Learn about incorporating your business, non-competes, licensing your IP and decision-making processes
Explore topics related to allocating equity, vesting terms, tax implications, IP ownership, compensation and employment agreements
Dive into employee compensation, hiring foreign employees and hiring before securing funding
Find out about board membership and roles, and advisory board setup and compensation
Understand vesting restrictions and terms, options and restricted stock, and tax differences between ISOs and NSOs
Position your company for success with information on how to raise capital and secure funding from banks, VCs, friends and family
Learn about the differences between bank loans, foreign investors, crowdsourcing, crowdfunding, angels and VCs
Explore information related convertible debt, preferred stock term sheets and valuation caps on convertible notes
Expand your understanding of IP ownership, terms of service and privacy policies, open source software and more
Dig deep into information related to if and when to file, to the difference between provisional and utility patents
Explore the best way to obtain a trademark and the difference between a domain name and a trademark
Uncover little-known information related to NDAs and patent filings
Read about copyright protection and how to register a copyright
Get up to speed on how to grant exclusivity to a reseller, OEM or distributer, license agreement terms, and licensing IP from a university or hospital
Time to grow? Learn about taking funds from a strategic investor and international expansion
Explore how to prepare for due diligence, guidance on selling your business and hiring an investment banker
Time to take your company public? Prepare your company properly
Once you are ready to move forward with an idea, you should formally incorporate your startup as a legal entity. It is important to do this relatively early for a variety of reasons.
Starting a company is risky, and many startups fail. Even if things go well, someone might sue the business. One of the primary reasons for operating your business through a legal entity is to shield your personal assets from claims made by the creditors of the business. If you operate the business through a corporation or a limited liability company (often called an LLC) then the owners and operators of the business will not generally be responsible for the liabilities of the business. Other legal structures like partnerships don't offer the same protection for all owners of the business. So between an LLC and a corporation, what's the best structure for you?
If you plan to raise external funding for your entity, then you should incorporate in Delaware. Delaware offers several advantages over other states. For many years, the legislature in Delaware has sought to attract companies to incorporate in Delaware by adopting a relatively company-friendly set of laws under which to operate. Delaware has a separate court whose sole job is to try cases under this set of laws, and so there are many published decisions interpreting these rules.
If your company is incorporated in one state (e.g., Delaware), but you are “doing business” in one or more other states (e.g., California, Massachusetts, New York, etc.), then the laws of the states in which you do business require your company to be “qualified to do business” there. To qualify to do business in a state, you typically need to make a simple filing with the Secretary of State's office that describes your business. You will also typically need to file reports and pay a fee (typically referred to as a “franchise tax”) in that state annually.
The shareholders of a corporation are its owners, and they vote their shares to elect the directors. The directors sit as a board, which, typically acting through a majority, oversees the corporation’s management and sets the overall corporate strategy and direction. Directors have fiduciary duties, so they generally must act in the best interests of the corporation and its shareholders. The corporation’s directors elect officers, including a CEO, who conduct the day-to-day business operations. The board must also approve certain significant corporate matters, such as stock issuances and important contracts.
All employees (including founders) must be paid in cash in amounts at least to satisfy the minimum wage laws established by federal and state laws. Many founders opt to go without compensation in the initial stages, but technically doing so is in violation of the federal and state wages laws. Employees may receive equity in addition to cash payments, but due to tax and other complexities it is generally not feasible to grant them equity in lieu of minimum cash wages. Although the market may reflect standard salaries for different types of positions, there is no requirement that employees receive any more than minimum wage, and the wages employees receive often depend on how large and established their employer is.
A foreign student is permitted to own equity in a company and to serve on the board of directors of a company. A foreign student may not perform work for a company without obtaining appropriate authorization from the foreign student office at his/her university. The rules are no different for founders.
To successfully launch a new startup, the company needs to own, or have a license to use, the intellectual property that will be used in the business. This aggregation of IP does not happen automatically and requires careful planning with your legal counsel.
Many companies are built on intellectual property licensed from academic or research institutions, such as universities and hospitals. Companies may also license technology from those types of institutions to supplement their existing intellectual property. These licenses are typically patent licenses, but may also be licenses to software, materials or other intellectual property. Many institutions have their own licensing office dedicated to commercializing intellectual property of the institution. Some of the key points to consider when licensing intellectual property from these types of institutions include:
It may seem logical and fair that the founders contributing IP they invented to launch a new startup should retain a license to that IP should the company fail or should the founders identify other uses for the IP outside those contemplated by the company. After all, the founders developed the idea and invented the IP prior to forming the company.
Non-competition agreements may be enforceable, depending on the state in which the employee lived and worked when the agreement was signed, the consideration (value) given in exchange for the agreement and the reasonableness of the restrictions in the agreement.
The option “pool” represents the number of shares the company sets aside in reserve under its option plan to compensate its employees, consultants, advisors and directors. The size of the option pool depends on the company’s stage, circumstances and hiring needs. When the company issues shares under the plan, it dilutes the ownership percentage of the other shareholders proportionately. However, any shares reserved under the plan that are not used (i.e., that are not sold or issued by the company) do not dilute the actual ownership of the other shareholders. Therefore, the size of the option pool at the initial formation of the company doesn’t really matter all that much—if the pool is too small and you need more shares, it can always be increased; if the pool is larger than you actually need, any excess shares don’t have any negative impact on the actual ownership of the company. Most startups will initially reserve an option pool that is big enough to provide for the equity incentives needed to cover their anticipated hiring needs for the first six months to a year.
Let our Knowledge Navigator direct you to content specific to where you are on your journey.
In the next QuickLaunch University Webinar on May 10, we will explore the fundamental concepts around founder equity and founder agreements.
Partner Mick Bain explores the idea of whether startups should take the B Corp route
Park Square and WilmerHale Release 17th Annual Technology and Life Sciences Compensation and Entrepreneurship Study
Thank you for your interest in WilmerHale.