1. NOVEMBER 19, 2014
13 Startup Company Legal Pitfalls
and how to avoid them
Max R. Masinter, Esq.
Presented to Uber Offices

2. Pitfall #1 – choosing the wrong entity
LLC is not always the best for small businesses
 S corp. tax savings on profits in the form of dividends
(15%) and avoids:
 FICA tax of 6.2% on the first $117,000 wages paid.
 The Medicare tax rate is 1.45% on the first $200,000 and 2.35%
above $200,000.
 S corp. disadvantage is that no entity can be an owner,
one class of stock, state level taxes, proportionate
dividends, etc.
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3. Pitfall #2 – protect yourself
Service providers need to make 83(b) elections
Will you have a tax bill and no cash to pay it?
Operate as your entity
Understand the form of entity and who has
authority to act for the company
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4. Pitfall #3 – a founder moved on
Buy sell agreement
 If the service provider stops providing services to the
company, then there needs to be a mechanism to buy
the departing founder out
 If a founder dies, you could be in business with the
dead founder’s spouse
 If the founder goes to jail, becomes disabled, etc. there
should be ways to buy out the founder
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5. Pitfall #4 – chasing the wrong funding
Venture capital
SBA
 Decent credit
 Guaranty (possible 2nd lien on your home)
 You continue owning your business without other shareholders
 A good business plan and an application is all that is needed
 Friends and family
 Kickstarter or crowdfunding
Tedco/DBED
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6. Pitfall #5 – Ignoring Economic
Inclusion Benefits and Requirements
Programs available for:
 Minority owned business
Veteran owned business
Small business
Benefits of programs:
 Small business set asides in government contracts
 Minority vendor status from larger companies
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7. Pitfall #6 – having no IP strategy
Do you need a patent? Why?
Have you protected trade secrets?
Assignment of inventions from contractors and
employees?
Confidentiality agreements with vendors,
employees, contractors, potential business
partners.
Is your brand yours?
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8. Pitfall #7 – using contracts effectively
What is the value of the transaction to your
company, and what is the risk if the transaction
goes wrong?
Shift risk to the other party
Limit your risk
Set expectations of services and payments
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9. Pitfall #8 – working with workers
Employment agreements
Tax withholding
Independent contractor vs. Employee status
Know when you have extra compliance and risk
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10. Pitfall #9 – use equity compensation
Options
Stock Appreciation Rights
Restricted Stock
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11. Pitfall #10 – having bad records
Maintain final signed versions of all contracts
Get the terms on paper, even if the terms are
simple
Keep records of company ownership
Avoid over issuing stock
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12. Pitfall #11 – restrictive covenants
Non-compete
Non-solicitation of customers
Non-solicitation of employees
Confidentiality
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13. Pitfall #12 – not preparing for exit
 Focus on earnings
Push off large capital investments
Work with an investment banker before you are
ready to sell to get your house in order and
maximize value
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14. Pitfall #13 – skimping on professionals
 find an accountant that knows your industry and
works with startup businesses
 find a business lawyer who works with startup
companies
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15. Questions?
Max R. Masinter, Esq.
mmasinter@tydingslaw.com
410.752.9751
Presented to Uber Offices
www.tydingslaw.com