Question<\/span><\/strong>:\u00a0 Two former classmates and I are launching a new venture.\u00a0 Unfortunately, we don\u2019t have enough money to hire a lawyer.\u00a0 I found a lot of articles on the web, but I\u2019m still not sure what kind of entity we should form and where.\u00a0 I also was wondering if there are any other legal issues we should be worrying about. Answer<\/span>: <\/strong>Thanks for your questions.\u00a0 Before I answer them, however, let me just say that I think it would be prudent for you to retain a good, reasonably-priced attorney to assist you and watch your back.\u00a0 If you don\u2019t have the money, some lawyers will defer their fees and\/or take equity (if you can get them excited about your venture).<\/p>\n There are, in fact, many issues that should be on your radar \u2013 more than we have time to get into in a single column. In the interest of time and space, I\u2019ll examine five this week and five next Monday.<\/p>\n 1.\u00a0 Choice of Entity<\/span><\/em><\/strong>.\u00a0 What\u2019s most important is you form an entity that will protect against personal liability.\u00a0 You have three good choices: a C corporation, an S corporation or a limited liability company.\u00a0 If you\u2019re going to seek funding, you should form a C corporation because that\u2019s the structure that investors will usually require.\u00a0 If you\u2019re not going to seek funding (or funding will not be imminent), you may want to form an S corporation or a limited liability company to obtain \u201cpass-through\u201d tax treatment.\u00a0 The bottom line is that every situation is different, and that\u2019s why it makes sense to sit down with a good lawyer.<\/p>\n 2.\u00a0 Place of Formation<\/span><\/em><\/strong>.\u00a0 If you\u2019re going to seek funding, you should form your entity in Delaware regardless of whether the operations are located in California (or any other State).\u00a0 Why?\u00a0 Because investors will usually require it due to Delaware\u2019s well-developed case law, its management protections and flexibility, and its ease of corporate filings and related state-law administrative issues.\u00a0 If the entity has not been formed in Delaware, investors will generally require this issue to be cleaned-up as a condition to closing.\u00a0 Thus, initially forming in Delaware will demonstrate a certain level of sophistication and credibility.<\/p>\n 3.\u00a0 Equity Issues<\/span><\/em><\/strong>.\u00a0 Form the venture and issue equity to the founders as soon as possible — i.e., before the company has any significant value.\u00a0 Clearly, as the company meets milestones (e.g., the creation of a prototype, the signing-up of customers, etc.), its value \u2013 and that of the stock – will increase. This could trigger significant taxable income to founders being issued equity for services or for a nominal purchase price.\u00a0 The same principle applies with respect to the issuance of options to employees: The goal is to do it as soon as possible – when the value of the company is as low as possible.<\/p>\n 4.\u00a0 Vesting Restrictions<\/span><\/em><\/strong>.\u00a0 There are two good reasons to impose reasonable vesting restrictions<\/a> (e.g., 25 percent\/year for four years) on equity issued to founders.\u00a0 First, it makes good business sense because the equity will presumably be issued not only for the founders\u2019 services or property relating to the conception of the venture, but also for their continuing commitment and efforts.\u00a0 Second, if you will be seeking funding, investors will usually require a vesting schedule.<\/p>\n 5.\u00a0 Issues re: Prior Employment<\/span><\/em><\/strong>.\u00a0 Before you get too deep, each founder needs to review the agreements and documents with his or her prior employer. These could be offer letters\/employment agreements, non-disclosure and inventions assignment agreements, stock options agreements, employee handbooks or any number of things. The point is: You need to determine if there are any provisions that may prohibit or create problems for the new venture.<\/p>\n Things to look for include (i) confidentiality provisions, (ii) non-compete provisions (which are generally unenforceable in California), (iii) provisions regarding the non-solicitation of customers, vendors or employees and (iv) provisions regarding the assignment of inventions.\u00a0 If the new venture is a technology company, pay particular attention to the creation of the intellectual property and applicable law.<\/p>\n Photo by <\/em>vaXzine<\/em><\/a> via Flickr<\/em><\/p>\n![\"asktheattorney\"](\"http:\/\/venturebeat.com\/wp-content\/uploads\/2010\/01\/asktheattorney.jpg\")
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