Every major action your company takes—amending the articles of incorporation, hiring company officers, authorizing the issuance of securities, entering significant contracts, etc.—requires approval by your board of directors. Every state requires a corporation to have a board of directors: some may require multiple directors; some require that there be at least one director. The rules vary a bit here from state to state, so it is important to learn your state’s specific requirements.
In an early stage company, is it highly likely that your executive officers will also be the directors of the company. It is fine that the officers and directors be the same people, but they must realize that each position requires wearing a different hat. While the executive officers run the day-to-day management of the company, the directors must act as representatives of the shareholders of the company and think about the long term implications and best interests of the company.
Additionally, every state requires that a corporation have bylaws in place. In addition to setting out the structure of the company, bylaws establish the rules by which meetings of the board of directors must be held. This includes not only when how director meetings must take place, but whether something needs director approval in the first place, and if so what percentage of directors that must approve the action.
Every action by your board of directors should be documented in board minutes that clearly state the issue to be decided and the resolution of the board. This is a requirement for all companies, including those where the sole executive officer is also the sole director.
There are many issues that can arise if your company does not have bylaws in place and regular, documented meetings by the board of directors. First off, if you do not have bylaws, there is no way to know what the ground rules are for running your company and no way for you to show that you have been running it properly. Next, if the meetings are not documented, who is to say that actions were properly authorized?
The deficiencies in the documentation of company actions may give rise to legal concerns, especially in regards to selling securities to investors. A purchaser of a security that has not been properly authorized by your board of directors has the right to rescind the transaction. This is essentially a “put” letting the investor sell the securities back to the company. That will allow investors to sit tight if the investment increases in value, or to exercise their rescission rights and get a full return of the investment, with interest, if the investment decreases in value.
Deficiencies may also result in securities fraud. Your company will usually be asked to represent that the securities are “duly authorized, validly issued, fully paid, and nonassessable” when selling to outside investors. If the shares are not properly authorized and issued, making sales in those circumstances could be a misrepresentation of a material fact. Such a finding could significantly hamper your ability to raise capital in the future. And get you sued.
So before you sell investments online, or offline, make sure your board has approved all the actions that your bylaws require them to approve.