Getting your Startup’s Legal House in Order
One of the first things you should do for your startup, besides coming up with an idea, coming up with a sweet name, trying to drag your friends and family on board, begging for money from everyone, developing a awesome logo, wait what was I talking about again?. Somewhere in between all the fun and cool things you get to do starting up your company you have to handle some very important work. Having a friend or family member that’s an attorney helps out a lot, but most of us don’t have that luxury.
These are some lessons I learned when I founded Resgrid, a cloud service for first responder originations, with my partner staxmanade. Because Resgrid is positioned to support volunteer and career fire departments, emergency medical services, search and rescue and other front line emergency services we wanted to ensure that all of our bases we covered.
First off, what type of company will you form? An LLC? S-Corp? C-Corp? Partnership? Inc. has a very old but decent article on the subject (http://www.inc.com/articles/2000/06/19438.html) and Nationwide Inc has one (http://www.nationwide-incorporators.com/get-information/article-whats-best-for-me.php).
From my experience the best bang for your buck with the lowest friction is an LLC. You get pass through on your taxes, liability protection and very little overhead work compared to an Inc. But I’m not a lawyer so always double check your particular circumstances with some form of counsel to ensure there aren’t any issues. This is an important first step to protecting yourself, and your partners and other stakeholders in the startup. You need to pay attention to all the work you need to do for the entity you want to form, for example for an Inc you need to have shareholder and director meetings, every year and keep notes of everything. If you don’t follow the rules for your particular entity and something goes down a court could say that the company is just a shell and liability rests on you.
In part when forming your company have very clear, and fair, distribution of ownership, responsibilities, costs and liabilities. Nothing will derail your startup faster then people who feel that they have been shafted, slighted, cut out of money or unfair distribution of work. Ensure there is a clear understanding on how decisions are made, who has final say (there always has to be a final say) and who, or whom, will run point on legal/official matters (in an LLC this would be your Managing Member, the ones that can bind the company to legal contracts, open accounts, etc).
When we founded Resgrid we knew it was going to be disruptive. In a market with antiquated software and hardware, slowly updated (and adopted) and technology adoption and high prices (there is a thing called “the fire service premium”, our low cost, cutting edge technology and frequently updated model was going to have a little shock associated with it, from customers and competitors. We didn’t realize how much until a few months after putting our site online we got a patent infringement letter from a competitor. Although after looking at the patent’s we were clearly not infringing this was something we had to handle. I won’t mention the competitor, seeming they have been very cordial and I wish them the best.
So moral of the story, also try and line up a law firm or lawyer you can bounce stuff off of either ad-hoc or via a retainer. One that I recommend is Hawley Troxell, where Brad Frazer works, Brad is an amazing speaker and very knowledgeable. In this area our options are pretty limited so we had to look outside a little to find someone with the right mix of knowledge, experience and skills. This wasn’t in our top priority list and it bit us a little, so I recommend at least getting your ducks in a row, know who to contact that has the skills and knowledge in your area of need.
Another thing that is so boring but a must, is get your accounting straight right away. All members should have access to the books and be able to review them. Again, be open and honest with all members on the books and when will people get paid and how much. In the startup phase people most likely won’t be earning much of any money, unless you got some form of funding, even so make sure all members are clear and in the know. A startup called Buffer recently revealed all their employee’s salaries and the formula of how they got them. So if you’re balking at transparency in your ownership then be prepared to deal with some issues. Choose an accounting software that meets your needs, and use it! We choose Outright, now GoDaddy Online Bookkeeping (yuck!) because it was free for the most part and meet our needs. We do pay a yearly free for access to the Tax Reporting forms.
Get a good CPA for your startup and encourage all your members to get good CPA’s as well. Because we are an LLC our profit and loss passes through to all the members of the LLC. This complicates your taxes, so be prepared and ensure your members are prepared.
Covering those three things (Entity Formation, Legal Advisor and good accounting/CPA’s) will give you a foundation for operating properly and legally. It also give’s you a great base for when you need to do it again, you have your “go-to’s” to get things up and running quickly. Don’t forsake the boring part of starting up a company, it could turn out to be the most important element at a critical junction.
