Legal Advice I Wish I Had Gotten for My Start-Up Company
Entrepreneurs face many difficult decisions when they are starting a company. These decisions can directly impact the success or failure of their entity, so it is imperative to get them right. A few areas where you want to seek legal advice include:
Selecting the type of legal structure
There are a variety of types of legal entities available, each with their pros and cons. A few examples include limited liability companies (LLC’s), partnerships, C corporations and S corporations. You must also select the state where you want to register or incorporate your entity. An attorney can review your start-up company’s goals and help determine the most advantageous type of entity and governing state law to accomplish those goals.
Establish Vesting Schedules
A vesting schedule is extremely important for start-ups. It helps ensure there is a balance between working founders, who mark the company profitable, and absent founders, who leave early. In sum, a vesting schedule allows the entity’s founders to get their stock in the beginning, but a repurchase agreement signed by all co-founders, gives the company the right to take it back for a small amount of money. As time passes, the company’s right diminishes allowing the founders’ stake to increase over time while also allowing tax benefits, long-term capital gains treatment and voting rights.
The vesting schedule should also provide for acceleration. In other words, if your company is sold, the schedule is accelerated and some or all of your stock vests upon the change of control. An acceleration provision can also provide that if the company is sold and you are fired, then some or all of your stock vests.
Determine Ownership of Intellectual Property
For financial reasons, many founders of start-ups must work for another company in the beginning. It is possible your employer may claim rights to your start-up’s intellectual property unless you take preventative action. Additionally, if you use a non-employee contractor to produce work for the start-up, it is imperative that you obtain the necessary assignment of IP rights to the company as part of the hiring process.
There are several other areas where seeking legal advice is essential, including ensuring your start-up complies with securities laws and performing due diligence on potential investors. By obtaining the guidance you need in these select areas, your start-up company will be off to a great start!