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If you are a founder of a company, it is likely you have chosen to be a director and shareholder of that company too. You need to distinguish between your roles as a founder, director and shareholder, as each position comes with different responsibilities and rights. There is a risk you might fail to comply with your duties in one capacity because you were only thinking of another. If this occurs, there may be legal consequences. This article explains:
- the differences between being a founder, director and shareholder; and
- issues to look out for if you are one, both or all three.
I Am a Founder, Director and Shareholder in a Company. What Is There to Worry About?
It is common for a founder of a company to also have the role of a director and shareholder. Even if you are not the founder of a company, you may be a director and a shareholder. Each of these roles comes with different rights and responsibilities. If you fail to comply with your responsibilities while performing in one role, then you could risk:
- an individual or company bringing legal action against you;
- receiving a fine; or
- potentially ending up in jail.
It is therefore important to know what each of your different roles expects from you.
What Are the Differences Between the Different Roles?
Founder
| How Do You Get This Role? |
If you start a business alone, with a partner or with a team of people, you will likely be considered a founder. Importantly, being a founder is not a legal concept. There is no law to say that you are or are not a founder of a business. It is up to you and the people who call themselves ‘founders’. You do not necessarily have to invest in your company to be a founder. However, founders will often have lent money to their company, or have bought shares in the company to get it up and running. |
| What Rights Do I Have? |
Being a founder of a company does not automatically mean you have any rights in respect of your company. However, you may have been given rights by your company’s shareholders or directors as a founder. For example, shareholders often agree in their shareholders agreement that founders have a right to appoint a director. |
| Do I Get Paid For My Role? |
As a founder, you may be an employee of your company. If you are, you are entitled to be paid at least minimum wage. Beyond this, founders may choose to receive shares in their company rather than cash, in order to keep the cash in their business. If you are a startup founder, you may be entitled to pay under Australian employment law. |
| What are my Responsibilities? | A founder is not a legal concept. Therefore, you do not have any legal responsibilities as a founder. |
Director
| How Do You Get This Role? |
You can be appointed as a director, either by shareholders in the company or the other directors. You must give a signed piece of paper saying that you consent to act as a director of the company before being appointed. |
| What Rights Do I Have? |
As a director, you have the right to make business decisions on behalf of the company. For the more important business decisions, you may need to agree with some or all of the other directors. How many directors need to agree on a type of decision will be set out under the law, in the company’s constitution or in the shareholders agreement. It is also likely that you will have the right to decide to issue shares in the company, and therefore determine who becomes a shareholder in the company. |
| Do I Get Paid For My Role? |
As a director you may be paid for your role. Generally, the shareholders will decide how much you get paid or approve the amount proposed by you or the other directors. However, if you are also a founder working in the business, you would generally not receive both a salary and a directors fee. |
| What are my Responsibilities? | If you are a director of your company, you will have a number of responsibilities. The most important of these are your directors duties. There are four main duties for directors. These are the duties to :
If a director fails to fulfil their duties or acts dishonestly, the director may be personally responsible for significant penalties. |
Shareholder
| How Do You Get This Role? |
You become a shareholder in a company if you buy shares in the company. This includes any shares you purchase when the company is first set up. You will be a shareholder in the company until you sell or surrender all of your shares |
| What Rights Do I Have? |
Whilst the directors control the day to day running of the company, some of the most important decisions are left to the shareholders. These include the decision to remove directors in some cases, change the rights attaching to shares or wind up the company. You may also have the right to share in the profit that the company makes. |
| Do I Get Paid For My Role? |
You do not get paid for your role as a shareholder. However, you may be entitled to receive payments on your shares in the form of dividends if the company makes a profit. |
| What are my Responsibilities? |
As a shareholder, you do not have any significant responsibilities to the company unless your company’s constitution or shareholders agreement says otherwise. Shareholders must act in accordance with the lawful decisions of directors and make decisions promptly and in good faith. For example, if you received shares worth $1,000.00 but only paid $1.00, you have a $999.00 liability to the company. You have no other liabilities, meaning that you are not responsible for the company’s debts. |
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When Should I Be Careful About My Different Roles?
For the most part, acting in your different roles should not cause problems. However, there are some situations in which:
- a conflict of interest may arise; or
- you may be at risk of breaching your responsibilities.
Examples of situations you where should be particularly careful are set out below.
Making a Decision About High Risk Business Transactions
As a founder, you may be tempted to make risky decisions on behalf of your company which you believe could have significant benefits down the line. However, as a director, you are only permitted to make decisions if you think those decisions are in the best interests of the company. If the chance of pay-off is too low, a high-risk decision may not be in the best interests of the company.
Making Decisions Which Affect Current Shareholders’ Shareholding in the Company
One way to raise money for your company is issuing shares to new investors. As a director, this decision may be in the best interests of the company. However, as a shareholder, you may not be happy about the company issuing new shares as this reduces your personal shares in the company. In this situation, your directors’ duties outweigh your misgivings as a shareholder. You must act in the best interest of the company, not in your best interest personally as a shareholder.
Choosing Who Makes Decisions on Behalf of the Company
As a founder, you may want to retain full control of your company and all decision making powers. However, as your company grows, you may not have the level of expertise required to run your company as well your shareholders would like. There may come a point where it would be in the best interests of the company to appoint another director to the board who has the required expertise. You may not want this as a founder but your directors’ duties are the most important. You must always ensure that you are acting in the best interests of the company.
Choosing Who Cannot Make Decisions on Behalf of the Company
It may no longer be in the best interests of the company for a director to stay on if they have:
- consistently displayed poor decision making ability;
- failed to show up to board meetings; or
- they become incapacited in someway.
If this is the case, they should be removed as director.
Key Takeaways
As a founder, you do not automatically have any legal rights in respect of your company. If you are a director of your company, you must always act in the best interests of your company. This duty applies even if it affects you negatively as a founder or a shareholder. If you are a director of your company and you have a personal interest in a matter, you must disclose this to the other directors. Decisions relating to the matter may not allow your involvement. If you have a question about your legal responsibilities as a founder, director or a shareholder, contact LegalVision’s startup lawyers on 1300 544 755 or fill out the form on this page.
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