As a company grows and formalizes its governance by appointing a board of directors, founders, investors, and advisors, those who join the board gain not just strategic influence but significant legal responsibility.

Failing to understand or fulfill fiduciary duties can expose directors to personal liability, even with good intentions. However, most claims are avoidable with sound governance, thorough documentation, and legal awareness. Our fractional general counsel services help growth companies advise directors on fiduciary duties, strengthen corporate governance, and reduce the risk of personal liability as the business scales.

With this context in mind, let’s explore the specific fiduciary duties of directors and practical steps you can take to reduce personal risk as your company grows.

What Are Fiduciary Duties?

A fiduciary duty is a legal obligation to act in the best interests of another party. For directors, that duty is owed to the corporation itself and its stockholders or members, not to individual founders, investors, or constituencies.

While the precise rules vary by state, Pennsylvania and Delaware law, which governs many venture-backed companies, generally recognize three core fiduciary duties:

The Duty of Care

The Duty of Loyalty

The Duty of Good Faith

Appreciating how these duties operate in a growth stage setting is the next step.

The Duty of Care: Making Informed Decisions

The duty of care requires directors to act as a reasonably prudent person would. Directors must stay informed about the company’s business and finances, review materials before meetings, ask questions, challenge assumptions, and make informed decisions.

Importantly, the law does not require perfect decisions; it only requires informed ones. Courts generally defer to directors under the business judgment rule, which protects directors from liability for honest mistakes if decisions were made in good faith and with reasonable diligence.

Where Problems Arise

Directors face risk when they rubber-stamp management decisions, fail to review key documents, or ignore red flags such as worsening financials or compliance issues.

The Duty of Loyalty: Avoiding Conflicts of Interest

The duty of loyalty requires directors to prioritize the company’s interests over their own. Loyalty disputes are common in growth companies.

Directors must avoid:

  • Self-dealing transactions\
  • Undisclosed conflicts of interest\
  • Competing with the company\
  • Using company opportunities for personal gain

For example, if a director also owns a vendor company or invests in a competitor, that relationship must be fully disclosed and properly managed.

Best Practice for Managing Conflicts

Conflicts are not always prohibited, but they must be disclosed, reviewed by disinterested directors, and approved in accordance with proper procedures. Failure to do so can eliminate business judgment protection and expose the individual to personal liability.

The Duty of Good Faith: Acting with Honest Intent

The duty of good faith is closely related to the duties of care and loyalty. It requires directors to act honestly, without intent to harm the company, and without consciously disregarding their responsibilities.

Bad faith can include:

  • Ignoring known legal violations\
  • Failing to implement basic oversight systems\
  • Acting with intent to benefit one group of owners at the expense of the company

In growth companies, bad-faith claims often arise when boards fail to respond to compliance risks, financial distress, or whistleblower complaints.

Special Risks in Growth Stage Companies

As companies scale, fiduciary risk increases due to:

  • Outside capital and minority investors\
  • Founder transitions and shifting control\
  • M and A discussions or exit planning\
  • Cash flow constraints and insolvency concerns

Once a company approaches insolvency, directors must be especially careful. While duties remain owed to the corporation, creditors may gain standing to assert claims, and decisions are scrutinized more closely.

How Directors Can Reduce Personal Liability

Fortunately, directors can significantly reduce personal risk by following established governance best practices:

1. Maintain Proper Documentation

Board minutes should reflect deliberation, questions asked, and the rationale for major decisions. Silence in the record can be costly.

2. Disclose Conflicts Early

Full disclosure allows the board to manage conflicts appropriately and preserve legal protections.

3. Rely on Qualified Advisors

Directors are generally permitted to rely on information from officers, accountants, and legal counsel when that reliance is reasonable.

4. Ensure Adequate Insurance

Directors and Officers insurance is essential for growth companies. Coverage should be reviewed as the company scales.

5. Understand Governing Documents

Operating agreements, bylaws, and shareholder agreements often modify default fiduciary rules or include indemnification provisions. Directors should know what protections and obligations apply.

The Bottom Line

Serving as a director in a growth company is both an opportunity and a legal responsibility. Fiduciary duties are not abstract concepts. They shape how decisions are made, documented, and defended.

With thoughtful governance, proper disclosures, and proactive legal guidance, directors can support growth while minimizing personal liability risk.

If your company is expanding its board or entering a new growth phase, a fiduciary duty review can help ensure that directors are protected and that the company is positioned for long-term success.

Speak with a Business Attorney About Fiduciary Duties

If you have questions about fiduciary duties or want to ensure your board is structured to minimize risk, contact Nathan Wenk at Spengler & Agans for experienced legal guidance. He works with growth companies to help directors navigate their obligations, protect themselves, and support the company’s success.