CORPORATE Managing director in a start-up? You should be aware of this!

The GmbH is the most frequently chosen legal form for start-ups in Germany. It is quick and easy to set up, well-established with investors and offers a wide range of legal structuring options. However, the appointment as managing director not only brings prestige but also considerable legal and economic responsibilities.

Understanding the role: prestige meets responsibility

As a managing director, you act exclusively in the company’s interests and manage third-party assets. You are personally liable for your private assets for misconduct or breaches of duty (§ 43 GmbHG). A shareholder managing director with 100% of the shares must know his dual function.

However, start-ups are usually founded with more than just one shareholder. The shareholders can be simple investors (FFF family, friends & fools, or professional investors), qualified investors (media or service for equity), employees, or (co-)managing directors in the company. The respective roles should be reflected in the company’s association articles and any participation agreement.

In particular, the legal consequences for cases in which the duties and responsibilities of the respective roles are not fulfilled must be worked out. For example, if four friends set up a GmbH and promise each other to devote their entire working capacity to the development of the company (or if only one shareholder takes this into his inner world of ideas and makes this assumption the basis of his decision to participate in the GmbH), the articles of association should include provisions for the event that one shareholder ceases to participate and only withdraws to his “shareholder role.” Suppose this happens in the event of a dispute. In that case, the “only” shareholder is in a position to drive the managing shareholder before him by exercising his shareholder rights on the one hand and the responsibilities of the managing director on the other. Such examples are legion. In this case, it is better to withdraw the shareholder’s shares and eliminate the shareholder who has broken or not correctly fulfilled promises of cooperation or performance.

The importance of individual articles of association

Many start-ups rely on ready-made articles of association that are not tailored to the specific needs of the founders. In the event of a dispute , this can be expensive or even threaten the company’s existence. Careful, expert advice when drawing up the articles of association and the participation agreement is essential to account for potential crisis scenarios. Conflicts among shareholders can often be avoided or managed with clear and precise regulations.

Focus on shareholder benefits

Monetary benefits or cooperation are often promised in addition to the agreed share capital contribution. To avoid disputes, these must be clearly formulated in legal terms and verifiable. The managing director should ensure all agreed contributions are contractually regulated and enforceable. If he fails to do so adequately, he may be accused of failing to pursue the company’s claims.

Protection of intellectual property (IP)

The protection of intellectual property is critical in technology-oriented start-ups. Software or other developments to which shareholders or managing directors have contributed must legally belong to the company. With appropriate copyright transfers, there is a risk of conflicts in which shareholders could only allow the company to use in the event of a dispute. This effect could not only jeopardize operations but also deter potential investors.

Liability and protection

Managing directors are subject to a strict liability regime. Breaches of duty can have consequences that threaten the company’s existence. Suitable D&O (directors and officers) insurance should, therefore, be taken out at an early stage. The D&O protects the managing director against personal liability risks and is often available under favorable conditions, especially for start-ups.

Expert advice is essential to avoid conflicts and lay the foundations for sustainable success. Take this responsibility seriously – your start-up will thank you for it!