A Legal Checklist for Startups
Starting a new company is kind of like playing golf. In golf, if your club face and/or your swing plane is off by just a degree or so on your first shot, you're going to end up 30-40 yards off target, in the rough (or worse), and scrambling to make par. In business, if your company doesn't get off on the right legal trajectory, you may find yourself in court, which will cost you more than a few strokes on your scorecard.
Filing a company registration - especially in Utah - might be easier than hitting a great tee shot. An hour or two spent filling out forms on Legalzoom or at utah.gov will turn you into a business owner. If you want to own a business for the sake of owning a business, that might be a fine route to take. But if you're serious about entrepreneurship and business ownership, there are a few things you'll want to do to make sure your tee shot doesn't end up in the rough.
Our business attorneys have represented a wide range of entrepreneurs with a variety of different goals. Our experience working with an array of startups has allowed us to create a comprehensive startup checklist, which includes tips about many non-legal aspects like banking, accounting/finance, marketing, and operations.
Instead of detailing the entire checklist here, I will focus on a few critical legal points to focus on during your company's startup phase. This checklist should not substitute for legal representation - your first step toward entrepreneurship should be hiring competent legal representation to help you accomplish the items on the following checklist.
- Register the company and execute governing documents (operating agreement for LLC, bylaws for corporation).
- Many attorneys are adamant about incorporating in Delaware, but that's not necessarily the best route for every startup.
- Determine ownership of company equity - this should be based on contributions to the company instead of merely being split equally.
- Determine vesting schedules for the founders and file 83(b) elections with the IRS.
- Document intellectual property ownership and determine intellectual property registration needs.
- Determine employment needs and ensure proper classification of employees (independent contractors vs. employees).
- Determine employment policies and guidelines.
- Don't issue stock/ownership options unless an option plan is in place and a 409A valuation has been performed.
- If you will raise capital from outside investors, hire an experienced securities attorney. Absolutely don't take outside capital without consulting an attorney.
- Document and execute contracts and agreement - don't rely on handshakes and verbal agreements. One breached handshake agreement can be death for a startup.
As always, we're here to help you along the way. Many of the foregoing issues require thoughtful consideration, which can't really occur without knowing the potential consequences related to your decisions. If you need help keeping your tee shot out of the rough, talk to your club pro. If you want to make sure your business is set up to succeed, give us a call!