Startup Evolution / A Year-Long Journey through A Founder’s Toolkit: Early Corporate Governance – Laying the Groundwork with Boards, Bylaws & Operating Agreements

Welcome to the fifth installment of our “Startup Evolution” series. In our previous article, we explored how to protect your startup’s intellectual property. Now that your innovations are safeguarded, it is time to establish early corporate governance to guide your startup’s growth. Implementing governance structures from the outset is essential for scaling up, securing investment and avoiding legal pitfalls as your company matures.

Why Early Governance Matters

• Ready to Scale: As your startup grows, having a basic governance framework (even a small board or advisory group) brings order and accountability. Studies note that new companies benefit from the support structure of a fit-for-purpose board. The earlier it is in place, the better for founders and the business. Early governance sets clear roles and processes so you can scale without chaos.
• Investor Confidence: Proper corporate governance boosts your credibility with investors. During due diligence, sophisticated investors will review your organizational documents (certificates, bylaws or operating agreement) and look for board or member consents authorizing key decisions. “Shoddy” governance – missing paperwork, undocumented decisions – can slow down funding, rack up legal fees or even derail a deal. In contrast, a well-governed startup instills confidence that the founders are diligent and the company is investment-ready.
• Liability Protection: Observing governance formalities helps maintain the liability shield of your corporation or LLC. If founders ignore formalities (commingle personal and company finances, never hold meetings or document decisions), courts can decide the business is just an “alter ego” and pierce the corporate veil, putting personal assets at risk. Good governance (separating accounts, keeping records, following your bylaws/operating agreement) reinforces that your company is a distinct legal entity, preserving your protection against personal liability.

Governance Basics for Delaware C-Corporations

Choosing a Delaware C-Corp means adopting a more structured governance model from the start:

• Board of Directors: The board is the governing body responsible for major decisions and oversight. Even if it is just you and your co-founder on the board initially, treat it formally. The board is elected by shareholders and must act in the company’s best interest. It makes “big picture” decisions – approving significant contracts, hires, equity grants, financings, etc. – and records these in minutes or written consents.
• Bylaws and Officers: Upon incorporation, startups should adopt bylaws, the internal rules for governance (how meetings are called, voting procedures, officer roles, etc.). You’ll also appoint officers (CEO, President, etc.) to handle daily operations, typically via a board resolution. Founders usually serve as officers in the early days. Clear bylaws and defined roles keep everyone on the same page about how the company is run.
• Meetings & Record-Keeping: Delaware corporations are expected to hold at least annual shareholder meetings and regular board meetings (though early-stage boards can act by unanimous written consent to save time). Make it a habit to document all important decisions with signed board consents or meeting minutes. Maintain a corporate records book with your incorporation documents, bylaws, stock ledger and copies of all resolutions. Being organized from day one means that when an investor asks, “Can we see your board approvals for that stock issuance?”, you are ready.

Governance Basics for LLCs

If your startup is a Limited Liability Company (LLC), governance is more flexible but still needs attention:

• Operating Agreement: This is the LLC’s bible—a contract among the members outlining ownership, management structure, voting rights, profit sharing and more. Draft an operating agreement early (even if you are a single-member LLC) so there is no ambiguity about how decisions are made. It can specify, for example, what member approval is needed to add a new investor or to spend over a certain amount.
• Member Management: LLCs can be member-managed (owners manage the business directly) or manager-managed (day-to-day control is given to a designated manager or management team). Choose the model that fits your team. A member-managed LLC with two founders, for instance, might require both to agree on major actions. A manager-managed LLC could designate one founder as the managing member. Define these roles in the operating agreement to avoid confusion later.
• Flexibility (with Discipline): Delaware LLCs are not required to have boards or hold formal meetings at all. This flexibility is a double-edged sword: it reduces paperwork but can lead founders to neglect governance entirely. Avoid that trap. Even without a legal mandate, document key decisions. For example, if you secure an angel investment in your LLC, have the members sign a simple consent approving the deal terms. Keeping at least informal “minutes” or written consents for major events will create a paper trail and prevent disputes among members down the road.

Common Governance Pitfalls to Avoid

Founders juggling product development and fundraising often slip up on governance. Watch out for these common mistakes:

• “We’ll Draft It Later” – No Bylaws or Operating Agreement: Neglecting to put in writing how your company is governed is a recipe for disagreement. Without bylaws or an operating agreement, even basic questions (Who can sign contracts? What if a founder leaves?) can become flashpoints. Avoid it: Formalize your governance documents early with the help of an attorney and make sure all founders are on board with the rules.
• Ignoring Formalities: Many founders treat their company like a personal extension – commingling funds or never holding any official meetings or votes. This can undermine your liability shield and your credibility. For example, failing to document stock issuances or key approvals can come back to haunt you during audits or investor due diligence. Avoid it: Even if it feels awkward, uphold some corporate formalities. Use a separate business bank account, have the board (even if just you two co-founders) approve major actions in writing and follow the processes laid out in your bylaws/operating agreement.
• Poor Record-Keeping: Startups move fast, and it is easy to let documentation lag. But a lack of records (unsigned contracts, missing stock certificates, no meeting minutes) can lead to chaos later. For instance, not recording a loan as either debt or equity can create disputes about whether an early funder is a creditor or a shareholder. Avoid it: Keep your records organized and up to date. Maintain a secure folder (a “data room”) for all vital documents and update it whenever a new agreement is signed or a decision is made. This habit will save you countless hours (and legal fees) when you are asked to produce documents in the future.

Best Practices for Early-Stage Governance

Set your startup up for success by embracing a few best practices from the outset:

• Adopt Governance Documents & Roles Early: Do not wait until an investor or lawyer forces you – put your bylaws or operating agreement in place as soon as you form the company. Have that first board meeting (or written consent) to appoint officers, issue founder equity and ratify any initial decisions. This foundational step ensures everyone knows the governance game plan.
• Use Written Consents and Resolutions: As a lean startup, you might not convene formal meetings often. Instead, utilize written consents to capture approvals of important actions in writing. For example, use a board consent to approve a new stock option plan or an LLC member consent to admit a new member. This keeps your paper trail intact without slowing you down.
• Keep Clean Records: Make diligent record-keeping part of your company culture. Maintain a cap table and update it with each equity issuance. File away signed copies of contracts, leases and key emails where decisions were made. Consistently recording decisions (in minutes or resolutions) will pay off in spades when you enter due diligence or face a compliance audit. Good records are the backbone of good governance.
• Define Decision-Making Processes: Clearly outline which decisions can be made unilaterally and which require a vote. For instance, you might allow each founder (or manager) to spend up to a certain dollar amount or hire up to a certain salary on their own, beyond which it needs board or member approval. Having these internal guidelines prevents misunderstandings and ensures that big moves get the proper sign-off. In short, create a simple approval matrix for your startup and communicate it to your team.

How We Can Help You Move Forward

Establishing strong corporate governance early is an investment in your startup’s longevity. By laying down the right governance groundwork – whether that is the formal structure of a Delaware C-corp or the flexible framework of an LLC – you are building a company that can grow smoothly and withstand investor scrutiny. Good governance today means fewer crises and scrambles tomorrow, and it signals to partners and investors that your startup is well-managed. Conversely, neglecting governance can lead to painful clean-ups, prolonged funding delays or legal disputes that distract you from growth.

If you found this fifth installment helpful, stay tuned for next month’s article as we continue to build out your founder’s toolkit. In the meantime, feel free to reach out for guidance on structuring your board, drafting governance documents, or any other early-stage legal needs. We are ready to help you keep evolving your startup, one well-informed decision at a time.

Author Jason Acevedo is a partner in the Venture Capital & Emerging Growth practice group in the Corporate and Securities Department at Klehr Harrison.

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