails to file a required notice with the California Department of Financial Protection and Innovation after issuing new shares, leading to a regulatory inquiry.
7. Failing to check organizational documents: Some companies have certificates of incorporation or bylaws that require supermajority board or stockholder approval for certain actions. Example: A company's charter requires a two-thirds board vote for new share issuances, but only a simple majority approves the fundraising.
8. Poor recordkeeping: Not keeping signed board consents, meeting minutes, or investor consents organized can lead to problems during due diligence or audits. Example: During an acquisition, the buyer requests board consents for all prior fundraising rounds, but the company cannot locate the documents.

To avoid these mistakes, founders should develop a standard checklist for every fundraising round and review it with their legal advisor before issuing any securities.

Practical Checklist: Securing Board Consents for Fundraising

Here is a step-by-step checklist to help you secure proper board consents for your next fundraising round:

1. Review your company's governing documents: Check your certificate of incorporation, bylaws, and any investor agreements for approval requirements, voting thresholds, and notice provisions.
2. Draft a board consent resolution: Prepare a resolution that clearly states the board is approving the fundraising, authorizing the issuance of securities, and designating officers to execute related documents. Tailor the language to your specific round (e.g., Series Seed, convertible notes, SAFEs).
3. Circulate the consent for signature: Send the draft consent to all directors. If your bylaws require a meeting, schedule one and record the minutes. Make sure all required directors sign the consent or attend the meeting.
4. Obtain investor or stockholder consents if required: If prior agreements require investor or stockholder approval, circulate the necessary consents and collect signatures before closing the round.
5. Update your cap table: After closing, update your capitalization table to reflect the new ownership structure. Share the updated cap table with your board and key investors.
6. File required state notices or fees: Check with your legal advisor or state agency for any required filings, such as blue sky notices or franchise tax updates. For example, Delaware does not require a filing for each share issuance, but California may require a notice filing.
7. Organize and store all documents: Keep signed consents, meeting minutes, investor consents, and updated cap tables in a secure and accessible location. These documents will be critical during future due diligence, audits, or exits.

Following this checklist can help you avoid costly mistakes and keep your fundraising process on track.

How Board Consents Affect Future Fundraising and Exits

Properly executed board consents are not just a legal formality. They play a crucial role in your company's ability to raise future rounds, attract investors, and complete an acquisition or IPO. Here is why:

• Due diligence: Investors and acquirers will review your board consents and corporate records during due diligence. Missing or incomplete consents can delay or derail deals, or lead to price adjustments and additional legal costs.
• Clean cap table: Accurate board consents help ensure your cap table matches your legal records. Discrepancies can cause disputes about ownership, dilution, or voting rights.
• Director and officer liability: Directors who approve issuances without proper authority or documentation can face personal liability under state law. This risk is heightened if investors claim they were misled or if regulatory authorities investigate the issuance.
• SEC and state compliance: While the SEC focuses on securities law compliance, state regulators may review whether your company followed proper corporate procedures, especially if there is a complaint or audit. For example, the Delaware Division of Corporations may require corrective filings if share issuances are not properly authorized.
• Investor confidence: Well-documented board consents signal professionalism and good governance to investors. This can make your company more attractive in competitive fundraising environments.

Example: A startup is preparing for a Series A round. The lead investor requests board consents for all prior fundraising rounds. The company provides complete, well-organized documents, which helps build trust and speeds up the due diligence process. In contrast, another startup cannot produce signed consents for a prior SAFE round, leading to delays and additional legal review.

In summary, treating board consents as a key part of your company's risk management and investor relations strategy pays dividends in the long run.

Special Considerations: LLCs, Foreign Corporations, and Industry-Specific Rules

While most US startups are incorporated as Delaware or state-specific corporations, some operate as LLCs or foreign corporations, or are in regulated industries. Here are some additional considerations:

• LLCs: LLCs are governed by their operating agreement, not corporate law. The operating agreement may require member or manager approval for issuing new membership interests or admitting new members. The process is different from corporations, so review your operating agreement and consult with a legal advisor before raising funds as an LLC.
• Foreign corporations: If your company is incorporated outside the US but raising funds from US investors, you may need to comply with both your home country's corporate law and US securities law. Board consent requirements will depend on your home jurisdiction.
• Industry-specific rules: Some industries, such as financial services or healthcare, may have additional regulatory requirements for fundraising or ownership changes. For example, a fintech startup may need to notify state regulators of new investors or ownership changes.
• Multi-state operations: If your company operates in multiple states, you may need to comply with notice or filing requirements in each state where you have investors or conduct business. This is especially relevant for blue sky filings.

Example: An LLC operating in California wants to admit a new investor. The operating agreement requires unanimous member approval, but one member is unresponsive. The company cannot complete the fundraising until all members consent, delaying the process.

Founders should always review their organizational documents and consult with a legal advisor to help support compliance with all applicable requirements.

FAQs

Do I need board consent for every fundraising round?

Yes, in most cases, you need board approval for each new issuance of shares, convertible notes, SAFEs, or other securities. This applies whether you are raising from friends and family, angel investors, or venture capital. Always check your bylaws and prior agreements for specific requirements.

Can I use a template board consent from another company?

While templates can be a helpful starting point, you should always tailor board consents to your company's current structure, state law, and the specific terms of your fundraising round. Using a generic or outdated template can lead to missing key approvals or incorrect language.

What happens if I forget to get board consent before issuing shares?

If you issue shares or securities without proper board approval, the issuance may be invalid under state law. This can create legal and tax problems, especially during future fundraising or an exit. In some cases, you may be able to ratify the issuance retroactively, but this can be complicated and may require additional approvals or filings.

Are there special rules for Delaware corporations?

Delaware law requires board approval for issuing shares and other securities. Delaware corporations must also comply with their certificate of incorporation and bylaws. While Delaware is the most common state for startup incorporation, always check for any unique provisions in your company's documents or in other states where you operate.

Do LLCs need board consents for fundraising?

LLCs are governed by their operating agreement, which may require member or manager approval for issuing new membership interests or admitting new members. The process is different from corporations, so review your operating agreement and consult with a legal advisor before raising funds as an LLC.

Key Takeaways

• Board consents for fundraising are legally required for most US corporations and are a critical part of corporate governance.
• Federal securities law sets the baseline, but state law and your company's own documents determine the specific approval process.
• Common mistakes include skipping board approval, using the wrong templates, missing signatures, and forgetting investor consents.
• Keep your corporate records, cap table, and board consents organized and up to date for future fundraising and exits.
• Consult a qualified legal advisor to ensure your fundraising process meets all applicable requirements and avoids costly errors.

If you have questions about board consents for fundraising or need help preparing the right documents for your next round, contact our team at (888) 449-8437 or team@sprintlaw.com. Where legal services are required, they are delivered by licensed lawyers at trusted US law firms through the Sprintlaw platform.