TOP 10 LEGAL MISTAKES STARTUPS MAKE

Transcription

1 TOP 10 LEGAL MISTAKES STARTUPS MAKE Royse Law Firm, PC IRS Circular 230 Disclosure: To ensure compliance with the requirements imposed by the IRS, we inform you that any tax advice contained in this communication, including any attachment to this communication, is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to any other person any transaction or matter addressed herein.

2 10. Failing to identify the right market-entry strategy Sales Rep Third Party Presence Distributor OEM/VAR Market Entry Options Direct Presence Branch Office Subsidiary 2

3 9. Choosing the wrong entity structure Liability shield Entity Form Liability Flexibility Taxation S Corporation Limited Liability Formal but flexible capital structure Pass through C Corporation Limited Liability Formal but flexible capital structure Double taxation Credibility LLC Limited Liability Very flexible Pass through Partnerships General Partners unlimited liability Can be flexible One level of tax Delaware is not right for everyone 3

4 8. Failure to establish intellectual property strategy Trademarks Copyrights Patents Invention assignments Prior Employer s IP ownership Jurisdiction specific Privacy Policy and Terms of Use 4

5 7. Violating Employment/Labor Laws Minimum Wage Laws apply to startups Employee v. Independent Contractor classification Post-termination restrictive covenants 5

6 6. Not complying with Securities Law Accredited Investors? Registration/ Exemption available? Sale of Securities State and Federal Securities filings Broker Dealer 6

7 6. Not complying with Securities Law Injunctive relief Fines Failure to comply with securities laws Rescission of securities Criminal prosecution 7

8 5. Lack of tax planning 409A 83(b) Deferred Compensation Plan 8

9 4. Lack of adequate corporate structure resulting in entrenched management Drag along rights Tag along rights Using stock as currency Lack of vesting schedule Buy sell agreements Right of First Refusal Using % while splitting up equity Veto rights 9

10 3. Not using the right equity compensation structure Typical Equity Structure 15-25% Option Plan 75-85% Founders/ Common Stock Issue options when valuation is low to realize a return on investment Options are securities, and have to comply with securities laws 409A compliance - mandatory for option plans Establish vesting schedules for option grants 10

11 2. Failure to ensure compliance with FCPA and immigration laws Anti-bribery laws apply to all U.S. persons and certain foreign issuers of securities Also applies to foreign firms and persons who cause a corrupt payment to take place within the United States. Check the immigration status of all founders: if sponsorship is required by the startup, you need good immigration counsel. 11

12 1. Substituting legal counsel with online incorporation services Templates could = missing provisions Check State law enforcement Business permits, State qualifications and county permits Obtain ownership documents Get legal counsel in the beginning Hire a lawyer but do your homework! 12

13 Additional Resources Royse Law Incorporator: Designed to help you incorporate and structure your company in Delaware or California. Royse University: Providing business, tax, and legal content to founders and executives. RoyseLink: Connecting founders with investors and service partners. Royse Law Legal Wizard: Offering legal document templates and more.

14 Contact Us Palo Alto Office: PALO ALTO 1717 Embarcadero Road Palo Alto, CA SAN FRANCISCO 135 Main Street 12 th Floor San Francisco, CA LOS ANGELES 1150 Santa Monica Blvd. Suite 1200 Los Angeles, CA 90025