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Don’t Go Down with the Ship - Organizing Your Business to Protect Your Self

Don’t Go Down with the Ship - Organizing Your Business to Protect Your Self

A brief overview of corporate law issues that new companies should consider.

Benjamin Hayes

July 09, 2013
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  1. Don’t  Go  Down  with   the  Ship   Organizing  Your

     Business  to  Protect   Your  Self    
  2. Overview   • Why  and  when  to  organize  your  business  

      • Types  of  legal  en==es   • Limited  Liability  Company   • S  Corpora=on   • C  Corpora=on     • Common  mistakes  new  companies  make    
  3. Why  Organize?   • Liability     • Raising  Capital    

    • Reputa=on  
  4. When?   Always  sooner  rather  than  later   • Before  risk

     of  exposure  to  personal   liability     • Before  the  company  gains  value     • Before  failure  becomes  a  real  possibility      
  5. Choosing  A  Form  

  6. Limited  Liability  Company  

  7. Limited  Liability  Company   •  Pros   •  “Pass-­‐Through”  Taxa=on

      •  Great  flexibility  of  management  structure  and  opera=on     •  Cons   •  Members  instead  of  shareholders   •  No  stock  to  issue   •  Complexity   •  Any  new  member/employee  requires  redo  of  opera=ng  agreement   •  Member  employees  considered  self-­‐employed   •  Difficult/expensive  to  grant  equity  op=ons   •  VCs/angels  will  generally  not  invest  in  LLCs  
  8. S  Corporation  

  9. S  Corporation   •  Pros   •  “Pass-­‐Through”  Taxa=on  

    •  Stock  transferable  just  as  with  a  regular  corpora=on     •  Cons   •  Heavy  restric=ons   •  Only  domes=c  corpora=ons   •  100  shareholder  maximum   •  Only  natural  individual  persons  can  be  shareholders   •  Only  U.S.  residents  can  be  shareholders   •  Only  one  class  of  stock   •  No  preferred  Stock   •  VCs/angels  will  generally  not  invest  in  S  Corpora=ons  
  10. C  Corporation  

  11. C  Corporation   • Pros   •  No  restric=ons  on  shares

     or  shareholders   •  Shares  fully  transferable   •  Investors  usually  require  this  form     • Cons   •  “Double  Taxa=on”  
  12. Location,  Location,  Location   •  New  York   •  Pros

      •  Rela=ve  flexibility  in  organiza=on  and  management   •  Subject  only  to  New  York  regula=ons,  fees,  and  taxes   •  Cons   •  Certain  restric=ons  on  corporate  forma=on,  organiza=on,  and  governance     •  Delaware   •  Pros   •  Greatest  flexibility  of  organiza=on  and  management  protec=on   •  Most  developed  and  corporate-­‐friendly  courts  and  case  law   •  Low  corporate  taxes   •  Angels  and  VC  prefer  and  some=mes  even  require  this  jurisdic=on   •  Cons   •  Hire  and  pay  resident  Delaware  agent   •  Fees  to  obtain  and  maintain  license  to  do  business  as  foreign  corpora=on  in   New  York   •  Subject  to  both  Delaware  and  New  York  taxes,  regula=ons,  and  fees  
  13. Avoid  Common  Pitfalls  

  14. Shareholders’  Agreement   •  Buy-­‐Sell  Provision   •  “Right  of

     first  refusal”:  Shareholder  must  first  offer  shares  to  corp   and/or  other  shareholders  at  agreed-­‐upon  price  before  offering  to   outsiders   •  Ves;ng  Schedule   •  Each  founder  should  execute  then  incorporate  into  Shareholders’   Agreement  post-­‐forma=on   •  First  professional  round  of  financing  (“Series  A”)  will  usually    require   one  regardless   •  Generally  25%  of  stock  every  year  for  four  years  on  monthly  basis   •  Some=mes  good  to  have  a  one-­‐year  “cliff”:  founders  don’t  get  their  25%   un=l  12  months  with  the  company  have  elapsed   •  Some=mes  it  may  be  appropriate  to  have  some  stock  vest  “up  front”,  i.e.   immediately,  based  on  founder  contribu=ons   •  Grant  the  company  the  right  to  repurchase  any  unvested  shares  (at   the  ini=al  purchase  price)  at  the  =me  of  the  founder’s  departure  
  15. Equity  Issues   •  Equal  division  is  not  usually  the

     best  choice   •  Consider  prior  contribu=ons  and  expecta=ons  going  forward:   •  Have  some  founders  brought  in  cash  and/or  IP?   •  Will  some  founders  be  part-­‐=me  or  working  less  than  others?   •  Have  some  founders  put  in  more  =me  or  actually  started  the   venture?   •  Do  some  founders  have  or  will  take  on  more  responsibility?  
  16. General  Good  Practice   •  DO  NOT  MINGLE  corporate  and

     personal  assets     •  Fully  read  and  understand  what  you’re  signing:   •  Understand  completely  what  you  are  gefng  or  giving  up  under   the  contract   •  Determine  what,  if  any,  addi=onal  payments  that  could  be   required  under  the  contract  (e.g.  termina=on  clauses)  or  if  there   are  circumstances  that  limit  what  you  get  under  the  contract     •  Completely  understand  who  owns  what  as  the  rela=onship   persists,  especially  in  the  case  of  intellectual  property.     •  Put  everything  in  wri=ng  
  17. Questions?     Benjamin  Hayes   (713)  320-­‐2960   benjamin.p.hayes@gmail.com

            Legal  Disclaimer     •  The  informa=on  provided  in  this  presenta=on  is  general  and   intended  only  as  a  basic  overview  of  corporate  law  and  does   not  cons=tute  legal  advice.