What Startups Must Know About Legal Mechanics

TL;DR

Startups must establish a legal entity, ideally a corporation, to protect founders from personal liability and facilitate fundraising. Utilizing online platforms like Clerky or Stripe Atlas can simplify incorporation and documentation. Founders should ensure proper stock purchase agreements are in place, adhere to legal regulations, and maintain transparency with all essential documents.

Transcript

I would like to introduce my colleague carolyn levy to my right here who's going to talk about startup mechanics and then with john levy and jason quan they'll answer some questions about getting your startup started legal issues i will point out that these three folks are probably the finest legal minds in the startup world these and i and i do no... Read More

Key Insights

• 📚 Incorporation: Startups should form a separate legal entity, such as a corporation, by filing a certificate of incorporation. It is recommended to incorporate in Delaware for ease and efficiency, and because many investors require it.
• 📝 Online Platforms: Startups are advised to use online platforms specifically designed for startups, such as Clerky and Stripe Atlas, for incorporation. These platforms offer post-incorporation services as well, unlike other platforms that only provide formation services.
• 💼 Corporate Structure: Startups should form a board of directors, appoint corporate officers, and adopt bylaws. They should also open a corporate bank account to treat the company as a separate entity from the start.
• 🚀 Founder Stock: Founders should purchase their shares from the company using a stock purchase agreement. Founder shares should be subject to vesting, meaning they are only fully owned after a certain time has passed.
• 📜 Cap Tables: Startups need to maintain a cap table, which is a record of all the shares of stock issued by the company. Online platforms can help track stock ownership effortlessly.
• 💰 Payroll and Taxes: Founders can pay themselves minimum wage, but it is not advisable to work for free. Startups should pay attention to payroll taxes and ensure they have a CIIA or PIIA in place.
• 📝 Legal Documents: It is important to store all legal documents, such as the certificate of incorporation, bylaws, and stock purchase agreements, in a secure location. It is recommended to use a shared Dropbox folder and ensure that all documents are signed and dated.
• ⚖️ Legal Mechanics: Startups should act like a true company to receive protection from personal liability. Treating the company as a separate entity, following legal procedures, and acting in accordance with corporate governance are advised.
• 🔒 Privacy Policies and Terms of Service: Startups should carefully review their privacy policies and terms of service and consult with lawyers to ensure compliance with regulations and protect their users' privacy. These insights cover various topics related to startup mechanics, including incorporation, online platforms, founder stock, cap tables, payroll and taxes, legal documents, legal mechanics, and privacy policies.

Questions & Answers

Q: When should founders make an 83(b) election and why is it important?

Founders should make an 83(b) election within 30 days of purchasing their stock to avoid substantial tax liabilities. This election allows them to be taxed on the difference between the stock's current value and the price paid, preventing future taxation as the stock vests.

Q: Why is it important to have a separate legal entity for a startup?

Forming a separate legal entity, such as a corporation, offers protection from personal liability for the company's actions and ensures proper ownership of intellectual property. It also allows startups to raise investment capital and enter into contracts.

Q: What are some common mistakes founders make when incorporating their startup?

Common mistakes include not choosing an optimal state for incorporation, failing to use online platforms for post-incorporation documents, not purchasing founder shares, and not creating a proper cap table to track stock ownership.

Q: When should founders consider hiring a lawyer instead of using online legal services?

While online legal services like Clerky and Stripe Atlas can handle basic incorporation and post-incorporation documents, founders may need a lawyer for more complex issues such as stock option plans, employment agreements, and international law considerations.

Q: Can founders work on their startup part-time while maintaining a full-time job?

It is challenging to work on a startup part-time while maintaining a full-time job, as startups require significant time and effort for success. Startups often require a full-time commitment to handle the complexities and challenges of building a company.

Summary & Key Takeaways

• Startups should form a separate legal entity, such as a corporation, and file a certificate of incorporation with the Department of Corporations in the chosen state, preferably Delaware.

• Online platforms like Clerky and Stripe Atlas can be used to incorporate and handle post-incorporation documents such as stock purchase agreements and cap tables.

• Founders should purchase their shares through a stock purchase agreement, subject to vesting, and consider opening a corporate bank account to treat the company as a separate entity.

• Common mistakes include not practicing good financial habits, failing to file an 83(b) election, using unpaid interns, and not having employment agreements or confidentiality agreements in place.