How much equity should I give to employees & consultants?
QUESTION:
Hi everyone – great site! I’d love some insight regarding compensating different employees with equity. I have had a web-based product in beta for just over a year. We are completely bootstrap (i.e. no outside funding). We are an LLC, though plan to become an Inc. at the end of the year.
I have 3 different scenarios for potential equity:
- I recently took on an operations person at a small salary. He is interested in working for equity. I want to incentivize him, but am not sure equity makes sense without real metrics. There is some room for him to lead up sales efforts so I was thinking about linking equity to sales performance.
How do I obtain a business license?
QUESTION:
How do I obtain a business license for my startup?
ANSWER:
Francine Miltenberger
by Francine Miltenberger, Managing Director and Partner in Onyx Asssociates
Do I have to form a partnership, LLC or corp to bring onboard a technical partner?
QUESTION:
My background is in small business management, as well as sales and marketing. However, I have a few business models I’d like to pursue taking advantage of. My challenge is that they each require the skills of a programmer (which I don’t have) to build either a very detailed website or an iPhone app, both of which would also require someone to update and maintain them. My question is can I form working relationships with individuals with these skills in order to start my business, perhaps with a working contract and not by forming a partnership, LLC or a Sub S Corp?
Do you know where can I find founders’ stock purchase documents that my startup can use?
QUESTION:
I’m looking for founders’ stock purchase agreements to use for my startup. Do you know where I can find any documents like these?
ANSWER:
Naomi Kokubo
by Naomi Kokubo, Cofounder of Founders Space
Below is a link to the Founders’ Stock Purchase Documents provided by Orrick. You need to check with your counsel to make sure these work with your company.
Go see Founder’s Stock Purchase Docs
Common Stock Purchase Agreement (with Vesting)
This agreement allows the founders to document their initial ownership in the Company, including standard transfer restrictions and any vesting provisions with respect to their shares.
Will a corporation protect me from all liability?
QUESTION:
I’m the Chairman and CEO of a small startup. Will a corporation really protect me from all liability?
ANSWER:
Russell Greenman
by Russell Greenman at Raines Feldman LLP
One of the main advantages of incorporating a business (or forming an LLC) is to limit your personal liability for the debts/obligations of the business resulting from judgments or general debts to creditors. This protection, however, can be lost and without careful management you could be held liable for certain obligations of the corporation. Some things to look out for:
Can you recommend a good place to go to find online legal documents for setting up my company?
QUESTION:
I’m a first-time Silicon Valley entrepreneur. Can you recommend a good place to go to find online legal documents for setting up my company?
ANSWER:
Naomi Kokubo
by Naomi Kokubo, Cofounder of Founders Space
Orrick’s startup toolkit helps with company formation and is a good place to start. It doesn’t replace having a good attorney, but it should give you an idea of what’s involved in setting up typical Silicon Valley startup.
Take a close look at the toolkit and see what works for you.
Where can I download an NDA and assignment of inventions agreement?
QUESTION:
One of our founders asked, “Do you know where I can download an NDA and an agreement for the assignment of inventions. I just need the basic boilerplate documents.
ANSWER:
Below is a link to the Technology Related Legal Documents provided by Orrick. Keep in mind, these do not replace having a good attorney, but they do provide a good starting point.
Go see Technology Related Legal Docs
Confidential Information and Invention Assignment Agreement for Employees
Can I simply abandon a California corp?
QUESTION:
Can I simply abandon a California corp and leave it blowing in the wind? I started a company a while back, and it didn’t work out. Since then, I’ve moved on to another profitable venture. Instead of bothering to close down the old company, can I simply abandon it. What will happen? Am I liable for anything like taxes?
ANSWER:
Ethan Stone
by Ethan Stone, Stone Business Law
First, a quick caveat: I’m not your lawyer and this answer doesn’t establish an lawyer-client relationship. I’m giving a generic answer to a generic question to educate the users of this site.
What happens if one partner wants to leave an LLC?
QUESTION:
We’re a California LLC. Both of us own half the company. We have no other agreement in place. What happens if one partner wants to leave the LLC? What rights does that partner have after leaving?
ANSWER:
by Geraldine Zaroukian at Zarig
Regarding Legal matters: Usually an LLC is governed by an Operating Agreement. An Operating Agreement is not required by the government or by law; however, in some states such as California, LLCs are required under state law to have an Operating Agreement. Whether required or not by state law, Operating Agreements are not filed with the government nor the state. That said, an Operating Agreement is a very helpful and important document for members of an LLC. (Owners of an LLC are called members.)
Is it worth setting up a Board of Advisors?
QUESTION:
I’m so busy just trying to get my startup off the ground that I’m wondering if it’s really worth the time and effort to set up a Board of Advisors. That’s a huge investment in time that I have to make, plus legal fees. Any guidance would be appreciated.
ANSWER:
Nathan Beckord
by Nathan Beckord at VentureArchetypes
I’m coming at this question from a particular perspective– that of an Advisor to four startups– but my answer is that it’s absolutely worth it, IF you can find the time and be disciplined in actually using your Advisory Board.
What’s the minimum I need to do regarding board meetings for a corporation?
QUESTION:
My startup is incorporated in Delaware and I’m doing business in California. What’s the minimum I need to do regarding board meetings for this corporation? I’d prefer to do nothing at all. It’s just me and one other partner.
ANSWER:
Dana Shultz
by Dana Shultz, Attorney at Law
You should hold an annual stockholder meeting – or, alternatively, prepare a written consent – at which the stockholders elect the board of directors. See Delaware General Corporation Law Section 211 and following at http://dana.sh/c2DGme.
Subject to bylaws provisions, the board should appoint officers. See DGCL Section 142 at http://dana.sh/hBxVlL.
Can I offer limited private stock options lieu of a paycheck?
QUESTION:
I have formed a LLC in Sate of Nebraska in order to pursue a small business idea. My challenge is that they I require certain skills/knowledge that I don’t have. Because my business has $0 value, I cannot yet afford to hire individuals with these skills. I want to form business relationships with individuals with these skills in order to start a business together (“entrepreneurial partners”). Can I offer some sort of limited private stock options to these “entrepreneurial partners” which would increase in value as the company grew, and potentially be sold on the open market years later, if the company goes public? What is this called, and what does it look like?
Does my startup have to be incorporated in order to go out and begin raising funds?
QUESTION:
Does my startup have to be incorporated in order to go out and begin raising funds? I’m a solo operation, and I’m looking for angel funding, but I haven’t incorporated yet. I figured I’d see what the potential is before taking this step. Is this fairly typical?
ANSWER:
Ethan Stone
by Ethan Stone, Stone Business Law
First, a quick but important clarification: I’m not your lawyer and this answer doesn’t establish a lawyer-client relationship. I’m giving a generic answer to a generic question to educate the users of this site. The information below is general in nature and should not be understood as a substitute for personal legal advice.
How much equity do I give to my Board of Advisors?
QUESTION:
I am about to ask a few advisors to join my startup and wanted to know how much equity to give. I believe that the typical range is between 0.01% to 3%, depending on experience and other assets the advisor brings; however, I’d love to get more specificity within that range. For example, below are a couple scenarios I’m considering, and I would like to get advice on reasonable equity grants:
Scenario A: EVP at a high-tech firm, and previously a CEO at a start-up. Meet monthly as an active advisor. Will agree to 2 introductions a month with C-level executives and accredited angel investors.
Will investors put money into an LLC?
QUESTION:
Does my startup have to be a Delaware corporation, or will investors put money into an LLC?
ANSWER:
Ethan Stone
by Ethan Stone, Stone Business Law
First, a quick but important clarification: I’m not your lawyer and this answer doesn’t establish a lawyer-client relationship. I’m giving a generic answer to a generic question to educate the users of this site. The information below is general in nature and should not be understood as a substitute for personal legal advice.
What’s the best way to dissolve a company?
QUESTION:
I started up a company but it didn’t take off, so we moved on to another company that’s doing well. Now I want to dissolve the older company, but it still contains assets, like computers and intellectual property, and multiple people have claim to those assets. What’s the best way to dissolve a company in this situation? Also, what happens if my partners don’t want to dissolve? What should I do then?
ANSWER:
Ethan Stone
by Ethan Stone, Stone Business Law
What are some of the things I should consider when setting up a stock option plan?
QUESTION:
My startup is considering setting up a stock option plan for our employees. What are some of the things I should consider when setting up a stock option plan?
ANSWER:
Dan Walter
by Dan Walter, CEO of Performensation
Please note that this answer is not comprehensive, but should provide some highlights on this topic.
Rolling out a stock option plan under current regulations requires an understanding of SEC, Tax, Accounting rules in conjunction with human capital and engagement practices. It is complex process that one should consider carefully before going it alone.
Are there any differences between an LLC and S Corporation in term of liability?
QUESTION:
Are there any differences between an LLC and S Corporation in term of liability? Which entity protects the owner more? Does a corporation provide more liability protection than an LLC?
ANSWER:
I found this site — I believe it does a good job of explaining things. Here is an excerpt of what Stephen Nelson says on the site:
Does an S Corporation provide better limited liability protection than an LLC?
Many people seem to think that an S corporation offers better legal protection than something like limited liability company. But this assumption is wrong—and for at least two reasons.
I heard that an LLC can be treated as an S Corporation, but what does that mean?
QUESTION:
One of our founders asked, “I heard that an LLC can be treated as an S Corporation, but what does that mean? I’m confused. How can that be possible?”
ANSWER:
I found this article that answers your question really well. It’s from S Corporations Explained site, and here’s the excerpt:
What, exactly, is an S corporation?
Business people (and sadly even some accountants and lawyers who should know better) get confused about exactly what an S corporation is. So this is a good question.
I’m changing from a partnership to an LLC, do I need to get a new tax ID?
QUESTION:
I’m changing from a partnership to an LLC, do I need to get a new tax ID? If so, I’d need to get new bank accounts and everything. It’s a big hassle.
ANSWER:
I found an interesting article that says, “converting a general partnership in California to a California LLC is as simple as filing a form and paying a fee.” The rules may vary in other states.
Click here to read the article.
Here’s another good article on converting a partnership to an LLC.
I’m starting a micro venture capital business & I need help
QUESTION:
I need help creating the business model for a venture capital firm that caters to small and micro-businesses. Also, I would like to know what critical factors I need to assess in running this type of business.
ANSWER:
by RJ Johnston
Critical factors to consider when starting this type of entity are the type of entity, where you will receive capitalization, and your target market.
Where can I find Delaware corporate formation documents? I’m launching a startup where I plan to get venture funding.
QUESTION:
I’m launching a startup where I plan to get venture funding. Where can I find Delaware corporate formation documents? I’m looking for angel & VC funding, so I want something that would be acceptable to both.
ANSWER:
Below is a link to the formation documents for a Delaware Corporation provided by Orrick. You need to check with your counsel to make sure these work with your company.
Go see Corporate Formation Docs
Incorporation Questionnaire
Do you know of an online term sheet creator for stock and bridge financing?
QUESTION:
Do you know of an online term sheet creator for stock and bridge financing?
ANSWER:
Yes, we do. Orrick’s Term Sheet Creator is helpful for drafting start-up and venture financing documents, ranging from a founder’s round to stock and bridge financing. Keep in mind, this doesn’t replace having a good attorney. We still highly recommend you get professional counsel.
The Term Sheet Creator includes the following…
Founders Term Sheet
