What do a company’s stockholders approve at formation?

Takeaway: Stockholders will approve the certificate of incorporation and the bylaws. They will sometimes also approve indemnification agreements and an equity incentive plan if one is being set up at formation.

When a company is formed, there are several matters that require approval from the company's stockholders. These matters are typically outlined in the company's Certificate of Incorporation and can vary depending on the jurisdiction in which the company is formed. Here's a detailed guide to what a company's stockholders typically approve at formation.

Certificate of Incorporation

The Certificate of Incorporation is the primary formation document for a company and typically requires approval from the company's stockholders. This document sets forth the company's basic information, including its name, purpose, duration, and authorized stock. The stockholders must approve the Certificate of Incorporation before it can be filed with the state and the company can be officially formed.

Bylaws

The Bylaws are another important document that typically requires approval from the company's stockholders at formation. The Bylaws govern the company's internal operations, including its management, shareholder meetings, and other procedures. The stockholders must approve the Bylaws in order for them to become effective.

Indemnification Agreements

One of the initial approvals that the stockholders of a company typically make when the company is formed is the approval of indemnification agreements. This agreement is designed to protect the company's directors, officers, and other agents from liability arising from their service to the company. The indemnification agreements typically require the company to reimburse these individuals for any expenses or losses incurred as a result of legal proceedings or investigations related to their service to the company. These agreements also provide the individuals with additional protection and assurance that they will not be personally liable for actions taken in the course of their service to the company. The stockholders must approve the indemnification agreements in order for it to be effective and to ensure that the company is providing adequate protection to its directors, officers, and agents.

Equity Incentive Plan

Stockholders of companies sometimes also approve an equity incentive plan when the company is formed though, more often, founders will sell shares directly to early employees at very low prices and leave the equity incentive plan for later. The plan outlines the terms and conditions under which the company will issue equity-based awards, such as stock options or restricted stock awards, to its employees, directors, and consultants. The stockholders must approve the equity incentive plan in order for it to be effective and to ensure that the company's equity-based compensation program is compliant with applicable laws and regulations.

Conclusion

When a company is formed, there are several matters that require approval from the company's stockholders. These matters typically include the approval of the Certificate of Incorporation, Bylaws, indemnification agreement, and equity incentive plan. It's important for the company's founders and management team to understand these requirements and to ensure that they are met in order for the company to be properly formed and legally compliant. Failing to approve the correct items up front can pose issues down the road (usually these issues come up when you’re fundraising).