Having founded and run several startups, I understand the challenge of focusing on the mundane details related to corporate formation and governance. But as an attorney, I can’t understate the importance of insuring that these foundational documents are tailored to the organization’s needs, for it is likely to be sooner than later that the situation arises where you will need to reference and rely on one or more of these agreements. To focus on the most pertinent, below you will find a “cheat sheet” summarizing those documents that should be in place before you form your organization, or soon thereafter.
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.
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.
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).
NDAs protect your startup by safeguarding your ideas and your intellectual property. Get one drafted that works for your needs, and then use it.