Board Consents For Fundraising: What To Review Before A New Deal Or Raise

When your startup is preparing for a new fundraising round or investment deal, one of the first legal steps is to secure the right board consents for fundraising. Many founders underestimate how critical this step is, or they assume their board will automatically approve any new investment. However, missing or mishandling board consents can delay your deal, cause investor concerns, or even invalidate the fundraising round. Common mistakes include not reviewing your company's governing documents, overlooking state requirements, or failing to record board approvals properly. This guide explains what board consents for fundraising actually require, what documents to review, and how to avoid issues that could jeopardize your next raise.

What Are Board Consents For Fundraising?

Board consents for fundraising are formal approvals from your company's board of directors authorizing the company to pursue a fundraising transaction. This typically includes issuing new shares, selling convertible notes, or entering into a SAFE (Simple Agreement for Future Equity). The board's consent is usually documented in board resolutions, which can be adopted at a board meeting or through written consent.

For most Delaware corporations (the most common structure for US startups), board approval is required by law before issuing new shares or securities. The board's role is to ensure that any fundraising aligns with the company's interests, complies with legal requirements, and does not violate existing agreements. Without proper board consent, the fundraising could be challenged by investors, regulators, or even other founders.

• Board consents are required for most equity and convertible debt fundraising rounds.
• Written board resolutions are the standard method for documenting approval.
• Failure to obtain board consent can lead to invalid share issuances or legal disputes.

While federal law (including SEC rules) sets the baseline for securities offerings, your company's own charter, bylaws, and state corporate law may impose additional requirements.

For example, if your startup is a Delaware C Corporation, Section 141 of the Delaware General Corporation Law (DGCL) requires that the board manage the business and affairs of the corporation, including the authority to issue shares. If your company is organized as a California corporation, similar requirements apply under the California Corporations Code, but there may be additional notice and consent requirements for certain transactions. If you are an LLC, your operating agreement and state law will govern who has authority to approve new fundraising, and it may be the managers, members, or both.

It is important to remember that board consents are not just a formality. Investors, acquirers, and regulators may review your board approvals during due diligence. Missing or incomplete consents can lead to delays, renegotiation of deal terms, or even loss of investor trust.

Federal and State Rules: What Sets the Baseline?

At the federal level, the Securities and Exchange Commission (SEC) regulates the offer and sale of securities. Most startup fundraising rounds rely on exemptions from full SEC registration, such as Regulation D (including Rule 506(b) and Rule 506(c)), Regulation CF (crowdfunding), or Regulation A. These exemptions do not replace the need for board approval, but they do set rules for how securities can be offered and to whom.

For example, under Regulation D, you may be limited to selling securities to accredited investors, or you may have to provide specific disclosures to non-accredited investors. Under Regulation CF, there are limits on how much you can raise and requirements for using approved crowdfunding portals. Regardless of the exemption, your board must approve the fundraising and ensure compliance with both federal and state laws.

State law also plays a key role. For example, Delaware General Corporation Law (DGCL) requires board approval for issuing shares. Other states have similar requirements, but the details can vary. If your company is incorporated in a state other than Delaware, check your state's corporate code for specific rules on board approvals and fundraising. For instance, New York and California have their own corporate statutes that may require additional filings or stockholder approvals for certain actions.

• Federal law: Sets rules for offering securities and investor disclosures.
• State law: Governs how your company must approve and document fundraising actions.
• Governing documents: Your certificate of incorporation and bylaws may have additional requirements or restrictions.
• Investor agreements: Prior financing documents may require special consents or notices.

In some cases, your investors' rights agreements, voting agreements, or prior financing documents may also require specific board or stockholder consents before a new fundraising round. Always review these documents before proceeding. For example, a previous investor may have negotiated a right of first refusal or a veto right over new financings, which can affect the board's ability to approve a new round without further negotiation.

LLCs are governed by their operating agreements and relevant state LLC statutes. In many states, unless the operating agreement provides otherwise, all members must consent to new issuances of membership interests. In manager-managed LLCs, the manager may have authority, but it is best practice to document all approvals in writing.

Practical example: A Delaware C Corporation plans to issue Series Seed Preferred Stock. The board must approve the issuance, the terms of the financing documents, and may need to recommend an amendment to the certificate of incorporation to increase authorized shares. If the company is a California corporation, the board must also comply with notice requirements to directors and may need to obtain written waivers if not all directors can attend the meeting.

What Documents Should You Review Before a Fundraise?

Before seeking board consents for fundraising, review the following documents carefully:

• Certificate of Incorporation: Check for authorized share limits, preferred stock terms, and any special voting requirements. For example, if you want to issue Series A Preferred Stock but only have Common Stock authorized, you will need to amend your certificate and get both board and stockholder approval.
• Bylaws: Confirm the process for calling board meetings, adopting resolutions, quorum requirements, and recording consents. Some bylaws require advance notice to all directors or specify how written consents must be executed.
• Board Resolutions: Review past board approvals for prior fundraising rounds to ensure consistency and check for any outstanding actions that need to be ratified.
• Investor Agreements: Look for rights of first refusal, pro rata rights, or special approval requirements for new rounds. For example, a major investor may have a contractual right to approve any new financing or to participate in the round.
• Stockholder Agreements: Some agreements require both board and stockholder approval for certain transactions, such as issuing a new class of shares or selling a significant portion of the company.
• Convertible Notes or SAFEs: If you have outstanding convertible securities, check if their terms are affected by the new fundraising. For example, a new round at a lower valuation may trigger anti-dilution protections or conversion rights.
• Cap Table: Review your capitalization table to confirm all prior issuances and conversions are properly recorded. An inaccurate cap table can delay closing and cause disputes with investors.

Failing to review these documents can result in missed approvals, conflicts with existing investors, or even legal claims. For example, if your certificate of incorporation does not authorize enough shares for a new round, you may need stockholder approval to amend it before the board can approve the fundraising. If you overlook a right of first refusal in a prior investor agreement, you could face a breach of contract claim.

Checklist for document review before a fundraising round:

• Is there enough authorized stock for the new issuance?
• Do any existing investors have approval or participation rights?
• Does the board have authority under the bylaws to approve the transaction?
• Are there any outstanding board or stockholder actions that need to be ratified?
• Is the cap table up to date and accurate?
• Are there any state law requirements for notice, filings, or consents?

Practical example: A New York startup discovers during due diligence that its bylaws require a two-thirds board vote for any new stock issuance, but only a simple majority approved the last round. The company must now seek ratification from the full board, delaying the new investment and raising concerns with the incoming investor.

How To Draft and Approve Board Consents for Fundraising

Once you have reviewed the relevant documents, the next step is to prepare and approve the board consent. Here is a practical checklist for drafting and adopting board consents for fundraising:

• Draft the Board Resolution: Clearly state the fundraising action (e.g., issuing Series Seed Preferred Stock, approving a SAFE round). The resolution should specify the type of security, the number of shares or units, the price per share, and the identity of the investors.
• Include Key Terms: Specify the number of shares, price per share, investor names, and any special rights or conditions. If you are issuing convertible notes or SAFEs, include the principal amount, interest rate, maturity date, and conversion terms.
• Attach Supporting Documents: Attach draft investment agreements, updated cap table, and any required SEC filings or state notices. This helps directors understand the full context and terms of the deal.
• Circulate to Board Members: Send the draft resolution and supporting materials to all directors in advance of the meeting or consent. This allows time for review and questions.
• Hold a Board Meeting or Obtain Written Consent: Follow the process in your bylaws for adopting resolutions. Written consent is common for early-stage startups, but some states (like California) require unanimous written consent unless otherwise provided in the bylaws.
• Record the Approval: Keep signed copies of the board consent in your corporate records. Update your minute book and cap table. This documentation is critical for future due diligence and compliance.

Make sure the board consent covers all necessary actions, such as:

• Approval of the fundraising round and related agreements
• Authorization to issue new shares or convertible securities
• Designation of officers to sign documents and complete filings
• Approval of any amendments to the certificate of incorporation (if needed)
• Approval of any required SEC or state filings

After board approval, you may also need stockholder consent, especially if you are amending your certificate of incorporation or issuing a new class of shares. For example, under Delaware law, a majority of outstanding shares must approve most charter amendments. In California, supermajority stockholder approval may be required for certain transactions.

Practical example: A Delaware C Corporation wants to issue Series A Preferred Stock but only has Common Stock authorized. The board must approve the fundraising and recommend an amendment to the certificate of incorporation. The company then seeks stockholder approval for the amendment before closing the round.

For LLCs, the process varies by state and operating agreement. In many cases, all members must approve new issuances, and the approval should be documented in a written consent or meeting minutes.

Common Mistakes and How To Avoid Them

Fundraising is fast-paced, and it is easy to overlook key steps in the board consent process. Here are some common mistakes and practical tips to avoid them:

• Not Reviewing Governing Documents: Skipping this step can lead to missed approvals or violations of investor rights. Always review your charter, bylaws, and investor agreements before proceeding.
• Insufficient Authorized Shares: Trying to issue more shares than authorized requires a charter amendment and stockholder approval. Check your authorized share count before approving a new round.
• Incomplete or Vague Board Resolutions: Resolutions should be specific about the terms and authorizations granted. Generic or incomplete resolutions can cause confusion and legal challenges later.
• Missing Stockholder Approvals: Some actions require both board and stockholder consent, especially for major changes like creating a new class of stock or amending the charter.
• Poor Recordkeeping: Failing to keep signed board consents and updated cap tables can create problems during due diligence. Store all approvals in your minute book and update your cap table after each round.
• Ignoring State Law Differences: If your company is not a Delaware corporation, check your state's rules for board approvals and filings. For example, California requires advance notice to all directors for board meetings, and New York may require additional stockholder approvals.
• Overlooking Convertible Securities: Failing to consider the impact of new fundraising on outstanding notes or SAFEs can trigger anti-dilution provisions or conversion rights.
• Assuming Informal Approvals Are Sufficient: Investors and acquirers expect formal, signed consents. Email approvals or verbal agreements are not enough.
• Not Coordinating With Advisors: Certain deal terms can trigger tax or securities law issues. Consult with legal and tax advisors before finalizing the fundraising structure.

Practical example: A Texas startup issues convertible notes without formal board approval, relying on email sign-offs. When a major investor conducts due diligence, they discover the lack of formal consents and require the company to ratify all prior issuances, delaying the closing and raising concerns about governance.

Another example: A Florida LLC issues new membership interests to an investor without unanimous member approval, as required by the operating agreement. A minority member challenges the issuance, resulting in a dispute and potential litigation.

FAQs

Do I always need board consent for a fundraising round?

In most cases, yes. Issuing new shares, convertible notes, or SAFEs typically requires board approval under state corporate law and your company's governing documents. Some minor transactions may be delegated to officers, but significant fundraising actions should always be approved by the board. For LLCs, check your operating agreement and state law to determine who must approve new issuances.

What if my board is slow to respond or does not approve the fundraising?

If your board is unresponsive or does not approve the fundraising, you cannot proceed with issuing new securities. Consider discussing the reasons for delay with your directors, providing additional information, or seeking legal advice. In some cases, you may need to rework the deal terms or address board concerns before moving forward. If there is a deadlock, your bylaws or operating agreement may provide a process for resolving disputes.

Can I use electronic signatures for board consents?

Yes, electronic signatures are generally valid for board consents, especially if your bylaws or state law permit them. Make sure all directors sign the consent and that you keep a copy for your records. Many startups use board portal software or secure e-signature tools for this purpose. Some states have specific requirements for electronic consents, so check your state's laws.

What happens if I forget to get board consent before closing a fundraising round?

Failing to obtain board consent can create serious legal and practical issues. The fundraising may be invalid, investors could demand their money back, or you might face regulatory penalties. If you discover a missing board consent after the fact, consult legal counsel immediately to determine if a ratification or corrective action is possible. In some cases, the board can ratify prior actions, but this may not cure all defects.

Are there special rules for board consents in different states?

Yes, state corporate laws can differ significantly. For example, California requires advance notice to all directors for board meetings and may require unanimous written consent unless otherwise stated in the bylaws. New York may require additional stockholder approvals for certain actions. Always check your state's corporate code and consult with a professional if you are unsure about the requirements in your jurisdiction.

Key Takeaways

• Board consents for fundraising are a legal requirement for most US startups raising capital, whether structured as corporations or LLCs.
• Always review your certificate of incorporation, bylaws, operating agreement, and investor agreements before seeking board approval.
• Draft clear, specific board resolutions and keep signed copies in your corporate records. Update your cap table after each round.
• Check for state-specific rules and additional stockholder approval requirements, especially if you are incorporated outside Delaware.
• Proper documentation and recordkeeping help avoid delays and legal disputes during fundraising and future due diligence.
• Consult with legal and tax advisors to ensure your fundraising structure complies with federal, state, and contractual requirements.

Preparing for a fundraising round? If you need help reviewing your board consents for fundraising or preparing the right documents, you can reach our team 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.