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>: <\/strong>Last Monday<\/a>, I looked at some of the issues surrounding this question, including the choice of entity, place of formation, equity issuance, vesting restrictions and prior employment.\u00a0 Below are five more issues that should be on your radar. With issues this critical, though, it\u2019s worth reiterating that it would be prudent for you to retain a good, reasonably-priced attorney to assist you and watch your back.<\/p>\n 1.\u00a0 Management Issues<\/span><\/em><\/strong>.\u00a0 You and your co-founders need to sit down and agree on how the company will be managed (e.g., who will be on the Board of Directors and what position each founder will hold).\u00a0 Whatever you decide should be reflected in a written agreement, referred to as a stockholders\u2019 agreement or voting agreement. This should also address other significant issues, including: (i) rights of first refusal with respect to the sale of any shares by a founder; (ii) whether any founders\/stockholders will have veto rights with respect to certain extraordinary company actions (such as the sale of the company or borrowing in excess of a certain amount); and (iii) whether founders\/stockholders will have so-called \u201cdrag-along\u201d and\/or \u201ctag-along\u201d rights.<\/p>\n 2.\u00a0 IP Issues<\/span><\/em><\/strong>.\u00a0 For many start-ups (particularly technology companies), intellectual property (IP) is the most valuable asset and, accordingly, certain steps must be taken to ensure that the company owns the IP.\u00a0 First, if any technology\/IP were developed prior the company\u2019s formation, you must do two things: (i) as noted last week, confirm that none of the founders\u2019 prior employers have rights to the technology\/IP because of prior agreements or applicable law (i.e., because a founder was \u201cmoonlighting\u201d while still employed); and (ii) make sure ownership to the technology\/IP is transferred from the applicable founder(s) to the company in writing.\u00a0 Once the company has been formed, protect the ownership of the technology\/IP by requiring all of the company\u2019s employees and independent contractors to sign confidentiality and IP\/invention assignment agreements (see #4 below).<\/p>\n 3.\u00a0 Securities Laws<\/span><\/em><\/strong>.\u00a0 As I have previously discussed<\/a>, a company may not offer or sell its securities unless (i) the securities have been registered with the SEC and registered\/qualified with applicable State securities commissions; or (ii) there is an exemption from registration.\u00a0 The most common exemption used by start-up companies is the so-called \u201cprivate placement\u201d exemption.\u00a0 As the term implies, a private placement is a private offering to a small number of purchasers \u2013 like a few founders.\u00a0 The SEC and each of the State securities commissions have their own set of rules regarding private placements, and it is imperative that you follow them to the letter.\u00a0 Non-compliance could result in serious adverse consequences, including a right of rescission for the securityholders (i.e., the right to get their money back, plus interest), injunctive relief, fines and penalties, and possible criminal prosecution.<\/p>\n 4.\u00a0 Employment Issues<\/span><\/em><\/strong>.\u00a0 If any employees are hired by the company, insist that they sign two documents: \u00a0an offer letter agreement and, as noted above, a confidentiality and IP\/invention assignment agreement.\u00a0 The offer letter agreement will set forth the employee\u2019s rights and obligations, including position, compensation, benefits and, most importantly, whether the relationship is \u201cat will.\u201d\u00a0 The confidentiality and IP\/invention assignment agreement is designed to prevent disclosure of the company\u2019s trade secrets and other confidential information – and to ensure that any IP developed by the employee is legally owned by the company.<\/p>\n Non-competition and non-solicitation provisions may also be included; however, such provisions are generally unenforceable in California other than in the context of the sale of a business (though California courts will generally enforce provisions that prohibit employees from soliciting the company\u2019s employees provided they are reasonable in scope and duration).<\/p>\n 5.\u00a0 Stock Option Plan<\/span><\/em><\/strong>.\u00a0 In order to attract and retain key employees (and consultants) and to conserve cash, it would make good business sense for your company to establish a stock option plan or other form of equity compensation plan. \u00a0As I mentioned last week, the goal is to issue any equity (including options) as soon as possible when the value of the company is as low as possible; and, as noted above, because options are \u201csecurities\u201d their issuance must comply with applicable federal and state securities laws.\u00a0 The SEC and most State securities commissions (including California) have created an exemption from registration for any offer or sale of securities pursuant to certain plans and contracts relating to compensation.<\/p>\n Disclaimer: This \u201cAsk the Attorney\u201d post discusses general legal issues, but it does not constitute legal advice in any respect.\u00a0 No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction.\u00a0 The author and his firm expressly disclaim all liability in respect of any actions taken or not taken based on any contents of this post.<\/em><\/em><\/p>\n Photo by<\/em> <\/em>vaXzine<\/em><\/a> <\/em>via Flickr<\/em><\/p>\n![\"asktheattorney\"](\"http:\/\/venturebeat.com\/wp-content\/uploads\/2010\/01\/asktheattorney.jpg\")
<\/a><\/p>\n