Living Will? Durable Power of Attorney? Life insurance policies? List of all credit cards?
I’m sure it was Beth who asked first. She’s the oldest. She long ago got her personal affairs all in line, making good use of her time during another long winter in northern Vermont. She’s the one who introduced me to I.C.E. (In Case of Emergency) to identify my personal first responder on my cell phone.
She’s also the one who mobilized the other four kids to join her in “encouraging” me to get my own ducks in order: Where are the car registrations? How do we access your bank accounts? The investment accounts? Where are the tax returns? I hadn’t anticipated that our extended Christmas gathering would include quite such an inquisition, but Beth had been doing some reading and deep thinking (another product of Vermont winters) and wanted to broaden the I.C.E. concept. Not hard to figure how Vermonters get ice on the mind, especially in December.
Of course, I knew where it all was. But no one else did. And that was just the point. So 2012 became the Year of Documentation. I committed to write it all down and make it accessible (see the “I.C.E.” file in My Dropbox, guys), and they and Annie committed to hold me accountable from time to time. With persistence, and a few rainy weekends, I may actually get the project done this spring.
“Ah, stop!” you say. “I’ve heard this before. Last September’s issue of Howe’s Bayou gave me all the info I need about Due Diligence. I know all about the financial history that the bankers and prospective investors need when I go looking for funding.”
Well, thank you for reading, and remembering. But there’s another whole side to the due diligence process that relates to your corporate organization. Briefly stated, your investors want to know that their money is going into a legally-constituted entity, that the corporate structure is well-established, and that, insofar as possible, the risks are fully disclosed, well-defined and well-described. They want to know who’s who in the established management hierarchy, what person or group has ultimate decision-making authority, what rights the various equity groups may possess, and what “membership fee” the other equity holders paid.
In most small companies, the responsibility for maintaining this record falls to the Controller or to the Director of Finance and Administration. But the Source, the usual repository of basic corporate information, is the lawyer or firm who filed the original documents to establish your company. At the earliest possible date thereafter, that information should migrate to your internal files to provide flexibility down the road should your needs for legal representation change.
This, then, is the minimum corporate documentation that should be on premises and no more than a couple of clicks away:
- Certificate of Incorporation â€” Issued by the state and attesting to your legal existence in return for filing your Articles of Incorporation, which provides essential data about your corporate name, organizational (and stock) structure, your officers and directors, and your address.
- Bylaws â€” Usually drafted by counsel and adopted by the Board to establish the rights and powers of the shareholders, the directors, and the officers and to describe the process for selection of the latter two groups.
- Shareholders’ Agreement â€” Establishes the rights of the respective owners of the entity, especially when there is more than one class of stock, and specifies the process by which shares may be bought, sold, or transferred.
- Stock Option Plan â€” Defines the basis by which persons or entities (usually those affiliated with the corporation) may be granted the right to purchase stock at a later time and/or under certain restricted conditions.
- Stock Register â€” Records the issuance (and redemption) of stock by certificate number, by name and address of stockholder, by number of shares, and by purchase date.
- Stock Option Register â€” Records the names and addresses of all option holders and the terms of their option grants, including the exercise prices and the effective dates and expiration dates of such grants.
- Corporate Record Book â€” Includes signed minutes of all meetings of shareholders and of directors together with copies of documents distributed to attendees and referenced in the minutes.
- Foreign Corporation Certificate â€” Attests to the company’s registration for the right to do business in a state other than the state of incorporation.
- Corporate Ventures â€” Agreements relating to ownership of or investments in any business or enterprise, including investments in joint ventures and minority equity investments.
- Cap Table â€” Presents in a single summary sheet your capitalization history, recording and tracking the ownership of the company including stock transactions, convertible debt, option conversions, and operating results (profit/loss) and the resulting effect on the value of the outstanding shares of stock.
After spending some time this week trying to reconstruct the Corporate File with the new Director of Finance of a still-young client company, I asked the CEO if he could help us to fill in the gaps. Of course, he knew where it all was. But no one else did. And that was just the point. Until he had a stable, full-time, permanent senior manager in charge, he wasn’t going to delegate the responsibility.
And neither am I.