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Many startup founders and executives I work with are surprised to learn just how important bylaws are.
Bylaws establish the internal rules that govern how your company operates, and they can have a significant impact on your startup's success. They're the rulebook for how your startup will operate.
This article demystifies bylaws, providing practical guidance for their creation and use.
What are bylaws?
Think of bylaws as your startup's internal operating manual.
They outline the governing processes and procedures for your company.
While Delaware law (the Delaware General Corporation Law, or DGCL) sets certain default rules, bylaws let you customize how your startup functions.
What do bylaws cover?
Bylaws typically address areas such as:
Directors and officers: Their roles, responsibilities, and how they are selected.
Meetings: Rules for scheduling board of directors meetings, stockholder meetings, and how decisions are made.
Stockholder rights: How stockholders participate in company decisions, receive meeting notices, and vote.
Corporate records: What records must be kept and how they should be maintained.
Stock transfers: Procedures and restrictions around transferring ownership shares in the company.
Indemnification: Protection for directors and officers from potential legal liabilities.
What bylaws don't do
Bylaws cannot override Delaware law or your Certificate of Incorporation.
If there's a conflict, the state law or your founding document takes precedence over the bylaws every time.
Why are bylaws important?
Clarity and consistency: Bylaws create clear rules, reducing potential conflicts and ensuring everyone understands how the company should run.
Investor confidence: Well-drafted bylaws demonstrate that your startup is organized and professional, which is attractive to potential investors.
Conflict resolution: In case disputes arise, bylaws provide a framework to resolve them.
Optional bylaw provisions to consider
Some additional clauses you might consider for enhanced control:
Supermajority voting: Requiring a higher percentage of votes for certain actions (like calling special meetings) can protect against unwanted changes.
Right of first refusal: Grants the company or existing shareholders the first option to buy stock offered for sale, preventing undesirable new shareholders.
Imagine a scenario where a co-founder wants to sell their shares to a competitor.
A right of first refusal in the bylaws would allow you and other existing shareholders to purchase those shares first, maintaining control and protecting your business interests.
Remember, investors may request revisions to these types of provisions when funding your startup.
Practical tips for bylaws
Don't reinvent the wheel: Utilize reliable templates and legal counsel to ensure your bylaws are comprehensive and legally sound.
Tailor to your startup: Avoid directly copy-pasting generic bylaws. Customize them to your startup's specific needs.
Regular review: As your company grows, revisit and update your bylaws to ensure they stay relevant and effective.
Conclusion
Bylaws are a powerful tool for ensuring the smooth operation of your startup.
By understanding their purpose, content, and practical uses, you position your company for success and streamline its governance processes.
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