Here's some highlighted excerpts from the post and my perspectives:
1. Set up your legal structure early and use cheap stock to avoid tax problems.
No small venture wants to invest too heavily in legal infrastructure at an early stage. If you are a solo founder working out of the garage, save your dollars and focus on development.Bam! Right there, the author shows he understands the startup's reality. And he offers a realistic solution. Realistic here means: cash-flow sensitive.
2. Normally, go with a corporation instead of an LLC.
There are special cases where an LLC makes sense for a startup but these are comparatively few in number (e.g., where special tax allocations make sense, where a profits-only interest is important, where tax pass-through adds value). Work with a lawyer to see if special case applies. If not, go with a corporation.
3. Be cautious about Delaware.
Delaware offers few, if any advantages, for an early-stage startup. The many praises sung for Delaware by business lawyers are justified for large, public companies. For startups, Delaware offers mostly administrative inconvenience.Wow. Ok. I'd never heard this clarification before. But administrative inconvenience for a startup means death. Startups cannot afford administrative staff. Any administrative inconveniences then are handled by the founder or 1 of the other members of the already-short staff. Not good.
4. Use restricted stock for founders in most cases.If a founder gets stock without strings on it, and then walks away from the company, that founder will get a windfall equity grant.
Makes sense. But when does a founder lose their role as primary decision-maker at the time stock is issued? This advice reads like "shutting the door after the cows are out". But, I'm sure I'm missing a key detail or two.
Regardless, the advice applies equally to all those who follow the founder into the startup. And founders and their minions often paint a picture of the future with pastels and soft hues of trust and conquering the world and people living saintly values of altruism.
6. Get technology assignments from everyone who helped develop IP.
Founders sometimes think they can keep IP in their own hands and license it to the startup. This does not work. At least the company will not normally be fundable in such cases. Exceptions to this are rare.
Ok. End of discussion. Anything that restricts funding options is not healthy for the startup.
8. Consider provisional patent filings.
Many startups have IP whose value will largely be lost or compromised once it is disclosed to the others. In such cases, see a good patent lawyer to determine a patent strategy for protecting such IP. If appropriate, file provisional patents. Do this before making key disclosures to investors, etc.
About the AuthorGeorge Grellas is a Silicon Valley business and corporate lawyer specializing in early-stage tech startups. He founded and heads a firm of startup business lawyers
I've never met Mr. Grellas. But,; in the event I found a tech startup I'll want to visit with him. You should, too, in that event. He has set up a firm of; startup business lawyers who have helped a lot of startups since 1984 in Silicon Valley. (Since 1984. That means he's survived the booms, the busts, the netscapes, and everything else in Silicon Valley over the past 25 years. )
Link to article from LegalRiver on Twitter.