---
title: "What Is Duty of Loyalty?"
term: "Duty of Loyalty"
description: "Duty of loyalty requires directors and fiduciaries to put the company's or fund's interests ahead of their own—disclosing conflicts and avoiding self-dealing."
date: 2026-07-25T00:00:00.000Z
updated: 2026-07-25T00:00:00.000Z
topics: ["venture-capital"]
source: https://venturecapitaltracker.com/glossary/duty-of-loyalty
---

# What Is Duty of Loyalty?

> Duty of loyalty requires directors and fiduciaries to put the company's or fund's interests ahead of their own—disclosing conflicts and avoiding self-dealing.

**Duty of loyalty** obligates fiduciaries to prioritize the entity they serve over personal gain—and to disclose situations where those interests might collide.

## How it works

Common loyalty issues in venture:

- A director personally invests in a competitor without board disclosure.
- A founder routes a company contract to a family-owned vendor at above-market rates.
- A GP allocates a hot deal to their personal carry vehicle ahead of the fund.
- An investor-led round prices unfairly to benefit the lead's existing stake.

Proper response: **disclose** the conflict early, recuse from votes where biased, and obtain **disinterested director** or committee approval. Delaware law allows many conflicted transactions if properly cleansed; hiding them creates liability.

Entire fairness review applies when loyalty is challenged—burden shifts to prove price and process were fair, a high bar.

## Why it matters

- **Founders:** Side projects, consulting gigs, and related-party hires need board visibility. "Forgot to mention" is not a defense in shareholder litigation.
- **Investors:** Your reputation and fund LP agreements require conflict policies. Coinvestment rights must be offered fairly across LPs where promised.
- **Employees:** Loyalty also binds executives who compete or steal trade secrets post-departure—overlapping with non-compete and IP assignment rules.

## Common mistake

Assuming small conflicts do not count. Even modest personal benefits—cheap office sublease from a founder's LLC—require disclosure if the company is party. Paper the waiver.

## Related ideas

- [Duty of Care](/glossary/duty-of-care) — prudent process standard
- Related-party transaction — formal term for insider deals
- Entire fairness — judicial standard for conflicted transactions
- [Drag-Along Rights](/glossary/drag-along) — sale process must respect fiduciary duties

## FAQ

### What is Duty of Loyalty in simple terms?

You cannot use your board or GP seat to benefit yourself at the company's expense—no secret side businesses stealing IP, no undisclosed personal investments in competitors without approval.

### Why does Duty of Loyalty matter?

Loyalty violations trigger lawsuits, forced resignations, and deal blocks. Conflicted financings, founder loans, and GP coinvestments all need transparent process and often disinterested approval.


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Source: https://venturecapitaltracker.com/glossary/duty-of-loyalty