I’ve been a corporate lawyer for more than 17 years, and there are certain fundamental legal mistakes that I’ve seen startups repeatedly make (many of which surface when investors are conducting their due-diligence investigation).
Accordingly, I thought it would be helpful to provide a simple checklist for startups that includes links to indepth posts for a more detailed discussion.
1. Form a corporation, not an LLC (see post here) or a partnership (see post here).
2. Incorporate in Delaware and qualify the company to do business in the state in which its principal office is located (see #2 here).
3. Set-up vesting schedules for the founders (see post here) and file 83(b) elections with the IRS (see #3 here).
4. Button-down IP ownership and assignment issues (see post here).
5. Split the equity based on prior contributions and expectations going forward, not necessarily equally (see post here).
6. If you hire any employees, make sure you don’t misclassify them as an independent contractor or fail to pay them at least the minimum wage (see post here).
7. Only raise funds from “accredited investors” (see post here) and don’t pay anyone a commission for raising funds for you unless they are a registered broker-dealer (see post here).
8. Put proper privacy policies in place and make sure you adhere to them (see post here).
9. Don’t issue stock options unless a proper option plan is in place and a valuation has been done in compliance with Section 409A of the Internal Revenue Code (see post here).
10. Regarding lawyers, don’t give them equity (see post here); don’t use your investors’ lawyers (see post here); and there are ways of cutting legal fees in half (see post here).
None of this is rocket science. But as the late, great super-lawyer and VC Craig Johnson wrote in the book, The Silicon Valley Edge: A Habitat for Innovation and Entrepreneurship, “Starting companies is a lot like launching rockets: if you’re a tenth of a degree off at launch, you may be a thousand miles off downrange.”
Scott Edward Walker is the founder and CEO of Walker Corporate Law Group, PLLC, a law firm specializing in the representation of entrepreneurs.
[Image via Yes Man/Shutterstock]