Rick Lucash, Senior Counsel at McCarter and English shares key legal items to consider when starting your business.

1. Make it Legal
Key Legal Issues for Startups
RamenCamp
June 8, 2013
Richard Lucash
McCarter & English, LLP
265 Franklin Street
Boston, MA 02110
rlucash@mccarter.com
@ricklucash

2. When Should I Incorporate?
No single answer
Balance
– Cost
– Informal team spirit
– Facing the hard questions: equity split, etc.
– IP protection vs. ability to walk away

3. Choice of “Entity”
What are your plans for growth; financing
Delaware C Corp is default for venture-funded
company
LLC works for individual investors with special
concerns; others

4. Founders’ Agreement
Who owns what percentage
– Between/among founders:
“The only rule is there is no rule”
– Wasserman post: Companies with unequal splits
may be more successful on average than 50-50
companies
“Percent of the Company”: Understand the
denominator and “fully diluted”
Vesting

5. Agreements with Former Employers
Of founders; staff; consultants
Look for
– Noncompete
– NDA
– IP
Be sure the new venture isn’t using IP that belongs
to another company!

6. Secure the IP
Individuals own their work product in absence of
agreement
Jointly-owned IP may not be controlled by any
one person
– Patents – any owner can deal with freely; NO “duty
to account”
– Copyrights – any owner can deal with freely but
there IS “duty to account”

7. Secure the IP (2)
Patents – avoid disclosure before filing
application
URL – often registered by a team member not the
company
Trademarks: Company name/product name
– Clear it
– File ITU
NDA for everyone

8. Valuation/IRS Issues
Founder A puts in $X; Founder B puts in services
– Tax on Founder B?
F&F round for small $ but high post-money
valuation
– Sets high price for subsequent grants of options;
for “83(b) elections” on restricted stock

9. What Happens When You Hire Someone
Is the person an “independent contractor”?
– In MA, probably not
Minimum wage; Overtime pay; workers comp
Get a payroll service!
Rules are often violated due to lack of time,
money and knowledge
Penalties are severe and enforcement authorities
are “employee-friendly”

10. Getting Legal Forms from the Web
Incorporation
Terms of Use; Customer Contracts
Unknown quality
Words may not have plain English meaning
Don’t know what’s missing (liability limits;
warranty disclaimers)
Don’t know what law inserts by default

11. Signing Customer’s Contract Forms
It may be “standard”
But it’s designed in their favor
Watch out for
– Rights in YOUR IP
– Noncompete
– NDA
– Warranty/SLA
– Payment
– Choice of Law/Forum