VC & PE Glossary
What Is Related Party Approval?
Updated
Definition
Related party approval is board or stockholder sign-off required before a company enters a transaction with insiders, directors, major shareholders, or their affiliates — ensuring conflicts are disclosed and terms are fair to the company.
Useful for: Founders, Investors
Related party approval is the formal governance step — usually disinterested directors or preferred holders — authorizing a transaction between the company and an insider or affiliated entity.
How it works
Delaware law and venture charters require fairness review when officers, directors, or significant stockholders have a material interest. The board documents conflict disclosure, compares terms to market, and records recusal of interested parties. /glossary/protective-provisions may require preferred consent above dollar thresholds for /glossary/related-party-transactions.
Examples: consulting payments to a founder’s other company, office lease from a VC-affiliated property, or sale of assets to a portfolio company with shared investors.
Why it matters
- Founders: Structure related deals at arm’s length before closing; retroactive approval looks like cover-up.
- Investors: Diligence lists all related-party flows; undisclosed deals retrade or kill rounds.
- Counsel: Minute books should show process, not just signatures.
Common mistake
Skipping approval because “everyone already knows.” Legal form matters; acquirers and auditors ask for paper trails.
Related ideas
/glossary/related-party-transaction, /glossary/board-consent, fiduciary duty, and fair dealing.
Related terms
- Board Consent — Board consent is formal approval by the board of directors — usually documented in a written consent or meeting minutes — authorizing corporate actions such as financings, option grants, or major contracts.
- Related-Party Transaction — A related-party transaction is any deal between a company and an insider — founder, executive, director, or controlling shareholder — or an entity they control, where conflicts of interest must be managed through disclosure and approval.
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Common questions
Short answers for founders, LPs, and operators