Top 10 Legal Mistakes That Startups Make. (Except Yours, Now That You re Here)

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Chrystal May
6 years ago
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1 Top 10 Legal Mistakes That Startups Make (Except Yours, Now That You re Here)

Who we help Seed and early stage entrepreneurial ventures that have not yet raised significant amounts of outside capital What we do Legal advice and assistance in formation, intellectual

2 Who we help Seed and early stage entrepreneurial ventures that have not yet raised significant amounts of outside capital What we do Legal advice and assistance in formation, intellectual property protection, commercialization strategies and operational issues Who we are Student-Attorneys Robert Barnes Dani Glazer Kimberly Jachimek Supervising Attorneys Jeff Ward Darrell Fruth

3 Mistake 1 We Trust Each Other. We Don t Need a Founders Agreement.

4 Yes You Do. Our Startup is great! Let s work really hard! This is fun! I thought I was CEO You re basically a janitor. LAWSUIT 1. Founders Are Happy 2. Two Founders Disagree 3. Chaos Ensues

5 Benefits of Founders Agreements Firm Commitment Role in company Responsibilities and corresponding incentives Clear Goals Negotiation = Communication Literally write them out Power and Process How to vote Who pays what & when Special circumstances Backup Plan Noncompete Nondisclose/ confidentiality Exit procedures

6 Mistake 2 I ve heard you should just keep all your tech under wraps.

7 No! Be clear about technology transfer issues. Student Tech Usually not a huge issue Employee Tech Can be a bigger issue Tech Transfer to Company

8 Mistake 3 Accidental Partnerships & Sole Proprietorships

9 Don t even *think* the word Partner. Finding investors Working together Talking with clients Signing contracts

10 Don t even *think* the word Partner. Finding investors Working together Talking with clients Signing contracts

11 But what if we never signed any contracts or wrote up any formal documents?

12 But what if we never signed any contracts or wrote up any formal documents?

13 But what if we re just about to file our Articles of Incorporation? We re basically a real business now.

14 But what if we re just about to file our Articles of Incorporation? We re basically a real business now.

15 Why is this bad? Shared Profits Unclear Terms *Partnership Agreement 100% Liability

16 How to Make Sure You re Not a Partnership Choose entity C Corporation S Corporation LLC Benefits Corp Cooperative Other variations File Documents Articles of Incorporation Bylaws

17 Mistake 4 LLCs Are the Only Way to Go.

18 C Corporations P R O S Perpetual existence Easier to incentivize investment: Well-known laws Transferability easy C O N S Double taxation Expensive yearly filings Operational formalities

19 S Corporations P R O S Well-known laws Transferability easy NO double taxation Pass-through Split into reasonable compensation & investment income (excluded from taxable self-employment income, unlike LLC) C O N S Expensive yearly filings Operational formalities Single class of shares Proportional earnings US Resident/citizen Harder to get funding (compared to C Corps)

20 Limited Liability Companies (LLCs) P R O S Flexible Based on contract, not regulations Can insulate management from members NO double taxation C O N S Harder to incentivize investors Less transferability Less predictable (newer laws)

21 Nonprofit, Tax-Exempt Companies P R O S No taxes Donations from individuals or organizations Fiscal sponsorship options Labeled a nonprofit C O N S Additional reporting requirements Restrictions to remain qualified under 501(c)(3) No equity ownership of company

22 Public Benefit Corporations P R O S Operates as a corporation Transferability easy Some well known laws Insulated from investor pressures Fiduciary duty includes social mission CONS Additional reporting requirements Only available in 24 states Investors sometimes turned off by fiduciary duty change Additional shareholder right of action

23 B-Corp Certification P R O S Clear, recognized stamp to lend credibility No restrictions on type of entity In peer network with Patagonia, Ben & Jerry s, New Belgium Brewing, etc. CONS Expensive yearly fees ($500+) Rigorous evaluations every two years (4+ hrs) Potential audits every year (6-8 hrs)

24 Mistake 5 Permits, Licenses, and Certificates

25 Transportation Handbook Permits NC Department of Transportation Forms & Documents

26 Food Service NC Department of Agriculture & Consumer Services Food & Drug Protection Division Food Branch Inspections Food product label reviews Wholesale and retail frozen dessert manufacturers Cheese and butter manufacturers Licenses Milk haulers and testers Automotive antifreezes

27 Tax-Exempt Nonprofits Charitable Solicitation License File online form Register license online Protects donors from fraudulent solicitation Access to online registry

28 Mistake 6 Nana s Investment Isn t a REAL Investment.

29 Registration Taking Money Security Exemption

30 Avoiding registration Exemptions Alternatives 4(a)(2) Private Placement Grants 506(b) or 506(c) Incubators Intrastate offering Start-up Contests, Crowdfunding, etc.

31 Why worry about securities violations? Past Present Future

32 Even more headaches... Reporting Costs Public disclosures to the SEC Tax Shareholders could get hit with major taxes

33 Mistake 7 You re an investor? Well let me tell you about this awesome trade secret we ve got!

34 Common IP issues Ownership Use Liability / Lawsuits

35 Avoiding IP problems Docs Strategic Choices Thorough Research

36 Mistake 8 Let s Name our Company Google.

37 Why does name choice matter? Time Money Market Confusion

38 Avoiding problems with names Choosing a Name: Brainstorm multiple flexible names Trademark and Copyright Thorough, diligent searches

39 Mistake 9 Policies and Standard Documents: We ll Just Wing It.

40 The benefit is in the process Readily available form docs Strong bargaining positions in the marketplace Thorough discussions early on

41 Mistake 10 Do-It-Yourself Lawyering

42 What can lawyers add? Savings Focus Experience

43 Bonus! Mistake 11 Our business plan is to be awesome.

44 Yeah, that s nothing. Thorough Helps clarify goals & next steps Ready to present to investors PowerPoint 10/20/30 Rule You must know all of it

45 Questions?

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