In previous posts, I have provided a lot of information on various aspects of getting a startup company established. I thought it would be useful to put a lot of that information in one post, as a startup checklist. So here we go…
1. Review your employment agreement – before doing any substantial development work, founders who are maintaining their day jobs should review their employment agreements (and this could include employee handbooks, etc.) to ensure that there are no conflicts with the startup. In particular, a startup founder wants to make sure that any IP she develops will belong to her startup, and not to her day job. It’s a good idea to have a lawyer take a careful look at employment agreements and policy statements.
2. Decide how you will split the equity among the founders – while equal shares might seem easy and uncontroversial, it may not be the best, fairest way of splitting the equity.
3. Form a corporation – if you have any aspirations of seeking angel investments or venture capital funding, form a corporation, not an LLC. And form it in Delaware. You might think forming an LLC is cheaper or easier, and you will be wrong. You will end up needing a corporation anyway, and will waste time and money fixing things that should have been done right the first time.
4. Adopt bylaws – once you have filed your certificate of incorporation, you will need to adopt bylaws to govern the management of your new company.
5. Appoint a Board of Directors – You will need one or more directors to oversee management of your company. The directors can now approve various resolutions to get the company operating.
6. Enter into a shareholders agreement with vesting and buyout provisions, and issue stock – you will want to have vesting provisions in place from the start, in case any founders leave the startup. Otherwise, you will have an ex-founder wandering around outside the company with fully-vested shares. Also, make sure each founder receiving shares files an 83(b) election with the IRS at the time you issue shares. Let me repeat that in boldface, because it is really important: make sure each founder receiving shares files an 83(b) election at the time you issue shares.
7. Assign IP to the company – at the time of issuing shares, make sure that all founders assign to the startup any IP they are creating. This will be part or all of the payment for their shares, depending on the situation.
8. Qualify to do business – You will need to qualify to do business in whatever state your principal location is located in, unless you are located in Delaware (see number 3). This is fairly easy to do; you just file some paperwork and pay the state a fee.
9. Stock options – do not issue stock options until you have a proper stock option plan in place, approved by the board of directors, with a Section 409(A) valuation of the stock options. This doesn’t necessarily have to be done at the outset, but there are advantages to doing it before entering into negotiations with VC’s over a Series A round.
10. Employment/consulting agreements — if you are going to hire employees or use outside developers, make sure they sign agreements specifying that any work they do for the startup is the property of the startup.
11. Comply with securities laws – just because you are not a public company does not mean that you are exempt from the securities laws. This is a complex area, with many risks and pitfalls. Definitely consult a knowledgeable lawyer in advance, and preferably each step of the way. Only seek funding from accredited investors; it will make your life much easier. There are no friends-and-family exemptions from the securities laws.
All of the above items are essential to making sure that your startup has a smooth path to growth. If you omit any of the above items, you jeopardize the well-being of the startup, and create many headaches and costs downstream.
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