The Biggest Legal Mistakes that Startups Make
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The Biggest Legal Mistakes that Startups Make
1–10 of 18 posts
Re: The Biggest Legal Mistakes that Startups Make
#2All good points--I don't completely agree on the LegalZoom issue. Our company incorporated in Illinois through LegalZoom and it worked out great. I've done LLC/partnerships on my own and the paperwork is easy. It's good to think of LegalZoom as a paralegal service and not as a lawyer. We had an actual corporate lawyer draft contracts and other important documents but I'm not paying someone $300/hour to fill out forms.
Re: The Biggest Legal Mistakes that Startups Make
#3All good points--I don't completely agree on the LegalZoom issue. Our company incorporated in Illinois through LegalZoom and it worked out great. I've done LLC/partnerships on my own and the paperwork is easy. It's good to think of LegalZoom as a paralegal service and not as a lawyer. We had an actual corporate lawyer draft contracts and other important documents but I'm not paying someone $300/hour to fill out forms…
You incorporated in Illinois?
I don't know Illinois law well, but there are good reasons why most corporations are Delaware (with a few in Nevada and a couple other states), including tax and governance issues. Did you ask an attorney if Illinois was the right state for you?
Re: The Biggest Legal Mistakes that Startups Make
#4A couple gripes:
- You will find a number of angel investors happy to invest in LLC's (depending on the stage and complexity of the funding round). While it's true that some investors require a more complex structure, the blanket statement that it's "required" is just wrong. It can also be destructive. There are REAL benefits to an LLC for a pre-revenue startup.
- Place of incorporation. I've never had an investor care about the state we've incorporated in. There are obvious tax implications, but it's often easier and cheaper to just do the paperwork in your state. It really just depends.
Points of emphasis:
83b election: This is SUPREMELY important, and applies to anyone attempting to invest equity (under any legal structure). Without properly handling the 83b you run into incredibly onerous tax issues. Learn about it and do it when you incorporate.
Re: The Biggest Legal Mistakes that Startups Make
#5That post read like a job security pitch for his field. I think as a general rule you want to avoid and delay using lawyers as much as possible: too much complexity, paperwork and cost, too early. Get to a sellable (and selling) product/service first, otherwise you're wasting your money and time.
Re: The Biggest Legal Mistakes that Startups Make
#6All good points--I don't completely agree on the LegalZoom issue. Our company incorporated in Illinois through LegalZoom and it worked out great. I've done LLC/partnerships on my own and the paperwork is easy. It's good to think of LegalZoom as a paralegal service and not as a lawyer. We had an actual corporate lawyer draft contracts and other important documents but I'm not paying someone $300/hour to fill out forms…
You incorporated in Illinois? I don't know Illinois law well, but there are good reasons why most corporations are Delaware (with a few in Nevada and a couple other states), including tax and governance issues. Did you ask an attorney if Illinois was the right state for you?
My understanding is that for S/C-corps you should incorporate in Delaware, for LLCs it's generally better to do it in the state you operate out of.
Re: The Biggest Legal Mistakes that Startups Make
#7A couple gripes: - You will find a number of angel investors happy to invest in LLC's (depending on the stage and complexity of the funding round). While it's true that some investors require a more complex structure, the blanket statement that it's "required" is just wrong. It can also be destructive. There are REAL benefits to an LLC for a pre-revenue startup. - Place of incorporation. I've never had an investor ca…
Have to disagree about place of incorporation. Investors may not care but you should. Delaware should always be your choice. Delaware is very company friendly with laws and procedures that generally make it much easier and cheaper to get things done there (document filings are a prime example). Always, always, incorporate in Delaware.
Re: The Biggest Legal Mistakes that Startups Make
#8That post read like a job security pitch for his field. I think as a general rule you want to avoid and delay using lawyers as much as possible: too much complexity, paperwork and cost, too early. Get to a sellable (and selling) product/service first, otherwise you're wasting your money and time.
On the flip side of that, a few hours of lawyer time in the first year of Facebook might have saved the IP ownership dispute that has now cost about $100 million dollars in settlements, and might still go higher.
There are a lot of stories of startups that went under because the 50/50 owners couldn't decide on a plan of action, or turned out to not own any of the IP that they thought they owned.
Re: The Biggest Legal Mistakes that Startups Make
#9I'll insert my ad in here, because this topic is so close to my heart: Before incorporating, if you have co-founders, protect yourself with http://fairsoftware.net.
I know many people who didn't use us (or a similar co-founder agreement, except we are the only game in town if you are looking for a reputable, lawyer-approved, silicon-valley, tech-friendly one).
They regretted it dearly, later. In general, first time founders are pretty clueless about IP assignment (if my co-founder dumps me, what happens to his 10,000 lines of beautiful Python), vesting (if my co-founder doesn't work out, why does he keep 50% of my company), etc...
You know better than start coding without some kind of code repository. Don't start cofounding without an agreement. You've been warned :-)
Re: The Biggest Legal Mistakes that Startups Make
#10A couple gripes: - You will find a number of angel investors happy to invest in LLC's (depending on the stage and complexity of the funding round). While it's true that some investors require a more complex structure, the blanket statement that it's "required" is just wrong. It can also be destructive. There are REAL benefits to an LLC for a pre-revenue startup. - Place of incorporation. I've never had an investor ca…
I disagree re LLC's: not only won't VC's invest in LLC's, but conversion to a C corp can be extremely complex and expensive. Indeed, it cost one of my clients about $15K to address tax issues relative to such conversion. In addition, issuing "stock options" is a nightmare with LLC's - not to mention the extraordinary complexity of operating agreements, with their complicated layer of partnership tax provisions.