Startup Law 101 Series – Ten Legal Advice Essential for Training Initiatives

These are ten essential legal tips for the founders of the beginning.

1. Configure your legal structure in advance and use cheap actions to avoid tax problems.

No small company wants to invest too much in the legal infrastructure at an early stage. If you are a solitary founder who works outside the garage, save your dollars and focus on the development.

If you are a team of founders, however, setting up a legal structure is important.

First of all, if the members of your team develop IP, the lack of structure implies that each participant will have individual rights for the IP that it develops. A key founder can be protected from that, so that everyone can sign "work contract" agreements by assigning these rights to this founder, who will then assign them to the corporation once formed. How many founding teams do this. Almost none. Obtain the entity on the site to capture the business IP as it is being developed.

Secondly, how do you get a foundation team without a structure? You can, of course, but it is uncomfortable and you have to make promises that you have to keep in mind about what will be given to team members. Conversely, many of them have been sued by a founder who claimed that he was much more promised than he was granted when the company was finally formed. As a team, do not consider this type of demand. Set the structure of the hour and get things written.

If you wait for a lot of time to set up your structure, you're entering tax traps. Founders often work for sweat equity and sweat equity is a taxable merchandise. If you wait until the first financing event before setting up the structure, provide the IRS with a measure to put a comparatively large number to the value of your sweat patrimony and hold the founders to unnecessary tax risks. Avoid configuring it first and using cheap actions to place things in the founding team.

Finally, get a competent startup lawyer to help you or at least check your proposed setup. Do this right to help eliminate problems before they become serious. For example, many founders will have the light of the moon while keeping jobs full-time through the initial phase of the start. This often does not present special problems. Sometimes, however, and especially if the IP that is developed overlaps with the IP that has a businessman of the founder of moonlight. Use a lawyer to identify and deal with these problems from the beginning. It is much more expensive to order them later.

2. Normally, go with a corporation instead of an LLC.

The LLC is a magnificent modern legal invention with a wild popularity that is derived from having become, for entities of only one member (including the husband-wife), the equivalent Present of the sole owner with a limit of limited liability.

When you go beyond the lists of an exclusive member, but, essentially, you have an association structure with a limit of limited liability.

The association structure does not fit well with the common features of a startup. It is a clumsy vehicle for restricted actions and for preferred shares. It is not compatible with the use of the incentive options. It can not be used as an investment vehicle for VC. There are special cases in which an LLC makes sense for a start, but these are relatively few in number (eg, where special tax allocations take place, where an interest only benefits, where the tax step adds value) . Work with a lawyer to see if a special case is applied. If not, visit a corporation.

3. Take care with Delaware.

Delaware offers few advantages, if it does, to start in the initial phase. The numerous praises of Delaware by business lawyers are justified for large public companies. To begin, Delaware offers administrative nuisances.

Some advantages of Delaware from the point of view of a privileged group of information: (1) may have a single director that constitutes the entire board of advice regardless of the complexity and complexity of the corporate configuration , giving a founder dominant a vehicle to keep all closure of the vest (if this is considered convenient); (2) Cumulative voting can be dispensed with, leveraging users who want minority shareholders to be represented on board; (3) you can choose the director's choice if you wish.

Delaware is also an efficient state to make corporate presentations, since anyone who has been frustrated by delays and disturbances of other state agencies can give faith.

At the bottom, and this is important, Delaware allows preferred shareholders to control most of the voting shares of the company to sell or merge the company without requiring the consent of the holders of common securities. This can easily lead the founder "downs" through the settlement preferences that these controlling shareholders have.

Also in the lower part, initial phase startups incur administrative problems and additional costs with a Delaware configuration. They still have to pay taxes on income derived from their originating states. They must qualify their Delaware corporation as a "foreign corporation" in the states of their home and pay the additional franchise fees associated with this process. They get tax accounts of the franchises in the tens of thousands of dollars and they must request relief under the alternative valuation method of Delaware. None of these elements is a crushing problem. Each one is an administrative nuisance.

My experience board working with the founders: keep it simple and jump out of Delaware unless there is some reason to choose it; If there is a good reason, go with Delaware, but do not deceive yourself to believe that you have obtained a special prize for the start of the initial phase.

4. Use restricted actions for founders in most cases.

If a founder owns no chains and then moves away from the company, this founder will get an economic subsidy. There are special exceptions, but the norm for most of the founders should be to grant them a restricted stock, that is, stocks that can be repurchased in the company in case the founder leaves the # 39; company The restricted stock lies in the concept of sweat equity for founders. Use it to make sure that the founders gain their custody.

5. Make timely elections 83 (b).

When restricted stock aids are made, they should almost always be accompanied by 83 (b) choices to avoid generating potentially horrible fiscal problems for the founders. This special tax election applies to cases where the property is owned, but it can be lost. It must be done within 30 days after the grant date, signed by the beneficiary and spouse of the population, and presented with the statement of benefit this year.

6. Obtain technological allocations from all those who have helped develop IP.

When the start is created, subsidies can not be made solely for cash contributions from the founders, but also for technology assignments, as appropriate to any founder working on issues related to intellectual property before training Do not leave these hangings loose or let inventories be published to the founders without capturing all intellectual property rights of the company.

Founders sometimes think they can keep the IP in their own hands and license it to start. This does not work. At least, the company can not normally be financed in these cases. The exceptions to this are rare.

IP routing should include not only the founders but all consultants who have worked on intellectual property issues before company training. Modern startups sometimes use development companies in places like India to help accelerate product development before company training. If these companies are paid for this work, and if they did it in work rental contracts, anyone who had the contract with them could assign the rights already captured in work contracts to the beginning. If there were no work arrangements for work, you would have to make a bonus, an existing option or a warrant, or pay another legal consideration at the # 39; External company in exchange for the intellectual property rights that it owns.

The same applies to all contractors or friends who have helped development locally. Smaller grant options will ensure that intellectual property rights are completed from all relevant parts. These grants must be granted in whole or in part to ensure that there is an adequate consideration for the intellectual property assignment carried out by the consultants.

7. Protect the IP by moving forward.

When the beginning is created, all employees and contractors who continue to work for it must sign confidentiality agreements and assign inventions or work contracts, as appropriate, to make sure that all IPs remain at the same time. Business

These people must also pay a valid consideration for their efforts. If this is in the form of a capital compensation, it must be accompanied by some form of cash compensation, as well as to avoid fiscal problems derived from the IRS that places a high value on the # 39 ; stock using the reasonable value of services as a measure of their value. . If the problem is cash, wages can be postponed as appropriate until the first financing.

8. Take into account the provisional presentation of patents.

Many start-up companies have an IP whose value will be lost or will be seen to a large extent when it is revealed to others. In these cases, see a good patent attorney to determine a patent strategy to protect this IP. If applicable, register provisional patents. Do this before making key disclosures to investors, etc.

If you need to make the first disclosures, do so incrementally and uniquely under the terms of the non-disclosure agreements. In cases where investors refuse to sign a NDA (eg, with VC companies), do not disclose your basic confidential items until you have provisional patents in the file.

9. Establish variable income incentives.

With any real start, capital incentives are the fuel that a team is running. In training, adopt a plan of incentives for participation. These plans will give the Board of Directors a series of incentives, not including, among others, restricted actions, incentive stock options (ISO) and unqualified options ( NQO).

The restricted stock is usually used for founders and very key people. ISOs only used for employees. The NQOs can be used with any employee, consultant, member of the board of directors, adviser or another key person. Each of these tools has a different tax treatment. Use a good professional to inform you about it.

Of course, with all forms of stock and options, the federal and state stock laws must be satisfied. Use a good lawyer to do so.

10. Finance the company incrementally.

Resource initiatives will use financing strategies for which they do not necessarily require large VC financing on the doorstep. Of course, some of the best startups have required significant VC funding at the start and have achieved great success. Most, however, will find themselves in trouble if they need massive infusions of capital at the head and, therefore, they find few options if this type of financing is not available or is only available in oppressive terms.

The best results for founders arrive when they have generated a significant value on the start before having to find important financing. Deductive success is much lower and often you get better general conditions for your financing.


These suggestions suggest important legal elements that the founders should take into account in their broadest strategic planning.

As a founder, you will have to work closely with a good home business lawyer to implement the steps correctly. Self-help has its place in small businesses, but it almost invariably stays short when it comes to the complex configuration problems associated with a startup. In this area, get a good business lawyer and start doing well.

Source by George Grellas