Speaking to a group of entrepreneurs about start-ups and growing a new business, Reid Hoffman, co-founder of LinkedIn, told his audience the following: “You jump off a cliff, and you assemble an airplane on the way down.” While there’s certainly a good bit of truth to that with any new business venture, there are a few key issues that must be considered at the outset to ensure that the company has a solid foundation for growth. So, I’d advise that at least a few critical pieces of the airplane be assembled, or at least planned for, BEFORE you jump off the cliff:
- Structure. It’s critically important to structure your company the right way from the beginning. Few entrepreneurs enjoy this part of the process and rarely feel much excitement about the dollars that they spend on it. As painful as it may be, getting the structure right, and making sure that the chosen structure aligns with the goals and long-term growth plan of your company, will prevent much difficulty and cost down the road – it’s almost always much more expensive to correct these problems than to get them right at the start. Although numerous online resources are now available for new start-ups, you should seriously consider spending the money to consult with an experienced corporate lawyer who can help you nail down your formation and governing documents. Trust me – you’ll be glad that you did.
- Ownership and Equity. We often see a very common scenario – in the rush and excitement surrounding the launch of a new venture, the founders and other key stakeholders gloss over ownership issues and how the members of the ownership group will deal with changes in ownership down the road. You should carefully consider the transfer and restrictive provisions that are included in your stockholders agreement or LLC agreement. Disagreements are almost sure to occur if these matters aren’t properly documented and agreed upon from the outset. Additionally, if you want to put a stock option plan or other equity incentive plan in place, remember that those plans involve a number of complex securities, tax and employment law issues – this is another area in which looking to an online download legal document service is fraught with danger, as is trying to “recycle” an old plan from a prior venture or employer. Finally, remember that vesting schedules for equity awards need to be carefully considered to avoid unintended consequences when departures occur.
- IP. Many start-ups involve the further development of technology or other information that one or more of the founders has historically developed. All relevant IP typically must be assigned to the new company, and certain restrictions, like non-disclosure agreements, are placed on the individuals involved to make sure that these assets are protected. Consultation with an experienced IP lawyer should be a priority.
- HR. A string of bad hires can derail a new company’s progress and growth plans. You should make sure that the HR function is covered, and that you have appropriate employment policies in place. This includes having, as appropriate, the right employment agreements, non-disclosure agreements, non-compete agreements, etc.
- Raising Capital. This is a pretty big topic, with specifics beyond the scope of this article. But a few points: your company will raise capital more efficiently if you only involve “accredited investors,” which term has a specific definition in the securities laws; you’ll have to comply with significantly more disclosure, financial statement and other technical requirements if you offer or sell to investors who don’t qualify as “accredited”; and you should consider raising seed capital with convertible promissory notes, which will defer the valuation challenges of early-stage ventures.
- Corporate Housekeeping. In order to reduce liability exposure and position the company for future success, it’s really important to, at a minimum, hold regular board and shareholder meetings, adhering to notice provisions for those meetings as required by law, and making sure that complete and accurate minutes are kept at each meeting; and safely and accurately maintain all corporate records, including formation and governing documents, ownership and equity documents, employment documents and other commercial agreements.
Good luck with your airplane!