The first 12 to 18 months of a startup carry a number of legal issues. Here’s an overview of reasons why hiring an attorney to help in the process is important:
- Forming the Startup — From a legal perspective, the first step for an entrepreneur or business to take is forming a company as a legal entity. In today’s world, the most common entity choices are the LLC and the corporation. Determining the right entity choice for your startup is dependent on a number of factors, including tax considerations, whether the startup will need to raise money from angel investors or a venture capital firm, and whether the company wants to incentivize key employees with equity compensation, etc. Another decision to be made in the formation process is where to form your company. For most companies, the right answer is North Carolina (or the state where you conduct your business). However, for some companies, particularly those that anticipate needing to raise money from venture capital firms down the road, Delaware is usually the right choice. While the formation with the state is a fairly simple process, it’s important to make sure that you do it properly, and that your name is available and protectable. Lastly, operating a business without forming a legal entity with the state means that the owners are personally liable for anything that goes wrong with the company. Limited liability is one of the many perks of owning a business, it is important to make sure that it has been established before your company starts operating.
- Operating and Buy-Sell Agreements — While formation establishes a legal entity with the state in which the business is formed, it’s also important to have agreements among the founders. These agreements are important because they establish the ownership interest of each founder, who has what responsibilities, who has the power to make which decisions, and the process for handling a founder’s exit from the company. For an LLC, this primarily comes in the form of operating agreements and buy-sell agreements. For a corporation, founders agreements come in the form of the company bylaws, restricted stock purchase agreements, shareholder agreements, etc. While some entrepreneurs try to put off these decisions, it’s much easier to take care of these types of documents at the beginning when the parties are in the honeymoon phase rather than when meaningful money is at stake or emotions are running hot because of a disagreement.
- Leasing Office Space — If you’re a typical startup that isn’t meeting with clients at the office, co-working spaces can be a great option because they are short-term leases that may not require consulting with a lawyer. But if you own the type of business that requires dedicated space, like a restaurant or doctor’s office, you will need to engage commercial leases. This is one of the contracts that will most likely create a dispute for a startup because commercial leases tend to be landlord-friendly. An attorney can help a startup evaluate whether lease terms are fair for the market in which you operate and ensure that your company is better protected than would be the case if you negotiated the lease.
- Independent Contractors and Employees — Whether you hire employees or bring on independent contractors, it’s important to have a contract that spells out the details of the relationship with your business. Detailing the job duties, compensation and benefits, and reasons for termination are just some of the important contract terms that should be defined in these contracts. One key misconception among business owners is that they get to choose whether to hire employees or independent contractors, but like many rules defined by the IRS, it’s not that simple. The IRS has a complex test to determine whether a worker qualifies as an independent contractor. This matters because improper classification and can lead to difficulties from a tax, financial, and legal perspective.
- Contracts — The key contracts for any business depend heavily on the industry, but all businesses have important relationships that should be properly documented by a contract. If you are a website developer, your key agreements are going to be your development contracts with your clients – such an agreement will lay out the scope of work, specify that the developer is an independent contractor, the amount of compensation, and the frequency of that compensation. For a restaurant, key contracts could include supplier or catering agreements. For SaS companies, the terms of service and/or licensing agreements are often the most important. Depending on the nature of the business, confidentiality agreements (i.e., NDAs), non-compete agreements, and non-solicitation agreements may be standard contracts needed by the company.
- Capital — For some startups, it’s necessary to raise capital to scale the business. On a basic level, you can raise capital in one of two ways: debt or equity. Regardless, it’s important that the capital raise is properly documented. Debt fund raising is usually in the form of a loan from a bank or from family and friends. Alternatively, you can raise money in the form of equity, which is selling ownership in your company in return for additional capital that will be used to grow the company. If you decide to go the equity route there are a number of really important restrictions on how you raise money and the sorts of disclosures you give to different types of investors. The process can be difficult to navigate and it’s important to make sure that you raise money properly because there are severe consequences for not following the securities laws that govern such transactions.