

Ask HN: What agreements and legal structures should you have in place for a startup? - stuartk

I've just got involved in a new startup and been offered a founder's stake. There are only 2 of us, she is based in the US, I'm in the UK.<p>Just wondering whether to form a company straight away, or wait until some point before launch. I guess the 2 most important things are to protect ip, and ensure I get my stake in the future.<p>Any advice on this?
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pg
The main things you have to do are incorporate the company, appoint a board
(presumably you two), issue stock, and each sign agreements with the company
saying that your work becomes the company's IP.

You should probably vest some or all of the founders' stock (the usual time is
4 years) as a way of deciding in advance what happens if you split. It is a
huge distraction to negotiate that later.

Don't incorporate as an LLC unless you don't plan to either take investment or
sell the company.

You should postpone incorporating only if (a) you're still not 100% sure you
want to start the company, (b) you're not sure yet what the stock allocation
should be, or (c) you want to get funding soon from YC or some other investor
who would prefer to start with a clean slate.

Use a lawyer. And if this is a startup, get one who works with startups,
because the issues with startups are different from ordinary businesses.

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ivankirigin
I don't really understand why people shouldn't incorporate or even take
investments before YC. Can't you just take the stock as advisory shares and
buy convertible debt (if they even want cash)? Neither really affect or are
affected by the valuation or current amount of investment.

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alabut
From the Ycombinator FAQ:

"Don't incorporate, though, if you can avoid it. Especially as an LLC. It's
much more complicated for us to deal with existing paperwork than to start
from scratch."

And as a personal note, I've found the same logistically - tinker together
with friends on a project, see how you gel together, then worry about forming
a company later.

There's also a contract that might help if one of you originally came up with
the idea and recruited the other - you can create one that says basically that
all the ideas and work belong to one person, the idea originator, but that
they all transfer to whatever company you guys form if you actually get around
to forming one.

I have zero legal experience, so take it for what it's worth, this isn't
advice either way.

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davidw
That FAQ is for people who want to apply to YC! I don't see that in the guy's
message, above.

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alabut
I was giving YC of an example of how to approach pre-seed funding startups -
if you don't have revenue or funding, and angels or incubators offer to deal
with the paperwork in forming your company as a condition of receiving their
money, then all that matters in the beginning is rapid iterations to test out
both the idea and team chemistry. Anything else is a distraction.

~~~
tptacek
It's good advice for 3 people with an idea and an application to YC. It
definitely makes it easier for YC to set you up; we're in the process of
converting from an LLC, and it is a huge pain in the ass.

It is one of the poorer pieces of advice on this site for someone who actually
wants to run a company, and I wish YC would clarify it. To actually run a
business, you need a incorporate for tax reasons, so you can invoice and be
invoiced, so you can make binding, valid equity grants, and so your vendors,
partners, and customers can't sue you for your house.

It will take you 2-3 hours, spread over 2 weeks, to set yourself up with an
LLC and an EIN. It's not one of the Great Distractions you face starting up.

~~~
davidw
> converting from an LLC, and it is a huge pain in the ass.

Yeah, how so?

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sachinag
It's just a fundamentally different structure - LLCs were invented in the 80s,
so the conversion is a huge PITA. If you want the benefits of incorporation,
you should strongly consider incorporating as an S-corp (if you qualify: must
be US citizens, no more than 75 shareholders, all of whom must be natural
persons).

To change from an S-corp to a C-corp is just one piece of paper. You're
already a corporation, not an LLC, and you get the flow-through benefits and
limited liability.

~~~
Brushfire
I've heard this from other people too, but as an owner of both LLC's and Corps
in the past, why is it so difficult? Just sell one company's assets to a new
company.

If everyone is on board for the 'new' structure, then this should be trivial.
If you have investors, you grant them new shares equivalent to their old LLC
member %.

LLC"s have huge advantages too, if you dont plan to raise money, or only do it
from a few people. The fact that you can allocate losses and gains regardless
of ownership % means that you can allocate tax losses to an investor who may
only own 20%. Them taking a tax loss is effective to them not paying more
taxes, so it is a form of benefit for them.

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sharpn
If you have no presence in the US, you'll need to fill in W8BEN forms
(available online) to avoid being taxed by both UK & US. There are other
considerations too, as you mention, but I'm not familiar enough with them to
advise. Hope that helps.

~~~
stuartk
Thanks for that, I'll check it out.

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imp
It's probably best to talk to a lawyer. There will be paperwork at some point,
but at least consult with one now so that you know exactly what you'll need to
do and when. It could also be complicated because of your different countries.
Only a lawyer will know all of the important details.

