Startup Legal Mistakes

Transcription

1 Startup Legal Mistakes Chris Sloan

2 My Top 10 List The Foundation 1.Wrong Entity 2.No Founder Vesting 3.Show Me The Money! The Building Blocks 4.Works NOT Made for Hire 5.Not Clearing Trademarks 6.Not Protecting Trade Secrets The Toolkit 7.Not Protecting Your Elevator Capital 8.Misclassifying Employees 9.Bad Housekeeping 10.Sloppy Contracts 2

3 1. Wrong Entity The Choices Sole Proprietorship (aka d/b/a ) Corporation An S-corporation is a tax election, not a different type of entity Limited Liability Company Ignore: General Partnership Limited Partnership 3

4 Corporation vs. LLC Corporation State statute Charter Bylaws Board of directors Officers Double tax (except S corp) LLC State statute (lite) Articles of Organization Operating Agreement Board or not Officers or not Pass through tax RIGID FLEXIBLE 4

5 Recommendations For likely VC-backed, DE C-corp is gold standard Pass-through entities create problems for institutional funds Delaware is the most familiar and well-respected body of corporate law LLC better if unsure of VC path, or not necessarily growing to exit Relatively easy to convert to a corporation later No real advantage (any more) to using S-corp over an LLC 5

6 2. Founder Vesting Founders usually have shared mutual expectations What if a founder quits or is fired? Startups aren t like Disney movies! Stuff happens. Reciprocal vesting agreements create an immediate self help remedy Usually 2, 3 or 4 years (different than standard employee vesting) Usually with full acceleration on change of control 6

7 3. Show Me The Money! Murphy s Law of Startups Murphy is an investor in ALL startups A common mistake is failing to plan for this Fundraising requires compliance with securities laws and also understanding of the deal terms Use accredited investors to keep it simple (Rule 506) Research the common terms (see, e.g., Venture Deals) Avoid death terms, e.g. strict antidilution Lots of tools in the toolkit other than just straight equity: Preferred stock (traditional) Convertible debt (simple, fast, avoids valuation) Convertible equity (trendy analog to convertible debt) 7

8 4. Works NOT Made for Hire Work made for hire is frequently misunderstood Only applies in two cases, only one of which is common: employees acting within scope of employment Employee means a true employee for labor law purposes GET A WRITTEN ASSIGNMENT OR ASSUME YOU DON T OWN IT This is a very, very expensive mistake to make BUT it s a very common one 8

9 5. Not Clearing Trademarks Infringement standard is likelihood of confusion Often misunderstood USPTO search tool is very limited Very limited boolean logic Does not cover common law marks Trademark Domain Name Legal Name A basic knockout search is inexpensive and can avoid a painful and expensive problem later 9

10 6. Not Protecting Trade Secrets Know your IP you can t protect what you don t know you have! Trade secret means: a secret that confers an economic advantage not generally known or readily ascertainable by competitors subject to reasonable efforts to protect Reasonable efforts varies by circumstance Generally, use NDAs + control access (physical and virtual) Be careful about expiration dates in NDAs 10

11 7. Not Protecting Elevator Capital Elevator Capital = your people! i.e. the capital that gets in the elevator to go home every day! Use invention assignment and confidentiality agreements Some rights will flow automatically, but why risk it? Non-compete Non-competes are enforceable in most states Must be reasonable in duration, scope, and territory Non-solicitation Should cover employees, customers, and suppliers 11

12 8. Bad Housekeeping A COMMON, AVOIDABLE PROBLEM if you don t know who owns what, how do you expect an investor to know?? Cap Table Keep accurate, current info on equity ownership Both issued and fully-diluted Vesting and forfeiture restrictions Transfer Ledger Track each individual stock certificate and equity transaction Keep the paperwork documenting each one Minute Book eshares! Minutes of all meetings (including actions on written consent) Copies of relevant corporate documents (e.g. certificate of incorporation, bylaws, shareholders agreement, option plan, etc.) 12

13 9. Sloppy Contracts Oral contracts can be enforceable (except when they aren t) Proof is the problem Old legal saying: If it s not in writing, it didn t happen. Written agreements provide proof and clarity. Written does not mean formal. e.g. An exchange can create a contract. 13

14 Sloppy Contracts (cont.) Contracts serve three main purposes: 1. Documenting the deal 2. Risk allocation 3. Legal compliance (not as common as you might think) Get it ALL in the contract People turn over Understandings are forgotten Use the Law of Common Sense Magic language is rare Simple, direct, plain language works FINE Lawyers are really, really bad at this 14

15 10. Misclassifying Employees Independent contractors vs. employees Improper classification can lead to serious liability with IRS and state(s) When in doubt, err on the side of employee Exempt vs. non-exempt (for overtime purposes) 15

16 Contact Us Chris Sloan