Complete DIY guide: legal basics for startups
blog.staply.coIn launching a venture, use a good lawyer to help you define what is the best legal structure for your venture, who owns what piece of that venture and on what earn-out terms, if any, who has rights to any IP developed by participants in that venture, and who has what authority to run things, either as owners controlling the ultimate management of a company or as directors/officers having strategic or operational control over how things are done. And do all this with tax, securities law, and other legal bounds in mind.
Are there hazards to founders as they roll along in the earliest stages without the benefit of lawyer review or guidance? Of course. And those hazards lie precisely in failing to understand what needs to be done or in how to do it.
But lawyers cost money and every founder is or should be cognizant of the need to budget wisely for such costs.
So there is room for good DIY guides and services. Indeed, in today's era, DIY guides and services are great and can be valuable: one of the great distinctives of our modern startup era lies precisely in having savvy and informed founders (except for serial entrepreneurs, this was a relative rarity at or before the bubble era). So, yes, by all means, do educate yourself and do use lawyers wisely so as not to overpay or overdo the legal pieces that are secondary (albeit important) to your venture. I encourage what the author is doing here and hope it lives up to its promise.
That said, I don't believe a DIY guide should include arbitrary rules or procedures.
In particular, I disagree that a founders' agreement is an essential first step on the path toward startup launch. In 30 years of specializing in this stuff, I have seen such agreements in very few startups. They can be helpful but there are no arbitrary rules about the need to use them.
A founders' agreement is after all a formal legal document. It locks in relationships and commitments - meaning, if you agree to its terms, your failure to conform to such roles and commitments can have legal consequences. And, while that can be fine, and while it can certainly go a long ways towards limiting the hazards mentioned above that a lawyer would normally deal with, it can also be frustrating for founders to front-load legal things at a time when the venture is in greatest flux. In many cases, you can wind up trying to define in the abstract, and hence lock in, roles and relationships that are by definition still not settled.
As always, the goal is to use good judgment and common sense while educating yourself to the maximum extent possible either through DIY guides/resources or with the help of lawyers. But do not think that there is only one process for getting to the goal of a good launch. If a founders' agreement fits your needs (and if the author offers a good one), by all means use it to your benefit. If not, don't get stymied by the thought that you have failed to meet some pre-condition to launch that really does not exist.
> In many cases, you can wind up trying to define in the abstract, and hence lock in, roles and relationships that are by definition still not settled.
The example given in the original post sort of proves this point. The OP makes "developing and managing of the software development" and "managing of the tasks" CEO responsibilities. It's not clear how those terms are defined, but it arguably suggests that were the CEO to focus on biz dev instead of coding or if a CTO decides to prioritize one bugfix over another without consulting the CEO, someone is now in breach of a legal agreement.
Thanks for this. Also: does formalizing the role of the CEO matter as much as this article suggests that it does? In two startups I've been involved in, "CEO" was chosen with a coin flip.
It may not really matter at first, but based on my experience it quickly becomes an issue once you grow to a size where you're either fundraising or hiring. In our case, as soon as we started relationship-building with angels and VCs it made sense for us to choose who the CEO is rather than spend 5 minutes trying to explain why we (as 3 co-founders with equal equity) didn't need titles. Now that we're ramping even more towards fundraising I'm realizing just how much of a full-time job that is for the person with the CEO title. Someone in the company will have to take point on that front and it really makes sense for them to be CEO.
Always take legal advice from a non-lawyer with heaping grains of salt, because they almost always get it wrong.
If you really are too shortsighted to pay for necessary legal advice for fundamental aspects of your business and want a DIY guide, check out the NOLO series, which is written and vetted by practicing lawyers and includes business-operational perspectives and considerations.
Are you talking about http://www.nolo.com/legal-encyclopedia/llc-corporations-part... ?
You're right, but if you follow the recomendation, it wont hurt the startup company. Because it's better than nothing.
The power that attorneys' hold is reminiscent of the power early catholic priests held when they knew how to read and everyone else was illiterate...can you imagine? I, like most normal people, am basically legal-illiterate. Absolutely, something is better than nothing. Even if it just serves to raise my awareness of what I need to pay attention to as I boot up my business. Yes, the NOLO books are great and all but dont't stop there. We should have 10's of NOLOs and 1000's of bloggers competing and contributing in this space already.
Thanks OP, hope you stay motivated with this!
The power that (coders/doctors/mechanics/opticians/dentists/security professionals) is reminiscent too. That is why we people gain a trade.
HN would be in uproar if someone wrote a blog saying - hey you don't need a CTO to launch your tech startup, just read my blog on Visual Basic and away you go.
Start ups ask people to invest their lives into the enterprise. The least you could do is get proper fucking legal advice to ensure your employees and co-founders are covered.
Or don't. And get raped by either the taxman or a VC legal counsel.
This person claims to be a lawyer though...
This is actually really dangerous advice in my opinion. While it's important to define performance expectations, performance can be subjective and this agreement could leave well performing founders in a bad spot.
Seek proper legal advice, please. You get what you pay for.
Come on, this is great for founders who is struggling to survive before they can hire lawyers. Thanks a lot for the blog and it's easy to learn some basics comparing to the 400-page Nolo books which I have a few.
100% agree. I think there are many lawyers posting in this thread ;)
Thanks a lot to the author!!
The inherent contradiction here always amuses me.
"Don't listen to blog writer because this, that and other thing, but of course listen to ME the commenter!"
The whole point of the post is if you're a founder, you need to take care of these legal things: Founders Agreement, vesting & performance, IP, NDA, responsibilities, etc. (NOTE: not a complete list)
Of course you should get a lawyer so it is done right and suited to you. Having made all these mistakes, I wish I had known about these things before making these classic blunders.
However, if there are boilerplate agreements given with the advice "use these", THEN release the hounds.
Is there a good book/blog with high bang-per-page for newbees? How to avoid rookie mistakes like Zuckerberg's with vesting? What do I need to know from idea to series A?
Grellas wrote a very informative series of "Startup Law 101" posts. Well worth reading:
All these questions I plan to answer in this blog. Personally, I couldn’t find a blog like you had described and that is why i decided to focus on these topics in our own blog.
What sort of mistakes did Zuckerberg make?
when investor become a shareholder of the company, the shares were derived from Eduardo Saverin (co-founder) shares only
Why would you need documented performance plans for all the founders? They aren't normal employees. If you want to get rid of one, can't you just vote them out?
It's good to set expectation up front with each other, and a performance plan is one way to go about doing it. The downside to completely getting rid of a co-founder is:
1) They're likely going to take /some/ amount of equity with them (have a vesting plan!)
2) Getting rid of a co-founder before you reach critical mass will be detrimental to the business. If not, they probably weren't a good pick for co-founder.
That’s true. However in some cases it can be difficult to agree on the voting conditions with other founders. If you agree on voting, make sure that you describe the procedure of voting: who can start the voting event, who will prepare a result of the voting, what will be in case when votes for both variants are equal, etc. I think we’ll prepare a separate article about it.
In the UK you can vote them out as a Director but it is difficult to get rid of them as shareholders.
Some co-founders simply let themselves get booted but still cash in at a later date without have actually accomplished anything.
On a related note, if anyone needs some help from real lawyers with legal stuff, we at Lawdingo (YC W13) are happy to get you connected to a startup lawyer for basic legal advice, or for some quotes on routine legal needs. help@lawdingo.com or 212-785-0632 (ask for Nikhil).
Not to be picky but you need to say for what legal jurisdiction this applies to - advice specific for a USA based company is worth about as much as a chocolate teapot in other country's
It is mentioned in the article - USA California and England
mm so incorporating a company and how TUPE applies on takeovers is the same in the UK and in CA and the USA I never knew :-)
Since you failed to even add a basic legal disclaimer to your own blog I will pass. Unless of course you are stating that your blog constitutes legal advice and I can sue you if things go wrong for me...
Every law student will attest that nothing replaces the advice of actual legal counsel. Even lawyers get a lawyer when they need one since you need someone with expertise that up to and including that minute.
If you want example of a sterling legal disclaimer then check out
http://www.jisclegal.ac.uk/aboutus.aspx#Disclaimer
A website dedicated to providing legal information.
I think a lot of these "not legal advice" disclaimers are overkill. You can't get proper "legal advice" from a blog. You get legal advice when you hire a lawyer. A blog might be full of accurate and useful legal information, but that doesn't make it "legal advice" in the sense that you can sue the blogger for legal malpractice.
Maybe I'm wrong here, but has anyone actually seen such a lawsuit?
Depends if you consider the blog and subsequent invitation on HN to be an offer to treat - acceptance being the implementation of said advice.
Without a legal disclaimer then the blog could theoretically be held accountable as they positioned themselves as the authority and invited action.
> If you want example of a sterling legal disclaimer then check out...
Is this legal advice? Can I sue you?
Are you a moron? Who would you sue - the username?
Lawyers have historically had little trouble suing John Does and subpoenaing ISPs/websites to get access to IPs and the users underneath them.
All that said, the point apparently wooshed a few miles above your head.
Nope. The point was a snark which does more to embarrass the poster than myself.
I posted a link to someone else's legal disclaimer as an example of how legal advisory services protect themselves. They used it to try and paraphrase my own comment back to me, unsuccessfully.
You could subpoena HN but it would display a startling lack of understanding about ISPs, legal process, HN and the Internet.
One, a subpoena has to be delivered in person...
It is always wise to tread legal waters carefully. Always keep in mind that a lawyer with his briefcase can steal more than a hundred men with guns.
I would be wary of taking advice from a CEO who cannot fire his cofounder. Technically that means he is not the CEO and there is no one explicitly in charge of the company.
In early stage startups, the title of CEO has more to do with who's in charge of vision and runway and less about org structure. Decisions are usually made based on an equity stake.
That is most definitely not the case for most start up companies I work with. Not have a CEO day one who runs the company is usually a sign that you have not started a company before.
Most C-Level employment decisions are made by the board on behalf of the shareholders. Many new companies do not have a BOD yet, so the shareholders will have 'direct' representation. Extremely early stage companies will have all of their shares split between the two founders.
The mere presence of a "CEO" title doesn't grant one founder domain over the other(s), and it shouldn't, but this helps explain the frequency of founder drama.
Is there anything like this for UK startups?
Cofounder of Staply here.
It is also applicable for the UK. When it will be different, we will provide clear examples for the US and the UK.
Are you the copywriter? The grammar and spelling is shocking.
Yes. I tried to do my best, but I'm not a native speaker... Sorry if that annoyed you.
I noticed that also. It is not about being annoying, it's that language matters when it comes to legal issues. I'm monolingual and not throwing any stones, just staying that in the legal arena this is not an unreasonable criticism.
I know of several UK court cases that went on for decades over tiny difference of opinion or wordings on a pension scheme documents.
In one the use of a single word instead of another was the key point.
It hasn't annoyed me. Clarity of language is crucial in discussing the law.
How can you offer legal advice without even writing correct English?