Related Party Transaction Policy for Startups: Guardrails for Protection, Not Gates

Related Party Transaction Policy for Startups

When you’re moving fast to build a product and find market fit, formal policies can feel like unnecessary corporate bureaucracy. But a scenario we repeatedly see is a founder putting a critical software subscription on their personal credit card to keep things moving, or a key investor offering their firm’s marketing services at a “friendly” rate. These aren't just operational shortcuts; they are related-party transactions (RPTs). Learning how to handle related party transactions in a startup isn't about red tape. It's about building a clean, auditable company that instills confidence in future investors and acquirers.

Establishing a simple process protects both the company and its leadership from potential conflicts of interest down the road. It is a foundational element of good startup governance.

What Is a Related-Party Transaction?

A related-party transaction is any business deal or arrangement between a company and one of its key insiders or their affiliates. To manage them, you first need to understand who qualifies as a “related party.” For a pre-seed to Series B startup, this group typically includes:

• Founders and Executive Officers: The C-suite and other key members of management.
• Board Members: Anyone serving on the company’s board of directors.
• Major Investors: While definitions vary, a major investor is commonly defined as an individual or entity holding more than 10% ownership.
• Immediate Family Members: Spouses, children, parents, and siblings of the people listed above.
• Other Businesses: Any entity controlled by a founder, executive, director, major investor, or their immediate family.

RPTs are not inherently bad. A founder loan to cover payroll for a SaaS company before a funding round closes can be a lifeline. The problem arises when these transactions are not transparent, fair, and properly approved. The guiding principle is whether the transaction occurs at “arm’s length,” meaning on terms that are as good or better than what the company could get from a completely unrelated third party.

Common examples in startups include:

• Founder-as-Creditor: A founder provides a short-term loan to the company to cover operating expenses.
• Investor-as-Vendor: A venture firm that invested in your biotech startup also has a specialized consulting arm that you engage for regulatory advice.
• Family-as-Landlord: Your e-commerce business rents warehouse space from a property company owned by a founder’s parent.
• Inter-Company Services: A founder’s separate software development agency builds the initial MVP for their new startup.
• Executive Compensation: Salaries, bonuses, and stock option grants to founders and executives are also technically RPTs.

Overlooking these common dealings is a primary source of unseen compliance gaps that can complicate future financing and exit opportunities.

The Startup Transaction Approval Process: Guardrails, Not Gates

Having no defined approval process can stall urgent payments and expose directors to claims of a conflict of interest. The goal is to create a founder conflict of interest policy that provides guardrails for protection, not gates to block necessary business operations. This process hinges on materiality, which is the transaction size that warrants formal oversight.

A common materiality threshold for requiring board approval at the post-seed or Series A stage is any transaction over $25,000. For companies seeking a more robust standard, a conservative threshold can be borrowed from the SEC disclosure rules for public companies, which is $120,000 (Citation: SEC disclosure threshold).

The reality for most startups is more pragmatic. What founders find actually works is a tiered approach that scales with the company’s growth.

Tier 1 (Good: Pre-Seed): Below the Materiality Threshold (e.g., less than $25,000)

The transaction should be reviewed and approved in writing by a disinterested manager or officer. An email is sufficient for documentation. A founder cannot approve their own related transaction. For example, a Deeptech founder wants to buy a used piece of lab equipment for $15,000 from their old university lab where their spouse now works. The other co-founder can review the price against other listings and approve it via email.

Tier 2 (Better: Seed or Series A): Above the Materiality Threshold (e.g., more than $25,000)

The transaction requires formal review and approval by the disinterested members of the board of directors. The related party must fully disclose their interest in the transaction and recuse themselves from the board discussion and vote. This approval must be formally documented in the official board minutes.

Tier 3 (Best: Series B and Beyond): Formal Policy in Place

The company adopts a formal RPT policy that defines related parties, sets clear materiality thresholds, and outlines the approval workflow. At this stage, the board may delegate authority to a specific committee, like an audit committee once formed, to review and approve these transactions.

Documentation and Disclosure: Your Audit and Diligence Shield

Inadequate documentation and disclosure create significant risk during audits and fundraising diligence, damaging investor confidence. Every approved RPT needs a clear paper trail. This does not require a complex system; it can be managed effectively with your accounting software, like QuickBooks or Xero, and a simple spreadsheet.

The Three-Piece Documentation Rule

For every material RPT, we recommend maintaining three key documents:

1. The Agreement: A formal agreement, statement of work, loan note, or lease that outlines the terms, duration, and financial details of the transaction.
2. Proof of Fairness: Evidence that the deal is at arm's length. For example, if a professional services firm engages an investor's marketing agency for a $50,000 project, you should get written quotes from two other unaffiliated agencies for similar work to demonstrate the price is fair.
3. The Approval: A copy of the email approval or an excerpt from the board minutes where the disinterested members approved the transaction.

Maintain a Central RPT Log

To manage this documentation, create a simple RPT log in a spreadsheet. This log serves as a single source of truth for your accountant and any future auditors. It should include columns for: Date, Related Party Name, Relationship, Transaction Description, Amount, Approval Date, and a link to a folder containing the three documentation pieces.

Disclosure Requirements for Startups

Formal disclosure requirements vary by geography. Your RPT log is the key tool your accountant will use to ensure compliance.

For US Companies (US GAAP)

Under US GAAP, financial statement disclosure for RPTs is governed by ASC 850. Your financial statements must include notes that detail these transactions. Specifically, ASC 850 requires disclosure of the nature of the relationship, a description and dollar amount of the transactions, and the amount due to or from related parties at the balance sheet date. Your accountant will use your RPT log in QuickBooks to prepare these notes.

For UK Companies (FRS 102)

The requirements under FRS 102 (Section 33) are broadly similar. You must disclose the nature of the relationship, a description of the transactions, and any outstanding balances. When preparing year-end accounts in software like Xero, your UK accountant will need the same RPT log to ensure compliance.

Practical Takeaways for Startup Governance

Implementing a process for RPTs is a key component of startup governance best practices, not an administrative burden. It builds a resilient, transparent company ready for scrutiny from auditors, investors, and acquirers. Ignoring this can create tangled issues that are far more painful to resolve during a high-stakes diligence process.

Here are five practical steps you can take today:

1. Map Your Related Parties: Create and maintain a simple list of all founders, executives, board members, major investors (over 10%), and their immediate family members. Share it with anyone involved in procurement or finance.
2. Define a Materiality Threshold: Start with $25,000. Document this as your internal policy for when a transaction requires formal board review. This gives your team a clear line to operate against.
3. Start an RPT Log: Create the spreadsheet described above. This simple tool provides a single source of truth for your accountant and any future auditors.
4. Implement a Simple Approval Flow: For transactions under your threshold, require written approval from a disinterested founder or officer. For those above, ensure they are on the agenda for your next board meeting. Emphasize the rule of recusal for the interested party.
5. Communicate with Your Accountant: Proactively share your RPT log with your accounting firm. This ensures proper tracking in your bookkeeping system and correct disclosure on your financial statements, which is a key part of any startup compliance checklist.

By putting these guardrails in place, you enable your startup to move fast while still building a strong, defensible financial foundation. See our accounting policy hub for more templates and guidance.

Frequently Asked Questions

Q: Are founder salaries considered related-party transactions?
A: Yes, executive compensation, including salaries, bonuses, and stock option grants for founders, are technically RPTs. They are typically approved by the board as part of a formal compensation plan, ensuring they are documented and reviewed for fairness, which aligns with standard startup governance best practices.

Q: What happens if we fail to properly document an RPT?
A: Failing to document an RPT can create significant problems during financial audits or fundraising diligence. It can lead to questions about conflicts of interest, damage investor confidence, and potentially require costly restatements of financial reports. A clean record is crucial for a smooth diligence process.

Q: Does a transaction with another company owned by our investor count?
A: Yes, this typically counts as an RPT. If a major investor controls another entity, any transaction between your startup and that entity must be treated as a related-party transaction. The key is control. You must disclose the relationship and follow your approval process to ensure the deal is on arm's-length terms.