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Startup Formation: What You Need to Know

Startup Formation: What You Need to Know

Formation

You probably already know that must be some separate legal entity, and I’ll discuss more about how to actually set that up in a bit more detail here, as well. For now, all you need to know is that this separate legal entity will own all of the inventions, intellectual property, and all other assets of the business. Why is this? It’s set up this way to protect the founders from liability, but also to help with raising money, hiring employees and entering into contracts.

Liability, in terms of contracts, investments, employment, and just being sued in general, is a big reason for formatting a separate legal entity because it protects the founders from personal liability. What that means is if your company ever gets sued, or when your company gets sued, it’s not your money, in your bank account; it’s the company’s.

Another thing to think about when setting up your company is what each of the founders’ roles will be and how much equity each founder will get. We’ll get to that in the next article.

Where Should I Form My Company?
Then the question is, where do you form this entity and theoretically you have fifty choices, but the easiest place is Delaware. There are two reasons for this:

The first reason is Delaware is in the business of forming corporations. The law there is very clear and very settled; it’s the standard.

The second reason is investors are very comfortable with Delaware corporations, as well. They already invest in companies that are Delaware Corporations. It is likely that most of their investments are Delaware corporations, so if you are also a Delaware corporation then everything just becomes much simpler. There’s less diligence for the investor to do.

After you have the corporation set up, you then need to complete a set of documents that, among other things, approve the bylaws of the company and issue shares of stock. These documents also elect the president and secretary.

It is at this junction that you, as a founder, need to complete documents to sign any inventions or any code or anything that you as an individual create over to the company, so that the company actually owns all of it.

Remember, at this point it is really good to think about things in two different ways: You always have to be thinking: am doing this as an individual? or am I doing this on behalf of the company which is a separate entity. It is important to maintain this separation from the beginning.

Going along with creating the company in the right way, it is important to keep all of these documents in a safe place. It sounds so basic, but losing this information happens a lot more often than you’d think.

It’s already hard enough building a business and there are going to be a lot of really high stress times in the life of the business. It’s likely that you don’t want to be running around looking for the right documents when your company is raising a big Series A round or being acquired.

At some point your company will have to go through due diligence and then lawyers, like myself, will be asking for all this stuff. So, don’t make it more stressful than it already is and just keep your documents organized. The key is to keep it simple, keep those documents in a safe place and keep it organized and it’ll make your life easier down the line.

 

If you have any questions or would like help forming your company, email us at ben@greenandgreen.com

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