Business Venture Blog
This is where we post about business ventures, law, and business venture law.
Anything interesting, really.
Anything interesting, really.
Business Venture Blog
Build An Effective Board Of Directors For Your Startup
Every company is required by law to have a board of directors. The board is responsible for the overall direction of the company and for making major decisions, such as hiring and firing senior management, approving a budget and keeping the company financed through equity investments and debt financing.  Therefore, building a strong, effective board of directors is very important for your company’s success.
There are some considerations when building the board of directors for a startup.
Have The Right Number Of Members
At the early stage, 3-5 directors are appropriate number for a new company. Too many directors at this stage will make scheduling an issue and be a drain on your funds. Generally, after the initial seed round, the company will have to allocate a board seat to the corporation which has led that seed round. If the founders still want to keep control of the board, it is better for them to retain two seats and the new investor to have one seat. It should be noted that when you accept a new investor, you might have to allocate a new board seat for it. Thus, if you do not want a certain person on the board, you’d better refuse that person’s investment.
At some point, if the board is getting too big or if the investment size doesn’t merit a board seat, instead of giving out more board seats, the company might allow investors to act as “observers.” That is, they can come to and participate in the board meetings, but they do not get a formal vote.
In order to avoid a tie vote, you are highly recommended to have an odd number of board members.
Create A Diverse Board
Establishing a board of directors with different knowledge, expertise, age and backgrounds can be a powerful force for your company's success. A diverse board can provide the company with unique perspectives. You might need a marketing expert, a financial expert, and an exit expert on the board, as well as an advisor who might help guide decisions and aid in negotiations.
Provide Good Compensation For Directors
Compensation is essential, so keep that in mind and consider giving them access to a percentage of stock instead of money. A common amount given is 1 percent of stock or expenses per quarter plus a meager retainer.
Choose People Who Can Participate Fully And Share The Same Vision For The Company
It is important to have board members who can dedicate significant time to the company. The board members should not just be available for scheduled meetings, they should also be available when urgent issues arise. Thus, it is better to have board members who are in close proximity to the company as you can meet face to face when some important issues emerge.
Please keep in mind to establish a board of directors who share the same vision and long-term goals for the company. If the members have different vision, the probability of risk of pulling the company in opposite directions will increase.
Have Independent Directors
An independent director is not a founder or an investor or an employee of the company. Appropriate independent directors can bring their previous business and operating experience to the company. They can also provide the company with their contacts which might be a great asset for the company. However, you should always have independent directors who can establish a long-term relationship with the company and who would like to dedicate significant time to the company. It would be great if the independent directors can provide hands-on mentorship.
Rong Gao is a member of the BLG Business Venture Clinic and is a second-year law student at the Faculty of Law, University of Calgary.
 Samer Hamadeh, Adam Dinow, What you need to know about startup boards, https://techcrunch.com/2016/11/05/what-you-need-to-know-about-startup-boards
 Alejandro Maher, Build Board of Directors: Simple How To Guide for Startups, https://www.upcounsel.com/build-board-of-directors-simple-how-to-guide-for-startups
Protecting Directors from Civil Liability Through Indemnification
A likely question an entrepreneur may ask themselves early in their venture is “how do I protect the directors of my company?” They may (or perhaps should) think about this because in all likelihood, they will be one of, if not the only director of their business during its early phases following incorporation. Please note: this post assumes that the company in question is incorporated under the Business Corporations Act of Alberta
Indemnification refers to one party’s agreement to secure another against responsibility for their actions, or to give security for the reimbursement of a person in case of an anticipated loss. In this case, it refers to a corporation’s agreement to make a director whole, should they be subject to legal proceedings as a result of their actions in their capacity as a director of the corporation.
Generally speaking, the Business Corporations Act (the Act) allows corporations to indemnify their directors for both legal costs incurred, as well as any monetary damages that arise from a director’s conduct in relation to the business. In order to benefit from such indemnification, a director must have “acted honestly and in good faith with a view to the best interests of the corporation.”
An Alberta corporation is not permitted to indemnify its directors for their actions if they have not acted honestly and in good faith with a view to the best interests of the corporation – that is, if they have breached their fiduciary duty to the corporation. If a director has breached his or her fiduciary duties to the corporation, any indemnity the corporation has offered will be void.
The scope of conduct that may be indemnified under the Act is very broad. Section 124(1) of the Act states:
“…a corporation may indemnify a director or officer of the corporation, a former director or officer of the corporation…against all costs, charges and expenses, including an amount paid to settle an action or satisfy a judgment, reasonably incurred by the director or officer in respect of any civil, criminal, or administrative action or proceeding to which the director or officer is made a party by reason of being or having been a director of that corporation or body corporate…”
When Are Directors Entitled to Indemnification?
In Alberta, a director is only entitled to indemnification by the corporation for all costs, charges and expenses, including an amount paid to settle an action or satisfy a judgment in a civil context if they (i) were substantially successful in defending the claim; (ii) acted honestly and in good faith with a view to the best interest of the corporation; and (iii) is fairly and reasonably entitled to indemnity.
A corporation that does not contain indemnity provisions in its by-laws will still be liable for any loss incurred so long as these criteria are met. If indemnification provisions found in either the corporation’s by-laws, or in an agreement between the corporation and a director impose mandatory indemnification, it will of course be liable to do so.
How to Indemnify Directors
Indemnification provisions can be found within a corporation’s by-laws. If a corporation seeks to provide its directors with a wide range of protection, these provisions do not need to be particularly robust. Any attempt to predict the types of conduct or liabilities that the corporation anticipates indemnifying its directors against may simply limit its ability to protect its directors.
If the company’s bylaws do not provide indemnification provisions that are acceptable to a potential director, indemnification provisions may be included within a written agreement between the corporation and the director. This method provides the greatest flexibility as each agreement can be tailored to suit the needs of both the corporation and the individual director.
Some things that indemnification provisions should contemplate include whether the corporation is required, or simply permitted to indemnify its directors (and in which circumstances), the timing of indemnity payments, and out of court settlement. Indemnification provisions that do not require the corporation to indemnify its directors should also consider a mechanism to oblige the corporation to do so such as arbitration.
Corporations that provide the widest range of indemnity to their directors often simply state in its indemnification provisions that the corporation must indemnify the director to the greatest extent authorized under the relevant law. Where it is desirable to minimize the short-term financial impact of litigation on directors, indemnity provisions may require the corporation to advance defence costs as they are incurred. Such provisions should also contemplate whether the corporation is required to indemnify the director for out of court settlements, as opposed to simply court judgments.
What Indemnification Provisions Do Not Cover
Indemnification provisions do not cover directors’ actions when they are not made in good faith with a view to the best interests of the corporation.
In cases where a director is being sued by the corporation or its shareholders, including in derivative actions, a corporation may only indemnify a director for their legal expenses. This leaves directors exposed to liability for corporate or shareholder damages arising from their action (or inaction as the case may be). Why is this? Most derivative actions against directors include a claim for breach of fiduciary duty. If this claim is successful, and a breach has been found, a director will have been found not to have acted in good faith with a view to the best interests of the corporation, and indemnity would not be available in any event.
Hamish Gray is a member of the BLG Business Venture Clinic and is a third-year law student at the Faculty of Law, University of Calgary.
 Black’s Law Journal; 2nd ed; online, <a href="https://thelawdictionary.org/indemnify/" title="INDEMNIFY">INDEMNIFY</a>
 Business Corporations Act, RSA 2000 cB-9 s124 [the Act]
 Act supra note 2 s124(3)
Blog posts are by students at the Business Venture Clinic. Student bios appear under each post.