Keep Your Startup Smelling Like a Rose
If you’re launching your startup, you’re likely throwing your heart and soul (and money) into making it a success.
Like it or not, there are some critical legal matters that you will face early in the startup process that can make or break your company. Failing to deal with these matters right from the start can lead to a stinking mess later on.
Pay attention to the following five key issues for your Startup:
1. Set up the Right Structure
Think corporation and tune out the LLC noise. It really is not hard or expensive to manage a corporation. In fact, the ongoing administrative costs typically are lower for a corporation than for an LLC. A corporation should be your first choice when planning the legal structure of your business, especially if you plan to raise money from investors or set up a stock option plan to provide equity incentives to advisors, consultants and employees.
2. Date Before You Marry
Know your co-founders. Will they hang tough when the company runs low on money or the product development is delayed? Does the startup team have complimentary skill sets? Do you communicate well together? Are you able to work through problems? These are the types of questions that you need to be asking yourself as you embark on your startup journey. Keep in mind that the startup process often highlights red flags when you start discussing money, ownership, titles and contributions. Also, pay close attention to what matters most to your co-founders before you jump into bed with them.
3. Stay to Play
You and your business partners have the same vision and agree on everything relating to the business. Of course, “there will be no problems” (until they actually happen). You deserve abundant success, but it is good to be prepared when founder relations don’t go as planned. A key way to help founders stay focused on building the startup is to layer vesting on their stock ownership. If the founders continue contributing to the business, they can lock down more and more of their stock ownership. If a founder no longer advances the startup or leaves the team before all of the vesting occurs, then the company can repurchase certain shares and reduce that person’s ownership.
4. Lock up Your Secret Sauce
Your company needs to collect and own the “value” that is created as the business is built. Make sure that the founders contribute the key assets and intellectual property to the company at startup and that advisors, consultants and employees continue to assign their work product, inventions, etc. to the company along the way. Collect these ingredients, mix in the right intellectual property protections, and your company just might create something important and valuable.
5. Admit You Can’t Do It All
You will be very busy as you launch your startup company. Focus on what you do best and get the right help in the other areas. You might save some money (at least initially) if you do everything on your own, but a critical misstep could derail your company. Find a good business attorney that knows startups and a good accountant or tax advisor that will put your business on the right financial path. Depending on your business, you also may need a good patent or trademark attorney. It may sound expensive, but there are experienced professionals who focus on startups and offer fixed-fee and other startup friendly services.
How did you handle the above matters to launch your startup in the right way? Or, did you learn the hard way? We look forward to reading your comments.