June 17, 2011
In the fun and exciting category, we have product development, marketing, sales. And over here in the boring but necessary category, we have legal paperwork. As we learned from our panel of experts at yesterday’s conference, making sure your paperwork is in order will save a lot of headaches down the road.
The panel was moderated by our very own Tech Cocktail contributing writer, Glen Hellman, who is an angel investor, serial entrepreneur, and turn-around specialist for venture capitalists at Driven Forward.
Three corporate attorneys who specialize in startups and emerging growth companies joined Glen onstage:
Steve Kaplan is an Emerging Companies Attorney at Pillsbury Law; he is dedicated to providing practical, business focused legal counsel to entrepreneurial companies as they build, grow and run successful business.
Geoff Willard is an Attorney at Virtual Law Partners; he represents emerging growth companies, their investors, and managers in a wide-range of corporate and commercial transactional matters from mergers and acquisitions to equity and debt financings (including venture capital, strategic, seed, and angel financings).
Here’s what they had to say….
Where should a startup incorporate?
Sue: If you’re going to stay small, just incorporate locally rather than in Delaware. And if you don’t want to pursue outside money, become an LLC.
Steve: There are actually good reasons to incorporate in Delaware, because they have a great bureaucracy (yes, that does sound like an oxymoron) so things happen very quickly – you can get paperwork done in a half a day; in DC, it could take weeks. Also, taxes are lower in Virginia than in Maryland.
Should you pursue a patent? How do you protect your company?
Sue: Patents don’t necessarily help your company because it takes so long to get one and technology changes very quickly. Licensing is more important.
Geoff: Big companies will actually get patents to use as a defense against startups.
Steve: Make sure your developers sign something that ensures that ownership of what they are building belongs to the company – have tight NDAs. If you have a partnership agreement, make sure the partner has a license to use it and make sure that it is clear that any data collected belongs to your company.
Sue: Don’t hand out equity loosely – you are giving away your company and you can’t get it back. There is a way to do it right, but many ways to do it wrong.
Steve: With open-source code, you could be forced to disclose your code. Talk to your developers and make sure they tell you if they’re using open-source.
Glen ended the conversation by asking what is the one mistake all startups need to avoid?
Steve: Understand the documents you are signing.
Sue: Avoid the naked handshake. A handshake via email or in person isn’t good enough – any agreement must be documented via legally binding contracts.
Geoff: Starting a new startup shouldn’t take that long. Make sure you hire an attorney who is experienced working with emerging startups – don’t hire a friend or family member who is an attorney in some other area of law.
During the Q&A session, they addressed vesting:
Vesting is a great idea if it is based on time rather than milestones/deliverables. Companies change direction all the time, plus it is also more complicated to set up a vesting schedule that is tied to milestones.
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