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Indemnification Agreement

An Indemnification Agreement sets forth procedures by which your startup will indemnify one of its officers or directors (the individual who signs the agreement), thereby minimizing his or her personal liability for actions taken on behalf of your startup.

The Indemnification Agreement generated by SmackDocs was developed by a working group of the National Venture Capital Association, and (in addition to providing protection for individual officers and directors) it allows you to indemnify entities (usually venture capital firms) that have committed some of their own directors to your startup’s board. This is a common and accepted practice that helps a venture firm protect its investment. How? It is an unfortunate reality that when a venture capital firm invests in a startup, any lawsuit filed against the startup or its board of directors is certain to name the venture firm as a party. This is because a venture firm normally has deeper pockets and greater resources with which to settle a claim than the startup being sued. Though there are divergent views in the startup community regarding the indemnification of venture capital firms, SmackDocs believes that doing so is fair and appropriate. Any venture firm with which you do business will appreciate it too.

Stockholder Approval of Indemnification Agreement

The Stockholder Approval of Indemnification Agreement is one of a group of documents that allows the stockholders of your startup to formally sanction or approve a “resolution” of your startup’s board of directors. A resolution is a decision or objective that has been voted on (and was agreed to) by your board members. A formal sanctioning or approval from your startup’s stockholders is generally reserved for important or significant board resolutions – examples of this sort are the approval of an Equity Incentive Plan, and the indemnification of a given individual or entity by your startup. Many less-impactful decisions involving your startup will be discussed and voted on by board members (replacing a non-critical vendor or changing the appearance of your employees’ uniforms might qualify), however those votes should not require formal sanction from stockholders.

The Stockholder Approval of Indemnification Agreement allows participating stockholders to sanction the indemnification of one of your startup’s officers or directors, or an entity (such as a venture firm which has appointed one or more of its own directors to your startup’s board) against personal liability if your startup is the defendant in a legal action. Discretion as to the individuals or entities to indemnify resides primarily with your startup’s president and/or its vice president(s). You might say that the role of the stockholders (via the document Stockholder Approval of Indemnification Agreement) is (first) to endorse those decisions, and (second) to authorize their execution.

Board Approval of Indemnification Agreement

The Board Approval of Indemnification Agreement is one of a group of documents that formally chronicles the approval of a “resolution” by your startup’s board of directors. A resolution is a decision or objective that has been voted on (and was agreed to) by your startup’s board members. The process of formal documentation is generally reserved for important or significant resolutions – examples of this sort are the approval of a Restricted Stock Award, and the issuance of stock options to a given individual. Many less-impactful decisions involving your startup will be discussed and voted on by board members (replacing a non-critical vendor or changing the appearance of your employees’ uniforms might qualify), however – while these should always be recorded – they do not require formal documentation.

The Board Approval of Indemnification Agreement allows your startup’s board of directors to sanction the indemnification of an officer or director, or an entity (such as a venture firm which has appointed one or more of its own directors to your startup’s board) against personal liability if your startup is the defendant in a legal action. The role of your startup’s board members and its stockholders (compare this document to the document Stockholder Approval of Indemnification Agreement) with respect to choosing the indemnitee(s) is mostly passive. The president and vice president(s) of your startup will be responsible for making any such decisions. The Board Approval of Indemnification Agreement simply gives board members an opportunity to put their stamp on it.