What to think about now to keep your legal house in order - Vator Splash Oakland

© 2015 Wendel, Rosen, Black & Dean LLP 1


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.


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


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


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


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


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


Step Three: Naming Your Business

• Brand Identity • Availability • Similarity to others • Trademark potential • Domain name

registration


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


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


Investment Stages

* Adapted from Canaccord


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


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


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


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


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


Questions?

William Acevedo [email protected]

Karen Balderama [email protected]

Wendel, Rosen, Black & Dean LLP

1111 Broadway, 24th Floor

Oakland, CA 94607

(510) 834-6600

Date post:	15-Jul-2015
Category:	Business
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