Congratulations on deciding to become an entrepreneur! Starting a business is exciting and can be a vehicle to fulfill personal ambitions. This decision took some planning and definitely took courage. It also meant thinking long and hard about the risks. Here are some basic legal considerations and steps that can help limit some of those risks for a startup:
1. Selecting a Team
The most important first step is to develop a quality network and team of trusted advisors. They will serve as the support network for the business and can be utilized to improve the business and achieve goals more quickly. The experience and background of the advisors is critically important. Specific recommendations will differ depending on the type of business, but it is generally recommended that individuals with a deep background in the industry the business targets who can advise on marketing, finance, and legal aspects, be on that team. Advisors with these backgrounds will be able to assist the business through the various stages of its growth cycle, from pre-launch to kickoff, product or service innovation, attracting more customers, and achieving financial goals. They also can help navigate unforeseen obstacles that create stumbling blocks and diversions.
2. Proper Organization
While identifying an advisory team, the organization of the business must also take shape. First, what will the name of the new business be? Be careful that the name does not conflict with any other businesses in the marketplace, which could be a serious setback in the future.
Next, focus on standard formation questions. Will the new business be a corporation? If so, will the corporation make an S election? Alternatively, should the new business be formed as a limited liability company? Working with legal and tax advisors is vitally important to understand the positives and negatives of each option and how each applies to the business.
Finally, discussions with any co-founders, key employees, and advisors must be held to clarify the business deal with them. The following are a few questions that should be asked:
If there are co-founders of the company, what percentage of the new company does each founder get?
What are the responsibilities of each co-founder? For example, is one co-founder responsible for development of the technology and leading that effort and another responsible for business development?
Is there compensation paid to the founders?
What if one co-founder wants to leave? What if the departing co-founder contributed technology or know-how to the business? Is the business able to keep what has been contributed if the co-founder leaves or will the departing co-founder retain some rights?
Similar questions should be considered for employees and consultants. There are many more questions depending on the particular business, and the team of advisors can be very helpful in helping to outline and then addressing the questions that are relevant to the business.
Once all of the initial organization questions have been answered, proper agreements will be needed to document the relevant structure or agreement. This is critically important. If done properly, this will preserve, and potentially even add, value to the business when it is time to raise money. Here is a list of those documents:
Sound organizational documents (e.g., Articles of Incorporation, Bylaws, Stockholder’s Agreement, or Articles of Formation and an Operating Agreement)
Co-founder Agreements, Employment Agreements, and/or Independent Contractor Agreements
Assignment of Inventions Agreements
Confidentiality, Non-Competition, and Non-Solicitation Agreements
Necessary trademark, copyright, or patent filings
When it is time to raise money for the business, rely heavily on the team of advisors. They are important resources for making connections for raising funds, and will provide important guidance. They also may have connections with active local angel investor groups and regional venture capital firms. Issues to consider include:
When is it an appropriate time to seek outside investors?
What is an appropriate valuation of the business?
How should the offering be structured? Should the offering be a debt offering? Should the offering be a new class of equity?
What rights should new investors have? Should they get control over certain company decisions? Should the investors get a seat on the company’s board of directors?
What sort of investment protections should the company agree to? Should investors be allowed to participate in new capital raises by the company?
Every business will have specific issues and challenges, but the summary of things above can help outline issues and identify what is important to the business and its success. Good luck!
Travis J. Leach, a partner at Ballard Spahr, focuses his practice on corporate and securities law, with an emphasis on public offerings, private placements, corporate governance matters, Sarbanes-Oxley and SEC compliance, and mergers and acquisitions. He also is Co-Practice Leader of the Emerging Growth and Private Capital Group and the firm’s Sports practice.