board members, directors are generally entitled to protection from liability. But doing so requires that they fulfill their core legal duties to the common shareholders of the company. Let’s take a look at what those duties are and how directors can ensure that they get the benefit of them.
A word first on this chapter. I am sure that some of you might be tempted to skip it because we are going to be talking about legal things, and we’ve already fairly exhaustively talked about board members. I get it. You may have other more exciting things to do right now (like, maybe, work on your startup?) but allow me to at least put in a plug for this material.
It’s one thing to start a company and have it fail. That sucks, no doubt, but at least you gave it your best and didn’t lose all your money in the process (at least I hope that’s the case). But it doubly sucks if you fail and then you end up in a legal battle for years beyond that trying to defend yourself from any number of decisions you made (or didn’t make) that are now being second-guessed by some of your shareholders.
If you didn’t bankrupt yourself from the company’s failing, the chances are pretty high that you will do so on the legal bills alone that accompany a lawsuit. Nor is it great to have your company succeed, make a bunch of money, and then find that some of your earlier shareholders feel as though they were screwed eight years prior and lost a lot of money as a result. Coming out on the losing end of that suit may mean that some of the gains you thought you had earned will disappear in the form of legal fees or a monetary damages award.
You don’t want to be in either of those situations—whether as a founder CEO or as a VC board member. And you don’t have to, because if you take the time to read this section, you’ll see that there are some common-sense ways to help prevent you from getting into trouble.
Of course, all the usual caveats apply here—I am not your lawyer and am not providing you formal legal advice here (in fact, I’m not really a lawyer at all since the state of California says I am now an inactive member of the bar and thus not properly licensed to practice law). So when you start your company, and if you ever find yourself in a legal quagmire, hire a real lawyer to help you navigate your way through. The path is pretty well-worn.
Let’s start by reviewing the duties of a board member.
- Duty of Care
The duty of care is a foundational responsibility of a board member. At its most basic level, the duty of care says that you need to be informed about what’s going on in the company to perform your basic role of maximizing value for the common shareholders. Specifically, you need to keep informed consistent with what a reasonable person would want to know in order to be able to evaluate the company’s prospects.
You’re not required to be prescient and see around corners to predict how some incredibly smart computer science student from Stanford is going to eat your company’s lunch. All you have to do is be informed read the board materials, show up at the meetings, don’t sit on your iPhone the whole time texting your bookie about the spread on the upcoming WWE match, and ask relevant questions. The joke is that you can probably satisfy your duty of care by not being asleep at the board meeting. I’m not sure that anyone has actually ever tested this, but that ought to give you a sense of the relatively low bar you have to clear.