Incorporating Startups

Transcription

1 Incorporating Startups HBS Rock Center February 12, 2014 Paul Sweeney, Esq. Meredith Haviland, Esq Foley Hoag LLP. All Rights Reserved Foley Hoag LLP. All Rights Reserved. Incorporating your Startup 1

2 These materials have been prepared solely for educational purposes. The presentation of these materials does not constitute legal advice, nor does it establish any form of attorney-client relationship with the author or Foley Hoag LLP. Specific legal issues should be addressed through consultation with your own counsel, not by reliance on this presentation or these materials. Attorney Advertising. Prior results do not guarantee a similar outcome. Foley Hoag LLP United States Treasury Regulations require us to disclose the following: Any tax advice included in this document and its attachments was not intended or written to be used, and it cannot be used by the taxpayer, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein Foley Hoag LLP. All Rights Reserved. Incorporating your Startup 2

3 Introductions Paul Sweeney, Esq. Partner (617) Co-Chair of Technology Practice Named one of the Top 20 Startup Lawyers in Boston, and one of Ten Most Innovative Lawyers in America by the ABA Journal Have worked on over 100 angel and venture capital financings (debt and equity) over 16 years of practice Foley Hoag LLP. All Rights Reserved. Incorporating your Startup 3

4 Introductions Meredith Haviland, Esq. Partner (617) Over 9 years of experience working with emerging companies on various issues, including formation, securing financing and general corporate matters. Regularly advise angel and venture capital investors in connection with early stage investments in emerging companies Foley Hoag LLP. All Rights Reserved. Incorporating your Startup 4

5 Incorporation What is it? Why do it? Deciding when to incorporate Choosing a form of legal entity What is involved Questions 2014 Foley Hoag LLP. All Rights Reserved. Incorporating your Startup 5

6 What does it mean to incorporate? From a legal perspective: Creates a legal entity, separate and distinct from its owners Can own assets (including other corporations) and incur liabilities Can enter into contracts (with rights and obligations) Can sue and be sued Can be convicted of criminal offenses (e.g. fraud, manslaughter) Existence based on corporate law on the state level Created by filing Certificate of Incorporation with the Secretary of State In most cases, duration of the entity is perpetual From a practical perspective: State laws require fees and formalities. Capital is provided to the corporation in return for equity (stock, membership interests, etc.) or debt Foley Hoag LLP. All Rights Reserved. Incorporating your Startup 6

7 Why should I incorporate? Protect owners from personal liability Liability limited to invested capital Avoid unintentional general partnership Establish clear ownership rights in intellectual property Issuing equity ( Founder Stock ) to founders Hiring employees or third party contractors Issuing stock options Raising capital Selling or liquidating business Holding period for capital gains 2014 Foley Hoag LLP. All Rights Reserved. Incorporating your Startup 7

8 When should I incorporate? If more than one founder Creation of IP or other material assets Signing agreements (e.g. office lease) Hiring employees or contractors Issuing stock or options Conducting business / launching product Starting the clock capital gains holding period Raising capital 2014 Foley Hoag LLP. All Rights Reserved. Incorporating your Startup 8

9 Which form of entity? Majority of startups are formed as: C Corporations / S Corporations / LLCs Key Considerations: Liability protection Raising capital Ownership issues (stockholders vs. members) Employee equity incentives Tax treatment ( double taxation vs. pass-through ) Appetite for complexity / legal expenses Look at the end game: Intend to raise capital, grow business, grant options and sell? Corp Intend to generate profits, distribute cash flow to owners? LLC 2014 Foley Hoag LLP. All Rights Reserved. Incorporating your Startup 9

10 Where should I incorporate? Delaware. Next question? 2014 Foley Hoag LLP. All Rights Reserved. Incorporating your Startup 10

11 Why Delaware? Investors insist on it Predictable and well developed corporate law High degree of protection for directors Well known, efficient-ish filing process But.. franchise taxes and annual fees 2014 Foley Hoag LLP. All Rights Reserved. Incorporating your Startup 11

12 What is involved? Reserve the name early in DE and resident state (but beware of trademark issues!) Certificate of Incorporation By-laws Initial consent of sole incorporator Initial consent of director(s) Stock certificates, receipts and ledger Qualification to do business in resident state Registered Agents for each state S corporation election, if applicable Application to obtain a tax ID (EIN) Opening bank account Annual tax returns 2014 Foley Hoag LLP. All Rights Reserved. Incorporating your Startup 12

13 What is involved? Key questions: What is the name of the company? How many shares to authorize? Who gets what? 2014 Foley Hoag LLP. All Rights Reserved. Incorporating your Startup 13

14 Questions? Paul G. Sweeney Partner (617) Foley Hoag LLP. All Rights Reserved Foley Hoag LLP. All Rights Reserved. Incorporating your Startup 14