Find out on March 30, 4pm, at OTBC, when we’ll pose questions about common start-up legal issues, and compare your answers with the answers of two Perkins Coie attorneys, Neil Nathanson and Jeff Bock. Learn more and register at this link.
Archive for the 'Legal' Category
A Venture Beat post, Ask the Attorney: What issues do I need to consider when forming a start-up? has a good summary of the issues that founders should be thinking about very early on. At OTBC, we frequently see start-ups making mistakes relating to these subjects – mistakes that may not be fatal, but that take a lot of time and effort (and pain) to go back and fix. These are important! If you’re starting a company, read the Venture Beat post.
The early formation days of a start-up are exciting times. You’ve got lots of ideas, the team is psyched, and you find new opportunities every day. It’s easy to overlook some of the basic steps that you need to do to protect the company. Here are 7 things you should do to avoid some very common mistakes:
- Get written IP assignment agreements in place. Before any code is written – and even before significant ideas are contributed – talk to an attorney about getting Intellectual Property Assignment agreements in place. Everyone on the team who is contributing ideas, designs, code, etc. should sign an agreement assigning to the company all of the intellectual property they create for the company. If the company does not clearly own all of the IP, you’re asking for trouble. Don’t rely on the “we’re all friends” rationale. Things change, so take precautions. Do this early than you think you need to! But to be able to assign IP, you need to …
- Create a legal entity very early on. Whether its a corporation or an LLC, you’ll need a legal entity so that you have something to which you can assign the IP!
- Have team members sign NDA and non-compete agreements. In addition to IP assignment, all team members should sign a Non Disclosure Agreement and a non-compete agreement. If things don’t work out, and a team member goes off to do something else, you don’t want them revealing confidential material, or using your ideas to compete against you.
- Decide on Founders Stock split, and write it down. Once you create an entity, you’ll have to deal with the question of stock ownership (or percentage ownership, in the case of an LLC). You don’t want to put this off. Vague verbal understandings can lead to very unpleasant discussions down the road when one or more team members remembers or interpreted a discussion differently than you did. Agree on the split, make sure everyone agrees its equitable, and write it down!
- Implement a “buy back” agreement for founders stock. Once you decide on a founder’s split, have an attorney put together a stock purchase agreement for founders shares. Yes, you’ll probably want founders to buy their shares ( for a very small valuation – ask your attorney about that). But protect the company by having the attorney include a ” buy back” provision. This works somewhat like stock option vesting. The idea is that if a founder leaves the company (or is asked to leave) in less than some agreed upon time (less than 4 years would be typical) the company has the right to buy-back some portion of their stock, probably at the same very low price for which they bought it. If you have a founder who owns 20% of the company and decides to leave after 6 months, you don’t want him or her to walk away with 20%! Buy-back agreements are typically declining. In other words, if a founder leaves after 1 year, maybe the company has the right to buy back only 75% of the shares (the founder keeps 25%). After two years, the buy-back right might shrink to 50%, and perhaps to 25% after three years, and then to zero after four years – meaning that the shares are “vested”. If a founder leaves in less than a year, the company should probably have the right to buy back the vast majority of his or her shares.
- Set up a company checking account. Early on, founders typically co-mingle personal funds and corporate funds (i.e., paying for things for the company out of personal checking accounts). Stop doing that! Set up a company checking account, and have the founders put money into it, and make expenditures out of that account. That way, you’re actually tracking your company expenses, and you’re also tracking exactly how much out-of-pocket funds are being contributed by the founders. (You might even want founders to get preferred shares for the money they’ve put in – but that’s a longer discussion!)
- Make sure founders complete the 83(b) form. Within 30 days of purchasing your founders share, be sure to complete and submit an 83(b) form to the IRS. Otherwise, if the shares ever end up having any value, you’ll get some nasty tax surprises. The attorney who sets up your stock purchase agreement should be on your case about this. But if not, you’ve been warned!
You’ve probably seen classic start-up setup mistakes too. Please add your advice in the comments!
From Ask The VC Model Seed Documents – Direct From Techstars
Techstars has published a number of the documents they use to serve as examples for others. There are five primary documents in the set:
John Cook’s Venture Blog reported that:
Skillbit, the Seattle Internet
startup created in January by a group of more than 100 volunteer
developers, lawyers and business people as part of the Startup Weekend,
has closed down due to legal complications over the ownership structure.
I had wondered how the Startup Weekend process dealt with ownership issues — but apparently the SEC is the real problem.
There’s a Startup Weekend project scheduled for Portland May 23-25.
In an article on their website, Portland law firm Swider Medeiros Haver describes changes to Oregon’s non-compete laws, including:
- The employer must inform the employee of the agreement’s requirements in a written employment offer received by the employee at least two weeks before the first day of employment, or
- The agreement is entered into upon a bona fide advancement of the employee if the requirements are disclosed in a written notice of advancement at least two (2) weeks prior to the effective date of the employee’s advancement.
Plus, there are some minimum-income requirements.
