Full disclosure: I’m really starting to dig this whole public note taking thing. My notes are yours. Share the knowledge and let’s talk about the things that are being discussed so we can take all of this information and put it into action!
Some of this will be gibberish (have you ever looked at your own notes?) But some of it you might find helpful. Dig in.
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Quick lunch at Code Academy…
Legal topics to keep in mind, with Brian Axelrad.
baxelrad@hmblaw.com, 312-606-3242
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Go read
Brad Feld: How to be smarter than your lawyer and venture capitalist
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You’re looking for a business partner in a lawyer. If someone is going to bill your startup by the quarter hour, that’s not a lawyer that is really interested in helping your startup business. The upside for lawyers who deal with startups is the future of the business, not the immediate billing.
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3 things to keep in mind with legal issues…
1) Ownership: If it has to do with who owns what, contact a lawyer.
>Equity:
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>Classes
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>Majority:
When starting a company, your obviously going to have a majority. But understand that you will be diluted over time if your company is successful and needs to grow.
>Employees:
Have hard conversations with people you bring on at the beginning. You don’t have to lawyer up, but you have to cover your bases. It’s sometimes best to get everyone in the room together and just buy people out when the company is worth nothing.
>Vesting:
Making everyone vest protects them and protects you.
–>Cliffs: You don’t get anything until you clear a set date or goal. So if you have a four-year vest you might not actually have any interest in the company until one year has passed from the start date.
2010-2012 example…
You get an investment. The company is not profitable and was formed in 2010. You are two years into the company. If you haven’t done any vesting up to the point of the investment, the investor can then anchor the discussion with their money to their own ideal vesting schedule. Protect yourself by getting credit for the time spent before investment comes into the picture.
>Valuation:
As investments come in, your company begins to get a set value. This creates the floor for your company. If your floor is too low, it impedes your ability to raise money in the future.
If you are taking in a ton of money, expect to have a lower percentage of the company.
>Getting fired:
What happens when you get terminated from the startup.
If you get terminated for cause, you could lose your equity. Cause is major stuff (felonies, etc).
Without case is ‘you suck’. In those cases, you’ll exit at a lower rate but you’ll have something.
>IP Ownership:
You have to assign the IP and assets into the LLC. IP is very broadly defined.
There is a statute in Illinois that states you can have ownership over the IP of an idea provided that it is outside of the industry of your current employer, regardless of any agreements that may have been signed between yourself and your day job.
To work on any startup and hold another job, you must have the awkward conversation and ask for a release of claim for the IP created for that startup. No one wants to have that conversation, but its the only way to protect yourself.
All LLCs should have a representation and warranty clause signed by all members of the LLC assigned IP created to the LLC and guaranteeing that no one can claim that IP as their own.
2) Risk: Anything involving risk, potentially contact a lawyer. The scale of risk will impact exactly when someone should get a legal advisor involved.
You need an LLC to protect your personal assets.
>Liability:
—> Leasemaid.com… started the business but is not incorporated yet.
… Sole-proprietor, totally exposed. If he brings in parters, it becomes a general partnership. If something goes wrong, you are personally exposed.
—> Furnishly.com… started a business and has formed an LLC.
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Generation Real Estate Inc.: Formed a C-Corp.
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>Pass-through:
—> You don’t get double-taxed with an LLC.
LLC vs. Corporations
To switch between a corportation to an LLC would require the corp to be dissolved to form the LLC.
Most of the time, when an investor asks that you reform your LLC to a corporation its generally grounded in a tax concern.
It’s easier to go from LLC to corporation than the other way.
You form an LLC first because;
if you are generating a profit in the short-term, the LLC has simple pass-thru.
LLC’s are very flexible. Has a default statute for operating agreement.
Delaware vs. Illinois filing
Delaware you can throw out anything in the statute. Illinois has protections built in for minority owners that can not be thrown out—which is why investors like Delaware, for flexibility.
File in Delaware. You do not have to register your business in Illinois. But you should. Eventually.
However, while there are some costs reasons around filing here or there—cost should not drive your decision.
100% of the tax profits and the tax losses can be applied to anyone in the LLC. IRS will not care so long as the bill is paid. This includes passing the tax losses through to an investor. This could make your company more attractive to angel investors.
3) Compliance: If you think you are on the edge of a legal boundry: contact a lawyer.
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Now hearing from Maria from Built In Chicago. (builtinchicago.com)
Founded by Matt Moog. Roots from discussions with folks at Groupon and Vibes media.
Built overnight. A much prettier relaunch coming in February. New World Ventures, Lightbank, others provided initial funding.
7K registered users. 35K monthly uniques.
70% of visits from Illinois. Most the rest is coming from the coasts.
Built in Chicago meetup coming soon.
Working closely with 1871. (Matt Moog deeply involved in that as well.)
1871 slated to open in April.
Office hours will be moving from Excelerate to 1871 in April. (sounds like she is saying Exceler-it. hmm.)
She’s been asked about her favorite company of 2012… talking about bootstrapped legal teams like TotalAttorneys and shifting gears to talk BrightTag, Groovebug? etc.
Be a good PR person for your product and idea and yourself. You are your best advocate. Be humble but be vocal. People will not find you if you are hiding in the corner.
Promoting via Built in Chicago touted by the guys from EveningFlow…