Introduction

Let’s face it, founding a startup is a totally irrational decision. Most people opt to start a career, climb the corporate ladder, then stay as high as they can be eking out a comfortable and rather stable existence. When you choose the startup path, you’re making a commitment to low pay, all-nighters, and doing whatever it takes to achieve success against all odds. As a founder, you’re bombarded by an ever-growing list of to-dos while trying to accomplish an insane number of tasks, all simultaneously. From building a product or prototype to snagging those first few customers to hustling to cobble together financing, who has time for the legal aspects, right?

Just the founders who want to be successful or cross the finish line, that’s who.

The legal aspects impact all your decisions, and if you get those decisions wrong, it creates a headache over lost revenue or time, or worse, a heartbreak over lost venture capital financings or acquisitions. Some founders believe there is no such thing as a shortcut; they must sacrifice and endure the pain of making the wrong legal decisions. That’s how we learn, isn’t it, through trial and error?

What if I told you there’s another way to learn? That you do not have to make potential million-dollar mistakes in order to understand the legal ins and outs of starting a business? Not only does this path exist, but I’m also going to show you how to avoid the common legal pitfalls that ensnare many founders.

As a startup lawyer, I work as a hands-on advisor to my clients, helping them understand and navigate all phases of the growth process from incorporation to seed financing to venture capital financing to a liquidity event such as an acquisition. In the last decade, I’ve helped my clients, which include high-growth companies and venture capitalists, close more than $500 million in transactions from seed rounds to Series A, B, C, and D rounds. I’ve represented more than 1,000 clients in places like California, Texas, New York, India, Australia, the European Union, and the Middle East.

Statistically, I have most likely seen everything.

I know, you may roll your eyes when you read the word lawyer. It likely dredges up images of someone wearing an expensive suit, sitting behind a big desk in a stuffy-looking office, and speaking in legalese that only other lawyers can decipher—in-between squash games with other similar lawyers, of course.

Take that image and burn it. I’m not that type of lawyer, and while this book gives you an inside look at how to protect your company, and yourself, from unintentional, self-inflicted legal wounds, my goal is to do it in a way that anyone without a law degree can understand. While this book is geared toward first- and second-time startup entrepreneurs, it’s a great refresher for seasoned entrepreneurs, too.

No Two Startups Are the Same, but Their Legal Paths Are

Before prospective clients even step into my office, I already know a few things about them and their startups. I know that they have a tight budget, that they’ve worked hard to get where they are and will continue to work hard, and that they have to make a lot of important decisions relatively quickly.

I also know that success, and its definition, varies from founder to founder.

Some measure it in the monetary heights they climb. For others, it’s about impact and influence. The founders I work with have different personalities and aspirations. Some founders like forging their own path and being their own boss. Others want to see how far their technology can take them, or how far they can take their technology.

Some are trying to give back to their communities or the people who have supported them throughout the years. I remember working with one cofounding team at the very beginning of their startup’s founding, at a time when they had no money. I’m talking dead broke. Four years later, the cofounders sold the company, and the first thing one of them did was pay off his mother’s house and other debts.

While no two prospective clients and their companies are alike, they do share one similarity—the legal path they will tend to follow. The vast majority of startups should follow the same legal path, unless there is a compelling reason to deviate from what some might call “market” or “standard” approaches. But it’s tough to know when your startup has to deviate. Thus, a standard approach is where to start and also where to fall back on when you aren’t sure.

What You Will Find in This Book

In the dynamic startup environment, founders have to make rapid decisions, yet simultaneously have the patience to await the results. In my work, I’ve observed three types of founders. There’s the founder who doesn’t care that much about the legal decisions, so he makes rash ones for the sake of speed. He makes decisions so fast, without contemplating any consequences that he hurts the company in the process.

Then there’s the founder who cares so much that he obsesses over any legal decision. He needs as much information as possible; he needs to talk to everyone he can to get their input, and then he has to sit and think through all his options. This takes so long that he puts his startup in a literal holding pattern. He puts off making decisions for weeks, sometimes months. He too, hurts his company in the process.

Both of these founders display what I call “analysis paralysis.” One cares too little; the other cares too much, and both put off making critical decisions for their startups.

There is the third type of founder, though. This person has attained a balance. She cares about the legal decisions, but not so much that she cannot decide. She makes decisions at a prudent pace, while understanding their short- and long-term implications.

Guess which type of founder this book encourages? If you guessed the third type, you’re spot-on. I want you to care about the legal decisions you must make for your company but without becoming paralyzed from making them. I want you to be thoughtful and to understand the choices you will be asked to make. I want to help you understand the why that you’ll face. I’ve found that when founders understand the why behind their decisions, then they can make those decisions faster and with more confidence, benefiting their startup with a solid legal foundation.

Think of this book as your practical legal guide that will give you the basic information you need to navigate the thorny issues of creating and then protecting your startup. In the coming chapters, my goal is to offer insight into some of the big legal milestone events that many startups share at the very earliest stage. The early days of a startup are where the wild, wild west occurs. Many founders shrug off following the prescribed legal path to blaze their own trail—only to find later that their mistakes cost them dearly. The early decisions, such as what state to incorporate, how to divide equity, attracting top talent, choosing a board of directors, and even selecting mentors, are critical to getting you to the bright lights of a Series A financing round and, perhaps, to the holy grail of a liquidity event.

I’ve broken the top legal aspects that you need to watch for into three parts: Entity, People, and Investments. You may not be at the beginning, but this is a typical chronological journey that most founders take and you can really jump in anywhere.

In part 1, “Entity,” we look at why and how to officially create a corporate entity, what documents should be produced, how to structure the entity, and how to issue stock and create vesting schedules. Many founders place these tasks low on their to-do lists, but if you get them done sooner and right rather than later and wrong, then you’re setting up your company for a far smoother experience when you get to the first financing round.

In part 2, “People,” we dive deeply into the founding team, the early hires, and the mentors and advisors whom you’ll likely encounter as you work to grow your startup. Many founders focus so hard on building a great product or service and getting it to their customers that they forget to pay close attention to the personal dynamics of their team—the engine that’s building the startup. But if you ignore the personal dynamics, it could haunt you down the road. From a legal perspective, there are absolutely steps you can take to reduce your risk and legal liabilities if these relationships don’t work out.

Finally, in part 3, “Investment,” we look at the financing transactions that you may encounter on your quest to build a successful startup company. I’ll walk you through the different investors such as accelerators, and how seed and venture capital rounds work.

In many ways, the advice in this book is everything I wish I had known or had access to as a college student just starting my own fledging company. And it’s everything that I try to instill...