Conference Presentation, Lecture, Interview
Carolynn Levy And Panel (Jon Levy, Jason Kwon) - Startup Legal Mechanics
- Most attendees are expected to review 2014 and 2017 startup mechanics videos prior to the lecture, with a future separate session by Kirstie addressing legal and accounting fundraising mechanics to serve as an adjunct.
- Delaware corporations are the standard for most public companies and are often a prerequisite for investor funding; while LLCs offer tax optimizations, the inconvenience and legal complexity of converting to a Delaware C Corp (with a cited example costing $400,000) generally outweigh benefits, as most angels and VCs do not invest in LLCs.
- Incorporation timing should generally be sooner rather than later to protect founders from personal liability, ensure the corporation holds intellectual property, and satisfy investor requirements to wire funds to a corporate account rather than a personal one.
- Founders are expected to purchase stock via a stock purchase agreement during incorporation, adopt a four-year vesting period to align with investor expectations and prevent founder attrition, and sign CIIA or PIIA documents to ensure company ownership of intellectual property, with strict adherence required for any non-founder work done without compensation.
- Employment agreements are typically unnecessary for startups given at-will employment defaults, except when securing special provisions like severance, though courts may interpret certain language as changing at-will status to for-cause; startups generally avoid paying founders in early stages unless sufficient payroll funds exist, despite legal mandates.
- Founders must maintain a detailed cap table, utilize shared folders for legal documents to prevent access bottlenecks, and avoid unsigned blank documents to pass investor due diligence, while ignoring basic mechanics risks wasting time on future fixes.
- Tax obligations include state payments for Delaware entities and payroll taxes for all employees, including founders; filing an 83B election within 30 days of purchasing stock is critical to avoid future income tax liability upon vesting, with the company required to retain the form permanently.
- Equity planning suggests allocating 10 to 20 percent for employees, utilizing online platforms like Clerky or Stripe Atlas for formation and initial stock option pools, and noting that while most startups delay stock plans until later, delaying grants increases stock cost and reduces incentives.
- Intellectual property protection varies by industry; patents are relevant for life sciences but less so for software, where execution drives success, and trademark disputes are often best resolved by rebranding rather than litigation, with early-stage registration considered a "nice to have" rather than a necessity.
- Founders working on startups while employed full-time face complex rules regarding non-compete agreements and classifying friends as independent contractors, with California rules having recently tightened; unpaid internships are generally illegal unless specific educational credit conditions are met.
- Immigration issues are identified as a difficult, evolving area requiring expert consultation, particularly for founders needing employment by the company; starting a nonprofit involves a nine-month process with strict public good requirements and disclosure obligations distinct from for-profits.
- Corporate structure advice includes registering where the primary market is, typically the U.S. for U.S. targeting, and avoiding complex parent/subsidiary setups initially; while single founders do not strictly need internal vesting, it is recommended to lead by example before hiring, and adding co-founders later does not reset original vesting schedules unless investors request it after about a year remains.
- Legal engagement scales with company stage: online platforms suffice for formation and early documents, but traditional counsel is recommended for raising significant capital, issuing employee stock, or navigating complex privacy laws like GDPR and California data collection requirements.
- Founders are advised against using shareholder agreements in the U.S. startup context unless necessary for investor deals, should avoid giving stock to advisors without thought, and should address failing co-founder relationships immediately to minimize damage to both the company and personal friendships.
- Operational expectations include the reality that building a company is a multi-year marathon rather than a sprint, with full-time commitment becoming necessary once a project transitions to a real company; B Corps are gaining popularity but may be less attractive to high-growth venture investors, and conversion should occur before fundraising if desired.