When you co-found a startup, you’re not just building a product - you’re taking on serious legal responsibilities. Among the most important are fiduciary duties. These aren’t abstract legal terms. They’re real obligations that shape decisions, disputes, and even lawsuits.
What Are Fiduciary Duties?
A fiduciary duty is a legal obligation to act in someone else's best interest. For startup founders, this typically applies to your duties toward the corporation itself and its shareholders.
If you’re a director or officer of the company (and in early stages, most founders are), you likely owe these core duties:
1. Duty of Care
You must make informed, well-reasoned decisions on behalf of the company. That means:
- Reviewing relevant information before board meetings
- Asking thoughtful questions
- Engaging experts when needed
Mistakes are okay - negligence or recklessness is not.
2. Duty of Loyalty
You must act in the best interest of the company, not your personal gain. That means avoiding:
- Self-dealing transactions
- Conflicts of interest
- Competing with the company
You can’t put your own priorities ahead of the startup’s welfare.
Who Owes Fiduciary Duties in a Startup?
Generally, fiduciary duties are owed by:
- Directors (members of the Board of Directors)
- Officers (CEO, CFO, etc.)
In some jurisdictions and scenarios, majority shareholders may also owe duties - especially if they have de facto control over the company.
Founders often wear all three hats. So if you're acting as director, officer, and shareholder, you need to be especially mindful of your decisions.
Common Traps for Founders
Here are some real-world examples where fiduciary duties come into play:
- Giving a friend a below-market advisory deal without board approval
- Taking confidential company info and applying it to a side project
- Authorizing a major company pivot without consulting co-founders or investors
Breaching fiduciary duties can lead to lawsuits, removal from the board, or worse. But staying in compliance is often as simple as transparency and proper process.
Protecting Yourself: Use the Business Judgment Rule
Courts generally don’t second-guess business decisions - as long as:
- You were informed
- You acted in good faith
- You didn’t have a conflict of interest
This is known as the Business Judgment Rule, and it’s your best protection against claims of breach - if you follow the right process.
Final Thoughts
Founders are stewards of their companies, not just creators of products. Understanding fiduciary duties helps you lead with integrity, navigate tough decisions, and build lasting trust with co-founders, investors, and employees.
If you’re unsure whether something raises fiduciary concerns, the safest move is to disclose, document, and seek legal advice.
Frequently Asked Questions
FAQs about Fiduciary Duties for Founders
Do all founders owe fiduciary duties?
Not automatically. Fiduciary duties typically apply when a founder also serves as a director or officer - which is common in early-stage startups.
Can fiduciary duties lead to personal liability?
Yes. Breaches of duty can expose directors and officers to lawsuits, financial damages, and even removal from their roles.
How can founders avoid fiduciary duty issues?
The best practices are transparency, documenting decisions, avoiding conflicts of interest, and seeking approval from the board when needed.
What happens if co-founders disagree on a major decision?
If fiduciary duties are involved, decisions should follow proper corporate governance—through board votes, shareholder approvals, or documented resolutions.
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