Fiduciary Duty

A legal obligation to act in the interests of another party - for a company director, generally the company and its shareholders as a whole.

Example

A director appointed by an investor must still consider all shareholders when voting on a sale.

Important

An investor-appointed director who simply votes for their fund's financial interest can breach these duties. Specific duties vary by jurisdiction.

Related terms

• Conflict of Interest — A situation in which a person's personal or other professional interests could influence their duty to act in another party's interests.
• Duty to Creditors — The obligation, recognised in many jurisdictions, for directors of a company approaching insolvency to give significant weight to creditors' interests.

Lessons that explain it

• Your reputation is built in the difficult moments — An investor's reputation is formed mostly by behaviour when companies struggle - down rounds, missed plans, founder departures. Founders and co-investors check it, and it shapes future access. (9 min)
• A director appointed by an investor owes duties to the company, not to that investor — Board directors generally owe fiduciary duties to the company and its shareholders as a whole. An investor-appointed director who puts their fund's interests first can breach those duties, which is the central tension in startup governance. (12 min)
• A board seat can carry personal legal risk, especially when a company approaches insolvency — Directors can face personal liability for certain failures, and the risks often rise when a company is close to running out of money. Directors' and officers' insurance and indemnities reduce but do not remove that exposure. (11 min)
• Decisions that are not recorded are difficult to rely on later — Board minutes, written consents and maintained records are what prove a decision was properly made. They matter most in disputes, financings and sales, when everything is examined. (10 min)
• The hardest board decision, and the one most often made too late — Replacing a founder chief executive is rare, disruptive and sometimes necessary. Boards tend to delay it, and the cost of delay is usually larger than the cost of the decision. (12 min)
• What you learn in one company is not yours to use in another — Investors see confidential information across companies. Handling conflicts, competitive overlap and confidential data properly protects founders, your reputation and your ability to keep investing. (10 min)

All 578 terms in the Investing glossary