Why do we need bylaws? 

Bylaws are important for many reasons, legal and practical. Each state has specific corporate laws that regulate the actions taken by nonprofit boards. Bylaws distill those laws into a series of clear procedures for the board to follow, providing an operational framework and helping to ensure that the actions taken are legally compliant. 

Who should draft our bylaws?

Ideally, drafting bylaws is a collaborative process between the board and an attorney with nonprofit expertise. Your organization’s governance practices will be dictated by the laws of the state in which your organization is incorporated, as well as federal tax laws applicable to exempt 501(c)(3) organizations. 

Nonprofit corporate laws vary from state to state, some with more specific requirements than others. There are areas of the law that provide the board with significant flexibility in deciding how it chooses to operate, so certain sections of the bylaws can be customized to reflect the board’s preferences on governance procedures. An experienced attorney will know the corporate laws of the state in which your nonprofit is formed and be able to advise your board on its legal requirements, optional provisions, and best practices. 

Copying another nonprofit’s bylaws or downloading a sample from the internet may seem like a good option, but it can be costly in the long run.  If your bylaws are not compliant with the laws of the state in which your nonprofit is formed or are not tailored to your board’s needs and preferences, you may face trouble down the road.  In a worst-case scenario, the actions of a board can be challenged by regulators or in court if the board has not been following its bylaws or its bylaws are not legally compliant. 

What should our bylaws cover?

Typical provisions in nonprofit bylaws include –

• Size of the board – minimum (and maximum, if any) number of directors 
• Procedures for the election, resignation, and removal of directors.
• Directors’ term lengths and term limits (if any). 
• Notice requirements for regular meetings and special meetings of the board. 
• Quorum requirements (the minimum number of directors that must be present at a meeting in order to take action). 
• Approval requirements for routine board actions and special approval requirements for major transactions. 
• Procedures by which the board can take action without meeting.
• Procedures for forming and authorizing committees. 
• Procedures for the election, resignation, and removal of officers.
• Officer titles and responsibilities. 
• Indemnification of directors and officers. 
• Procedures for amending the bylaws.
   

Can we change our bylaws? 

Yes! Bylaws can, and often should, be amended to better match the organization’s practices and goals. The bylaws that worked for your nonprofit in its start-up phase frequently need to change as your organization grows and develops.  Laws also change from time to time, so we recommend having an experienced attorney review your bylaws with your board every few years. 

There’s a lot more we can say about governance and bylaws, but we’ll save that for future articles.

The post Bylaws – Legal, Practical and Foundational 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.

The post Startup Alert : Key Agreements Every Startup Should Have appeared first on Perlman & Perlman.