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 Calagator.org, here are upcoming events for entrepreneurs:
Key Events
Aug 04 – Portland Ten Startup Workout – “Basics of Sales for Startups”
Aug 05 – OEN Webinar: The Principles of IP Valuation
Aug 05 – Congressman Earl Blumenauer: China, Global Warming, & Clean Energy
Aug 11 – FastTrac® Startup Boot Camp
Aug 11 – Funding Innovative Research: SBIR/STIR Conference
Aug 12 – Secrets of NIH Small Business Grant Applications
Aug 12 – OEN Pub Talk – So You Think You Can Pitch?
Aug 25 – Silicon Forest Technology and Financial Forum
Sep 16 – Sustainable Industries Economics Forum
Sep 21 – Micro Nano Breakthrough Conference
Sep 24 – Climate Change – Positioning Your Business
Sep 24 – OEN Tom Holce Award Celebration
Sep 26 – TechStart Uncork-Ed
Oct 07 – OctoberBEST
Oct 10 – Startupalooza II
Oct 29 – Venture Northwest 2009
All Events
Monday, Aug 03, 2009
10:00 am, The Career Circle
12:00 pm, West Side PDX Job Search Group
7:00 pm, DorkbotPDX informal meeting
Tuesday, Aug 04, 2009
7:30 am, Portland Business Alliance presents ShopTalk Showcase at Homestreet Bank
1:00 pm, Portland Ten Startup Workout – “Basics of Sales for Startups”
7:00 pm, Portland Ruby Brigade monthly meeting
Wednesday, Aug 05, 2009
8:00 am, SCORE: 10 Secrets of Distinctive Products
8:00 am, SCORE: 10 Secrets of Distinctive Products
10:00 am, OEN Webinar: The Principles of IP Valuation
11:30 am, Vendor Selection: International, National, Regional or Local?
12:00 pm, Lunch 2.0 at Slate Technologies
12:00 pm, Congressman Earl Blumenauer: China, Global Warming, & Clean Energy
Thursday, Aug 06, 2009
8:30 am, SCORE: Business Basics
11:30 am, SBA Loan Briefing
12:00 pm, Are you networking effectively? How to turn your natural network into your referral team
4:00 pm, SAOpdx ConnectPDX
Friday, Aug 07, 2009
11:00 am, Why do I need Social Networking for my Business? Yes, you can do it less than one hour a week.
Saturday, Aug 08, 2009
12:00 pm, Bear and Blog at Bagby Hotsprings
5:00 pm, DorkbotPDX 0×04 (tentative)
5:00 pm, DorkbotPDX 0×04 (tentative)
Sunday, Aug 09, 2009
7:00 pm, DorkbotPDX 0×04 – NYC invasion
Monday, Aug 10, 2009
12:00 pm, West Side PDX Job Search Group
3:00 pm, Teleseminar: What are your Businesses’s Strengths and Weaknesses?
7:00 pm, Portland Functional Programming Study Group
Tuesday, Aug 11, 2009
7:30 am, Speed Networking! Portland Business Alliance presents Business Leads Exchange
8:30am FastTrac® Startup Boot Camp
9:00 am, Funding Innovative Research: SBIR/STIR Conference
1:00 pm, Portland Ten Startup Workout – “Market Validation Basics”
6:30 pm, Drizzle, Gearman and their PHP API’s
Wednesday, Aug 12, 2009
11:30 am, Secrets of NIH Small Business Grant Applications
5:00 pm, Portland Business Alliance presents Business After Hours @ Morton’s The Steakhouse
5:15 pm, OEN Pub Talk – So You Think You Can Pitch?
5:30 pm, August Springboard Social Innovation Forum: Year-Round Harvests
Thursday, Aug 13, 2009
8:30 am, SCORE: Internet Marketing
3:00 pm, “Doing Business in the United Kingdom” A Case Study in Software
4:00 pm, Portland Ten Startup Workout – “The Fundability Matrix – What Angel/VC Investors Look For, And How You Stack Up”
Saturday, Aug 15, 2009
5:00 pm, Dorkbot Pd Workshop #2 (tentative)
According to Venture Beat, VCs raised the fewest funds in Q2 since 1996:
VCs raised 25 funds for a total of $1.7 billion. That’s the smallest amount of money raised in any quarter since 2003, and the lowest number of funds since 1996. It even represents a major decline compared to the first three months of the year, when firms raised $4.6 billion for 49 funds.
And VentureBeat also reported that VCs invested $3.7 billion in startups in Q2 - $2 billion less than VCs raised. There have been posts from VCs in the past few months talking about he “Venture Capital Math Problem” (one noteable example is Fred Wilson’s post) basically arguing that there’s more money in the VC system than can be productively used.
Here are the quarterly VC fund raising numbers since Q2 2007 from Thomson Reuters and the National Venture Capital Association:
As Adeo Ressi points out, a large portion of the fund raising in the first half of 2009 was done by new funds, many of them managed by entrepreneurs looking to bring about change, such as Marc Andreesen and Ben Horowitz. Still, it looks like the market is beginning to adjust to the new VC math, and that could make for an even tougher period of fund raising for start-ups.
