Many thanks to Maret Delf, Summer Associate currently attending Stanford Law School, for her assistance with this article.
So, you’re about to raise money for the first time. Good luck! Before you start approaching VC firms for pitch opportunities, though, be aware that investors typically expect a certain amount of organization and structure from your company despite its early stage. Below is a brief overview of 8 legal items you should take care of (for your sake) before engaging with investors.
- Incorporate as a Delaware C corporation. Investors will expect your company to be a “C” corporation formed in Delaware (a process that requires a suite of documents such as those included in the CooleyGO Document Generator). If your company is not currently a Delaware C corporation, investors will likely expect you to convert from your existing entity before proceeding with raising money. See our articles Corporation Basics and Where Should You Incorporate for more information.
- State Business Registration. Your company must be qualified to do business in any applicable state – and beware, because state requirements vary. If you’re a Delaware C corporation doing business in California, for example, you’ll need to register as a foreign corporation with the California Secretary of State.
- IP/Invention Assignments. This is a crucial item and one that’s too often overlooked. Make sure to establish a chain of title for all of your company’s intellectual property, including requiring all employees and consultants (and anyone else) touching your code or other IP to sign some sort of invention assignment agreement (such as the Confidential Information and Inventions Assignment Agreement available on Cooley GO Docs). Investors are particularly concerned about this issue because they don’t want a former employee coming out of the woodwork and claiming ownership once your company is successful. You want in place clean agreements that transfer an employee’s or consultant’s work product to the company, barring them from claiming ownership over the work done while they were engaged by your company.
- Provisional Patent Filings (if applicable). If you think you have something that is potentially worth patenting, it’s worth looking into filing a provisional patent before letting the world know the ins and outs of your product. Check out our Provisional Patent Applications FAQ and What You Need to Know About Patents article for more information.
- Branding and Trademark Considerations. You should begin to think about branding and trademark considerations before you seek financing, if only to enhance your credibility with investors and increase your likelihood of being funded. Although most early stage companies don’t have valuable brands yet, think about filing a trademark so you don’t run into any conflicts down the road. Registering a domain name is not enough. Before you begin to invest in your brand, you will also want to do a comprehensive trademark search, not only for other companies using the same mark, but also for companies with similar products using similar marks. Our article Neglecting Trademark Protection May Be Costly addresses some of these issues.
- Establish Equity Structure. This is a very broad category. Highlights include:
- Equity Agreements. The founders (and any other stockholders) should sign equity agreements that include vesting components. The typical vesting schedule is over four years (sometimes with a one-year cliff),, although other arrangements are fairly common as well.
- Equity Incentive Plan. You should put an Equity Incentive Plan (sometimes referred to as a Stock Option Plan) in place so that you can grant options or restricted stock to employees and consultants.
- File Your Section 83(b) Elections. If anyone is purchasing stock subject to vesting (or exercising an unvested option), the purchase should be immediately followed by an 83(b) election (which must be filed within 30 days of the stock purchase). Missing this deadline is something you cannot fix later. If you don’t file your 83(b) election on time, it could have disastrous tax consequence for you in the future. Find more information in our article What is a Section 83(b) Election and Why Should You File One?
- Employment Agreement and Offer Letters. If you’ve hired anyone, make sure to have all the appropriate employment paperwork and practices in place, including employment agreements, offer letters, and confidentiality and invention assignment agreements (see #3 above). You should also make sure to register with applicable state employment divisions. Be careful about contractors, interns (see Engaging Unpaid Interns: What You Need to Know), and compensation. You can find more tips about onboarding early stage employees here.
Most importantly, keep good records of everything. It will make the financing process go more smoothly, and will save you significant money and frustration. This includes keeping copies of your company charter and bylaws, minutes of board meetings, any board and/or stockholder consents, major customer list, budgets, business plan, employment agreements and offer letters, and any other documents that have been important in your course of business. You should make sure all of the applicable documents are appropriately signed and organized somewhere you have easy access to them (i.e. a secure cloud data site – many law firms provide secure cloud document hosting at no extra charge). For more tips about organization and its importance to your financing, read our article Why You Cant Afford To Be Disorganized.
If you have all of these bases covered, you’re well on your way to a successful financing. Happy pitching!