I recently had an opportunity to attend a breakfast meeting sponsored by NTEC (North Texas Enterprise Center for Medical Technology). The breakfast was an opportunity for start-ups and entrepreneurs to learn about the legal considerations when forming a new company, including the preferred types of corporations, handling intellectual property and being prepared for your exit strategy. I'd like to share with you just a few thoughts which came out of the presentation that you might find interesting. All of the main presenters were attorneys and even though NTEC's focus is on Medical start-ups, the information was general and could apply to any start-up business. (Disclaimer: these are just some notes of mine from the breakfast, NOT legal advice. Depending on what you are doing your needs may be very different).

1) Before quitting your job review all relevant agreements with your current employer. Contrary to popular belief non-compete agreements ARE enforceable.

2) The type of corporation (LLC, LP, S-Corp, C-Corp, ...) of course depends on your tax profile, risk profile and whether or not you will be seeking investment capital or an IPO. VC's will prefer C-Corp's but you will have to deal with the double taxation. Angel investors will prefer pass-through entities (S-Corp, LLP,...). Note, it is not difficult in most case to convert another type of corporation to a C-Corp when necessary. I personally use S-Corp and LP right now. I'll deal with C-Corp when the time comes.

3) Unless you are doing business almost exclusively in or have a major client in a specific state, it is preferred to incorporate as a Delaware corporation. This particular consideration is particularly applicable to those who will seek funding, and IPO or to eventually be acquired through a ,mergers and acquisitions (M&A) transaction.

4) Stay away from boilerplate Internet incorporation and forms. Get it done right or you'll end up redoing it.

5) Don't use stock as currency to pay everyone you do biz with. Keep your shareholders as few as possible. It causes too many problems down the road.

6) If you have partners be very clear (document) who owns what and what happens if someone leaves (create capitalization table).

7) On the formation and exit of your company, ALWAYS use qualified advisers. Namely attorney's, accountants and if appropriate an investment banker. They really will make your life easier and keep you from making mistakes that could be catastrophic down the line. They can also smooth out a lot of processes for you such as complex things like setting up your company for an IPO or protecting your IP. Don't think you can do it all.

8) If you sell your company expect a portion of the purchase price to go to escrow (10% is standard). This is standard practice to cover additional expenses/legal matters that can come after the transaction. This protects you and the buyer.

Those are just a few things to ponder but should get you thinking. My advice (and I drink this Kool Aid too) is to hire professional, seasoned attorneys. Don't make the mistake of thinking you can't afford it. The truth is in this complex business environment and litigious world, you can't afford not to.

If you are in Texas and need referrals on Corporate, Transaction or Patent attorneys feel free to contact me. I'm happy to make personal recommendations.

Labels: law, start up