Why Founders Need External Counsel to Sit-in During Board Meetings

Legal counsel has many crucial responsibilities outside of formation docs, patent applications, and negotiating financing docs. We identify the important role that’s often overlooked—which is sitting in on their board meetings.

Why Founders Need External Counsel to Sit-in During Board Meetings

Generally, founders know they need to retain external legal counsel for a few main reasons: 1) file corporate formation documentation, 2) file patent applications, and 3) help to negotiate financing documents. What founders may not know is that their legal counsel has many other crucial responsibilities and should be involved with their company on a frequent basis – including—an important role that’s often overlooked—which is sitting in on their board meetings. However, before we get to board meetings, let’s discuss a few of the other important roles of outside counsel.

In the early days, external counsel will be one of the founders’ most experienced resources in terms of setting up their private company. As mentioned, this includes the actual formation documents. This also includes providing advice on how to structure employee option pool plans and vesting schedules. It is imperative that these plans be set up correctly to ensure it doesn’t create future problems such as onerous tax implications. Commonly, founders will hear that a four-year vesting schedule is standard – but there are many different ways equity can vest over those four years (e.g. 25% each year or 30% in the first year / 30% in the second year, and 20% each year thereafter). Counsel can help determine what is market and take into account company-specific circumstances.

Another activity counsel will likely opine on is setting and updating your 409A valuation. While an external firm will actually set the 409A price, counsel will help determine when it needs to be updated and may help you prepare documentation for the actual process.

Now - let’s get to the question of why counsel has an ongoing role in board meetings.

There are actually many reasons. Starting with the broadest, it’s simply good corporate hygiene. Counsel typically takes notes – which are referred to as minutes. These are often very high-level and do not include specific material non-public information. These minutes are sent around to board members prior to the next meeting for approval and then are recorded as such.

Proof Your Company Takes Corporate Governance Seriously: Future investors may ask to see these minutes. By providing future investors with minutes, it shows them the frequency with which the board actually convened. It’s a red flag if your board isn’t meeting quarterly. It is also a signal that the company takes corporate governance seriously. Typically, future investors aren’t actually expecting to learn anything material from these notes, but rather to use them as a signal that the board is operating appropriately.

Timely Legal Advice: Counsel can do more than take minutes, though. While they are typically observers in these meetings, they can also provide advice. These topics can include reminding the board that a 409A needs updating based on a financing event as discussed or it can be advice on severance policies or the hiring of employees from other jurisdictions.

The perspective of counsel remains important as a company raises subsequent rounds of financing – especially if the capital structure gets more complicated. For example, counsel will know if any party has non-standard voting rights. They will also know who has information rights, super pro-rata rights, etc. Having them at board meetings to remind everyone of any non-standard terms can be very helpful in anticipating or resolving potential issues.

Privilege & Confidentiality: Finally, a commonly overlooked reason to invite counsel to board meetings is that they provide privilege. Conversations had amongst the board in the presence of counsel are protected by privilege and confidentiality. It is important to speak to your counsel about this point if you need to have a privileged conversation – by inviting outside guests to a board meeting – you may be waiving privilege.

Counsel is important in many areas of successfully running a start-up. Setting up your documentation and option pools correctly is just the beginning. Going forward, you’ll rely on counsel to ensure you are navigating conflicts, new jurisdictions, 409A valuations, and much more. Inviting them to your board meetings will ensure they are up-to-date and allow them to best support your company.

A version of this article originally appeared on Forbes.