Frequently Asked Questions (FAQs) for Startups

A Founders Agreement is a crucial document that outlines the rights, responsibilities, and relationships between the co-founders of a startup. It serves as a roadmap for how the company will be run and helps prevent misunderstandings and conflicts down the line. This agreement typically covers:

• Equity distribution
• Roles and responsibilities
• Decision-making processes
• Intellectual property ownership
• Exit strategies

Having a well-drafted Founders Agreement in place can save you from potential disputes and legal battles in the future, ensuring a smoother journey for your startup.

A Shareholders Agreement is a contract between the shareholders of a company that outlines their rights, responsibilities, and obligations. Key elements to include are:

• Share transfer restrictions
• Voting rights and decision-making procedures
• Dividend policies
• Dispute resolution mechanisms
• Confidentiality clauses
• Exit provisions

This agreement helps maintain harmony among shareholders and provides a framework for resolving conflicts, making it an essential document for startups as they grow and bring on new investors.

For most startups looking to attract significant investment, a C-Corporation is often the preferred structure. This is because:

• It allows for multiple classes of stock, which is attractive to venture capitalist investors
• There’s no limit on the number of shareholders
• It’s easier to go public in the future if desired
• Many investors are more familiar and comfortable with this structure

However, the best structure can vary depending on your specific circumstances, so it’s always wise to consult with a legal professional to determine the most suitable option for your startup.

Understanding these differences is crucial for choosing the right structure for your startup:

LLC (Limited Liability Company):

• Pass-through taxation
• Flexible management structure
• Limited liability protection for members
• Fewer formal requirements

C-Corporation:

• Double taxation (corporate and individual level)
• Unlimited number of shareholders
• Ability to issue multiple classes of stock
• More attractive to outside investors

S-Corporation:

• Pass-through taxation
• Limited to 100 shareholders
• Only one class of stock allowed
• Must be a domestic corporation

Each structure has its pros and cons, and the choice depends on factors like your growth plans, funding needs, and tax considerations.

Protecting your intellectual property is crucial for startups. Here are some key strategies:

• Patents: For inventions and new technologies
• Trademarks: For brand names, logos, and slogans
• Copyrights: For original works of authorship such as software code or content
• Trade secrets: For confidential business information and processes

It’s important to start protecting your IP early. This might involve filing provisional patents, registering trademarks, and having employees and contractors sign confidentiality and IP Assignment Agreements.

A vesting schedule is crucial for startups because it ensures founders remain committed to the company over time. Typically, founder shares vest over a 4-year period with a one-year cliff. This means that if a founder leaves within the first year, the founder forfeits all of his or her shares. After the first year, the founder earns a portion of their shares each month. This protects the company and co-founders from a situation where someone leaves early with a large equity stake.

NDAs are important tools for protecting your startup’s confidential information. However, be strategic about their use:

• Use them when sharing sensitive information with potential partners or investors
• Be cautious about asking VCs to sign NDAs, since many will likely refuse
• Ensure your NDA is clear about what information is considered confidential
• Include provisions for the return or destruction of confidential information

Remember, an NDA is only as good as your ability to enforce it, so use them judiciously.

When raising capital, startups need to be aware of securities laws. Key considerations include:

• Compliance with federal and state securities regulations
• Proper documentation of all investments
• Clear communication of risks to potential investors
• Adherence to restrictions on general solicitation and advertising of securities offerings

Violating securities laws can have severe consequences, so it’s crucial to work with a legal professional experienced in startup financing.

When working with contractors, startups should:

• Use well-drafted independent contractor agreements
• Clearly define the scope of work and deliverables
• Include strong IP assignment clauses
• Be cautious about misclassification issues (contractor vs. employee)

These steps can help prevent disputes and ensure that the startup retains ownership of any work product created by contractors.

Term sheets are preliminary documents that outline the basic terms and conditions under which an investment will be made. Key points to understand:

• They’re typically non-binding, except for certain clauses like confidentiality
• They set the stage for more detailed legal documents
• Important terms include valuation, investment amount, liquidation preferences, and board composition
• Negotiating a favorable term sheet is crucial because it forms the basis for final agreements

Having a good lawyer is crucial for startups. Lawyers can help with:

• Choosing the right business structure
• Drafting and reviewing contracts
• Protecting intellectual property
• Ensuring compliance with relevant laws and regulations
• Navigating the complexities of fundraising

While it may seem expensive, a good lawyer can save you from costly mistakes and legal issues down the road.

A cap table (capitalization table) is a spreadsheet showing the equity ownership capitalization for a company. It’s important because:

• It tracks all the equity ownership in the company
• It’s used to calculate ownership dilution from new funding rounds
• Investors will want to see it during due diligence
• It helps in making decisions about equity compensation for new hires

Keeping an accurate and up-to-date cap table is crucial for startups at all stages.

To protect trademarks, startups should:

• Conduct a thorough search before settling on a name or logo
• Register trademarks with the USPTO for strongest protection
• Use the ™ symbol for unregistered marks and ® for registered ones
• Enforce your trademark rights if others try to use confusingly similar marks

Remember, trademark protection is territory-specific, so consider international registration if you plan to operate globally.

Convertible notes are a popular funding instrument for early-stage startups. Key points:

• They’re essentially loans that convert to equity at a future funding round
• They often include a discount and/or valuation cap for early investors
• They allow startups to defer valuation discussions
• They’re typically simpler and cheaper to set up than a priced equity round

However, they can lead to complex cap tables if overused, so consider them carefully.

When expanding internationally, startups should consider:

• Local business registration requirements
• Tax implications and structure
• Employment laws in the new jurisdiction
• Intellectual property protection in new markets
• Compliance with local regulations (e.g., data protection laws)

It’s crucial to work with local legal experts to navigate these complexities.

A good privacy policy should include:

• What data you collect and how you use it
• How you protect user data
• Whether you share data with third parties
• Users’ rights regarding their data
• How users can contact you about privacy concerns

With increasing focus on data privacy, having a clear and compliant privacy policy is crucial.

When dealing with larger companies, startups should:

• Be clear about what they’re willing to share before signing an NDA
• Be cautious about exclusive dealings
• Protect their intellectual property
• Ensure agreements have clear deliverables and timelines
• Consider including termination clauses that protect the startup’s interests

Remember, don’t be afraid to negotiate – even with big players.

Understanding board dynamics is crucial:

• The board has a fiduciary duty to act in the best interests of all shareholders
• Board composition often changes as the company raises more funding
• Having independent directors can provide valuable outside perspective
• Board rights are a key negotiation point in funding rounds

Startups should think carefully about board composition and dynamics from the early stages.

To protect software code:

• Use copyright protection (automatic upon creation, but registration provides additional benefits – namely statutory damages)
• Consider patent protection for novel, non-obvious aspects of your software inventions
• Use strong confidentiality agreements with employees and contractors
• Be cautious about using open-source code, and understand the implications of different licenses

Liquidation preferences determine the order and amount in which investors get paid in a liquidation event. Key points:

• They can significantly impact founders’ and employees’ payouts
• They’re a key negotiation point in funding rounds
• Multiple rounds of funding can lead to complex “liquidation stacks”

Understanding these can help in negotiating more founder-friendly terms.

In today’s digital age, data protection is crucial:

• Implement strong security measures (encryption, secure authentication, etc.)
• Train employees on data security best practices
• Have a plan for responding to data breaches
• Ensure compliance with relevant data protection laws (e.g., GDPR if dealing with EU data)

Taking data protection seriously from the start can prevent costly issues down the line.

An IP Assignment Agreement is a legal document that transfers ownership of intellectual property from an individual (like a founder or employee) to the company. It’s crucial because:

• It ensures the company owns all relevant IP
• It prevents future disputes over IP ownership
• It’s often required by investors during due diligence
• It protects the company’s core assets

All founders and employees should sign IP Assignment Agreements.

To mitigate risks associated with co-founder departures:

• Have a well-drafted founders’ agreement
• Use vesting schedules for founder equity
• Include provisions for buying back unvested shares
• Have clear processes for resolving disputes

Planning for potential departures early can save significant headaches later.

Indemnification clauses are important in many startup contracts:

• They require one party to compensate the other for specified losses or damages
• They’re common in investment agreements, protecting investors from company liabilities
• They’re also important in customer and vendor contracts
• The scope of indemnification is often heavily negotiated

Understanding these clauses is crucial for managing risk in various business relationships.

While it may seem far off, it’s good to understand M&A basics:

• Due diligence is a crucial part of the process – be prepared to open your books
• Having clean cap tables and clear IP ownership is important
• Consider both the financial and strategic fit of potential acquirers
• Understand the difference between asset sales and stock sales
• Be prepared for the process to be time-consuming and potentially disruptive

Even if not immediately relevant, understanding M&A can inform earlier decisions and help in long-term planning.