basic legal issues addressing the when, why, and what of forming a legal business entity for your startup

1. Business Formation Basics
Steve Rosard
Principal, Rosard Law LLC
Director, Drexel Entrepreneurial Law Clinic

2. Life Cycle of a Startup

3. Founders Agreement
the Entrepreneur’s Pre-Nup

5. Founders Agreement Issues
 Allocate work, authority, rewards
 Ownership split – static or dynamic?
 What happens if you divorce?
 Ownership of IP
 Ownership of name, logo, website
 Right to continue business or compete
 Buyout or compensate terminated founder
 Not necessarily a formal business entity yet

6. Oral and informal agreements

9. When to Organize an
Entity
 Hold ownership of valuable IP or other assets
 Hire employees, contractors, etc.
 Currency to compensate service providers
 Bring in investors
 Doing business with the public

10. LLC or Corporation?
Corporation
LLC
•
Popular when looking to raise
$
• Popular for earliest stage
startups
•
Operating formalities
• Less formalities to follow
•
Potential double tax
•
Standardized and familiar
management structure,
ownership and voting rights
• Pass-through taxes, but added
accounting work
•
Preferred by institutional
investors (esp. DE corps)
• Highly flexible in management
structure, ownership and voting
rights, but less familiar terms
• Easy to convert to Corp
Both have filing requirements, upfront costs, and annual fees

11. What to Address
 Assign IP to company
 Split equity
 Management roles and voting rights
 Deadlock provisions (esp. if 2 co-founders)
 NDA and non-compete
 Dissolution and buy-sell provisions
 Right to fire a non-performing founder?

13. Equity Splits
 Don’t fix split too soon
 Protect yourselves – USE VESTING!
 Vesting can be time-based or milestone-based
 File 83b election with IRS
 Plan to issue additional equity in future to adjust
based on actual experience
 Consider potential for tax issues

14. Some Resources
www.foundersworkbench.com - free startup docs and
info
www.venturedocs.com - low cost startup docs and info
CAUTION – consult a startup lawyer to assure these
docs are right for your situation
Do not use LegalZoom or RocketLawyer – not geared
to IP-oriented startups and they don’t have
comprehensive document packages
Harvard Business Services – www.delawareinc.com low cost service for state filings