Startup Law

Entity type: Many investors are used to seeing a vanilla Delaware C-corp (with one or two classes of shares to begin). Sometimes founders choose other structures or states, but that is normally for a specific reason or at the request of a lead investor. 

Formation services: There are various service providers that can help set up a C-corp. in Delaware quickly, either through a lawyer or if you want to do it yourself, like: Clerky, Stripe Atlas, and AngelList. Our firm recently switched to Harvard Business Services for local filings and we have been impressed by their customer service. (Minor scheduling note: lookout for the processing times, since “same day” does not necessarily really mean “the day you order.”) 

Other docs: Orrick has a good startup library that investors are familiar with, for example simple employment offer letters and confidentiality agreements. They also have templates for founders to grant stock to themselves, which is important for establishing a clear cap table and avoiding unintended tax consequences. CooleyGo also has an extensive startup document generator and Goodwin has a workbench too.

SAFEs: An increasingly common way to fund early-stage startups is through what is known as a Simple Agreement for Future Equity (hence: SAFE). SAFEs have two main components that are negotiated: (1) the cap (which is typically the post-money market cap of the company); and (2) the discount rate. SAFEs convert at a future date when you raise money on a priced round. There are three primary forms, which the incubator YC maintains here, and which entail minimal negotiation. (One math note: it’s important to understand the dilution implications of issuing a number of SAFE notes; there are some calculators that can help too.)

Priced round: For a Seed or Series A round that has specific valuation attached (a priced round), first the investor(s) and the company typically negotiate and sign a term sheet. Next, they implement those terms, often based upon model financing documents developed by the National Venture Capital Association. These are long and detailed and have some important provisions that are subject to negotiation and customization. Lawyers for each party tend to go back and forth a few times ironing out the details and explaining the implications to their clients. In terms of recent market trends and deal terms, Wilson Sonsini has a useful quarterly report. Schedule-wise, it is important to note that the process from signed term sheet to money in your account can take approximately 1-3 months.

Cap table: For priced rounds in particular, investors will want to see a clear and clean cap table. Sometimes, an Excel spreadsheet will suffice. Increasingly, startups turn to platforms like Carta, LTSE, or Global Shares to maintain this information for them and make sure the numbers line up (and later: issue stock options to employees).

Equity incentives: A tricky area for startups is issuing stock options to employees and consultants. This is too complicated to boil down here, but two big things to watch out for involve taxes: early 83(b) elections and periodic 409(a) valuations. (Call a lawyer.) There are a variety of service providers that can conduct a 409a valuation, including Carta and Eton Venture Services.

Annual filings: Delaware, for example, requires an annual report and also has a franchise tax (these are important to stay on top of). For early-stage companies with little (or no revenue), it’s easy to accidentally be assessed improperly (and face a staggering tax bill). This article on an alternative method shows how companies can end up with a $400 tax instead (sigh of relief). Depending on the location of offices and sales, it may also be necessary to register a corporation in multiple other states (typically known as a foreign qualification or foreign business authority).

Taxes: Even companies that have no revenue or no profit have to file federal and state taxes. It may be worth finding a good accountant (or at least accounting system) or tax specialist early, since a number of incentives and credits may be available to startups, depending on where they are based or what they do.

Industry-specific regulations: A variety of federal and state regulations can apply to startups. Some are fairly common and common-sense (e.g., don’t fudge the truth to customers), but even simple principles can turn into detailed guidance. Some laws and licenses are industry-specific. Others are still emerging, for example new forms of legislation in the states that deal with data privacy and social media. A lawyer can help navigate that, particularly for companies doing business in multiple states.

Terms of Service: Almost every website has a Terms of Service (even if it’s basically just a website). This is an important way of setting out responsibilities and disclaimers to customers and establishing rules for their behavior and the companies alike. There are templates here, but it can make sense to customize with a lawyer.

Privacy policy: Ditto, we all see privacy policies and notices everywhere nowadays. They can be quite consequential (and in some instances can be required, e.g., California, European Union), particularly if a startup is handling large amounts of consumer data. Personally identifiable or sensitive data (let alone health-related data) may require special arrangements and disclosures.

Customer contracts: Startups, particularly those that serve enterprise customers, may need bespoke agreements for major customers or may want to set up templates that they can easily modify for future projects. There are some common principles and pitfalls. Moreover, there are some important technical clauses where conferring with an attorney early is useful (e.g., indemnity, governing law / jurisdiction / arbitration clause). We have our own library with scores of models and try to avoid starting from scratch.

This post provides a set of links and common resources; it is neither offering nor serving as a substitute for professional legal advice. If you want guidance on any aspect of startup law, please seek advice from legal counsel.

Special thanks to Christopher Driscoll (@Hatch Legal) Sam Garcia (@Amplo VC) for their thoughtful input and expert additions to this document.