Carolynn Levy And Panel (Jon Levy, Jason Kwon) - Startup Legal Mechanics

Incorporation and Entity Formation

• Founders are strongly recommended to incorporate in Delaware due to its efficient processing, established legal framework for public companies, and investor expectations.
• Online platforms like Clerky and Stripe Atlas are preferred over traditional lawyers for standard incorporations due to cost efficiency and specialized startup focus.
• Incorporation involves filing a Certificate of Incorporation, adopting generic corporate bylaws, appointing a board of directors (founders only is acceptable), and designating corporate officers (President/CEO and Secretary).
• Founders must immediately open a separate corporate bank account to establish the company as a distinct legal entity and treat company funds independently from personal finances.
• Founders must purchase their own shares from the company via a Stock Purchase Agreement, paying a nominal cash amount (e.g., $1) and contributing any existing intellectual property.
• Founder equity must be subject to a standard four-year vesting schedule with a one-year cliff to protect the company if a founder departs early; unvested shares are repurchased by the company.
• Founders are advised to treat themselves as employees and pay themselves a minimum wage (if cash flow permits) to establish payroll tax compliance and legal separation.

Intellectual Property and Agreements

• All founders, employees, and contractors must sign Confidential Information and Invention Assignment Agreements (CIA/PIIA) to ensure the company owns all created intellectual property.
• Non-founders should not work for free; if payment is not possible, they must be engaged as independent contractors (subject to strict classification rules) rather than unpaid interns or volunteers.
• Founders should avoid signing legal documents without reading them, specifically ensuring full understanding of Founder Stock Purchase Agreements and fundraising terms.
• Early-stage startups should delay trademark registration and domain purchases over $10,000 to avoid litigation risks and capital inefficiency, focusing instead on product execution.
• If a trademark dispute arises early, the recommended strategy is to abandon the contested name rather than engage in costly legal battles.

Taxation and Compliance

• Founders must file an IRS Form 83(b) election within 30 days of purchasing stock to tax the nominal value immediately rather than future appreciated value upon vesting; missing this deadline is irreversible and costly.
• Corporations must file an annual tax return with the IRS and pay an annual franchise tax to the state of incorporation, even if no income is generated.
• Companies with employees must utilize an online payroll service to remit payroll taxes, a requirement that applies even to founders drawing a salary.
• C-Corporations are the standard entity for startups raising external capital; LLCs are generally discouraged due to the high cost and complexity of converting to a C-Corp later.
• S-Corporations are not recommended for startups planning to raise venture capital, as investors typically require C-Corp structures and external investment can invalidate an S-Corp election.

Equity Management and Hiring

• Early employee equity pools typically range from 10% to 20% of total company stock, with grants usually structured as Restricted Stock or Stock Options.
• Stock Option Plans should be adopted early to grant equity to employees before valuation increases, as higher valuations make options less incentivizing due to higher strike prices.
• A 409A valuation is required before issuing stock options to employees; most startups delay this until after a fundraising round due to cost and complexity.
• Single founders still require vesting schedules on their shares to appear attractive to investors and to set a precedent for future employee stock grants.
• Introducing new partners or co-founders later in the process does not require restarting the original founders' vesting schedules, though investors may request extensions.

Operational Pitfalls and Q&A Insights

• Founders working part-time while employed elsewhere must strictly separate company activities from their employer's time and resources to avoid intellectual property claims, though building a scalable company generally requires full-time commitment.
• Immigration issues (e.g., TN visas) are complex and political; founders should consult specialized immigration experts rather than relying on general legal advice.
• Advisory board equity grants should be rare and reserved for specific scenarios (e.g., life sciences), as advisors often seek free equity; investment is generally preferred over advisory compensation.
• Shareholder agreements (common in non-US jurisdictions) are generally discouraged for US startups; vesting schedules and standard corporate governance serve this purpose.
• Public records (e.g., PitchBook, Crunchbase) will reflect corporate filings; attempting to obscure this data is low priority compared to business execution.
• B-Corp status changes fiduciary duties and may be less attractive to traditional venture investors, though it is viable for mission-driven companies.
• Hiring international employees often requires establishing a local subsidiary entity to comply with local labor laws and tax regulations.
• Co-founder breakups are significantly reduced by clear vesting, IP assignment, and prompt resolution of disagreements; delaying these issues can be fatal to the company.