Corporate Documents Every Startup Needs
As an entrepreneur, there will likely come a point when you want to take that next step for your startup and incorporate. At the same time, running your business demands most of your attention. While it can be easy to sweep the paperwork under the rug, laying a strong legal foundation is essential for scaling up and seeing the benefits of your hard work.
“Thiel’s law: a startup messed up at its foundation cannot be fixed.”Peter Thiel
That’s why we invited Geoff Pedlow, Associate at Fasken, and Michael Walters, Partner at Borden Ladner Gervais LLP, to answer the important question, “What corporate documents do I need for my business?”
Pre-incorporation: So, You’ve decided to Incorporate – Now What?
When you incorporate your startup, it becomes its own legal entity – this means that as a founder, you benefit from limited liability, increased access to funding, and a more flexible control structure. Before officially incorporating, Geoff recommends that you create a share capital structure that determines the rights that will be given to shareholders. This information will go in the articles, corporate documents that govern the relationship between shareholders and the company.
“Our recommendation to almost all of the clients we work with is to keep [share capital] as simple as possible. There’s rarely a good reason to spend the time and energy around complex share structures like voting/non-voting, preferred/common, etc.” – Geoff Pedlow
While it can be tempting to save money and do it yourself, hiring a lawyer who specializes in startups and high-growth is the best option for a smooth incorporation. Online services, and even general corporate lawyers, can miss considerations specific to startups and make mistakes that will lead to expensive clean-up costs down the road. Think of it like investing in a relationship – these lawyers have extensive resources for startups and can be a valuable strategic advisor for you in the future.
Post-incorporation: Now that your business is incorporated, what are the immediate next steps?
Since your business is now its own legal entity, you have to formally allocate ownership to the founder group. Geoff shared a few guidelines to help you with that initial share issue:
|· Issue far too few shares – when you raise capital, price per share will become ridiculously high||· Issue 5 or 10 million shares to the founder group to allow for flexibility later|
|· Issue different share classes to each founder||· Keep the share classes simple|
|· Issue shares freely to all your friends, family, co-workers and acquaintances||· Be mindful of who you issue to and track all equity entitlements in a capitalization table|
Before moving forward, sign these two corporate documents: a (reverse) vesting agreement and a shareholders agreement. Vesting agreements allow issued equity to be clawed back if a founder leaves the business without earning into their shares while the shareholders agreement regulates the relationship among shareholders. Investors will expect to see these documents when you start raising capital; as Geoff explained, “get this in place early to avoid those uncomfortable conversations!”
Growth: Now that you have a strong corporate foundation in place, how can you bring on external help to grow your business?
First, you have to decide if you want to hire an employee or an independent contractor and draft an appropriate employment agreement based on that relationship. An agreement is needed to establish:
- Certainty of terms
- Limitation of termination obligations
- Protection of confidential information and IP
- Other protections and rights for the company (ex. non-competition provisions)
Many startups look for creative ways to attract employees that do not require a cash outlay upfront. For an alternative compensation method, Michael recommends offering stock options that give your employee the contractual right to buy shares for a specified amount over an extended period of time.
“[Stock options are] a nice way of incentivizing your employees and giving them a benefit with limited costs to the company… it gives employees an equity interest in the company without actually allocating the shares.”Michael Walters
Two documents are needed for this: a stock option plan that lays out the terms of your options and a 1-2 page stock option certificate for the employee. The certificate will specify the strike price, length of the term, and number of shares that can be purchased.
Congratulations on signing your foundational corporate documents! If you’re interested in learning more about the documents we discussed above, check out the full webinar.
While this is a huge step, it’s the first of many in the process of starting up and growing your business. At SFU VentureLabs, a science and technology growth accelerator in Vancouver, we’re committed to supporting you at each of these steps by offering valuable resources for startups in BC and beyond. Feel free to check out our programs and past webinars, or join us here on November 4th where we’ll be continuing the conversation about corporate documents with a focus on raising capital – this includes terms sheets, due diligence checklists, and advice about approaching investors!
SFU VentureLabs does not provide legal advice. Please ensure you talk to a lawyer on these issues.