1. Governance Bodies in early-stage startups
A typical German early-stage startup has two legally required governance bodies: (1) the managing directors and (2) the Shareholders’ meeting. As far as the law is concerned, the advisory board (known as "Beirat") is not a requirement during the initial stages, but it typically gets set up when the first round of institutional funding comes in.
2. Advisory Board
Many startups establish an Advisory Board, which serves as an intermediary between Managing Directors and Shareholders, typically required for GmbHs with 500 to 2,000 employees. As a company grows, many chose to transform into an societates Europaea or SE, which is technically a public company registered in accordance with the corporate law of the European Union. This step makes it easier to merge and acquire other companies cross-border within the European Union, and transforming into an SE also eases the transition to the public markets and the preparations for an Initial Public Offering or IPO. We believe the Advisory Board should be designed as a body with a strong and independent management team in the lead that aligns the interests of all other stakeholders and investors. It acts as both an advisory and oversight body, granting specific powers that can replace some Shareholders' Meeting responsibilities. Legally binding provisions for the Advisory Board must be in the company's articles.
The Advisory Board's typical actions and measures include:
- Supervising and advising the company's management
- Helping advise and prepare capital measures such as Mergers and Acquisitions, capital increases, and a public listing
- Managing directors' appointments, and decisions related to their compensation
- Approving specific consent measures, such as the annual business plan, hiring employees above a certain salary threshold, and establishing or closing subsidiaries
- Issuing of VSOP or other employee participation rights
3. Liability of Advisory Board Members
The Advisory Board's liability is contingent on its rights and powers. Liability becomes crucial when board approval is required for actions and measures; in such cases, a Board Member may be held accountable for detrimental decisions, even with sufficient information and expertise. This shift of responsibility from management and shareholders to the Board underscores the importance of liability.
For Advisory Boards primarily serving a consultative function, liability is less significant. Prospective board members are advised to acquaint themselves with the articles and related responsibilities. Typical liability risks encompass inadequate management supervision, failure to prevent management fraud, neglecting to pursue damage claims against third parties or management, and the unauthorized disclosure of confidential information.
Personal liability is typically limited within the company's Articles or Shareholder Agreements, which is particularly relevant for optional Advisory Boards. Personal liability protection can also be achieved through D&O Insurance, a notable consideration for mandatory Advisory Boards.