Donna Petkanics from Wilson Sonsini shared with us at our latest meetup on how not to get tripped up on legal matters, so you can focus wholely on building your startup.
Top 10 tips on setting up your company
- Set a good foundation. Make sure you have everything in order in terms of leaving your current employer. Carefully divide what you are doing at your new company and what you are doing with your current employer. You want to make sure that your current employer does not eventually end up owning your startup, because you chose to work on your startup during office hours and using the company laptop. Work on your own project on your own time with your own resources. This is especially important for technology-based startups that have intellectual property that will be essential to creating a competitive advantage for the startup. Ensure that the people you hire are also ‘clean’ to such issues. Check that if they signed a non-compete agreement with their last employer, that it is not relevant to your company. Check that any trade secrets and intellectual property from your current employer is not utilized in any way in your startup. (if still unsure, check with a startup lawyer!)
- Limit your liability. Selecting a form of business entity. If you are not incorporated, then you will be personally liable. Forming a corporation is more expensive to set up and maintain, but it has its advantages, including stock options, limited liability and separating from management.
- Keep it simple. Stick to a simple capitalization model. Keep just one form of a common stock. It will be easier to maintain and manage. It is recommended that founders get common stock, while investors get preferred shares. Investors are more willing to pay a higher price for the company’s shares since they believe in it’s growth, and in exchange they get the rights to receive returns first. Founders who invest capital into the company can also get preferred shares.
- Get it in writing. Have a clear understanding amongst the founders what the rules are, and what the ownerships are. Be clear about what restrictions you need to have in place. Memorialize everything in writing so that there is a minimized risk that any one founder walks away with a third of the company. Do this as early as possible to make sure the founders are all comfortable with what they get up front. This is not carved hard in stone, and investors tend to request a annual (or regular) revision of the founder shares so that each founder still received what they deserve as the startup moves along and evolves.
- Be clear about the roles. Know what you want your board of directors and CEO and chairman and executive board to do. Decide on who selects the board (investors? founders?), and know what you want to get out of each role.
- Mind the basics. Be clear about who has the authority to issue shares. Differentiate between the Board of Directors vs Board of Advisors. Also make sure you know who are consultants and who are the real employees of the startup.
- Understand the vocabulary. For example, know the differences between common stock and preferred stocks. What are the benefits and reasons for each. You need to first understand what all these mean, before you know what terms you are agreeing to. Another important type of structure to note is vesting. Know what types of vesting are possible and typical, and know which ones would fit your startup best.
- Focus on what matters. Term sheets will have lots of terms, but know which you need to really focus on, because there are many that are just standard and not worth to be bothered with. Important things include who’s on the board, who is the representative, what happens during liquidation, what amounts of funding is required.
- Understand the end goal. Know what is your goal? IPO? Sale or merger & acquisition? Keep this in mind when negotiating agreements. Discussions about change of control provisions and termination rights will have to be managed differently in different situations or goals. So know what you want before you start negotiating anything.
- Manage your risks to maximize growth. This includes both business risks as well as legal risks, which are both as important.
About the Speaker:
Donna Petkanics is a partner in the Palo Alto office of Wilson Sonsini Goodrich & Rosati. Her law practice focuses on the representation of growth companies, with a particular emphasis on corporate and securities issues. She represents both privately held and public companies across a broad range of industries, including telecommunications, Internet infrastructure, networking, life sciences, computer software and hardware, clean technology and energy, and electronics. She has experience representing companies in many types of corporate transactions, including mergers and acquisitions, initial public offerings, and joint ventures. She also counsels clients who are starting new businesses with respect to general corporate matters and protection of their intellectual property.
During her tenure at the firm, Donna has served in a number of management positions, including managing director of operations and chair of the Operations Committee from 2000 to 2006; member of the firm’s board of directors, Policy Committee, and Compensation Committee; associate managing partner of the firm; and co-chair of the Hiring Committee and Nominating Committee. She served on the board of directors of the Wilson Sonsini Goodrich & Rosati Foundation from 2000 to 2010.
Prior to attending law school, Donna was a staff economist in the Executive Office of the President during Jimmy Carter’s administration and also worked for the House of Representatives. She began practicing at Wilson Sonsini Goodrich & Rosati in 1985.