What is my personal liability as an officer of the corporation, and how do I protect myself and my shareholders, when my co-founder makes job offers well above fair market value to his friends?

Disclaimer, not legal advice, get legal advice from lawyer licensed to operate in your state...etc..etc... That being said, first and foremost I see this as an organizational  Management and Communication issue which needs to be fixed and then documented in a number of different ways. I strongly disagree with thoughts on operating agreements being simple and straightforward. Simple and straightforward "canned" agreements don't reflect the specific and often complicated dynamics of partnerships, responsibilities of the partners and methods (and triggers) for equity transfer as well as a multitude of other details.  This lack of detail  can spell disaster in the event of a dispute or liquidity event where vague language can result in differing interpretations of intent. In this case you mention shareholders, so I'm assuming you're not an LLC - that notwithstanding, as a co-founder and equity/shareholder in the company your rights and obligations as a shareholder will be spelled out in the OA or bylaws.  Being a co-founder (in title) in and of itself conveys no rights unless documented.  Your authority, and signing powers should appear in both the OA and your employment agreement and internal job description (you and your co-founder don't have these either? Get them done!) As to liability, I'm not sure what you're concerned with here - liability for extending offers that you may rescind? Again, should that happen I would hope your partner extended offer letters not guarantees of employment...offer letters get pulled all the time.  Not fun, but it happens.  Your personal liability is limited (most likely) but the company's may not be if the offers contain promises or guarantees et al... I'm assuming that combined offers for $250k means you're generating some meaningful revenue, which in turn means you and your co-founder need to put a little management structure and communication in place (in addition to tightening up your corporate structure) -  I can't imagine making key hires at these levels without wanting not only my partner's input, but discussion with the broader Management Team - and - if you are both too inexperienced to know how to address all of this, seriously consider bringing on an advisor to help you...you need to iron this stuff out early or it just amplifies with growth.

Quick Answers: 1.  What is my Personal Liability:  If you are a Delaware corporation, recent case law does make it clear that officers share the same fiduciary duties as directors.  So if you did nothing and you think that your partner is clearly wasting money by hiring unqualified persons and its material to your company, unless you try and do something there is some common law basis to bring a claim against you for breach of your duty of care.  2.  How do I protect my shareholders?   Well, the best thing would be to talk to your co-founder and come to an agreement -- maybe there are facts you did not understand and these people really are good hires.  If not, maybe you can convince him that this is a poor decision and you can get these people out of the company for some small amount or, if they are friends of his, for nothing.  But if you can't come to an agreement and you think he is wasting the company's money or exhibiting poor judgment, the only thing you can really do is get him replaced by the Board.  Of course, in a lot of startups, maybe he and you are the Board.  In which case, you would have to see if you could convince enough of your investors that hold enough shares to elect new directors that would vote to replace your friend.  But in an early startup, sometimes you and your co-founder own most of the shares so you can't mobilize shareholders anyway.  In which case, the best you can do is to protect yourself because if your co-founder is the majority stockholder and at least a majority of the board then your co-founder can not get replaced. 3.  How do I protect myself -- At the least you need to establish that you did something to stop the hires, get the people terminated, or maybe get convinced that the hires may not be as unreasonable as they seem to be to you and fall within the zone of decisions that may not be right but are not so crazy as to be outside of the business judgment rule.  That way if a stockholder sues you for breach of your duty of care you can say that you did try and stop it.

We solve this with a simple rule at our start up. If the person is a friend of mine he/she needs to be interviewed and approved by my partner and vice versa. This is the only solution for it. What is your position in the company, read the bylaws for the company if you have one. If you find your position gives you power to review the action do it. PS: If the people are skilled the facts that they had been unemployed do not matter.