Within a week, the group created the ConstitutionDAO, organized its followers on Discord (a messaging and community platform), and raised roughly $47 million in virtual currency.⁴ Armed with their new war chest, the group bid on, but ultimately failed to win, the Sotheby’s auction, losing out to a hedge fund billionaire who purchased the copy of the Constitution for $43.2 million (the Constitution DAO had withheld some funds to cover costs associated with winning the auction).⁵

Following their loss, the creators of the group were faced with what to do with the virtual currency sitting in the DAO’s treasury. Many of the community members sought refunds, only to learn that the transaction costs (also known as gas fees) would eat up much of their original contribution.⁶ Ultimately, the ConstitutionDAO’s founders decided to shut it down.⁷ The token issued in connection with the project, originally intended to be used to allow holders to vote on what the DAO would do in the future, lives on, with some holders still hoping to profit.⁸

What if the ConstitutionDAO had succeeded? Who would have “owned” the copy of the Constitution the group would have purchased? In a later interview one of the founders of ConstitutionDAO, Jonah Erlich, disclosed that the group had partnered with a traditional nonprofit organization that would have had legal custody of the Constitution.⁹ The fact that this new type of organization would be reliant on a traditional nonprofit provides excellent insight into the emerging world of DAOs. It also gives us an entry point to examine this new structure.

WHAT ARE DAOS?

In a traditional corporation or limited liability company, the organization is formed by filing paperwork with a government office, typically a state’s Department of State. By creating a legal entity, the people behind the organization are protected from liability. When someone sues a corporation over a contract dispute or other liability, the directors, officers, employees, members, and volunteers are not liable individually. Rather, it’s the corporation that must answer for its liabilities.

In a DAO, however, there is no formal legal entity. Built using the same blockchain technologies that underly the virtual currency ecosystem, DAOs are organizations that are never incorporated in any state (with limited exceptions). The founders create the DAO, and it simply exists.

While DAOs actual structures vary, most DAOs issue a token that gives members of the DAO voting rights. Once tokens are issued, in order to make decisions, all token holders are allowed to vote. The idea, touted by DAO supporters, is that this new structure democratizes organizational decision-making, placing it in the hands of the members. An oversimplified comparison would be a for-profit company that has no paid executives or board of directors, making every decision by allowing all shareholders to vote.

Although the ConstitutionDAO is a well-known example, DAOs are proliferating in the nonprofit community. Here are a few interesting examples: DiatomDAO is raising support to protect the oceans;¹⁰ KlimaDAO hopes to speed up solutions for climate change by increasing the price of carbon assets;¹¹ Bloomeria is using NFTs to increase biodiversity; ¹² and The Regen Network is issuing a token as part of a group of entities to realign the agricultural economy with ecological health.¹³

While each of the foregoing organizations uses the language of the DAO and decentralization, they also demonstrate how the DAO community encompasses many different structures. For instance, the Regen Network is comprised of a traditional C-Corporation, a traditional 501(c)(3) public charity, and a decentralized DAO program.¹⁴ The DiatomDAO is purely a decentralized entity, “owned and directed” by its token holders (see more on this below). The ConstitutionDAO, while operated as a decentralized DAO, would have relied on a traditional 501(c)(3) public charity (one named EnDAOment¹⁵) had it won the Sotheby’s auction and needed a legal entity with which to hold the copy of the Constitution. As you can see, while many groups use the mantle of “DAO”, the term encompasses many different structures.

WHAT ARE THE BENEFITS OF DAOS?

Now that we’ve discussed what DAOs are, and seen some examples, let’s step back to consider what DAO proponents like about the structure. In theory, a pure DAO offers each supporter the opportunity to participate in the group’s decision-making. If a member of a charitable DAO wants to make a grant, they would propose it to the rest of the DAO community. The members then hold a vote. Using this structure, a DAO represents a more direct form of organizational decision-making and, for donors, more direct-action philanthropy.

Further, by avoiding any legal structure, some DAO proponents believe this new structure will give DAOs greater flexibility. Without a state’s laws dictating how decisions have to be made or how boards have to be structured, a DAO might be nimbler. Some libertarians believe that DAOs, who have no real jurisdictional nexus to any state, might even be able to avoid generally applicable laws.¹⁶

WHAT ARE THE DRAWBACKS OF DAOS?

While there is a lot to be excited about by DAOs, they use an organizational structure in its infancy, with many more questions than answers. One critique is that the voting structure adopted by most DAOs (1 token = 1 vote) replicates existing problems with shareholder structures, namely, that the larger shareholders control organizational decision-making, alienating smaller shareholders. If one person holds 60% of the DAO’s tokens and the DAO implements a 50+1% vote threshold decision-making could be even more centralized than it would be in a traditional organization with a board and executives who can counterbalance a large shareholder’s interests. The DAO community has proposed some possible solutions to this problem, such as limiting votes to one per token holder, or creating non-transferable tokens to limit token holder hoarding. Each of these solutions have drawbacks, but they could drive decision-making closer to the idealized notion of the DAO.

Another issue is the legal uncertainty of DAOs. Assume that the libertarian notion that DAOs are legally unaccountable as organizations, since they are not organized in any state nor do they have any other jurisdictional nexus with any local, state, or federal government. That might put the DAO beyond the reach of regulators and law enforcement, but it would not exempt the individuals participating in or working for the DAO, all of whom are real people subject to normal laws. Actually, the idea of a group of people running an unincorporated organization isn’t new. In New York, for instance, such an entity would be deemed an “unincorporated association.” Under longstanding common law, an unincorporated association is not legally separate from the members who comprise it.¹⁷ That means that members of a DAO could be taking on direct legal risk from their participation in the DAO. If the DAO were to breach a contract, discriminate against an employee, or cause other real-world harm, the DAO’s members might be jointly and severally liable.

It’s also an open question whether regulators will share the libertarian view that DAOs are not subject to local, state, or federal laws. It wouldn’t be surprising to see the Securities and Exchange Commission (SEC) bring an enforcement action against a DAO, given that it has already notified the Decentralized Finance (DeFi) community that it considers many DeFI products analogous to products regulated by the Commission.¹⁸ The SEC has already brought an enforcement action against a Wyoming organization operating under the guise of a DAO, albeit only after the entity sought SEC approval to register two tokens as securities.¹⁹

Finally, DAOs in the philanthropic sector face the additional hurdle of providing tax-deductibility to donors. In general, a contribution to a non-charitable intermediary doesn’t allow a donor to take a tax-deduction. The answer to that question isn’t clear²⁰ as it depends on how the entity is treated for tax-purposes, whether its distributions would otherwise qualify for a tax-deductions, and whether it is considered an agent for the donors or beneficiary charities. A person hoping for a tax-deduction should contact a tax professional to examine the particular DAO’s structure and the taxpayer’s circumstances. To date, I’m unaware of any DAO specifically advertising the deductibility of contributions to its treasury, nor having considered tax-deductibility as part of their DAO structure (except, of course, for DAOs like Endaoment and Regen Network that operate using a traditional 501(c)(3) corporate structure).

WHAT’S NEXT FOR DAOS?

Despite the novelty of and the uncertainty surrounding DAOs, their popularity is undeniable. This was exemplified by the incredible enthusiasm around ConstitutionDAO. Taking advantage of the late 2021 surge in the value of many cryptocurrencies, DAOs provide an opportunity for the crypto community to put its assets to work in novel ways, including philanthropy. While they are evolving, DAOs will likely persevere, barring regulator intervention to shut them down.  Donors and charities looking to participate in the DAO community should do so carefully, and with the benefits of advisors familiar with the DeFi and DAO space.

1 https://www.sothebys.com/en/digital-catalogues/the-constitution-of-the-united-states

2 Id.

3 https://www.theverge.com/22820563/constitution-meme-47-million-crypto-crowdfunding-blockchain-ethereum-constitution

4 https://www.constitutiondao.com/

5 https://www.vice.com/en/article/qjb8xv/hedge-fund-ceo-who-bailed-out-gamestop-short-seller-bought-the-constitution

6 https://www.theverge.com/2021/11/24/22800995/constitutiondao-refund-progress-steep-gas-fees-cryptocurrency

7 https://www.theverge.com/2021/11/23/22799192/constitutiondao-shutting-down-lost-auction-refunds

8 The latest price quote for the PEOPLE token can be found at  https://coinmarketcap.com/currencies/constitutiondao/.

9 https://www.theverge.com/22820563/constitution-meme-47-million-crypto-crowdfunding-blockchain-ethereum-constitution.

10 https://diatom.fund/

11 https://www.klimadao.finance/

12 https://bloomeria.org/

13 https://www.regen.network/

14 https://www.regen.network/faq/organization

15 https://endaoment.org/

16 For instance, in his conversation on the Deep Background podcast, Erik Voorhees argued that a DAO could avoid the difficulties of employment law because no states employment laws would apply. https://www.pushkin.fm/episode/whats-the-deal-with-decentralized-autonomous-organizations/

17 See, generally, New York Elec. C. Assn. v. Local Union No. 3, (NY Sup. Ct. 1941), available at https://casetext.com/case/new-york-elec-c-assn-v-local-union-no-3

18 https://www.sec.gov/news/statement/crenshaw-defi-20211109

19 https://www.sec.gov/news/press-release/2021-231; https://www.coindesk.com/policy/2021/11/11/sec-stops-wyoming-based-dao-from-registering-2-digital-tokens/.

20 For an excellent discussion, see Prof. Samuel Brunson’s blog post https://lawprofessors.typepad.com/nonprofit/2021/11/charitable-daos-revisited.html.

The post DAOs and the Nonprofit Sector – How Can they Work Together? appeared first on Perlman & Perlman.

While New York’s new law doesn’t affect nonprofits that are controlled by other nonprofits[i], the reasoning for New York’s change is instructive. It grew out of regulators’ and lawmakers’ concerns that a sole member structure is susceptible to abuse – a nonprofit controlled by one or two people is more likely to engage in self-dealing or private benefit transactions, both of which are prohibited under state and federal law.

New York’s restrictions on sole member structures comes at a time when charities regularly use corporate sole member structures as part of a variety of major transactions and strategies. Typically, the arrangement is used by a large, well-funded nonprofit that is either (i) forming a new entity in which to house a new activity, or (ii) taking control of an existing nonprofit.

A nonprofit sole member structure puts directors of the subsidiary in a challenging position because their fiduciary duties to the nonprofit can sometimes put them at odds with the interests and direction of the sole member. Below I walk through:  (i) what is a sole member structure; (ii) how sole member nonprofits are useful; (iii) when implementing a sole member structure, what are some challenges; and (iv) suggestions to help implement a sole member structure.

What is a sole member nonprofit?

Modern nonprofits are typically run by a board of directors that is self-sustaining – that means the board elects new directors to fill empty board seats. Historically, however, a nonprofit was a membership corporation and the “members” were responsible for electing the board. Who the “members” differed from organization to organization, but the members met at least annually and took an active role in electing the board of the organization. A good modern analogue is a labor union – the membership is active in electing the leadership, so even though the Board is still responsible for overseeing the union’s activities, the members can keep the Board in check. A membership structure parallels the shareholder structure of a for-profit corporations, where shareholders elect directors to the Board but are removed from the corporation’s day-to-day operations.

Many states’ laws still allow one person, or one corporation, to be the “sole member” of a nonprofit, retaining the right to elect and remove directors. There is no federal prohibition against that structure, provided that the controlled nonprofit and its Board observe all of the other rules applicable to 501(c)(3) organizations. The sole member structure, therefore, has been popular as a way to give individuals or large nonprofits the ability to keep control over a subsidiary nonprofit.

How are sole member nonprofits useful?

A sole member structure is really appealing when an individual or corporation creates a new nonprofit and wants to retain long term control over the nonprofit’s mission and activities. By making themselves the sole member, the founder can give themselves the power to appoint or remove board members. This allows the sole member to have a veto power over board decisions that the sole member disagrees with – they can always remove (or threaten to remove) board members who vote against the sole member’s interests.

Most founders use this veto power for good. The founder, who is passionate about the organization and its mission, is especially sensitive to mission creep. If they sense that board members are not pulling their weight or are moving the nonprofit in the wrong direction, the sole member can appoint new board members and remove the bad ones to get the nonprofit back on track.

Another scenario where we often see a sole member structure is a small nonprofit that is approaching an inflection point and is in need of assistance.  Enter a large financially-healthy nonprofit, able to take over back office and administrative functions for the smaller nonprofit. Both organizations recognize that the smaller nonprofit has developed goodwill, so they don’t want to just absorb the smaller nonprofit’s programs into the larger nonprofit – there’s a benefit to keeping the smaller organization as a separate legal entity, with its “brand” and support intact. The larger nonprofit’s board may also want to protect the larger nonprofit from liability by maintaining the separate legal entity.

Transaction costs are also much smaller in a change of control transaction involving a sole member compared to a traditional merger or acquisition – a sole member transition often requires little more than a minor revision to the bylaws to provide for a sole member. A formal merger with, or transfer of assets to, a larger nonprofit often requires regulatory approval and generally entails more legal fees and staff time to implement.

A third situation where we often see a sole member structure used is where a large nonprofit identifies a new market – either a new location where its programs can succeed, or a new type of program the nonprofit would like to implement. If the new market creates new types of legal or financial exposure, the large nonprofit might want to insulate itself by housing the new venture in a separate legal entity.[ii] The large nonprofit, to encourage the small nonprofit to be self-sufficient, could set the new nonprofit up as a separate 501(c)(3) public charit with its own board and staff. While there may be some start-up support, the goal is often to have the large nonprofit’s input be limited to high-level oversight and the appointment of the board members each year. The large nonprofit can ensure there’s no mission creep through its control of the board of the new nonprofit, but it owes no legal duty to the smaller nonprofit.

When implementing a sole member structure, avoid key pitfalls

Sole member structures can be very useful, especially when trying to quickly take over a nonprofit or when structuring a new organization to ensure it can be controlled going forward. It can also be an intermediary step to a full merger transaction.  But let’s step back for a minute to consider some of the practical and legal issues that can arise with sole member structures.

Donor Confusion

Donors want to know where their money and support is going. They want to feel like they understand the values of the organization they support and who is responsible for making decisions. That’s why nearly every nonprofit website includes an “About Us”, “Board”, or “Team” page that lets donors know who is in charge. By introducing a sole member structure, you risk confusing donors if the relationship isn’t clearly defined. Donors, especially your biggest donors, do not want to call up a board member to discuss a major decision, only to learn there’s another entity the donor has never heard of that controls the board.

Board Member Dilemmas

Nonprofit board members are often more familiar with the for-profit world than they are the nonprofit sector. In a for-profit, board members owe their fiduciary duties to the shareholders and the organization. That’s not the way nonprofit law works for 501(c)(3) organizations. In a 501(c)(3), even one with members, the board members’ fiduciary duties are owed to the organization and, tangentially, the public. But we have heard from board members at nonprofits controlled by a sole member who are confused or frustrated by the ways in which they believe decisions that would be in the best interest of their nonprofit are at odds with the sole member’s interests. For instance, the sole member may believe that entering into a management agreement with the controlled nonprofit would be in everyone’s best interests, but board members at the controlled nonprofit think the management fees the sole member wants to charge are too high.

Placed in that position, the controlled nonprofit’s board members can feel helpless – stand up for what they believe are the best interests of the controlled nonprofit and they risk being removed from the board, but yielding to the sole member could be a breach of their fiduciary duty to their organization. While it’s a difficult choice, legally the board members owe their loyalty first and foremost to the controlled nonprofit on whose board they sit. You need to make sure that board members are fully briefed on their obligations, both to protect the organization and uphold their legal duties as board members.

Staff Confusion & Fear

When staff members see a new organization come in as sole member, it can create anxiety about how operations will change. Nonprofits should clearly message what functions will and will not change. Similarly, governance, HR, and oversight functions should be reviewed to see how to efficiently operate with closely related organizations. In some scenarios, leaving in largely separate systems might make sense, whereas in others the new sole member might displace a number of the controlled nonprofit’s overhead functions.

Related Party Transactions

Governance best practices, along with many state laws, require independent board members to carefully review related party transactions. Wherever the sole member enters into a major transaction with the controlled nonprofit, best practice would require that only independent directors should be involved in reviewing and approving those transactions. The board of the controlled nonprofit is under a legal obligation to make sure that the transaction is fair to, and in the best interests of, that organization. In many cases, however, there is reluctance among board members to treat transactions with the sole member as creating a conflict of interest. Often we hear that the interests of both organizations are aligned, and the controlled nonprofit is wholly dependent on the sole member, so board members think it does not make sense to treat a transaction with the sole member as a conflict of interest. This conflates practical considerations with legal ones – just because a controlled nonprofit needs the sole member doesn’t mean it should accept any transaction with the sole member without proper consideration of alternatives.

Strategies to Implement a Sole Member Structure     

Now that we’ve reviewed some common pitfalls, let’s talk about some relatively simple structural changes that can mitigate the possible downsides of a sole member structure. Remember, there are many reasons why a sole member structure can be beneficial. As with any governance decision, a sole member structure should be well-considered and tailored to the needs of each organization at which its implemented.

Staggered Boards and Limited Removal Rights

Nonprofits should balance the control of the board by the sole member with directors’ fiduciary obligations. One way to do that is to stagger board terms (for instance, three year terms with 1/3 of the board up each year) and place some limitation on the sole member’s right to remove directors. The sole member might still have the ability to remove directors, but that right can be limited to “for cause” removals or require ratification by a majority of the board. By insulating directors slightly from the sole member, directors will have the space to speak critically when they feel the organization is being led down the wrong path.

Independent Directors

Another possible solution is for certain board seats to be reserved for independent board members, individuals who are NOT appointed by the sole member. This will likely be limited to a small minority of the Board, but a small number of directors can play a big role in providing assurance to the whole board that transactions, including ones with the sole member, are in the best interests of the controlled nonprofit. Independent directors can also be useful barometers of the board’s performance and governance.

Clear Messaging

Internally and externally, the sole member and the controlled nonprofit should make sure it is clear how the entities are related and how they work together. Donors deserve to know if money given to one organization will end up supporting another organization (albeit indirectly). Regulators want to know that transactions are properly and fairly approved. Staff need to know to whom they are answering and who is setting policy internally.

In conclusion

Corporate sole membership structures can be useful to all everyone involved. They can help grow and manage complex organizations. Sole member structures can also mitigate legal exposure to their parent nonprofits. As with anything, board members should be prudent when contemplating a sole membership structure. Potential pitfalls can be mitigated by embedding certain structural safeguards to protect the controlled nonprofit’s independence, which should ultimately provide reassurance to the boards of BOTH organizations that a healthy corporate structure is in place.

[i] Where a corporate entity is the sole member and the corporate entity itself is owned or controlled by at least three people.

[ii] There are many other options (such as an LLC) that could accomplish this goal, but we won’t get into those in this article.

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Analogizing this to startup companies can be illuminating. Having founded and run several startups, as well as having advised founders as either an attorney or board member, it has become clear to me that while a variety of factors are needed for an enterprise to be successful, there are several key factors that virtually every startup need to exhibit and embrace in order to be successful.

Accepted wisdom is that most startups will fail. So what makes the outliers successful? In my experience, there are five key factors, and I share them here.

1. Don’t start with a product, start with an open mind.
Thanks to lesson from the book the “Lean Startup,” the days of “if we build it, they will come” has thankfully passed. Most companies are founded on a “big idea,” whose founders are, understandably, passionate and committed to pursuing their dream. So what goes wrong? One survey of failed startups determined that 42% of them identified the “lack of a market need for their product” as the single biggest reason.

The brilliance of the concept that an entrepreneur should develop a “minimal viable product” – build something small, fast and cheap, and then test it – is its simplicity. Remaining nimble, flexible and open-minded cannot be overstated. (Equally important, of course, is to make sure the appropriate inventions assignment agreements and contractor agreements are drafted to ensure that your company properly owns everything your employees and contractors create).

2. To build a viable business, you need to build a successful team.
Psychological research is rich in the documentation and study of dysfunctional groups (think of Tolstoy’s “unhappy families”.) In the world of startups, many failures are due to discord among the founders. Although most founders are people with high hopes and good intent, when you bring into the mix the differences of personality, background and skills, combined with variation in expectations, conflict is to be anticipated. In most cases where the founders fail to resolve or work around these differences, the demise of the company is not far behind.

Thus, instilling teamwork skills and practice into your company culture is the key to its success. From a legal framework, a “founders” or shareholders agreement that delineates the rights and remedies of shareholders should disagreements or conflicts arise is also essential.

3. When adversity strikes, resilience is essential.
Things will go wrong, terribly wrong with your startup. This is not due to bad luck, rather it is part and parcel of launching a new enterprise. Startups operate in a rarefied environment in which market conditions, competition and circumstances (both macro and micro) are constantly in flux. Startup teams must possess the ability to change products, adjust to the changing landscape of competition, shift industries, rebrand the business, or even tear down a business and start all over again.
Resilience in the face of the headwinds of adversity is essential. There are many studies examining what makes one individual more resilient than another. One commonly identified trait is referred to as the “internal locus of control”. Simply put, resilient individuals believe that “they,” and not their circumstances, are the driver of success. So when things go wrong, roll with the “punches” and remain focused on success.

4. Keep your friends close, and your advisors closer.
I have helped many startups screen and engage advisors. Advisors and board members can make a significant contribution to a startups success. By providing an imprimatur of credibility, imparting insightful wisdom, making key introductions, or raising seed capital, an advisor can give the startup the foundation it needs to keep on track.

Unfortunately, the reality is that most advisors will not workout. He or she may overpromise, lose interest, or become consumed by competing commitments. You can insure that your advisor agreements provide adequate equity and/or incentives to secure the advisor’s engagement, but also have reasonable “cliffs” and milestones to warrant that compensation is tied to value received.

5. Show me the money!
All too often I have seen the never-ending pursuit of founders for money become the crucible that becomes too heavy to bear. Thus some very good ideas and promising companies fail to get very far. Since raising money is so challenging, my advice is to ask for more money than you think you will need, take money when you can get it, and in most cases use a convertible note to quickly (and cheaply, relative to other approaches) bring in the money so that you can focus on growing your company.

Once you have the necessary funds to get things underway, make sure you are disciplined in your spending. That means keeping overhead in line with your cash, recruiting key first employees with a modest (but competitive) salary and a generous equity grant. (And if you don’t have an equity compensation plan/strategy in place for key employees, stop reading this and go get one!)

Increase your odds of success.
Launching a startup is a momentous endeavor, and one that promises both excitement and heartbreak. While there is simply no “formula” that guarantees success, keeping in mind some of the above lessons may increase your odds.

The post From Startup to Growth Company – Five Factors For Success appeared first on Perlman & Perlman.

Articles of Incorporation
The Articles of the Incorporation is the charter document filed with the Secretary of State to establish the corporation. It sets the name and address of the corporation, the authorized number of shares, the terms of each class and/or series of capital stock, and either opt-in or out-out of various other matters governing the corporation and as described in the applicable state corporation statute. It is the foundation you will build on.

Bylaws
The Bylaws outline the rules and procedures that govern the internal management of your startup, such as how directors are elected, how meetings of directors and shareholders are conducted, and what officers are to be appointed and a description of their duties.

Shareholders Agreement
The Shareholders Agreement governs the relationship between the shareholders of the company and covers issues such as a shareholder’s right to transfer his or her shares and rights of first refusal.  The Agreement is significant for a variety of reasons, including when a co-founder departs the business or for taking on new shareholders (e.g., outsiders investing in your company).

Stock Purchase Agreement
A stock purchase agreement is made between each shareholder and the corporation; it regulates the transfer and sale of the corporation’s stock to the shareholder. It determines how much stock will be purchased, the price of the stock, and how the payment will be made (i.e. cash, IP, or another form or combination of consideration).  Stock purchase agreements come in two forms – non-restricted and restricted. Non-restricted stock purchases are the norm: you pay for your shares and you own them.  Restricted stock purchase agreements are used when a co-founder’s shares will vest over time, which, for a variety of reasons, is often a good idea.

Technology/Intellectual Property (IP) Assignment Agreement
Often, the value of a startup’s IP portfolio is what investors and venture capital firms evaluate when considering buying in.  Therefore, an IP assignment agreement is a key legal document for technology startups.  Please, don’t skip this one!  Startup founders should have complete ownership of all IP assets in writing. There are two typical types of IP agreements to consider:

• Technology Assignment Agreements assign startups any intellectual property created before forming the company. The technology assignment agreement is usually referred to in the stock purchase agreement as an IP transfer to the corporation and can be consideration (full or partial) for the stock received/purchased by the founder(s)/shareholder(s).
• Invention Assignment Agreements assign the new company IP ownership of any relevant work product created by employees after the company’s formation. A confidentiality and invention assignment agreement is typically signed by founder(s) and employees.

You may choose to incentivize employees with stock options. Two documents must generally be drafted in connection with the issuance of stock options: (i) a Stock Option Plan, which is the governing document containing the terms and conditions of the options to be granted; and (ii) a Stock Option Agreement to be executed by the Company and each optionee, and which specifies the individual options granted, the vesting schedule and other employee-specific information (and generally includes a form of Exercise Agreement).

And Don’t Forget These!  Additional Key Documents
83(b) Election Letter to IRS
If any of the founders’ stock is issued subject to repurchase, then such founder should choose to file an 83(b) election with the IRS. For an 83(b) election to be effective, it must be filed with the IRS within 30 days of the purchase date. The tax ramifications for failing to file an 83(b) election can be severe, so if you are a founder, and about to or recently formed a company, pay attention!

Employee Contracts and Offer Letters
It’s helpful for a variety of reasons to have offer letters and employment contracts. These legal documents are key to ensure employees understand what’s expected of them, and provide you remedies should people don’t workout.  They should clearly state the terms of employment (e.g., compensation, role responsibilities), required commitments, share vesting, company policies (e.g., vacation days).

Non-Disclosure Agreements
NDAs protect your startup by safeguarding your ideas and your intellectual property.  Get one drafted that works for your needs, and then use it.

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