You’ve finally got your concept in place and you’re ready to proceed with your startup but not sure of what to do next. Here are the eight important legal steps to consider as you get your startup ready to go. Don’t ignore or postpone these items in the rush to get the business going, because making the right moves at the start can prevent future headaches and add potential value. These steps are not in any particular order – all are very important!
- Choose the right business entity and corporate structure. Don’t do anything without having a business entity in place. The right business entity will vary depending on your situation, but this will usually be a limited liability company or a corporation. Get legal, accounting and tax advice before proceeding.
- Equity ownership. Confirm and document all issuances of equity. Equity is the most valuable resource that you have – guard it carefully! Ensure that you have a strategy for equity issuances to founders, key employees, consultants and others. Build a fully diluted capitalization table (including options and convertible debt) and keep it updated. This will show you at a glance who owns (or could own) your startup’s equity. This table will become an increasingly important tool as more equity holders come in.
- Get controlling agreements in place. This item is sometimes overlooked or postponed and that can lead to tension and potential legal problems. Get the right controlling agreement in place early. This will depend on the type of business entity that you use, but it will normally be an Operating Agreement (for a limited liability company) or a Shareholders Agreement (for a corporation). These agreements control such critical items as how the startup is governed, voting rights and procedures, restrictions on transfers of equity and buyback rights.
- IP protection. Engage a good IP attorney early to ensure that you have maximum protection for your startup’s IP. Work on internal IP protection as well, such as putting invention assignment agreements in place to ensure that any IP developed by employees and consultants will be the property of the startup.
- Your internal team. Document all relationships with employees, consultants and other internal team members. Ensure that their compensation, equity rights, roles and obligations are clearly documented. Don’t ever rely on understandings or oral agreements.
- Your external team. Before doing anything, get the right lawyer and accountant in place. These are invaluable resources in all aspects of your startup. Be sure to use advisors who “get it” regarding the special needs of startups, and use an accountant who can also provide tax advice (beyond just record keeping). Also locate outside business advisors. We are lucky in South Florida to have access to a wide range of very smart men and women who can help you from a business and financial perspective. Many of them may be willing to help without asking for much in return. Build a board of directors and board of advisors, but also utilize informal advisors if they are available. Learn what worked and didn’t work through these advisors’ experiences.
- Financing. Be realistic about your startup’s financing needs and the associated timing, and don’t be afraid to use a high number in your planning in case of unforeseen contingencies. Start now to line up financing – it always takes a lot longer to get a check in the door than you anticipate. Work with your lawyer, accountant and financial advisor to ensure that you clearly understand the terms of any financing transaction as financing documents can have far reaching and potentially serious negative consequences for you.
- Have form contracts ready to go. Having contracts ready to go (which favor your startup’s position) can be a huge advantage in negotiating various business arrangements and can make the process go more quickly.
There are obviously many other significant issues that will affect your startup, but these are the ones that in my experience are the most urgent. Taking care of these items can add substantial value to your startup. Keep a close eye on these and make it happen!
Attorney Robert C. White Jr. is a shareholder at Gunster’s Fort Lauderdale office, and practice leader of the Technology and Innovative Companies Practice Group. He is also a member of the firm’s Corporate Practice Group and Securities and Corporate Governance Practice Group