top 10 legal mistakes that startups make
TRANSCRIPT
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(Except Yours, Now That You’re Here)
Top 10 Legal MistakesThat Startups Make
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Student-Attorneys
Robert Barnes
Dani Glazer
Kimberly Jachimek
Supervising Attorneys
Jeff Ward
Darrell Fruth
Who we are
Who we helpSeed and early stage entrepreneurial ventures that have not yet raised significant amounts of outside capital
What we doLegal advice and assistance in formation, intellectual property protection, commercialization strategies and operational issues
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“We Trust Each Other. We Don’t Need a Founders’ Agreement.”
Mistake 1
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Yes You Do.
2. Two Founders Disagree 3. Chaos Ensues
“I thought I
was CEO”
“You’re basically
a janitor.”
“Our Startup is
great!”
“This is fun!”
“Let’s work really
hard!”
LAWSUIT
1. Founders Are Happy
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Benefits of Founders’ Agreements
Firm Commitment
Role in company
Responsibilities and corresponding incentives
Clear Goals
Negotiation = Communication
Literally write them out
Power and Process
How to vote
Who pays what & when
Special circumstances
Backup PlanNoncompete
Nondisclose/ confidentiality
Exit procedures
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“I’ve heard you should just keep all your tech under wraps.”
Mistake 2
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No! Be clear about technology transfer issues.
Tech Transfer to Company
Student Tech
• Usually not a huge issue
Employee Tech
• Can be a bigger issue
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Accidental Partnerships & Sole Proprietorships
Mistake 3
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Working together
Signing contracts
Talking with clients
Finding investorsDon’t even *think* the word Partner.
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Working together
Signing contracts
Talking with clients
Finding investorsDon’t even *think* the word Partner.
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“But what if we never signed any contracts or wrote up any formal documents?”
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“But what if we never signed any contracts or wrote up any formal documents?”
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“But what if we’re just about to file our Articles of Incorporation? We’re basically a real business now.”
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“But what if we’re just about to file our Articles of Incorporation? We’re basically a real business now.”
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Why is this bad?
100% Liability
Shared Profits
Unclear Terms
• *Partnership Agreement
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How to Make Sure You’re Not a Partnership
• C Corporation
• S Corporation
• LLC
• Benefits Corp
• Cooperative
• Other variations
Choose entity
• Articles of Incorporation
• Bylaws
File Documents
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“LLCs Are the Only Way to Go.”
Mistake 4
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C Corporations
P R O S
• Perpetual existence
• Easier to incentivize investment:
• Well-known laws
• Transferability easy
C O N S
• Double taxation
• Expensive yearly filings
• Operational formalities
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S Corporations
P R O S
• Well-known laws
• Transferability easy
• NO double taxation
• Pass-through
• Split into reasonable compensation & investment income (excluded from taxable self-employment income, unlike LLC)
C O N S
• Expensive yearly filings
• Operational formalities
• Single class of shares
• Proportional earnings
• US Resident/citizen
• Harder to get funding (compared to C Corps)
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Limited Liability Companies (LLCs)
P R O S
• Flexible
• Based on contract, not regulations
• Can insulate management from members
• NO double taxation
C O N S
• Harder to incentivize investors
• Less transferability
• Less predictable (newer laws)
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Nonprofit, Tax-Exempt Companies
P R O S
• No taxes
• Donations from individuals or organizations
• Fiscal sponsorship options
• Labeled a nonprofit
C O N S
• Additional reporting requirements
• Restrictions to remain qualified under 501(c)(3)
• No equity ownership of company
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Public Benefit Corporations
P R O S
• Operates as a corporation
• Transferability easy
• Some well known laws
• Insulated from investor pressures
• Fiduciary duty includes social mission
C O N S
• Additional reporting requirements
• Only available in 24 states
• Investors sometimes turned off by fiduciary duty change
• Additional shareholder right of action
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B-Corp Certification
P R O S
• Clear, recognized stamp to lend credibility
• No restrictions on type of entity
• In peer network with Patagonia, Ben & Jerry’s, New Belgium Brewing, etc.
C O N S
• Expensive yearly fees ($500+)
• Rigorous evaluations every two years (4+ hrs)
• Potential audits every year (6-8 hrs)
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Permits, Licenses, and Certificates
Mistake 5
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Transportation
NC Department of Transportation
Permits
Handbook
Forms & Documents
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Food Service
NC Department of Agriculture &
Consumer Services
Food & Drug Protection Division
Food Branch
Inspections
Food product label reviews
Licenses
Wholesale and retail frozen dessert
manufacturers
Cheese and butter manufacturers
Milk haulers and testers
Automotive antifreezes
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Tax-Exempt Nonprofits
Protects donors from fraudulent solicitation
Access to online registry
Charitable Solicitation License
File online form Register license online
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“Nana’s Investment Isn’t a REAL Investment.”
Mistake 6
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Taking Money Security
Registration
Exemption
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Exemptions
4(a)(2) Private Placement
506(b) or 506(c)
Intrastate offering
Alternatives
Grants
Incubators
Start-up Contests, Crowdfunding, etc.
Avoiding registration
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Past Present Future
Why worry about securities violations?
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Even more headaches...
Reporting Costs
•Public disclosures to the SEC
Tax
•Shareholders could get hit with major taxes
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“You’re an investor? Well let me tell you about this awesome trade secret we’ve got!”
Mistake 7
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Common IP issues
Ownership
Use
Liability / Lawsuits
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Avoiding IP problems
Docs
Strategic Choices
Thorough Research
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“Let’s Name our Company… Google.”
Mistake 8
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Time MoneyMarket Confusion
Why does name choice matter?
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Choosing a Name: Brainstorm multiple flexible names
Trademark and Copyright
Thorough, diligent searches
Avoiding problems with names
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Policies and Standard Documents: “We’ll Just Wing It.”
Mistake 9
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Thorough discussions early on
Readily availableform docs
Strong bargaining positions in the marketplace
The benefit is in the process
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Do-It-Yourself Lawyering
Mistake 10
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Savings
ExperienceFocus
What can lawyers add?
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“Our business plan… is to be awesome.”
Bonus! Mistake 11
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Yeah, that’s nothing.
• Helps clarify goals & next steps
Thorough
• PowerPoint
• 10/20/30 Rule
Ready to present to investors
You must know all of it
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Questions?