Planning Your Startup Structure
Just as you planned for the launch of your startup, you need to prepare for the possibility of its eventual sale. Planning startup structure well in advance for the potential sale of your company can preemptively address many issues that may arise when it comes time to negotiate a sale with a prospective buyer.
Follow these three basic steps to lay the right foundation for your company from the start, so that for a well-planned M&A exit for your company:
1. Startup Structure: Choose your entity wisely
The right choice typically is a corporation.
In our experience, a corporation generally is better suited for many startups (especially tech and biotech startups) than a limited liability company. Forming a corporation is often less expensive than an LLC in the long run and may provide a significant tax advantage upon exit if your company meets the IRS requirements for Qualified Small Business Stock (IRC 1202).
Delaware is the gold standard for incorporation. If you plan on growing your team, granting stock options and raising capital from outside investors, then forming a Delaware C-Corp is most likely your best choice.
2. Get organized and stay organized
“I want to buy a company that is a hot mess,” said no buyer ever.
It is critical that you establish a streamlined document and information management system for your corporation at incorporation. Ensure that your legal documents are kept current, fully signed by all parties and easily accessible, preferably in the cloud (we love box.com). This will help you efficiently create a virtual data room when it comes time to due diligence.
Examples of key documents that buyers likely will scrutinize: those related to the formation of your corporation, non-disclosure agreements, proprietary information and invention assignment agreements, financing documents, vendor contracts, leases, licensing and other commercial agreements.
3. Startup Ownership Structure
Do you know what buyers hate more than anything? Surprises.
This is why you need to know exactly who owns your company and what your company owns. This means that your equity capitalization table must be spot on, all stock and other equity grants, including all convertible securities, should be properly approved and documented, and that you have properly handled all required securities law filings.
Your company’s most valuable asset oftentimes is its intellectual property. Make sure that your company properly owns its “secret sauce” by putting robust proprietary information and invention assignment agreements in place with all employees, consultants, and advisors. Additionally, the founders need to contribute to the company all of the pre-existing intellectual property, business plans and other assets related to the company at incorporation, so that the company properly owns what it needs from day one.
Want to learn more about the incorporation process? Check out these related posts and webinars: