Legal 101 for Startups

After spending weeks researching the best way to set up the business, I was thrilled to find the Law 101 For Startups – with Bill Schreiber of Fenwick & West interview at Mixergy. For anyone founding a startup, the interviews on are gold. The interviews are always a bit on the long side, but Andrew Warner asks all the right questions – the ones I would want to ask as a new founder. Andrew had a successful startup and describes mixergy as “the site I wish I had”. For me, it’s the site I’m glad I found.

Some notes:

Section 1 – Get It documented

  • Make sure the company owns the Intellectual property (anyone who provides services in any capacity should sign agreements)
  • Be clear with employees and vendors on relationship.
  • Capitalization: Venture Capitalists want 30-60%, want the owners to own the majority, and want to know who else is involved
  • Consider vesting stock. If you decide to vest stock, there’s an important form to file with the IRS.
  • Section 2 – Business Entities and Taxation

  • Bill Schreiber recommends S-Corp over LLC. S-Corp advantage is ease of granting stock options. The catch: no foreign investors, single stock type (no preferred stock).
  • Transforming S-Corp and LLC to C-Corp is a tax-free transaction. UNLESS you have negative net assets (more liabilities than you have assets). This is “the only risk”.
  • Advice: Create the business opportunity offshore (parent or subsidiary). All sales generated outside the US, the US will not tax.
  • Section 3 – Stock

  • Convertible notes are the way to go.
  • Touches on typical terms for stock equity rounds. Valuation, liquidation preference, how board is set up, rights of preferred stockholders, etc.
  • Liquidation preference = how much benefit preferred stock gets at the expense of the normal stock.
  • Participating vs. non-participating preferred stock.
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    One Response to Legal 101 for Startups

    1. This is even better than my post. You outdid me on my own interview. Thanks!

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