It’s important to choose a legal structure that maximizes benefits to the business and its owners. The two best options for startups are corporations and LLCs due to the limited liability protection they afford to owners. Ownership/management flexibility and tax issues are also important factors in deciding which entity to use. Both are formed under state law by filing documents with the appropriate state office. Many companies choose to incorporate under Delaware law because of its well- developed corporate law. (For more information on the benefits of each entity, see previous post “Corporations vs. LLCs: The Benefits of Owning Different Entities”)
Hashing out the details with co-founders
Having a written founder agreement in place at the time of formation is essential to avoiding potential problems in the future. There are many important issues that should be agreed upon at the outset. For example, what are the responsibilities of each founder? What percentage of the company does each founder get? How will important decisions of the business be made? What happens to a founder’s shares if he or she leaves the company?
Creating a vesting schedule
What happens if a co-founder decides to leave the company early on, taking a large chunk of company stock with him? Is there enough equity left to attract new members? Vesting co-founders’ equity over time solves this problem. This means that a percentage of each founder’s equity is given over a period of time. The typical equity structure is 4 years vesting.
Protecting intellectual property
It is important that founders take the necessary steps to protect the company’s intellectual property. A Patent is the best way to protect the company’s products. This often requires hiring a patent attorney to submit a patent application to the U.S. Patent and Trademark Office. Trademark rights protects symbols or names a company uses in commerce. Marks can be registered with the U.S. Patent and Trademark Office. If the company creates any original works of authorship such as software, books, or art, founders should obtain copyrights to cover such works.It is also important to protect the company’s confidential information internally. Confidentiality Agreements for employees protect any work, ideas, or products developed in the scope of employment. By requiring every employee to sign a confidentiality agreement, the company ensures that all employee work product belongs to the company and not the individual employee.
Getting client contracts
Don’t get into the habit of making handshake deals, even with clients or vendors you trust. Founders should have a standard contract in place that provides legal recourse should someone fail to pay or breach an agreement.
Chelsea Walker and the attorneys at De Leon & Washburn, P.C. are available to assist clients with entity selection and formation and governance. For more information regarding the firm’s business transactions practice, please visit our Business Transactions page, and please feel free to contact the attorneys at any time.
© De Leon & Washburn, P.C. This article is provided for informational purposes only. It is not intended as legal advice nor does it create an attorney/client relationship between De Leon & Washburn, P.C. and any readers or recipients. Readers should consult counsel of their own choosing to discuss how these matters relate to their individual circumstances. Reproduction in whole or in part is prohibited without the express written consent of De Leon & Washburn, P.C