Why does Corporate Governance Diligence matter?
A startup that grows fast and treats board approvals as a formality to clean up later often discovers, at exactly the moment it matters most, that a stock grant, an officer appointment, or a prior financing round was never properly authorized by a board resolution. Unwinding or ratifying a corporate action years after the fact, sometimes requiring consent from people who are no longer easy to reach, is a real cost and delay, and checking the minute book is one of the first things a diligence team does.
What does Corporate Governance Diligence look like in practice?
Suppose a company issued options to an early employee based on a verbal agreement in a board meeting, but the formal written consent approving the grant was never circulated or signed. Years later, during Series B diligence, counsel finds the option grant has no corresponding board approval in the minute book. The company now needs a retroactive ratification, requiring current board members to formally approve, after the fact, an action taken years earlier without contemporaneous documentation.
What are the common mistakes with Corporate Governance Diligence?
- Treating board approvals as informal, discussed and agreed in a meeting, without following up with the actual written consent or minutes that make the action legally valid.
- Letting the minute book fall behind, sometimes by years, and trying to reconstruct it retroactively right before a fundraise or sale.
- Assuming email agreement among board members substitutes for a formal written consent, when corporate law generally requires the latter for it to be binding.
- Not keeping the bylaws and any amendments in the same organized record as the minutes, leaving governance diligence to hunt across multiple sources for a complete picture.
Related concepts
- Board Written ConsentA formal document, signed by all directors, approving a specific company action without holding a live meeting, a faster, equally binding alternative to a board resolution passed at a meeting, used for routine or time-sensitive approvals.
- Due Diligence Data RoomA secure, organized repository of a company's key documents (financials, contracts, cap table, IP filings, HR records) assembled for a buyer's or investor's legal, financial, and operational review before a financing or acquisition closes.
- Cap TableThe authoritative record of who owns what in a company, every founder, investor, and option holder, with share counts, security type, and percentage ownership.
- Director and Officer (D&O) IndemnificationThe company's contractual and insurance-backed commitment to cover legal costs and damages for its directors and officers if they are personally sued for decisions made in that role, protecting them from bearing the company's legal risk out of their own pocket.