The Startup Legal Setup Guide
Information used from a public Airtable Base containing the legal knowledge gained by Howie Liu throughout the process of co-founding Airtable (and his previous startup, the YC-funded Etacts). The scope of the guide is strongly biased towards U.S. startups incorporating as a Delaware corp (a common approach, even for companies not based in Delaware itself).
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Delaware Corp Checklist
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When should I form an entity?
You will need to form a legal entity before you can legally distribute equity or receive investment funds to your Company. However, many companies still in the "working-in-a-garage-with-friends" phase haven't formally incorporated yet, and simply have a handshake agreement on how equity will be distributed between the different founders. You will not be able to open a Company bank account before you have incorporated.
Regardless, it is recommended that you form a legal entity when the founding team has been established and the team is creating core intellectual property ("IP"). Each collaborator or founder should assign his or her rights in all IP he or she creates related to the business to the legal entity.
As part of the financing due diligence process, investors often check that every collaborator has assigned all IP to the Company. It can be difficult to get past collaborators (who may have joined pre-incorporation) to sign IP assignment agreements to the Company retroactively. Consider incorporating as soon as you would want an entity to own any IP created for the business.
See more here:
What type of entity should I form?
Most startups incorporate as a Delaware C corporation, even though they have no actual presence in or relationship to Delaware. Delaware is a common choice for a variety of reasons, including investor familiarity with Delaware law, certain legal protections afforded the Company and its officers and directors, procedural efficiencies (such as filing Charter amendments) and a well-developed body of corporate law that can lead to fair and predictable outcomes.
However, there can be benefits to incorporating in other jurisdictions as well. The decision to form a Delaware C Corporation or a different type of entity should be carefully discussed with your Company's lawyer and accountant.
Alternatives to Delaware C Corporations:
If a startup chooses not to incorporate as a Delaware C corporation, the common alternatives include (1) S Corporation, (2) corporations in other states (such as California), or (3) limited liability companies (such as in Delaware, California, or other states).
(1) S Corporations:
An S corporation is a corporation that elects to be taxed under Subchapter S of Chapter 1 of the Internal Revenue Code. In general, S corporations do not pay any federal income taxes. Instead, the corporation's income or losses are divided among and passed through to its shareholders. The shareholders must then report the income or loss on their own individual income tax returns. Essentially, an S corporation is a corporation that is taxed like a partnership. Theoretically, this avoids double taxation: taxation at the corporate level for corporate earnings, and then at the individual level when such earnings are distributed to the owners of the corporation.
However, the lengthy requirements for an S corporation election are often not suitable for a startup company, and the S corporation benefits are rarely gained in practice. For example, a corporation that seeks to be an S corporation can have no more than 100 shareholders. This may be difficult if the startup company has a large number of angel investors, and certain rules must be considered for trusts and estates when counting "shareholders." Secondly, the corporation can have only one class of stock (e.g., only common stock). Since most startups intend to issue preferred stock to investors, they will not be able to meet this requirement. Additionally, any individual who holds stock in an S-corporation must not be a resident alien. This will restrict the Company's ability to issue stock to certain foreign individuals. Thus, most startup companies are not S corporations.
To become an S corporation, the Company must file Form 2553 with the IRS. Typically, an S corporation seeks to be treated as such when it does not meet the statutory guidelines to be one, and further paperwork/filing may not be required. These filings should be coordinated with the Company's lawyer or accountant.
(2) Corporations of Other States:
A Company can also incorporate in another state. California and Nevada are popular states for incorporation outside of Delaware. However, since most startup investors require a startup company to be located in Delaware, a corporation of a different jurisdiction may have to "reincorporate" into Delaware as a condition of investment. Reincorporating can cost more than $5K - $10K in legal bills.
(3) Limited Liability Companies (in any state):
A limited liability company ("LLC") is a form of a private limited company. This entity combines the pass-through taxation of a partnership or sole proprietorship with the limited liability of a corporation. LLCs, like corporations, can be formed in any state in the United States and will be governed by that state's local laws. Whereas corporations are owned by "stockholders," partnerships are owned by "members." Many companies choose to form LLCs because they can be beneficial from a tax perspective, depending on the specific factors unique to the business. To form an LLC, one member must file a Certificate of Formation in the state in which the company would like to incorporate. All members should sign a Limited Liability Company Agreement. Generally, this private LLC Agreement will dictate the structure of an LLC. From a taxation or organization standpoint, the structure can be more flexible than that of a corporation, which will be more dictated by statute. However, like a non-Delaware corporation, most investors will not invest in a startup company that is an LLC and will require the LLC to convert to a Delaware corporation before dispersing funds. This may require significant legal fees.
How much does incorporation/formation cost?
To form a Delaware corporation, you will need to file a Certificate of Incorporation (or "Charter") with the State of Delaware. In addition, startups need to fill out other standard legal paperwork to divide equity to founders, assign inventions, etc. These steps will be explained in detail on the "Incorporation Checklist" tab. The relative costs for each are as follows.
Incorporation requires filing the Charter with the State of Delaware. Most startups will use a registered agent to file the Charter. A registered agent is a business designated to receive service of process when a business entity is a party in a legal action (such as a lawsuit or summons). A registered agent is required when a business does not have a physical location in Delaware. Incorporation costs will vary based on the registered agent you select. A registered agent may charge approximately $99 per year of services. The actual filing fee with Delaware starts at around $89 and may increase depending on the length of your Charter and the desired turnaround time for filing. Online services, such as Clerky, may charge around $99 for incorporation.
OTHER FORMATION COSTS:
In addition to filing the Charter, a company should also complete the necessary forms to distribute founder equity, establish the board, and hold the first board and stockholder meetings (among other tasks). Clerky charges $299 to automatically prepare the standard post-incorporation forms, but it allows for little variation. A startup law firm may charge several hundred to several thousand dollars to customize these forms for your Company.
For more on formation costs:
How does joining an incubator affect incorporation?
Startups may join an incubator or accelerator program to help guide them through the process of developing their business, improving their core intellectual property, and connecting the founders to investors. Many incubators request an equity stake in the Company and/or convertible securities in exchange for participation in their program.
Certain incubators prefer that you do not incorporate before joining their program, as they would like to take their equity at the same time as the founders. However, this is rarely mandatory. Other incubators, such as Y Combinator, will assist with the incorporation and post-incorporation process through the use of Clerky or other technology. Y Combinator typically provides an on-staff lawyer to provide review and oversight of the incorporation process. Most incubators will ask you to use your own attorneys to finalize the equity and investment documents.
Incubators are generally willing to work with startups pre- or post- incorporation, but many specialize in earlier stage startups. It may be more complicated or costly to join an incubator after you have brought on investors, as doing so can complicate issuing equity to the incubator.
For more on incubators, see:
When should I use a lawyer?
There are three options for incorporating your Company: (1) incorporating without any legal assistance, (2) using an automated legal service, or (3) engaging a startup attorney.
Though the formation documents are sometimes similar, mistakes can be made easily and are often costly (or impossible) to later remedy. I strongly recommend consulting with a startup attorney to provide guidance throughout the process and review important documents before you finalize them, even if you wish to file most of the incorporation paperwork yourself to reduce legal costs. Many startup lawyers will even do the basic incorporation for free of labor charge (passing through only the filing fees directly to you) in the interest of gaining your business as a long-term client down the road. Other lawyers will also/alternatively allow you to defer payment for legal work (up to a certain maximum, sometimes as high as the $10k range) until you've raised funding.
See here for a horror story involving DIY incorporation: http://bit.ly/incorporatinghorrorstory
It is possible to incorporate your Company yourself using online forms and resources. This may be the most cost-efficient option but it is time-intensive. Also, it can be difficult to vet which online forms incorporate the most up-to-date startup company knowledge. In the early days of Y Combinator, the participating startups were provided group counseling about the incorporation process by YC's on-staff lawyer, but the startups were responsible for actually filing the paperwork themselves (and subsequently obtaining their own legal counsel). As mentioned above, I highly recommend that you find a startup lawyer to counsel you through the process, even if you'd like to lower costs by physically filing the paperwork yourself (and reducing the billed legal hours).
AUTOMATED LEGAL SERVICE
You can use an automated legal service like Clerky or Legalzoom to fill out your Charter and post-Incorporation documents. These services provide forms to insert company and founder names among other info, and to produce quick form documents. However, they provide little room for customization. Many companies like to use these services for simple incorporations. Y Combinator asks its unincorporated companies to incorporate via Clerky forms, and Airtable itself was created through Clerky. Many companies are comfortable using these services without a lawyer's review. However, if this is your first startup you may wish to walk through the documents with a lawyer so that you can understand the form and analyze whether you want customization (to par value or create founders' preferred stock, for instance).
For more: http://www.quora.com/Has-anyone-used-Clerky-to-handle-their-founding-documents-If-so-did-you-have-a-lawyer-review-them-before-filing
Many startups prefer to work with a startup attorney to create and customize their Charter and post-incorporation forms. The standard Silicon Valley law firm will charge around $200-400 an hour for associates' time, and $500-1000 an hour for a partner's time. Associates perform most of the work during the incorporation process in about 5 hours, but this largely depends on the level of standardization required. Some startup lawyers will not charge you for basic incorporation work and will only require you to pay the Delaware filing fee. Many startup law firms may let you defer payment for any other legal costs (as much as $10-15k) until after you raise your first funding round. Other law firms may also ask for a small amount of equity in your Company in exchange for deferral or for their services.
Other articles on the topic:
Find legal counsel
I strongly recommend consulting with a startup attorney to provide guidance throughout the process and review important documents before you finalize them, even if you wish to file most of the incorporation paperwork yourself to reduce legal costs.
Review Incorporation Questionnaire with Co-Founders
When you are ready to incorporate your Company, you and the other founders should sit down and walk through a sample incorporation questionnaire and discuss items such as your company name, number of directors, equity distributions, etc.
This incorporation questionnaire from well-known law firm Wilson Sonsini provides an overview of some of the decisions you'll need to make about the structure of your company. You may want to walk through this as a team before finalizing the forms. This questionnaire is also similar to the other steps and questions listed in this Overview.
Name your Company
You'll need to select a name for your Company. Note that your Company could be different from your consumer-facing product name and website. For instance, Maplebear Inc. is the corporate name of the company running Instacart, but it does not own Maplebear.com. There is no legal reason why your company name and product name must be the same. However, you may want to file two trademarks if your company name is external facing.
You can always amend your Company name following incorporation, though this requires an amendment to your Charter and the associated legal and filing costs. You will then also need to update this name with your bank, Company credit cards, etc.
Your Company name must satisfy the following criteria:
1) Under Delaware law, the name of the company must include a corporate identifier such as "Company", "Corporation", "Limited", "Incorporated", or their corresponding abbreviations like "Inc." or "Ltd."
2) Your name must be unique to Delaware's list of corporations. You can search for existing corporation names here:
https://delecorp.delaware.gov/tin/EntitySearch.jsp The Delaware Secretary of State Examiner will have final say on whether the name you choose is too closely affiliated with an existing corporation. Note that changing the corporate identifier is not sufficient to not conflict. E.g., if there is a Software Inc., you cannot form as Software Ltd. However, you could try to add a second word, e.g., Software Labs Inc.
3) It is also recommended that you conduct a diligent search for any conflicting company names or trademarks. The Del. Secretary of State does not check trademark availability of your name. You should search the USPTO for any similar sounding or similar spelled names, not just your exact Company name. Importantly, you should discuss any similar names with your trademark attorney. You may also want to search Instagram, Twitter, etc. for similar social names (to the extent that is important for marketing your business) and search multiple search engines (Google, Yahoo, the Apple App Store etc.) for any similar business names which may confuse the consumer.
It can be very difficult to find a name that meets all of the above requirements, but it is oftentimes beneficial to choose a strong, unique name at incorporation rather than realizing your name is not strong after your Company has received press attention or the product has been launched.
Choose a Registered Agent
Delaware law requires your Company to designate an agent in Delaware on whom legal process may be served. This agent may be either a person or a corporation. To satisfy this requirement, companies will often hire one of several firms that provide registered agent services for a fee. A registered agent is a necessary legal formality; you can select from various providers who may provide services for different prices (such as handling charter amendments, paying your Delaware franchise taxes, etc.).
Some popular registered agents include: VCorp, The Corporation Trust Company ("CT Corp"), Incorporating Services, Ltd. and National Registered Agents, Inc.
For more, see: http://www.quora.com/For-startups-incorporating-in-Delaware-what-firms-are-good-Registered-Agents-to-use
Select the Sole Incorporator
To incorporate your Company, you will need to select a person over the age of 18 to act as the Company's "Sole Incorporator." This person will sign the Charter filed with Delaware and appoint the initial board of directors. This person then immediately resigns and the directors take over the operations of the Company.
If you are using a law firm to incorporate, the sole incorporator will often be the associate lawyer or a paralegal at the firm. Other firms will arbitrarily choose a founder or the future President/CEO of the Company. In practice, the Sole Incorporator does not have significant importance beyond these basic steps and any founder is likely sufficient to act in such a capacity.
The Sole Incorporator will sign a document known as the "Action of the Sole Incorporator" as part of this process.
For more information, see:
Specify Common Stock (Authorized/Par Value)
Your initial Charter will set forth the number of shares your Company is authorized to issue, and at what par value (minimum price) per class of stock. Theoretically, you can choose almost any amounts here, although the numbers you choose may affect the taxes you pay in Delaware. Most startup companies initially have only one class of stock, common stock. There are typically 10,000,000 shares issued initially, at a par value of either $0.0001 per share or $0.00001 per share. You should discuss with your lawyer before changing from these standard figures. These choices will affect how you issue founder equity and your Delaware franchise taxes.
For more on authorized shares and par value, see:
Specify Non-Standard Capitalization (As Applicable)
Some companies may want to include an additional class of stock in their initial charter, known as Founders' Preferred Stock or Series FF stock. This will require you to customize your Charter and may require use of an attorney or specially vetted forms. Most automatic legal services, such as Clerky, do not allow creation of this form of stock through the basic forms.
Series FF stock is preferred stock that provides founders with additional benefits. Historically, founders and employees of tech startups have held common stock, and only investors who pay cash for their shares received preferred stock (usually named Series A, B, C, etc. for each successive round of VC financing). Series FF shares are identical to shares of common stock in most respects, and are issued to founders (instead of or in addition to common stock) when the startup is incorporated. However, Series FF shares can be converted into shares of the series of preferred stock issued to investors in a later financing round (Series A, B, C...) and sold as part of that round. Thus, the Series FF stock is valuable to investors and investors may purchase Series FF stock from the founders at the same price per share as the new series of stock.
In other instances, Series FF stock may also receive ten votes per share on certain matters, so that founders can exercise control over certain corporate actions for longer periods of time.
Though founders can sometimes ask that they convert their standard common stock to Series FF stock following incorporation (or even following a round or two of preferred stock investments), it is usually better for the founders to decide to issue Series FF stock to themselves at founding to avoid unnecessary negotiation down the road and reduce legal costs.
Preferred Stock is rarely authorized at incorporation, as the specific rights that the Preferred stockholders will receive will be specially negotiated (usually through your lawyer). If you have early investors who are requesting preferred stock, please consult your lawyer on the best way to issue equity.
VCs used to resist Series FF stock, but they are starting to accept it more often if all other terms (e.g. vesting and acceleration) are standard. Founders who have had successful exits as founders of other companies will be able to implement Series FF without investor resistance. However, a first time founder may get pushback from investors who don't think the special terms are necessary.
However, for a majority of companies, founders still receive common stock only.
File the Certificate of Incorporation
To formally incorporate, you or your lawyer (typically through a registered agent) will file the Charter signed by the Sole Incorporator with the Secretary of State. The Secretary of State will review the charter, stamp it with a seal and unique identification number, and email a copy back to you. This can take 1-3 business days for regular service, or can be same day with expedited filing. Keep a copy in your minute book and in your Company files.
At it's simplest, the Charter can be a one-page form available on the Delaware website and filled out by you or your registered agent and contain only basic information on the Comany's name, authorized stock, par value per share, registered agent and the name of the sole incorporator. Typically, startup companies will add standard additional language to their Charters, such as language related to indemnification of officers and directors.
Your Charter will also differ if you choose to create Series F Stock alongside common stock.
For more information, see:
Complete Post-Incorporation Paperwork
After your corporation has been created, you need to perform a few steps to distribute equity between the founders, create a board of directors, and adopt the bylaws of the company.
You should not begin this process until after you've received confirmation from the Delaware Secretary of State that the company has been incorporated. These steps will be laid out in the below sections and should be completed promptly after incorporation.
A company's Bylaws define the rules that the company must follow regarding corporate procedure, governing the day-to-day operations of the company, such as conducting board meetings or taking corporate action by written consent. In contrast, the Charter contains rights of the different stockholders, protective provisions, voting rights, etc. One could analogize the Charter to the US Constitution (supreme, difficult to amend), and the Bylaws to the state laws (easier to amend, more specific). Like the Charter, the Bylaws may provide further indemnification for the officers and directors if the company is sued. Note that Bylaws are not filed with Delaware, but instead kept in your company's minute book for safekeeping.
The Bylaws and the Charter may govern under what conditions the Bylaws can be amended. Typically, Bylaws will need to be amended by at least a majority of the stockholders. The Certificate of Incorporation may also give the directors the right to amend the Bylaws.
Bylaws are typically provided by your lawyer and are based on templates that are easy to customize. A startup lawyer can usually draft you Bylaws in less than 30 minutes.
See more here:
Sign Initial Board Consent
Many important actions are taken at the first action of the board of directors. This is typically done by a written instrument signed by all directors, not through an in person meeting. The document is also known as "Written Consent of Board in Lieu of First Meeting" or "Action by Unanimous Written Consent of the Board of Directors in Lieu of First Meeting" or "Initial Organizational Resolutions of the Board of Directors."
This document typically does the following things:
(1) Appoints the officers of the Company (at least a President, Treasurer and Secretary). This could all be the same individual and should draw from the founders. These titles are only used for legal procedure, and don't necessarily have to be the same as the person's actual title or role.
(2) Approves issuance of stock to founders. This will state the class of stock, number of stock, and price per share of stock given to each founder. This will match the initial founder restricted stock purchase agreements each founder signs.
(3) Approves creation of stock incentive plan. This will set out the size and class of the equity set aside for issuance to employees, advisors and consultants.
(4) Other general resolutions - Including approving Bylaws, approving form of stock certificate, banking resolutions to give the board authority to open a bank account for the company, and authorization to foreign qualify the Company.
For more, see:
Sign Initial Stockholder Consent (As Applicable)
Stockholder consent is required to take certain action under Delaware law, including creation of a stock incentive plan, entering into indemnification agreements with officers/directors or approving a form thereof, or amending the Charter (such as to issue a new class of stock for a financing). Depending on which actions are being taken in the initial board meeting, you may need a stockholder consent as well.
Apply for an Employee ID Number (EIN)
To open a Company bank account, you must first apply for a Federal Employee Identification Number, or FEIN or EIN. This is the unique number provided by the government for your entity, and is used for official filings, such as federal taxes.
To apply for an EIN online, visit https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Apply-for-an-Employer-Identification-Number-(EIN)-Online. This process may be quicker if the individual applying for the EIN on behalf of the Company has a valid social security number.
You can also fill out a form known as the SS-4, and mail the document to the IRS. See here for tips on filling out the SS-4: http://www.techstartuplawyer.com/toolkits/corporate-formation/incorporating-a-technology-startup-getting-the-ein/#sthash.ozgGyB5r.dpbs You will receive a letter confirmation by US Mail stating your Company's EIN number. You should keep this number in the Company's minute book.
Contribute Money to Company (Optional)
Most companies don't receive investments for several months following incorporation. Until then, the founders must bootstrap the company with their own funds. It is very important that the founders keep clean corporate records of what personal finances are contributed to the company. If these corporate formalities are not followed, the founders are at risk to be held personally liable for the debts of the company (whereas a corporate structure typically protects the personal assets of founders).
Founders should not use their own bank account or credit card for company expenses. Instead, founders should (a) make transfers from their personal accounts to their corporate account (e.g. $1,000 at a time) and (b) only pay company expenses out of the company account. Your lawyer can also give you simple documents (such as a promissory loan) to record the $1,000 the founder gave to the company. It is recommended that any bootstrap fees do not get considered as "investments" but a "loan." E.g., these are not like convertible promissory notes where the principal and balance convert to equity.
Some founders may ask an investor that the investment funds be used to pay back founders for these early bootstrap investments. Some VCs may be willing to pay back some of these early costs, but many feel that investment funds should only be used for future growth of the company. Keeping clean corporate records helps make the case that certain bootstrap funds should be paid back. It is uncommon that a VC would allow the aggregate bootstrap reimbursement to be more than $50K.
Sign Founders' Stock Purchase Agreements
"This document is also known as ""common stock purchase agreement"" or ""restricted stock purchase agreement."" This agreement sets out the number, class and price of the shares being issued to a founder and the consideration (such as cash payment or assignment of IP) being issued in exchange for such stock. It also sets out the vesting schedule of the stock.
For tax reasons, corporations typically issue stock to founders in exchange for either cash, intellectual property, or a combination of both. The price should be at least equal to the par value of the Company (which, as discussed above, is typically nominal at $0.0001 or $0.00001 per share). You may want to discuss with your lawyer regarding setting a different price per share or how to assign any intellectual property rights for the stock. The founders must actually pay for the stock. As a best practice, records should be kept showing the check or wire transfer paid by each founder to the Company. Note that paying the Company will require that the Company have set up its bank account so that payment can be properly deposited.
The most common vesting schedule for founders includes a four year vesting period, with a one year cliff. Vesting schedules incentivize the founder to stay at the Company during the term of the vesting period. If a founder leaves the Company during the vesting period, he or she will only keep that number of shares which have vested over the period of service. It helps rewards founders who stay for longer periods of time and theoretically add more value to the Company during that time.
It is strongly encouraged to stick with the four year vesting period, one year cliff. A super majority of founders follow this formula, and deviations will be skeptically reviewed by investors. VC investors will frequently request founders to amend their agreements and go back to the four year vesting structure as part of a VC's investment.
These agreements also may include ""acceleration"" of vesting. Acceleration helps to reward or protect the founder and credit the founder by allowing more unvested shares to become vested upon certain events, such as a change in control of the Company or termination of the founder without cause.
Founder vesting and acceleration is an important concept to understand and should be carefully discussed with all co-founders. Having a well-understood and firm founder stock agreements will protect the Company when one founder leaves.
For more on pricing, vesting and acceleration, see:
File 83(b) Election [TIME-SENSITIVE]
"All individuals receiving restricted stock (e.g. founders) should file a federal form known as an 83(b) Election within 30 days of the Board Consent that authorized the issuance of such stock. This 30 days is a strict deadline and failing to do so can cause serious tax consequences. This form may also be necessary for issuance of ""early exercise"" stock options.
It's helpful to you use USPS certified mail and keep the certified mail receipt so that you have proof (from USPS, a government entity) that you mailed the 83(b) before the 30 day deadline, especially the mailing date becomes disputed later or if the letter is lost in transit. You'll also want to make and keep an extra three copies of the 83(b)--one to file with your year-end tax return, another for the company's archive, and a final one for your own personal archive. Ultimately, the 83(b) will likely only come into play down the road once you sell your stock, if the IRS audits you to determine whether you really did file it on time (because if you didn't, you'll be obligated to pay short-term income tax on the stock sale proceeds, as opposed to long-term capital gains).
Note that the IRS may or may not respond to your filing with an officially stamped letter noting that they've received the 83(b).
When you include another copy of the 83(b) filing with your year-end tax return (both for state, and federal), you'll need to file your taxes by paper mail, rather than e-file. It's recommended that you also include a cover letter for your tax return (see attachments in this record).
More background on the 83(b) election below:
Founders typically purchase stock pursuant to restricted stockpurchase agreements that allow the company to repurchase “unvested” stock upon termination of service. Under Section 83 of the Internal Revenue Code, the founder would not recognize income (the difference between fair market value and the price paid) until the stock vests. However, if a founder timely makes a voluntary Section 83(b) election, the founder recognizes “income” upon the purchase of the stock.Typically, the purchase price for the stock and the fair marketvalue are the same for founders who purchase stock shortly following incorporation. Therefore, no income is recognized in the 83(b) election. Thus, a founder should almost alwaysmake an 83(b) election.If the founder failed to timely make the 83(b) election, then he orshe may have income at the stock “vests.” The income will besubstantial if the value of the shares increases substantially overtime.Due to the sensitive nature of the 83(b) Election, you should speak to your attorney before you issue equity to any individual, and discuss the tax consequences and necessary filings. For example, early exercise stock options also require filing an 83(b) election."
File Form D (Federal Security Filing)
"A startup's issuance of equity is governed by Delaware state law, federal tax law, and federal securities laws (among the laws of any other state/local government which may apply).
Under the federal securities laws, a company must file a ""Form D"" to the Securities and Exchange Commission within 15 days of the first private placement sale of equity to purchasers. In the scenario of a startup company, this includes the sale of the initial equity to the founders. The Form D is a relatively simple document to complete and file; however, it’s very easy for a startup to overlook filing one, especially if it doesn’t use an experienced startup attorney in the process.
For more on Form D filings, see:
File "Blue Sky" Filings (State Security Filings) (As Applicable)
"In addition to any federal securities filings required by the issuance of stock to founders, your attorney should research and confirm which state securities laws may apply to the issuance of equity to any founder located in such state. These local laws are known as ""Blue Sky"" laws and should be considered each time equity (including restricted stock, preferred stock, or stock options) is issued to a founder, employee, or investor.
For example, for a Delaware corporation where all three founders are located in California, a California security filing known as the 25102(f) must be filed. If creating a stock incentive plan and issuing options to California residents, a 25102(o) notice must be filed.
Your attorney can advise you on what state filings are required for equity issuances.
For more, see:
Cut Stock Certificates or Send Notice of Stock Issuance (As Applicable)
"Stock certificates evidence the founders' stock ownership in the Company. Each stock certificate is typically signed by the President and the Treasurer of the Company. In some instances, your Company's attorney may issue notice of stock issuance rather than original stock issuances, by instead acting as an official record that the stock have been legally (and virtually) assigned to their purchasers (ie the founders). The attorney will wait until necessary to issue original stock certificates, since originals can often can lost or damaged and keeping track of them can be expensive (especially if done piecemeal for each stock issuance).
For more, see: http://www.quora.com/Are-issuing-paper-stock-certificates-really-necessary-for-startups
"Along with founder restricted stock agreements, the founders' confidential information and invention assignment agreements (""CIIAA"") or the proprietary information and invention assignment agreements (""PIIAA"") (or other similar names) are the most important document founders should sign. This agreement assigns all inventions created by a founder to the Company, as well as binds the founder to keep confidential certain information it learns as part of its role as a founder, and requires the founder to keep it confidential for a certain period of time (including following termination).
Depending on the jurisdiction, these agreements may also include non-solicitation or non-competition obligations. It is essential that founders sign the CIIAAs so that all of their valuable inventions belong to the Company, making the Company a valuable entity for investment. As part of the financing due diligence process, investor counsel will review the CIIAAs with the founders (as well as with all contributors to the Company) to confirm the agreements were duly executed and were appropriate in scope.
Your lawyer can provide you with an appropriate PIIA for the jurisdiction where each founder resides.
Register as a Foreign Corporation (As Applicable)
"Once you have incorporated in Delaware, you may want to register to do business in other states. First, you should look to the state where the business is currently operated (e.g. California or New York), to see whether you need to file as a ""foreign"" (Delaware) corporation doing business in that state. The threshold for ""doing business"" can vary by state statute, but typically includes activity in the state such as: entering into leases, hiring employees, entering into material contracts and/or receiving revenue in the state. Most investors will require you to be ""foreign qualified"" in the state in which you are based prior to closing a preferred stock investment round.
If there is already a company operating in a state named the same or similar to yours, you may be asked by the Secretary of State to use a different name in such state. This is known as a ""doing business as"" or ""DBA"" filing, and, while not extremely common, is not typically problematic. For example, Instacart is actually Maplebear Inc. DBA Instacart.
You will need to pay filing fees and pay your registered agent for making such filings. Depending on which states you are foreign qualified, you may be required to pay certain state franchise fees or minimum taxes, as well as make other yearly filings with the state.
For more, see:
http://www.dos.ny.gov/corps/buscorp.html (New York)
Create Stock Incentive Plan (As Applicable)
"If you plan on issuing equity to employees, consultants or advisors, you should consider allocating a certain number of shares for the creation of a Stock Incentive Plan (also known as an Equity Incentive Plan, among other similar names). As discussed above, both the Board and the Stockholders should approve the issuance of the Plan -- including the number of shares reserved from the Plan and the actual legal document that sets forth the rules and regulations about the Plan.
Please confirm you are following all necessary federal and state security filings when creating a Plan or issuing equity from the Plan. "
Create a Minute Book
"A minute book is a written record of the corporation of the regular course of its business. This typically includes original copies of the company's records, including the incorporation-related documents, as well all future board and stockholder meeting minutes and the stock ledger. Any person allowed to inspect the books and records of the company by law may request from the Company a copy of the minute book. This should be kept up to date at all times. If you have a lawyer, he or she may help maintain the physical minute book (usually a binder in their records room). You may also want to keep digital copies of its contents.
By the end of the post-incorporation process, the minute book will likely include:
Certificate of Incorporation and any amendments thereto
Federal Employer Identification Number
Minutes/Consents of Directors/Stockholders
Stock Purchase Agreements (as a best practice)
Copies of all Stock Certificates/Notice of Stock Issuance
Federal, State and Local Filings
See also: http://delcode.delaware.gov/title8/c001/sc07/
Comply with State-Specific Regulations (As Applicable)
"The state where your founders or principal business operations are located may require additional permits, registrations or filings. Please confirm if any such procedures are necessary with your attorney.
In many states, additional registration is required before hiring employees. For example, in California, a startup company must register as a Foreign Corporation with the Secretary of State and receive their California SOS number. They must then file a registration form with the California Employment Development Department (EDD) within 15 days after paying more than $100 to any employee within a calendar quarter.
For more information, see: http://www.edd.ca.gov/Employer_Services.htm
Comply with City-Specific Regulations (As Applicable)
"The city where your founders or principal business operations are located may require additional permits, registrations or filings. Please confirm if any such procedures are necessary with your attorney.
For companies located in San Francisco, you may need to secure a license to do business in San Francisco by filing the New Business Registration Application.
For more information, see:
These agreements are often drafted by your startup attorney, however, several companies or online legal services can help auto-create or draft these at a fraction of the cost as a completely customized agreement. For example, SnapTerms, TermsFeed and iubenda specialize in off-the-shelf terms of service agreements and privacy policies.
http://www.leginfo.ca.gov/cgi-bin/displaycode?section=bpc&group=22001-23000&file=22575-22579 (California law)
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