I recently attended a useful talk by Scott Walker on the biggest legal mistakes start-ups make. I had been exposed to many of these concepts before, and it was useful to hear someone talk about them in depth. This was part one of a two-part series of talks. The following is not meant as legal advice; it's just notes I took on Scott's talk.
1. Your employer has ownership to your IP
-If you're using your employer's facilities
-If your outsourced development company keeps your IP and doesn't properly transfer it to you
2. Choosing the wrong entity
-If you need venture funding, you really should be a corporation in Delaware.
-S or C corp is the only decision to make.
-"Qualified small business stock": if you start as a C corp, you get a big tax break (0 capital gains up to $10M if hold the stock for 5 years). You can't get this if you convert to a C corp. This is from IRS Sec. 1202.
-Use an S corp if want to put in your own money for a while and want to take tax losses early on.
-If you're bootstrapping, an LLC can be fine.
-Sec 1244 gives $50K of deductions for C corps.
3. Splitting equity foolishly
-Equal split is the most common and biggest mistake.
-It should depend on levels of involvement in past and future and value each person brings.
-Biggest business decision you'll ever make: who is your co-founder (Scott said 2 is the best number of founders; he said YC and TechStars require it)
4. Not setting up a vesting schedule
-Done through a Restricted Stock Purchase Agreement
-Typically vest shares over 4 years on a monthly basis
-1 year cliff: nothing vests if fired or leave in the first year
-Can sometimes pre-vest or accelerate in certain circumstances
-VCs will always set up vesting schedules for the team
-Your accountant needs to file an 83b election with the IRS.
5. Not complying with securities laws
-You can't raise money on social media.
-You can't advertise or solicit.
-You must build relationships directly.
-Investors want to see resourcefulness and tenacity of an entrepreneur in networking.
-You must get "accredited investors."
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