Board Consents For Fundraising: Risk Points Before Fundraising

Why Board Consents Are Essential for Startup Fundraising

For US startups, raising capital is a major milestone. Whether you are issuing new shares, convertible notes, or SAFEs, one legal step is almost always required: obtaining board consents for fundraising. Board consents are not just a formality. They are a legal safeguard, a sign of good governance, and a critical risk management tool. Without proper board approval, your fundraising round can be challenged by investors, regulators, or even your own shareholders. This can delay your deal, trigger legal disputes, or even force you to unwind the transaction.

Board consents are written resolutions that document the board of directors' approval of a specific fundraising transaction. They show that the board has exercised its fiduciary duties and considered the impact of the fundraising on the company and its stakeholders. In many cases, board approval is required by state law, your company's charter or bylaws, and by the expectations of investors and acquirers. Failing to obtain and document board consents can expose directors to personal liability and put your company's future at risk.

This article explains the legal framework for board consents for fundraising in the US, practical steps for startups, state law caveats, common mistakes, and best practices to help you prepare for a successful and compliant fundraising round.

Legal Framework: Federal, State, and Company Requirements

The legal requirements for board consents in fundraising depend on a combination of federal securities laws, state corporate laws, and your company's own governing documents. Here is how these layers interact:

• Federal baseline: The Securities and Exchange Commission (SEC) regulates the offer and sale of securities. Most startups rely on exemptions from registration, such as Regulation D, Regulation CF, or Regulation A. See the SEC exempt offerings overview for details. While the SEC does not always require explicit board approval, it does require that companies comply with their own corporate governance processes and make accurate disclosures to investors.
• State law overlay: Most states require board approval for issuing new shares or convertible securities. Delaware, the most common state of incorporation for US startups, requires that the board of directors approve the issuance of stock or other securities. The Delaware Division of Corporations provides official guidance. Other states, such as California and New York, have similar requirements, but the details can vary. For example, some states require notice to shareholders or special approval thresholds for certain actions.
• Company charter and bylaws: Your company's certificate of incorporation (charter) and bylaws may impose additional requirements. For example, you may need shareholder approval to increase the number of authorized shares or to amend the charter. Some investor agreements also require investor consent for new fundraising rounds.

It is critical to review all three layers before proceeding. Failing to follow the correct process can result in legal challenges, fines, or the need to redo the transaction. In some cases, directors who approve a fundraising round without proper authority can be held personally liable for any resulting damages.

Example: A Delaware C-corp wants to raise a new seed round by issuing preferred stock. The board must approve the issuance, and if the company needs to increase its authorized shares, shareholder approval is also required. If the company skips board approval, the issuance may be invalid under Delaware law, and investors could demand that the company fix the process before closing.

What Should Be Included in a Board Consent for Fundraising?

A board consent is a formal document that records the board's approval of a fundraising transaction. It can be adopted at a board meeting or by unanimous written consent, depending on state law and your company's bylaws. The content of the consent should be tailored to the specific transaction and the requirements of your jurisdiction. Here is what a typical board consent for fundraising should include:

• Type of fundraising: Specify whether the company is issuing equity, convertible notes, SAFEs, or another security.
• Amount and terms: State the amount to be raised, the price per share or conversion terms, and any key investor rights (such as board seats or information rights).
• Authorization to issue securities: Approve the issuance of new shares or convertible securities and any related amendments to the charter or option pool.
• Approval of transaction documents: Approve the form of subscription agreements, investor rights agreements, and other transaction documents.
• Appointment of officers: Authorize specific officers or representatives to execute documents and take actions needed to complete the fundraising.
• Compliance statement: Confirm that the fundraising complies with applicable securities laws and company policies.
• Summary of board discussion: (Optional but recommended) Summarize the board's rationale for approving the fundraising, including any risks considered and how conflicts of interest were managed.

Checklist for Drafting Board Consents:

• Review the company's charter, bylaws, and any investor agreements for approval requirements
• Confirm the number of authorized shares and whether an increase is needed
• Prepare detailed board materials outlining the fundraising terms and rationale
• Circulate the draft consent to all directors in advance
• Document any conflicts of interest and how they are addressed
• Obtain signatures or hold a properly noticed board meeting
• Retain signed copies in the company's corporate records

Using a generic template without customizing it for your company's structure, state of incorporation, and the specifics of your deal is a common mistake. For example, a California corporation may need to include additional language about notice to shareholders, while a Delaware company may need to reference specific sections of the Delaware General Corporation Law.

State Law Caveats and Examples

While Delaware law is often the default for US startups, state law requirements can differ significantly. Here are some examples and caveats to consider:

• Delaware: Delaware General Corporation Law (DGCL) Section 141 requires board approval for issuing shares. If the company needs to amend its charter to increase authorized shares, Section 242 requires both board and shareholder approval. Delaware also allows for unanimous written consents in lieu of a meeting.
• California: California Corporations Code requires board approval for issuing shares and, in some cases, notice to shareholders. California also has stricter rules on director conflicts of interest and may require additional disclosures in the board consent.
• New York: New York Business Corporation Law requires board approval for issuing shares and may require shareholder approval for certain transactions, such as mergers or significant asset sales. New York also requires that board meetings be properly noticed and documented.
• Other States: Some states have more flexible rules, but it is still best practice to document board approval for any fundraising round.

Practical Example: A startup incorporated in California is raising a convertible note round. The board must approve the issuance of the notes, and if any directors are participating as investors, the consent should specifically disclose and address those conflicts. The company must also check if any notice to shareholders is required under California law or its own bylaws.

Tip: If your company is incorporated in a state other than Delaware, California, or New York, check with a qualified advisor to confirm the specific requirements for board and shareholder consents. Do not assume that Delaware rules apply everywhere.

Common Mistakes and How to Avoid Them

Even experienced founders and directors can make mistakes when preparing board consents for fundraising. Here are some of the most common errors and how to avoid them:

• Failing to obtain board approval before issuing securities: Issuing shares or notes without documented board approval can make the transaction invalid and expose directors to liability.
• Using outdated or generic templates: Templates that do not reflect your current state law, company structure, or the specifics of your deal can create gaps or errors in the approval process.
• Overlooking shareholder approval: Some actions, such as increasing the authorized share capital or amending the charter, require both board and shareholder approval. Missing this step can delay your fundraising or trigger legal disputes.
• Ignoring conflicts of interest: If any directors or officers are participating in the fundraising as investors, this must be disclosed and handled according to state law and company policy. Failure to do so can lead to claims of breach of fiduciary duty.
• Poor recordkeeping: Not retaining signed copies of board consents, meeting minutes, or related documents can create problems during due diligence or future fundraising rounds.
• Not checking investor agreements: Some investor rights agreements or voting agreements require investor consent for new fundraising rounds. Overlooking these requirements can breach contract terms and expose the company to claims.

Checklist to Avoid Common Mistakes:

• Start preparing board consents early in the fundraising process
• Customize consents for your state of incorporation and the specifics of your deal
• Review all governing documents and investor agreements for approval requirements
• Document and address any conflicts of interest
• Obtain and retain all required signatures
• Keep organized records for future reference

Addressing these issues proactively can save time, reduce legal risk, and build investor confidence in your company's governance.

Best Practices for US Startups and Founders

To ensure a smooth and compliant fundraising process, US startups and founders should follow these best practices:

• Plan ahead: Start the board consent process as soon as you begin negotiating fundraising terms. This avoids last-minute delays and ensures all approvals are in place before closing.
• Engage experienced advisors: Work with legal and financial advisors who understand startup fundraising and the requirements in your state of incorporation. They can help you identify all necessary approvals and avoid common pitfalls.
• Use detailed checklists: Develop a checklist of all approvals, filings, and documents needed for your fundraising round, including SEC filings, state notices, and updates to your corporate records.
• Communicate with shareholders: If shareholder approval is required, prepare and circulate consents or meeting notices in parallel with board approvals. Keep shareholders informed about the process and timing.
• Maintain clear records: Store all board consents, meeting minutes, and related documents in a secure, organized location. This is critical for due diligence in future fundraising, acquisitions, or audits.
• Review and update governance documents: Periodically review your charter, bylaws, and investor agreements to ensure they reflect your current needs and comply with state law. Update them as necessary before your next fundraising round.

Example of a Best Practice Process: A New York startup is preparing for a Series A round. The founders consult their attorney to review the company's charter, bylaws, and investor agreements. They prepare a detailed board package outlining the fundraising terms, circulate it to all directors in advance, and hold a properly noticed board meeting to approve the transaction. They also prepare shareholder consents to increase the authorized shares and update the option pool. All signed documents are stored in a secure online data room for future reference.

For more guidance, see our resources on startups and getting finance.

FAQs

Is board approval always required for startup fundraising?

In most cases, yes. State corporate laws, such as those in Delaware, generally require board approval to issue new shares or convertible securities. Even if not strictly required by law, investors and future acquirers expect to see documented board approval as evidence of proper governance. Your company's charter and bylaws may also require board or shareholder approval for certain actions. Always check your governing documents and consult with a qualified advisor.

Can board consents be signed electronically?

Yes, in most states, board consents can be executed electronically, provided that the company's bylaws and applicable state law allow it. The federal ESIGN Act and most state laws recognize electronic signatures as valid for corporate actions. However, it is important to follow any specific procedures set out in your bylaws or state statutes. Some states or investors may prefer original signatures, so confirm the requirements before proceeding.

What happens if a board consent is missing or incomplete?

If a board consent is missing or incomplete, the fundraising round may be challenged or delayed. Investors may require the company to ratify the transaction or provide additional documentation. In some cases, regulatory authorities could impose fines or require the company to unwind the transaction. It is best to address any gaps as soon as they are discovered, ideally with the help of legal counsel. Some states, like Delaware, allow for ratification of defective corporate acts, but this process can be complex and time-consuming.

Do all directors need to sign the board consent?

Not necessarily. If the consent is adopted at a properly called board meeting, only a majority (or the required quorum) of directors need to approve it, unless your bylaws require a higher threshold. If using unanimous written consent, then all directors must sign. Always check your bylaws and state law to confirm the correct process. For example, California may require additional disclosures if directors have conflicts of interest.

Can board consents cover multiple actions or only one fundraising round?

Board consents can cover multiple related actions, such as approving a fundraising round, increasing the authorized shares, and amending the option pool, as long as each action is clearly described and authorized. However, it is important not to combine unrelated actions in a single consent, as this can create confusion or legal challenges. When in doubt, use separate consents for distinct transactions.

Key Takeaways

• Board consents for fundraising are essential for legal compliance and risk management in US startups.
• Federal securities laws, state corporate laws, and your company's governing documents all play a role in determining what approvals are required.
• Properly drafted and executed board consents help protect directors, satisfy investors, and avoid regulatory issues.
• Common risks include missing approvals, conflicts of interest, and failure to comply with securities laws or investor agreements.
• Best practices include planning ahead, customizing consents for your state and deal, keeping clear records, and working with experienced advisors.
• Always review your state law and company documents before approving a fundraising round, and do not rely solely on templates or assumptions.

For more information on startup fundraising, board governance, or to discuss your company's specific needs, 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.