TLDR:
Fiduciary duties are legal obligations requiring directors, officers, and certain others to act in the best interest of beneficiaries, including the duty of care and duty of loyalty.
Core Fiduciary Duties
The two primary fiduciary duties are the duty of care (acting on an informed basis with reasonable diligence) and the duty of loyalty (placing the company’s interests above personal interests, avoiding conflicts, and not usurping corporate opportunities). Additional duties include good faith, candor, and confidentiality. These duties form the bedrock of corporate governance and are enforced through derivative lawsuits and direct claims by shareholders.
Application to Startup Boards
Startup directors face heightened fiduciary scrutiny, particularly in situations involving founder departures, financing rounds with conflicting investor interests, and acquisition decisions. The business judgment rule generally protects informed, good-faith decisions, but courts apply stricter standards when conflicts of interest exist. Directors should document their decision-making process, recuse themselves from conflicts, and consult independent counsel on significant matters.
Breach of Fiduciary Duty Consequences
Breach of fiduciary duty can result in personal liability for directors and officers, including monetary damages and equitable remedies. Most companies provide D&O insurance and indemnification to protect directors, but these protections have important limits (notably, no indemnification for bad faith conduct). Founders should ensure proper D&O coverage before joining or recruiting board members.