Yesterday, we held a Zoom event on our weekly show. The topic for the Zoom session was AMA—Startups Legal. We are extremely thankful that over 45 startup founders and attendees participated in the show, sharing their thoughts and questions with us.
The Zoom session was hosted by Anshuman Sinha, co-founder of Startup Steroid and we also had a legal expert, Hayk Mamajanyan. He is a legal professional and partner at Rimon PC.
Hayk emphasized the common problems that startup founders and entrepreneurs face while launching their startups in the US. He discussed a few of these problems in detail, including liability, asset protection, management structure, taxation, capital, exit strategy, and compliance.
In short, if you’re desirous of launching a business in the US, you should make sure that you have all the necessary documents and agreements in place to legally comply with all the above points as highlighted by Hayk on the show.
Hayk also advised all startups should have the following initial governance documents at the time of commencing their business:
Corporate consents and regulations
Corporate consents and regulations refer to the internal rules and requirements that a corporation must adhere to in order to conduct its business activities and govern its operations properly. These consents and regulations are established by the corporation’s board of directors, shareholders, and relevant governing bodies, and they aim to ensure compliance with applicable laws, protect the interests of stakeholders, and maintain the overall integrity and transparency of the corporation’s actions. Corporate consents might include major decisions like mergers, acquisitions, stock issuances, or changes in the corporation’s structure, and they often require formal approval or consent from specified parties within the organization.
Bylaws
Bylaws are the rules and regulations that outline the internal governance framework of a corporation. They are typically adopted by the board of directors and serve as a guide for the corporation’s day-to-day operations and decision-making processes. Bylaws cover a wide range of topics, such as the composition and responsibilities of the board of directors, procedures for shareholder meetings, voting rights, quorum requirements, appointment of officers, and other essential aspects of the corporation’s management.
Stock Purchase Agreement (Vesting)
A Stock Purchase Agreement (SPA) is a legally binding contract between a buyer (individual or entity) and a seller (usually a shareholder or founder) for the purchase of shares of a corporation. This agreement outlines the terms and conditions of the stock purchase, including the number of shares to be purchased, the purchase price, representations and warranties of both parties, and any specific conditions that must be met before the transaction can be completed.
Inventions Assignment Agreement
An Inventions Assignment Agreement is a legal contract used by employers to clarify the ownership of intellectual property (IP) and inventions created by their employees during the course of their employment. In the context of corporate law, this agreement is crucial to protect the corporation’s rights to any inventions, innovations, or creative works developed by its employees in the scope of their job duties or using the company’s resources. The agreement typically requires employees to assign all rights and ownership of such inventions to the corporation, ensuring that the company has full control over the IP and can use it for its business purposes.
Equity Incentive Plan
An Equity Incentive Plan (EIP) is a compensation scheme established by a corporation to incentivize and reward its employees, directors, consultants, or other service providers by granting them equity-based awards. These awards can take various forms, such as stock options, restricted stock units (RSUs), or performance-based stock grants. By offering equity-based incentives, corporations can attract and retain talented individuals, foster a sense of ownership among employees, and create a direct link between their efforts and the company’s overall performance.
Watch the Full Zoom Session Here
Anu Kumar from New Jersey raised an interesting point on how a company that formed as an S-corp some 15-16 years back can be converted into a C-corp in order to take advantage of QSBS tax exemption benefit?
Hayk listened to his question and suggested him to talk to an attorney and CPA to get the QSBS tax exemption benefits. There are ways to convert S-Corp to C-corp, but it will be specific to the business needs of that person. It’s a very sensitive situation from a legal angle and needs to be dealt with carefully.
Our mentor, Anshuman Sinha also chimed in, adding, “You should start a brand new C-corp, and then, buy the necessary IPs, patents, and other rights from your previous company (S-corp). It is the cleanest way to do it. However, setting up a new entity might cost you a bit more, but it’s worth than losing out on the 10-million dollar federal tax exemption under QSBS.”
Then, Amit Pandey raised a very valid question. “I’ve a startup. It’s a Delaware C-corp. I created its wholly-owned subsidiary in India. And I am also in discussing with Indian investors to raise funds like debt capital for which I want to issue warrants or something like that. But I don’t want to issue any equity in India. However, I’ve been advised not to take funds directly from Indian investors here in my C-corp. Are there any ways in which I can accommodate Indian investors and raise funds from them?”
Hayk suggested Amit create an SPV in Delaware where Indian investors can put their funds into that SPV. And then, that SPV will put the accumulated capital into the C-corp.
Our mentor, Anshuman Sinha, also advised Amit to get in touch with an attorney and a CFA who has rich experience in dealing with cross-border dealings and transactions.
Likewise, several other attendees also raised their questions and got appropriate responses to them from our expert team.
Key Takeaways
Choose the right legal structure: Options like LLC, C-Corp, and S-Corp come with different tax and liability implications. Consult an attorney to find the perfect fit for your business goals.
IP and Patent: File patents, trademarks, and copyrights to safeguard your innovations and brand identity. Don’t let competitors steal your unique ideas and innovative products or solutions!
Put Your Contracts In Writing: Whether with employees, suppliers, or partners, put everything in writing. Clear agreements prevent misunderstandings and protect your interests.
Legal Compliance: Keep an eye on federal, state, and local regulations. From permits to licenses, ensure your startup is complying with the relevant rules and regulations.
Privacy Policy: If your startup collects user data, create a clear privacy policy and follow data security best practices to stay safe from legal troubles in the future.
Employment Laws: Understand worker classification, overtime rules, and anti-discrimination laws that are being followed in the US. Being a fair employer attracts top talent and avoids potential legal headaches.
Partnership Agreements: If you are setting up your business entity with co-founders, have a partnership agreement in place. Define ownership, roles, and dispute resolution.
Fundraising: Whether it’s angel investors or crowdfunding, be aware of SEC regulations and exemptions. Keep investors informed and comply with fundraising rules.
Taxation: Understanding tax deductions, credits, and obligations can save your startup money and avoid tax pitfalls.
Exit strategy: Whether it’s acquisition, IPO, or passing the business to the next generation, an exit strategy ensures your startup is future-proof. Create an exit strategy in writing and make sure it complies with the country’s law.
In Conclusion
Startup legal essentials are the cornerstone of a successful and sustainable entrepreneurial journey. Entrepreneurs who prioritize legal compliance from the outset create a strong foundation for their ventures, fostering growth, and attracting investors. By understanding the nuances of legal structures, protecting intellectual property, and establishing clear agreements, startups can navigate the complexities of the business landscape with confidence. Moreover, seeking legal counsel and adhering to regulations ensure entrepreneurs can focus on realizing their vision, revolutionizing industries, and leaving a lasting impact on the world of business.
