What to Ask: Venture Capital, Financing, and Incorporation | Paul Spitz, Esq.
UpCounsel attorney Paul Spitz explains what every startup should be asking their legal team about venture capital, financing, and incorporation3 min read
How can we protect the business from one of the co-founders leaving?
The best way to protect the business in these situations is to set up each co-founder with restricted stock on a vesting schedule. This gives the company the right to repurchase that co-founder's stock at a nominal price, when the co-founder leaves the company.
How do we create accountability for the co-founders?
This can be done through a founders' agreement, where you specify what each co-founder is responsible for doing – not just areas of expertise but also whether a co-founder is expected to work full time. And then you spell out the consequences if someone fails to meet these stated goals.
Can I just sell stock to friends and family?
Any time you are talking about selling stock or bringing on investors, you are dealing with the securities laws. This is not a DIY project – you will need an experienced lawyer to help you with this to avoid penalties and to protect the company.
How do we protect our IP?
It is crucial for each person creating intellectual property – software code, hardware design, marketing strategies, etc. – to formally assign ownership of that IP to the company. This can be done through an IP assignment agreement. Investors will want to see that everyone who is or was involved with the company signed an IP agreement.
If I plan on raising venture capital, what kind of company should I form?
If you plan on raising money from VCs, you almost always should form a corporation, rather than an LLC. VC investors cannot invest in LLCs, and converting an LLC to a corporation is neither easy nor cheap.
What is the best way a small business owner can protect personal wealth and assets from business risks?
Create a company to operate the business, and keep your personal finances separate from company finances. For example, don't use company money to pay your cellphone bill or car payment.
What is the best way a small business can maximize its tax deductions?
Keep really good records of all your spending, and consult an accountant at least once a year.
What specifically are small business owners most confused about when you first meet with them?
The difference between a corporation, an LLC, and an S corporation
How can quality legal services help a small business grow?
It's always easier and less expensive to do things right, than to try to correct mistakes later.
How can quality legal services help small businesses save money?
Doing things right is always less expensive than doing something wrong and having to fix it later.
How can small businesses maximize the value of their legal team’s services?
Ask questions, a lot of questions.
Should business partners have the same amount of equity in a company? Why or why not?
No – everyone makes different contributions, and some contributions might be worth more than others. In addition, over time certain types of work may be more valuable than others. Also, if someone is working full time, he or she should get more equity in general than someone working part time.
What are the top three things a small business owner should be aware of when purchasing an existing business?
Due diligence reviewing customer lists, sale records, advertising materials, and employee contracts. Find out if there are any patents, copyrights, or trademarks associated with the business. Determine why the business is for sale.
Do you have any other essential legal guidance for startups that you haven't already included in this survey?
Do research – there is a lot of information out there. And budget appropriately for legal and accounting help.