Business formation basics

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

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Business formation basics

  1. 1. Business Formation Basics Steve Rosard Principal, Rosard Law LLC Director, Drexel Entrepreneurial Law Clinic
  2. 2. Life Cycle of a Startup
  3. 3. Founders Agreement the Entrepreneur’s Pre-Nup
  4. 4. 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
  5. 5. Oral and informal agreements
  6. 6. 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
  7. 7. 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
  8. 8. 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?
  9. 9. 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
  10. 10. 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

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