If I Launched a Startup

http://thestartuplawyer.com/startup-issues/if-i-launched-a-startup

by fusionman • 16 years ago

196 36 16 years ago

epi0Bauqu4• 16 years ago

I don't see the point of authorizing that many shares. I've always authorized 1,000 and initially issued 100 to the founders. 1,000 is enough to get the % breakdowns you need and you aren't charged for having that many shares: http://www.corp.delaware.gov/frtaxcalc.shtml

gyardley3• 16 years ago

His list implies he's raising money and issuing options.

Although only the percentage ownership should matter, many employees react very differently to getting a tiny number of options at a relatively high strike price vs. a big whopping number of options at a miniscule strike price.

epi0Bauqu4• 16 years ago

A 2 min conversation should fix that.

ryanroberts6• 16 years ago

If you use the assumed par value capital method to calculate your franchise taxes (instead of the authorized shares method), your startup's franchise tax bill isn't likely to be very much.

epi0Bauqu4• 16 years ago

Why pay any extra $ when you don't have to? Many scenarios will end up with you paying greater than the minimum ($75).

alttab• 16 years ago

There is another good reason not to authorize so many: some states tax you based on the number of shares you have authorized (and not necessarily with their dilution). 10,000,000 shares is way too much if you can get by with less.

This tidbit comes from my girlfriend who is a tax specialist and consultant who also read the article.

soyelmango• 16 years ago

Thanks for the link - bookmarked for further reading, I wish I'd read this a lot earlier. This is why I love the internet - information empowers us all.

vinhboy• 16 years ago

"Asking a VC to sign a NDA is tantamount to splitting 10’s at the blackjack table" - Funny.

mos1• 16 years ago

So if the VC's up card is a 6, and the true count is +5, you should ask them to sign an NDA?

anamax• 16 years ago

> "Asking a VC to sign a NDA is tantamount to splitting 10’s at the blackjack table"

Splitting 10s makes sense in certain circumstances.

VCs will sign NDAs when doing so benefits them. Such situations do exist, but they're rare.

travisp2• 16 years ago

I'm surprised to see the recommendation to incorporate in Delaware.

Downsides to incorporating in Delaware:

1) You still pay full taxes in the state you are operating in (you don't get to avoid taxes by incorporating somewhere else).

2) If someone sues you, they can choose to sue you either in Delaware (forcing you to travel to Delaware to defend yourself), or your local jurisdiction. The Delaware courts can be friendly to business, simply because they are often not jury based, but since you're not operating there, they don't have to sue you in those courts. And, the person suing you gets to choose the place they are most likely to win in.

3) Many states will require you to register as a "foreign corporation", possibly for more money than just incorporating there.

Yes, you can structure your company more flexibly, but are you really using some complicated structure that is only allowable in Delaware?

Edit: Just in case I'm misinterpreted, I do think this is a valuable post as a whole.

gyardley3• 16 years ago

He's assuming you're going to raise money.

VCs and their lawyers prefer Delaware incorporations because everything's business-friendly, there's well-established case law, and therefore things like financings are easier to do.

travisp2• 16 years ago

That's only part of what he says, and the rest doesn't seem really valid to me.

He said:

>1. Flexible Laws.

Yes, this is slightly more attractive for VCs. But I imagine, unless you are in an odd state, that VCs can handle corporations incorporated in, say, California.

>2. No Wildcard Juries.

If you're sued in Delaware, which you don't have to be.

>3. Precedence = Less Litigation.

Ditto.

>4. It’s Free! (Well, almost)

Foreign corporation registration may end up making it more expensive.

> A little bit cheaper than California ($100..but they nail you for $800 every year in franchise fees)

You don't get out of California franchise fees by incorporating somewhere else. See California's Franchise Tax Board document FTB 1063.

>5. Privacy

Since you may have to register as a foreign corporation, this anonymity in Delaware may be moot.

ryanroberts6• 16 years ago

My recommendation is always home state OR Delaware--the post is what I would personally do. I'd rather deal with the administrative issues early than reincorporate later.

Also, in true hacker tradition, it's probably easier to hack the available free startup legal document sets if you are a Delaware corporation. Most if not all the docs assume the startup entity is a Delaware corporation.

grellas• 16 years ago

Great post, Ryan! It is always easy to quibble with this or that aspect of how to launch a startup legally, but this is a great roadmap for founders to get them started in their thinking and to keep them focused on the right issues. It is quite consistent with the rest of your high-quality blog.

joshu3• 16 years ago

Pretty good articles. The blog is really nicely designed, too.

ryanroberts6• 16 years ago

Design credit goes to Dave Onkels, co-founder of Magntize. (http://daveonkels.com)

kullar2• 16 years ago

if you have vested share scheme with a 1 year cliff then also have 'acceleration on change control' i.e. if you get bought out early then you don't want to be waiting years for the remainder of your money, get the payment accelerated

ryanroberts6• 16 years ago

Sure, if it's my vesting schedule I'm pushing for single-trigger acceleration. ;)

joshu3• 16 years ago

If you get acquired, the payout schedule gets renegotiated anyway. So what's the point?

kullar2• 16 years ago

kinda chicken and egg... why do they have an 'acceleration of change control' if it gets renegotiated anyway? I figure its worth mentioning either way.

necrecious2• 16 years ago

It is great that he summarized many of his posts in one concise post.

I've read and followed his advice to form my first corp recently. But it took a few days of research to understand what he was saying and why.

It still costed me over $2k to get incorporated though.

jbellis• 16 years ago

> It still costed me over $2k to get incorporated though.

Getting a lawyer to double-check things, or something else?

necrecious2• 16 years ago

Just getting a lawyer to double check things. Just the base fees of DE incorporation, getting a registered agent then register as a foreign entity will cost you around $500.

ww520• 16 years ago

I actually don't understand the straight 4 year vesting schedule for founders. It seems unfairly favoring the investors. For founders who have poured their hearts and souls into building product and market initially, they still have to wait for 4 years after accepting funding to get their full reward? And risk losing their work along the way? And yes, many founders have been forced out from their startups before their 4-year schedule.

For startups that have product and market before funding, it would be more fair to have a "regressive" vesting schedule, e.g. 25% immediately vested, 30% 1st year, 20% 2nd year, 15% 3rd year, 10% 4th year.

Flemlord• 16 years ago

It prevents a founder from quitting early and keeping all their stock. The article doesn't mention it, but usually there is an acceleration clause that fully vests the shares if the company is acquired.

rdl• 16 years ago

Usually I see the start date for 4 years for founder vesting back-dated to start when the people actually started working on the project, not necessarily from taking funding or even incorporation.

rgrieselhuber• 16 years ago

This is in a founder's interest only if there is more than one founder. If it's a single founder, there is no incentive for them to agree to this.

If I Launched a Startup

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