what to think about now to keep your legal house in order - vator splash oakland
Post on 15-Jul-2015
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© 2015 Wendel, Rosen, Black & Dean LLP 2
Step One: Plan
Create a Business Plan
• An essential blueprint for business success. (Business concept, marketplace and financial.)
• Projects 3-5 years ahead and outlines the building blocks that the company will need to grow revenues and achieve desired outcomes.
• From a legal perspective, it also assists counsel to help identify what the company will need to achieve its desired outcomes.
© 2015 Wendel, Rosen, Black & Dean LLP 3
Step Two: Entity Formation
Which One?
• Sole proprietorship
• Partnership
• LLC
• Corporation - S Corp
- C Corp
- Benefit Corporation
Most common forms for startups are LLCs or corporations
© 2015 Wendel, Rosen, Black & Dean LLP 4
Limited Liability Companies
Advantages
Limited liability of members
Flexible organizational structure: creature of contract, less corporate formalities
Pass-through taxation
Easier to convert to corporations than vice-versa
Disadvantages
Relatively new form
Investors prefer
corporations
Operating Agreement:
The devil is in the details
Equity compensation
challenges
For single-member,
alter ego liability
© 2015 Wendel, Rosen, Black & Dean LLP 5
Corporations
Advantages
Preferred by Investors
Limited liability of
shareholders
Centuries old, familiarity
Well-developed body
of law
Simplicity of stock
ownership
Disadvantages
Double taxation (unless
S-corp is elected)
Must observe
Corporate formalities
• Shareholder meetings
• Board of Directors
• Corporate minutes
© 2015 Wendel, Rosen, Black & Dean LLP 6
An election by a corporation meeting certain requirements to be taxed as a pass-through entity
• No corporate level tax
• Profits and losses passed through to shareholders
• Election made with IRS within 2 months + 15 days of stock first being issued
Requirements
• No more than 100 shareholders
• Individuals and certain trusts only, no entity shareholders
• US citizens or permanent residents
• One class of stock issued – no preferred stock
Lose S-corp status when you bring in institutional investors – entity shareholder, preferred stock issued
Not recognized in all states (ex. New York)
S Corporations
© 2015 Wendel, Rosen, Black & Dean LLP 7
Where to Incorporate?
Considerations:
• Where you are located, primarily doing business
• Costs: upfront and ongoing, taxes
Delaware corporation is preferred forum of investors
• Familiarity, well-developed body of corporate law, faster turnaround for filings
• If located in CA, required to register in CA and still subject to CA franchise tax in addition to DE annual fees
• Can easily convert to DE corporation if investors require it
© 2015 Wendel, Rosen, Black & Dean LLP 8
Step Three: Naming Your Business
• Brand Identity • Availability • Similarity to others • Trademark potential • Domain name
registration
© 2015 Wendel, Rosen, Black & Dean LLP 9
Step Four: Mechanics of Formation
LLC • Choose name (must end
with LLC designator)
• File Articles of Organization/Certificate of Formation
• Pay filing fee
• Prepare LLC operating agreement
• Obtain necessary licenses and permits
• Obtain EIN and set up a bank account
Corporation • Choose name
• Appoint initial directors
• File Articles/Certificate of Incorporation
• Pay filing fee
• Prepare corporate bylaws
• Hold first meeting of board of directors
• Issue stock to initial shareholders
• Obtain necessary licenses and permits
• Obtain EIN and set up a bank account
© 2015 Wendel, Rosen, Black & Dean LLP 10
Step Five: Capitalization
Issuing Stock to Founders
• Capital Contributions: Cash, Assets, and IP
• Vesting Provisions
• 83(b) Elections • Shareholders Agreement
Raising Capital
• Debt vs. Convertible Debt vs. Preferred Stock • Private Placement Memorandum
• Securities Law Compliance
• Accredited Investors
© 2015 Wendel, Rosen, Black & Dean LLP 12
Step Six: Intellectual Property
Ownership
Patent/trademark Applications
Assignment to Company
• Founder(s)
• Employees
Works Made for Hire (independent contractors)
Protection
Protection
• NDAs
• Trade Secrets
• Other Confidentiality Agreements
• Use of ™ ® • Terms of Use
© 2015 Wendel, Rosen, Black & Dean LLP 13
Step Seven: Maintaining Your Business
Employees
• Workplace Issues (employee handbook, wage
and hour, discrimination,
sexual harassment, etc.)
• Incentivizing Performance
- Equity Incentive Plan
- ISOs, NSOs, Restricted
Stock Awards
- Differences
- Valuation
- Rule 409A
- Vesting Provisions
© 2015 Wendel, Rosen, Black & Dean LLP 14
Maintaining Your Business (Cont’d)
Corporate Governance
• Holding annual shareholders’ meeting
• Paying taxes
• Filing annual statements with Secretary of
State
• Nailing down the cap table and securities
law compliance
• Board composition
© 2015 Wendel, Rosen, Black & Dean LLP 15
Maintaining Your Business (Cont’d)
Website Terms of Use and Privacy Policy
Obtain insurance: CGL, Product liability, Workers Comp
Maintain solid debt-to-equity ratio
Maintain cash reserves
Constantly evaluate salaries/performance
Have complete understanding of how your business works
Keep a tight lid on expenses
© 2015 Wendel, Rosen, Black & Dean LLP 16
Summary: 10 Mistakes Startups Can Make
1. Choosing the Wrong Entity Structure
2. Not Planning for Early Exits by Founder(s)
3. Not Documenting Stock/Equity Promises
4. Failing to Lock Up Trade Secrets
5. Failing to Obtain Written Assignments of IP Rights
6. Carrying Inadequate (or No) Insurance
7. Using Outdated/Inadequate Privacy Policies
8. Failing to Register Patents, Trademarks and Copyrights
9. Having No Social Media Policy
10. Not Seeking Necessary Legal/Accounting Help
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