When you are starting a company, there is a lot on your mind. Many founders treat legal issues as secondary concerns, i.e. things that can be worked out at a later date. Unfortunately, this lack of attention to startup law can lead many founders to later face huge legal problems (and bills), including issues related to corporate structure and compliance. Such issues can haunt a startup for years, present issues during financing rounds and even be contributing factor to a company’s demise.
From the first days of your startup, a startup lawyer can help to ensure that you have handled the full range of salient issues before they become a problem. At Priori Legal, we can connect you with an experienced startup lawyer, who will work with you to identify important legal issues and strategize with you to tackle them efficiently and cost-effectively.
Almost every startup forms an entity early, and with good reason. Incorporation can provide your startup the legal protections and structure that a growing business needs. Even once startups have decided to form a legal entity, however, questions remain regarding the ideal legal structure for the business and the appropriate allocation of initial shares of the company.
There are many legal structure options, but the following are the most common choices for startups
• C-Corps. Traditional corporations that are individual tax entities. Generally, structuring as a C-Corp is preferred if you want to pursue venture capital funding
• S-Corps. Corporations structured much like C-Corps, but feature limitations regarding investors and stock options and are taxed as pass-through entities
• LLCs. Flexible structures typically taxed as pass-through entities and subject to fewer compliance requirements
• Limited Partnerships. Entities formed under state law, often to hold investments in real estate
Choosing which structure may be best for you must be done early in order to limit your liability, but figuring out the ideal structure at such an early stage can be challenging for many startups, as each have unique advantages and disadvantages. A startup lawyer can help your startup weigh these pros and cons to decide which one is best for your future needs and plans.
Dividing Shares Among Founders
The division of original shares must be done at the time of entity formation. Ideally, you should establish how much of the company each founder deserves at the earliest possible stage—and in writing. You should also specify what each founders responsibilities and cash investment will be and consider appropriate vesting agreements.
Every startup should have standard forms written up that protect your company from legal issues arising with your customers, employees, and even your website. A corporate lawyer can help you draft these important agreements.
Without adequate employment documentation, your startup can quickly get in trouble with your state’s labor laws. Startups should prepare a core group of employment documents and contracts to be signed by employees. Some things to consider with employee contracts include:
• “At-will” offer letters;
• Stock options and related rights;
• Employee handbook;
• IRS documentation; and
• Benefits packages and forms.
If you are considering hiring workers as "contractors" rather than "employees, you may also want to talk to your lawyer about proper employee classification.
Many startups do not consider the implications of securities law on early issuances of stock, especially when dealing with friends and family investors. It is vital, however, that you comply with all SEC guidelines and other securities laws from the very beginning of your existence as a company.A lawyer can help you understand how to comply with these rules, including making required disclosures.
For many startups, intellectual property is a vital asset. Accordingly, its generally important to take steps to protect this IP with patents, copyrights, trademarks and licenses as appropriate. In terms of more day-to-day protections, it’s generally important to have all employees and contractors execute proprietary inventions and non-disclosure agreements. Finally, as you consider the name of your company, domain name and names of any important product lines, it’s important to consider possible infringement of existing third party IP.
Starting off with solid relationships with investors, partners, advisors and your board is vital to successfully launching your business. Yet far too often, startups fail to lay out corporate governance documents early on, pushing off the task until problems have already arisen. You should establish corporate governance documents with clear clauses as soon as you have any advisors or investors, even if these advisors and investors are your friends and family. It’s been well established that companies with high governance standards produce a higher return on equity, which is good for you and your co-founders, as well as your investors. In addition, having all stakeholders aware of your governance standards protects investors and fosters transparency—a vital part of a successful relationship in the long-term. These documents vary based on your entity type and needs, but may include Operating Agreements, Bylaws, Shareholder Agreements, Partnership Agreements, Buy-Sell Agreements and more.
"Startup" law encompasses a wide-range of different needs, so the cost of hiring a startup lawyer can vary significantly. If you hire a startup lawyer through Priori, hourly rates tend to range from $150 to $350 per hour. In order to get a better sense of cost for your particular situation, put in a request to schedule a complimentary consultation and receive a free price quote from one of our lawyers.
Isn’t it better to save money on legal fees in the early stages of a startup?
Unfortunately, this common belief in the startup community has led to many legal disasters later on down the road. Hiring legal counsel when forming a company can help you mitigate significant risks. Finding an attorney who specializes in startups that you trust who can tell you honestly what protections and documentation are vital and what can be put off until later can be immensely helpful for your business.
Are there any other legal issues that could affect my startup?
Absolutely. Starting a business exposes you to tons of legal issues that you probably never dreamed of before establishing your startup. Startup law—and corporate law as a whole— is incredibly complex. That’s why an experienced startup lawyer is your best bet for staying compliant.