Essential legal tips for startups | Hacker News Reader

Essential legal tips for startups

grellas.com

57 pointscsallen13 comments

If you don't know Grellas you should. He's one of the most giving and knowledgeable contributors HN has on a subject where a lot of junk normally gets tossed around

http://news.ycombinator.com/user?id=grellas

The writer has an entire series of legal advice for startups, found here: http://www.grellas.com/faq_business_startup.html

I've only gotten through 5 or 6 of these so far, but I've found his explanation of restricted stock and tax law 83(b) particularly simple and useful.

This all seems like great advice, but the hurdle is that wherever the advice comes to do something that involves a lawyer, my brain parses it as "spend thousands of dollars on x, spend thousands of dollars on y". That's the minimum ante for involving a lawyer in even a basic task.

Physicians are to nurse practitioners as lawyers are to ______. If we could put something in that blank, dealing with legal matters would get a lot easier (and cheaper). That would involve changing a lot of laws, though, so the prospects aren't terribly rosy at this point.

The guy doing all of this writing refers to himself as a "Founder's Firm", and it seems his goal is to fit into that blank: http://www.grellas.com/faq_business_startup_003.html

I'm looking for something like that in the Boston area. I have yet to speak with any attorneys who can help me form a corporation and take moderate angel investment without charging $5000 up front and $thousands more later...

That blank would be a 'paralegal' wouldn't it? Filing incorporation paperwork and the like should be a simple paperwork/paralegal/stock work job, not something to spend many billable hours on.

Hi, grellas here - thanks to all for the kind words and glad the articles are useful.

On the specific point of legal costs, it is important to use one's legal budget wisely because good startup lawyering is not cheap. A few pointers: (1) even if you bypass the lawyers, it usually pays to do an initial meeting with a lawyer just to get a strategic overview of your legal options and likely costs (this is usually pretty inexpensive in itself); (2) when you do use lawyers, be proactive in managing their time by getting estimates for key tasks or even fixed-fee pricing (not all projects lend themselves to this but many do, especially in the contract and corporate area); (3) never pay for a big name as an end in itself, as the vital ingredient for a good relationship with any business lawyer is that of trust and confidence (I have relationships going back 20+ years with many of my founders and entrepreneurs); and (4) don't lose heart on legal pricing, for, even though the laws are unfairly stacked in this area such as to unduly restrict cheap legal services, the modern information age has enabled many such services to be gotten at prices that are much less out of line than they used to be (e.g., typical "complex" setup with a founding team, restricted stock, IP assignments, etc. for, say, $2K; friendly angel funding for less than $5K, etc. - none of this is cheap but it is a lot less than it was a decade ago and is normally quite achievable for a startup with a founding team and clearly beats getting whip-sawed with a botched setup or funding that can so easily happen if one tries to wing it in this area).

That said about lawyer pricing, I am also a proponent of founders doing what they can without lawyers whenever reasonably possible, and that is why I did this series - to help people understand how things generally work so they can make their own best decisions on such issues.

I hope to do more posts as time permits. Happy reading!

All good points, and you're a good example of a lawyer who gets it. As you say, prices have dropped even as laws continue to restrict the development of cheaper alternatives. I wonder how close we are to the lowest prices achievable without having to pass new laws.

(None of this, of course, is to take away from the good roles that lawyers play, especially in non-trivial and non-routine legal matters.)

"If you wait too long to set your structure up, you run into tax traps."

We had someone who was effectively a co-founder, but for one reason or another he never got stock. After our first round of investment we realized that we had made a mistake and we founders said "no problem, we'll give him some of ours".

However, in the UK this would have meant substantial capital gains liabilities for us and income tax liabilities for him - so we didn't do it. Eventually once we had a proper share options scheme he got an equivalent chunk out of that.

i found this surprisingly difficult to read because of the typography (admittedly, i am sensitive to this.) probably don't want full justification without hyphenation. or san-serif fonts for a large amount of text.

I've started using Readability to help with pages like that - I find it works really well:

http://lab.arc90.com/experiments/readability/

Yeah, I do too. I gave the feedback because the author is reading the thread.

I'm troubled by what the author says about filing in Delaware. The impression I got from reading around (particular in VC blogs) is that the Delaware C Corp is the preferred entity for investment. Just as importantly, it was suggested that if you file as something else, then becoming a Delaware C Corp can be expensive/complicated.

What are the upsides/downsides to filing as a corporation in California then? Are there alternatives such that it's easy to become a Delaware C Corp if the founders so chose? What's wrong with being a California C Corp?

The key is to avoid making a screwed-up corporation with its records in disarray. In particular, keep a detailed ledger of of all shareholders and what they own (!) and write bylaws that provide for a merger/stock-swap/sell-out without needing the signature of every shareholder. IP assignments and records are also important. The nightmare scenario to avoid is a missing shareholder or inventor derailing the IPO/sell-out.

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