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.

Transcript

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

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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  
    
   

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3. Why  Organize?  
   • Liability  
    
   • Raising  Capital  
    
   • Reputa=on  
   

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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  
    
    
   

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5. Choosing  A  Form  
   

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6. Limited  Liability  Company  
   

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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  
   

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8. S  Corporation  
   

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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  
   

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10. C  Corporation  
    

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11. C  Corporation  
    • Pros  
    •  No  restric=ons  on  shares  or  shareholders  
    •  Shares  fully  transferable  
    •  Investors  usually  require  this  form  
     
    • Cons  
    •  “Double  Taxa=on”  
    

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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  
    

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13. Avoid  Common  Pitfalls  
    

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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  
    

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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?  
    

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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  
    

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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.    
    

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