As a founder, you’re faced with a lot of research, decisions, and processes from day one but knowing which documents you need should not be one of them. These documents and the way in which you organize them can make or break the future of your business. To ensure you consider and accomplish everything you should at this early junction, we’ve created the below checklist to cover all early stage startup decisions and documentation from a legal, tax and financial perspective.
Choice of entity – You have the decision to form as a corporation or an LLC. If you plan on raising venture capital and issuing stock options to incentivize employees then C-corp is the route to go. LLCs will have trouble getting interest from individual investors since they can be personally affected by the profits & losses (versus at the firm level with corporations). Further, LLCs cannot issue employee stock option plans or actual shares, but they can get around this by sharing profits interests. While not the common, traditional route for most startups, it is an option and the National Center for Employee Ownership details options for equity incentives in LLCs if you’re interested in exploring further.
Still questioning how to incorporate your startup? Check out our post on Tips for Entrepreneurs Incorporating a Business.
Jurisdiction – For the purposes of this post, let’s assume you’ve decided to incorporate as a C-corporation. Whether you’re a startup based in Massachusetts or Texas, Delaware is likely your best jurisdiction option given its business advantages from a logistical and regulatory standpoint (i.e. its Chancery Courts that specialize in corporate law without requiring a jury). You will be taxed at a lower rate in Delaware and avoid higher taxes in your home state, while avoiding higher taxes in their home states.
You’ll sign and receive a Certificate of Incorporation at this juncture. Hopefully you’ve chosen a business lawyer who can guide you through this process, but just in case, below is a checklist of the documentation items you must complete.
Founder Stock Purchase Agreements – These forms are incredibly important as it allows the company to issue stock to founders at a low price, and should be required for each founder (up to five) to execute. These agreements give the company the right to repurchase any unvested shares at the original price if and when a founder leaves. This is also when founders agree upon timing for vesting schedules and restrictions so that, essentially, if you plan on issuing stock, it ensures that someone can’t walk away with their stock after one month in. The standard schedule for tech startups is a four year vesting period with a one year cliff, meaning if an employee leaves before year one, they receive nothing, and equity ownership grows 25% each year until you hit 100% ownership interest.
83(b) Elections – These forms alert the Internal Revenue Service (IRS) that you’ve been granted equity so that they tax you the date the equity was granted instead of the date that the equity vests. The reason for this? Income tax rates are much higher than long-term capital gains rates. You must file these forms within 30 days of the date the equity is granted.
Stockholders Agreement – For C-corps, this document puts in place a structure for managing the company, especially if there is more than one founder. It also outlines how each founder participates in equity distributions in the future. Sometimes this document can also put legal expectations in place should a founder leave and try to create a competitive company.
Proprietary Info and Inventions Agreement – If this is not included in the Stockholders Agreement, this form specifically helps keep confidential information and product ownership between original founders, with implications for those that leave the business.
Bylaws – While not all states require you to create corporate bylaws, it’s not a bad idea to create your own for compliance and record-keeping. It is required for Delaware c-corps. This document basically outlines the purpose of your company and how it will be run specific to shareholders, directors, and officers.
Capitalization Table – Not necessarily a legal form but incredibly helpful, a cap table is basically a document listing your company’s securities. This includes your stock, options, warrants, etc., and who owns each. It should be simple, organized, and up to date in Excel-type format.
State/Local Registrations – Even if you’re set up in Delaware, you still need to register in the states you’ll be doing business. For instance, the Secretary of the Commonwealth of Massachusetts lists all the state registration forms you have to fill out. The Housing & Economic Development office also has a comprehensive list of regulations, licenses and permits you should have based on business type and area.
Unanimous Written Consent – When you’re making decisions that do not require a formal meeting or voting, this document lets directors make decisions such as selling stock, opening bank accounts, appointing officers, etc. This is a particularly important document to have in place for when decisions need to be made very quickly with your business.
Employer Documents – Once you start hiring and growing your team, you’ll need an Employer Identification Number (EIN), W-4’s, W-2’s, etc. The SBA.gov site is a good resource to check out once you are ready to make your first hire.
NDAs – To protect your IP, draft up nondisclosure agreements that will protect your company against exposure to your invention. This is particularly important if you don’t have a patent, etc.
Insurance Policy Documents – Once you start to grow you’ll need general liability insurance and others depending on the stage of your hiring, etc. Curious what business insurance you need? Check out our guide to choosing business insurance for your startup.
Having all of these documents completed, organized, and up to date is not only advised, but often required if you plan on raising capital from investors. VC due diligence is so detailed and thorough so you’ll want to ensure you’re not scrambling to get organized at the last minute. And, now that we’ve mapped out all of the forms you need to complete before that stage, you can stop worrying and get back to growing your team and product.
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