These are my notes from Carolynn Levy’s lecture on “Startup Legal Mechanics”. An entry of my Startup School series where I follow the curriculum in Y-Combinator’s Startup School
Incorporating a company just means filing a Certificate of a Corporation form with Department of Corporation in whatever state you want. Delaware is recommended.
Use an online platform geared for startups to do this. Clerky and Stripe Atlas. These two don’t stop after formation, they do post formation documents as well.
- Form board of directors. You can have 1 or 2 or more
- Appoint corporate officers. President, CEO, or both
- Adopt bylaws
- Stock purchase agreement
- Open a corporate bank account
Founder shares should be subject to vesting - Meaning you don’t get full ownership of your stock until a certain amount of time has passed. If you leave the company earlier, the company automatically gets your unvested shares back. Typical vesting period is 4 years.
Even if you’re friends, burnout is very real and common. Stock price rises and it’s hard to re-issue that stock. You still need vesting as a single founder. When you start hiring, it will be a big deal.
When to Incorporate?
It depends, but sooner rather than later. Here are the reasons to incorporate:
- Protects your personal liability
- It acts as a repository for intellectual property
- You can’t raise money without it
- You can’t do payroll without it
- You can’t enter contracts without
- Doing any of these as an individual will become very messy
Founders should be employees of their company. Pay yourselves minimum wage if you can. It’s against the law not too (although not usually enforced). This risk increases once there are multiple co-founders, you can always be sued by a co-founder if they aren’t paid minimum wage. This risk increases significantly for non founders (hired employees).
You DON’T need an employee agreement. It’s only needed for special arrangements (e.g. severance packages). There are already default “at will” laws in effect without it. But you should all sign a CIIA PIIA. Which ensures everything created belongs to the company.
LLC vs C Corp - LLC are better for taxes, but most investors will not invest in an LLC. Don’t believe tax benefits outweigh the inconvenience of switching later. C Corp must pay taxes annually. You still need to file return even if you don’t make money. You’ll owe very little in this case. Extreme case is was a $400k cost to switch from LLC to C Corp.
Hiring a Lawyer - You probably don’t need a lawyer for formation anymore. Use Clerky or Stripe Atlas for company formation. You may need a lawyer once you’re at the point of raising money. Using a family friend is not a good idea! They aren’t specialized in startups.
I Still Have a Full-Time Job - Primary legal consideration is keeping everything separate. Use a different computer, don’t work on it during non business hours. But different states have different laws. Get help, do your research.
I Didn’t Read What I Signed - You need to know EVERYTHING happening with your companies stock.
I’m Going to Pay With Shares - You can include equity component in pay, but need to pay MONEY. Exceptions for contractors, but do your homework.
I got a cease and desist letter about trademark - Don’t be attached to your name. Your company is too young, not worth pain of fighting someone with more resources. Pick a new name, get back to work. Trademarks can wait, nice to have, not a need to have. Don’t pay 10k for a domain name, no matter how good the domain is. Do what’s cheapest and move on.
83b Election - starts 30 days from when you buy your stock to file. Prevents large tax liability if your value goes up. One of the few things that can’t be fixed.