Hi everyone! I'm one of the cofounders of Clerky :)
We've gotten a ton of questions from founders over the years - this handbook is what we always wished existed, so that we could point people to it. There are already a lot of great blog posts by attorneys out there, but we thought it was also important to have something that (1) helps founders build a solid foundation of knowledge rather than piecemeal, (2) covers the terminology and practices used across startup law firms (thanks to our incredible editorial board), as opposed to one attorney or one firm, and (3) is kept up-to-date as laws or market practices change.
We're very excited to be finally sharing this with the community - please let us know what you think!
A few notes:
* This is very much aimed at startups of the type that might apply for YC one day, seek angel or VC money, etc. Obviously there are many other kinds of businesses, but it's really hard to write something that is broadly applicable, unfortunately. My apologies in advance to founders of other types of businesses.
* The content that we have has been thoroughly vetted, by more top-tier startup attorneys than you can shake a stick at. That said, the scope of the handbook in terms of topics covered should be considered a first cut, as should the presentation. We have many articles on the todo list, and also have some ideas for how to better present some of the more complex concepts.
Finally, feel free to use this thread as an opportunity to ask any general questions you might have about legal issues for startups - my cofounder Chris and I (we're both startup attorneys) will do our best to answer. Some of our editorial board might pop in from time to time too!
1. How do you handle assets (in particular IP) transferred into the corporation at formation time - if, for example, the founders have been working on it as a project beforehand?
2. How difficult is it to add a co-founder after formation but before investment? Does this require a lawyer, or are there standard forms that can be filled out? How does founder stock get re-apportioned, or must new stock be re-issued?
3. How about swapping stock plans? The chapter of the handbook suggests it's possible - is it a "talk to a lawyer, and they will file some paperwork" situation? If, for example, a startup wished to adopt progressive equity [1] but hadn't thought about it until they were ready to hire employees, would it be complicated and expensive?
4. What are the day-to-day responsibilities of a founder regarding the corporation after it's been formed? I've heard of (at a minimum) paying taxes, conducting board meetings, and ensuring that company expenses and personal expenses are separate? Others? Are there particular records that startup founders must keep, and particular duties they must perform over the course of the year, once they've incorporated?
1. That's routinely transferred over in the restricted stock purchase agreement, or else in a separate technology assignment agreement. Just depends on the preference of the lawyer. But yes, this is absolutely crucial as part of the formation process.
2. It's almost always easier to just issue new stock rather than re-distribute whatever shares were already issued. It's not difficult to add a new co-founder at all, fortunately :) Any startup lawyer can help you with this, or else we have templates for it on Clerky too. Note that if you don't have enough shares available for issuance in the corporation, you'll typically want to file an amendment to your certificate of incorporation in order to authorize more.
3. I don't know about progressive equity in particular, but in general, it's not too difficult to adopt a new stock plan as long as there are standardized forms for it. You can have old and new stock plans co-existing next to each other. That said, for something new like progressive equity, your lawyers might want to review everything to make sure it all works - that would add to the cost.
4. That all sounds about right. Delaware will require you to submit an annual report (just basic details about your corporation - doesn't take long). Early on, there's usually no need to have a lot of formality around board meetings. You'll need to pay your registered agent fees every year too. Different states and localities might have their own requirements - in some cities, you have to get a business license, for example. In terms of records, I would recommend just keeping all your legal paperwork as a matter of course.
1. Could you provide any links to similarly high quality content or services like Clerky that are geared towards setting up an ideal lifestyle business structure (such as consulting and a smattering of low-revenue SaaS products). Particularly something that covers what to do beyond just setting up a passthrough entity.
2. Can you provide any links to resources on how to evaluate E&O policies for professional technical work? Some of the work I do involves spending 6 figures a month on a marketing campaign, building out BI solutions that are then relied on for making critical decisions (not to mention giving me access to highly confidential data), and building out SaaS products that enforce TCPA compliance on telemarketing databases. Even with a solid contract in place, I'm somewhat terrified at the thought of a well-funded, sue-happy client trying to use me as a scapegoat someday if something goes sideways or doesn't go their way.
3. Any good contract templates for the kind of services mentioned above, that include solid indemnity clauses?
4. How do you find a competent lawyer to ask these kinds of questions to? The few I've spoken to locally don't seem to have many clients like me and were generally about as helpful as a google search (with a much higher pricetag). And I'm unsure how to find the ones that can give actionable advice.
1 & 3. Unfortunately, I have not seen any high quality services geared toward non-startup businesses. Believe it or not, that's actually a harder problem than the one we're solving. There is just much less standardization outside of the world of startups, due to how fragmented the market is. There might be some useful content out there, but I don't know of any personally (let me know if you find some!).
2. I don't know of any resources on this (although I'm sure they exist), but good insurance brokers can often walk you through a lot of the analysis. I've heard Heffernan is a good one (https://www.heffins.com). The good insurance brokers are usually pretty objective and not very sales-y. If you need to get super in-depth in analyzing a policy, you may eventually need to talk to an insurance lawyer - but I suspect most people don't go that far.
4. It's tough. It tough even for attorneys to find competent attorneys outside of their own practice areas, because it's hard to tell who's good. One of the major issues is that most legal work never gets tested out. Clients can certainly have their impressions based on their interactions, but until legal work is tested out - either by being reviewed by other attorneys, or in courts, there's just no way for a client to ascertain the quality of the work product. Legal services are a credence good: https://en.wikipedia.org/wiki/Credence_good The best thing you can do is to find people who have similar businesses and successfully survived the risks you're trying to protect against, and then see what lawyers they recommend. I realize this is a ton of work, and it may not even be possible in many cases. Depending on where you're located, we might be able to give you some attorney leads - feel free to ping us at support@clerky.com.
Great question - there's nothing stopping you from doing it at incorporation. But it's pretty rare. Very few companies will have enough negotiating leverage to keep it when they raise money. So rather than complicate things from the start, I think the majority view amongst startup attorneys (there are differing opinions on this) is to go with the standard setup, then add in super-voting later on if the company is in a strong position.
Additional question added with an edit: If someone wants to start a company with the goal of never going public (i.e. Bill Gates has talked about regretting going public and only did so because they needed better liquidity for employee options and I believe they were coming close to the shareholder cap) -- what should someone be thinking about nice and early?
2nd additional question: I've heard of unique corporate structures, like where an LLC owns a C-Corp. Any suggested resources for learning some basics there? One well known startup that I won't name has this setup
3rd additional question: If you a friend of yours was starting a company and you were almost certain that they'd eventually be doing $10s of billions in net income, what special things from a legal sense should they look into setting up early that are hard to change later on? (e.g. incorporation in Ireland or things like this)
Ah sorry, I wrote my first answer before seeing your edits. I'll just number my responses here for convenience.
2. It shouldn't change much early on... it would probably be premature optimization to think about it early on, to be honest. The shareholder limits can lead a company to go public, but I think the laws have changed since Microsoft's time to make this less of an issue. Of course, you still have the issue of shareholder liquidity, so I suppose you will want to plan to be able to buy back people's equity :) Also, VCs will usually have demand registration rights that can force the company to go public at some point (never seen those negotiated away though).
3. Usually startups are more forced into more exotic corporate structures due to having some pre-existing business that is hard to convert into a DE C-corporation. So it's usually not something they sought out. I don't know of any good resources for these types of setups unfortunately - in general, the less standard something is, the more I think an attorney should be involved. I would only recommend DIY approaches in areas where there is a ton of standardization.
4. It sounds counter-intuitive, but for startups, I don't consider there to be any special things to look for. VC backed startups are all setting up to be massive successes - if there were any significant issues with respect to highly profitable companies, they would have likely been addressed.
Which is not to say that you won't need to change things later on - but the optimizations that are not done up-front are skipped because the opportunity cost in the early stages is not worth it. Many startups do not get off the ground because too much time was spent on hyper-optimizing legal / tax up front. It's usually better to just go with the beaten path on the legal front, and focus on the business.
But yes, ultimately, there will probably be some off-shoring involved in optimizing that kind of massive success.
I am not a lawyer, but getting something like this in requires that you have a very strong hand in your negotiation position with potential investors. If you have dozens of investors all competeting to put money into your startup and you don't need the best valuation, then you are in a position to ask for this, otherwise it is just going to be another reason for investors to pass.
Very few startups are in a position to negotiate super-voting shares - it is a bit like a group of teenagers in new punk band worrying about what they are going to do with all the millions they will make when they release their first record.
* Which states require the existence of typical officer positions? Perhaps list out what California, Washington state, and New York require.
As noted in the Officers section of the handbook, Delaware doesn't require any specific positions.
Under the "internal affairs doctrine" of U.S. federal law, it's doubtful that another state can technically require that a Delaware corporation appoint a specific officer position, but some states purport to do so and it's most pragmatic to simply comply with their requirement. For example, California and New York (though not Washington) require that Delaware corporations doing business within their borders disclose the following specific officers:
- CA - CEO, Secretary and CFO
- NY – CEO
* What is the distinction between CEO and President? CFO and Treasurer?
For early stage startups, there’s not much distinction between CEO and President or CFO and Treasurer. Generally, the board of directors determines the officer positions and duties. In many cases this is spelled out in a startup’s bylaws. For example, under the bylaws on Clerky, the CEO has general supervision and control of the business and other officers. The President has the same duties as the CEO, but is subordinate to the CEO. The CFO and Treasurer also have similar duties – to handle the startup’s financial matters, including deposits, maintaining books, etc., but the CFO supervises and directs the treasurer’s responsibilities.
* What are the pros and cons of formally naming all the co-founders as officers of the corporation (assuming the typical 2-3 founder situation)?
One of the pros of naming all of the co-founders as officers is convenience. Everyone has the ability to sign things (bank account, tax returns, etc.) and it’s handy to not have to track down one specific founder. For some teams, for whatever reason, having all of the founders hold an officer title seems to improve the dynamic amongst the founders.
A potential con is the time spent on these sort of corporate formalities, but that’s not usually an issue when there’s a healthy founder relationship.
* Which states require the existence of typical officer positions?
WA, like kbagby explained for DE, doesn't require any particular officers (unless a particular company's bylaws required certain officers).
In all four of CA, DE, NY and WA, the corporation law allows for the same person to hold more than one officer position simultaneously. If you find yourself organized in a state that requires particular offices, you might check to see if that state also allows this flexibility.
Thanks for the suggestion! We have all the pages listed out in the navigation - you might have to click on the hamburger menu in the upper left if you're on a mobile device. Or let me know if I misunderstood :)
One of our illustrious editors will respond to your questions!
Bit of a non standard question: we drop ship and/or resell a lot of items from retailers. Sometimes this is against the retailers terms of service. How bad is that legally? At worst, could it be criminal, or civil only? (Some stores ban resellers altogether, some just have restrictions.)
Definitely outside my area of expertise :) I suspect it's only civil, assuming your products are not regulated in some way. But I really can't say for sure - sorry!
We've gotten a ton of questions from founders over the years - this handbook is what we always wished existed, so that we could point people to it. There are already a lot of great blog posts by attorneys out there, but we thought it was also important to have something that (1) helps founders build a solid foundation of knowledge rather than piecemeal, (2) covers the terminology and practices used across startup law firms (thanks to our incredible editorial board), as opposed to one attorney or one firm, and (3) is kept up-to-date as laws or market practices change.
We're very excited to be finally sharing this with the community - please let us know what you think!
A few notes:
* This is very much aimed at startups of the type that might apply for YC one day, seek angel or VC money, etc. Obviously there are many other kinds of businesses, but it's really hard to write something that is broadly applicable, unfortunately. My apologies in advance to founders of other types of businesses.
* The content that we have has been thoroughly vetted, by more top-tier startup attorneys than you can shake a stick at. That said, the scope of the handbook in terms of topics covered should be considered a first cut, as should the presentation. We have many articles on the todo list, and also have some ideas for how to better present some of the more complex concepts.
Finally, feel free to use this thread as an opportunity to ask any general questions you might have about legal issues for startups - my cofounder Chris and I (we're both startup attorneys) will do our best to answer. Some of our editorial board might pop in from time to time too!