New Year, New Venture: 13 Steps to a Legally Compliant, New You!

Written in collaboration with Jessica Hoffman, Managing Attorney at Hoffman Law PLLC, originally on Jessica Hoffman’s blog.

Posted by Arthur Shalagin on January 28, 2016

It’s 2016, a brand new year and a time for fresh beginnings. So, let’s go all the way back, with a checklist to help guide you through some important legal issues from the very start and avoid problems down the line.

  1. Figure out your equity ownership splits with your co-founders. Jessica Hoffman wrote about this here.
  2. Find a lawyer well-versed in startups, especially of the kind you will be creating. It may be true that all corporate attorneys can form a corporation, but startups are often set up in a particular way depending on the product and the long-term strategy of the company. Just because your friend Joe graduated from law school and now forms LLCs for restaurateurs does not mean he necessarily knows the typical setups for tech startups. Yes, there may be overlap, but a brick-and-mortar company with one location serving food will have totally different considerations than an online-only tech product intending to have bi-coastal operations in a year.
  3. Figure out the type of legal business structure you would like to form. A legal entity protects your individual assets from liability judgments, and if your company has intellectual property, allows you to assign that IP to the company. If you are planning on pitching for VC or institutional money within the first year, it might make sense to form a C-corporation. VC firms and angel investors often prefer corporations because other structures, like LLC’s, subject those investors to potential income tax liability for company income that does not actually go in their pockets, since they are typically taxed as partnerships. If you're not going out for investments just yet, an LLC might be the right fit. Remember, there's no one-size-fits-all entity for every company--it all depends on your team, your product, and your vision. Talk to your lawyer about all of this for guidance on what's right for you.
  4. Pick a state of formation and form/incorporate your company. New founders generally believe that the best place to form is Delaware. It can be, but not always--some of the benefits of Delaware as a home jurisdiction have either been eroded or modified by changes in the law, and other benefits you may have heard of are just not true. Don't run to Delaware just because you've heard there is no tax--that's not true, and you're not going to be able to avoid paying taxes just by being there. As a friend of mine once told his client--think about it logically: if there really were zero taxes to be paid, companies would never form in any other state. There are a lot of considerations that go into your state of formation. You should talk to your lawyer about them.
  5. Register to do business in the state where your actual operations will run. Check with your state’s requirements for registering as a foreign (out-of-state) corporation. New York requires all out of state companies to submit an application for authority to operate or do business in New York, and this filing is generally required to open a bank account.
  6. Get an EIN. You'll also need one of these to open the bank account. It's free and pretty easy*, just go to the IRS web site and search "EIN." You can do it all online (*with the caveat that persons without an SSN or in the US on visas may have additional considerations, making this more time consuming).
  7. Draft your initial corporate documents. In order to stay compliant with state laws, certain initial documents will be required, including your Bylaws and your first Board meeting minutes. Your attorney should craft these up, and should also draft your initial stock purchase agreements for all co-founders to document each founder's percentage ownership. It might be a good idea to create a vesting schedule for all founders, which will be set in these documents.
  8. File for an 83(b) tax election within 30 days of the grant of restricted stock. If you do set up vesting schedules, this document is a tax election that can save anyone on such a schedule a ton of money when your company becomes the next Unicorn. Everyone's financial situation is different, so speak to a tax advisor about the pros and cons of an 83(b) election. It's a complicated concept so we're not delving into its inner workings here, but know that this can be a huge boon. Keep in mind that the 30 day deadline is a HARD deadline, there are absolutely no exceptions if you miss it.
  9. Create a capitalization table (cap table), which details all of your company’s stock ownership. You can check out this article from Cooley LLP for more info, and a sample cap table you can download as a starting point.
  10. Secure trademark protection of your company’s name/product. Choose a “strong” name - the best marks are usually made-up words ("fanciful marks") like Exxon or Kodak, or rarely used words. Do a trademark clearance search. Google your company’s proposed name before running with it. If that looks good and fine, then have an attorney do a more detailed search--there are some nuances about trademarks that your attorney should be knowledgeable about, and may help you prevent headaches from cease-and-desist letters later. If it's all good, register! Owning and building on your company's IP will be important as you scale up your value and/or look for investment.
  11. Document employment related agreements. When you start hiring, have an attorney draft either an employment offer letter or agreement explaining salary, bonus structure, responsibilities, benefits, and stock options; or, independent contractor agreements. These documents will also likely include non-compete, non-solicitation, and non-disclosure clauses to protect your company's IP and its investment in its people. The classification between employee and independent contractor can be a tricky one (be wary of the Uber trap), so make sure your attorney is knowledgeable on the difference.
  12. If your company has a website that is interactive with users in any way, put up a Terms of Service and a Privacy Policy. A Terms of Service covers issues like the company’s use of user-generated content, website community standards (defamatory content, sexually explicit content, etc.), and what happens if the company is involved in a dispute with a user (including a limitation of liability). A Privacy Policy deals with the type of information your website collects, from whom it collects the information, how the information is used, who the site is targeted toward, and if any of the information collected is “personally identifiable information” (PII). PII includes names, IP addresses, email addresses, or anything else that could allow you to pinpoint someone’s identity.
  13. When you start raising money, be aware of securities laws. There are certain compliance rules for selling private company stock under federal law (SEC) and state Blue Sky laws. This comes into play both when raising money from family and friends as well as your future investors. Again, this is complex and tricky so consult with your attorney!