In prior posts, this blog has discussed some specific issues that affect your start-up, from incentive plans, to early IP protection and hiring your team. But the number of topics, and more importantly, the number of documents founders should have in place can be a little daunting. With that in mind, this post is intended to present a summary checklist of key areas of documentation that your lawyer can help you with and to start an ongoing series of posts focusing on the below checklist in greater detail.
- Choice of Entity – there’s a lot of bias in favor of forming as a Delaware corporation, but in some cases there may be a reason to incorporate or organize as a different type of entity (for tax purposes primarily) or in a different state (for instance, some states have greater flexibility in converting from one form of entity to another).
- Formation Filings and Internal Governance Documents – these will be the certificate of incorporation or organization filed with the state in which the entity is formed, as well as the “private organic rules” that govern internal matters (such as the bylaws, or an operating agreement of a limited liability company). For the most part these are straightforward and are the easiest and least expensive parts of forming your start-up, though it would be a mistake to assume that they are just forms that can be safely pulled from any source.
- Founder Equity Agreements – in a prior post we talked about founder equity and how a lawyer can help structure it to meet the needs of the founders. Founder equity may be as simple as board resolutions approving founder shares and compliance with blue-sky securities rules, but may also involve vesting agreements with claw backs and non-competes and tax elections (83(b)) that have short time limits for filing to be valid.
- Stockholder Agreement – we frequently think of stockholder agreements as being driven by institutional investors, but if the start-up has more than one founder, a well thought out stockholder agreement (or its equivalent in an LLC’s operating agreement, etc.) can help set ground rules that can solve issues in the future, such as rights of first refusal over share transfers (so founders can exercise some control over those with whom they are in business), call rights and put rights to address founders who want to exit and “drag-along” provisions to establish parameters over M&A exits beyond what the formation filings discussed above can control.
- NDAs and Invention Assignments – nearly every start-up will have some amount of information that it needs to keep confidential, and many will have employees participating in the creation of protectable intellectual property, so it is important from the beginning to make sure each person with access to such information or who is helping to create IP is bound to confidentiality and has acknowledged in writing that such IP belongs to the company.
- Equity Inventive Plan – getting started with a good equity incentive plan and consistent forms of agreements that are simple to use is important as a start-up tries to bring additional people on board. Prompt approval and complete documentation of equity awards helps clarify things for both an employee’s and the company’s benefit, and having an equity incentive plan that logically connects with the needs of the company is key.
- Stockholder Records, Cap Table and Communication – In another prior post, we discussed the benefits of being able to communicate via modern technology with stockholders in a way the corporate law will recognize. Maintaining that kind of access to stockholders can be part of an overall practice of maintaining good stockholder records (in terms of documenting equity purchase and ownership, cap table and contact information) that will serve a lot of good purposes down the road.
- Record Keeping – in the rush to get things done, especially things that aren’t key to the real business of the start-up, corporate records can suffer if there isn’t a simple, comprehensive plan in place. Long term, poor corporate record keeping can hurt the business in a number of ways that won’t come to light until they are much harder to fix, such as finding out in negotiation of IP representations and warranties for the company’s Series A round that some employees never signed an NDA (and have since departed), or in a sale of the company that a long-departed founder isn’t subject to the drag-along because he or she never joined the stockholders agreement, and so on.
In subsequent posts, we’ll study some of the items on this list in greater detail.