You've got a fabulous new
idea. It's an idea that you believe will pick up steam, buzz. You
might even be planning to approach a venture capitalist soon.
At this early stage, you might be thinking of doing the basics. While the following steps may sound very simple, you need to be cautious because early mistakes could cost you down the line.
Here are five legal mistakes startups make:
- Choosing the wrong entity. Some Big Law corporate attorneys will tell you that funders prefer C-corporations over other forms. While LLCs are becoming more popular, not all investors prefer them and the switch from an LLC or a partnership to a C corp could cost you in legal fees down the road.
- Filing in a state other than Delaware. It makes sense to file in your home state. But corporate attorneys swear by Delaware for incorporating. Delaware is also usually the state of choice for funders.
- Thinking you own the intellectual property. If you created intellectual property while at your old job, beware. Your big idea might actually belong to your old employer. Talk to an attorney.
- Not putting vesting restrictions. The people you currently have on your initial management team might not be there tomorrow. Do you want them to walk away with shares that easily? Your rule should be simple-- if you want your shares, you need to earn them over time. Shares shouldn't vest on day one. Phase out the vesting of the shares in the restricted stock purchase agreement.
- Asking a VC to sign an Nondisclosure Agreement. Here's the unwritten rule: VCs hate NDAs. Not only do they ignore them, but asking a VC to sign an NDA indicates that they're dealing with a rookie. Do you really want to put yourself in that vulnerable position? Let's be real about NDAs-- while they are a binding legal document, they are hard to enforce. And when dealing with VCs who come with their army of Big Law lawyers, you'll have an uphill battle trying to enforce an NDA.
Far too many startups founders end up with regrets later on, due to early stage mistakes. Play the game properly from day one.
Related Resources:
- Starting a Business (FindLaw)
- Common Intellectual Property Mistakes of Startups (FindLaw)
- A Nondisclosure Agreement (FindLaw)
- Samples of Shareholder Agreements (FindLaw)
