Hi everyone! I'm one of the cofounders of Clerky :)
We've gotten a ton of questions from founders over the years - this handbook is what we always wished existed, so that we could point people to it. There are already a lot of great blog posts by attorneys out there, but we thought it was also important to have something that (1) helps founders build a solid foundation of knowledge rather than piecemeal, (2) covers the terminology and practices used across startup law firms (thanks to our incredible editorial board), as opposed to one attorney or one firm, and (3) is kept up-to-date as laws or market practices change.
We're very excited to be finally sharing this with the community - please let us know what you think!
A few notes:
* This is very much aimed at startups of the type that might apply for YC one day, seek angel or VC money, etc. Obviously there are many other kinds of businesses, but it's really hard to write something that is broadly applicable, unfortunately. My apologies in advance to founders of other types of businesses.
* The content that we have has been thoroughly vetted, by more top-tier startup attorneys than you can shake a stick at. That said, the scope of the handbook in terms of topics covered should be considered a first cut, as should the presentation. We have many articles on the todo list, and also have some ideas for how to better present some of the more complex concepts.
Finally, feel free to use this thread as an opportunity to ask any general questions you might have about legal issues for startups - my cofounder Chris and I (we're both startup attorneys) will do our best to answer. Some of our editorial board might pop in from time to time too!
1. How do you handle assets (in particular IP) transferred into the corporation at formation time - if, for example, the founders have been working on it as a project beforehand?
2. How difficult is it to add a co-founder after formation but before investment? Does this require a lawyer, or are there standard forms that can be filled out? How does founder stock get re-apportioned, or must new stock be re-issued?
3. How about swapping stock plans? The chapter of the handbook suggests it's possible - is it a "talk to a lawyer, and they will file some paperwork" situation? If, for example, a startup wished to adopt progressive equity [1] but hadn't thought about it until they were ready to hire employees, would it be complicated and expensive?
4. What are the day-to-day responsibilities of a founder regarding the corporation after it's been formed? I've heard of (at a minimum) paying taxes, conducting board meetings, and ensuring that company expenses and personal expenses are separate? Others? Are there particular records that startup founders must keep, and particular duties they must perform over the course of the year, once they've incorporated?
1. That's routinely transferred over in the restricted stock purchase agreement, or else in a separate technology assignment agreement. Just depends on the preference of the lawyer. But yes, this is absolutely crucial as part of the formation process.
2. It's almost always easier to just issue new stock rather than re-distribute whatever shares were already issued. It's not difficult to add a new co-founder at all, fortunately :) Any startup lawyer can help you with this, or else we have templates for it on Clerky too. Note that if you don't have enough shares available for issuance in the corporation, you'll typically want to file an amendment to your certificate of incorporation in order to authorize more.
3. I don't know about progressive equity in particular, but in general, it's not too difficult to adopt a new stock plan as long as there are standardized forms for it. You can have old and new stock plans co-existing next to each other. That said, for something new like progressive equity, your lawyers might want to review everything to make sure it all works - that would add to the cost.
4. That all sounds about right. Delaware will require you to submit an annual report (just basic details about your corporation - doesn't take long). Early on, there's usually no need to have a lot of formality around board meetings. You'll need to pay your registered agent fees every year too. Different states and localities might have their own requirements - in some cities, you have to get a business license, for example. In terms of records, I would recommend just keeping all your legal paperwork as a matter of course.
1. Could you provide any links to similarly high quality content or services like Clerky that are geared towards setting up an ideal lifestyle business structure (such as consulting and a smattering of low-revenue SaaS products). Particularly something that covers what to do beyond just setting up a passthrough entity.
2. Can you provide any links to resources on how to evaluate E&O policies for professional technical work? Some of the work I do involves spending 6 figures a month on a marketing campaign, building out BI solutions that are then relied on for making critical decisions (not to mention giving me access to highly confidential data), and building out SaaS products that enforce TCPA compliance on telemarketing databases. Even with a solid contract in place, I'm somewhat terrified at the thought of a well-funded, sue-happy client trying to use me as a scapegoat someday if something goes sideways or doesn't go their way.
3. Any good contract templates for the kind of services mentioned above, that include solid indemnity clauses?
4. How do you find a competent lawyer to ask these kinds of questions to? The few I've spoken to locally don't seem to have many clients like me and were generally about as helpful as a google search (with a much higher pricetag). And I'm unsure how to find the ones that can give actionable advice.
1 & 3. Unfortunately, I have not seen any high quality services geared toward non-startup businesses. Believe it or not, that's actually a harder problem than the one we're solving. There is just much less standardization outside of the world of startups, due to how fragmented the market is. There might be some useful content out there, but I don't know of any personally (let me know if you find some!).
2. I don't know of any resources on this (although I'm sure they exist), but good insurance brokers can often walk you through a lot of the analysis. I've heard Heffernan is a good one (https://www.heffins.com). The good insurance brokers are usually pretty objective and not very sales-y. If you need to get super in-depth in analyzing a policy, you may eventually need to talk to an insurance lawyer - but I suspect most people don't go that far.
4. It's tough. It tough even for attorneys to find competent attorneys outside of their own practice areas, because it's hard to tell who's good. One of the major issues is that most legal work never gets tested out. Clients can certainly have their impressions based on their interactions, but until legal work is tested out - either by being reviewed by other attorneys, or in courts, there's just no way for a client to ascertain the quality of the work product. Legal services are a credence good: https://en.wikipedia.org/wiki/Credence_good The best thing you can do is to find people who have similar businesses and successfully survived the risks you're trying to protect against, and then see what lawyers they recommend. I realize this is a ton of work, and it may not even be possible in many cases. Depending on where you're located, we might be able to give you some attorney leads - feel free to ping us at support@clerky.com.
Great question - there's nothing stopping you from doing it at incorporation. But it's pretty rare. Very few companies will have enough negotiating leverage to keep it when they raise money. So rather than complicate things from the start, I think the majority view amongst startup attorneys (there are differing opinions on this) is to go with the standard setup, then add in super-voting later on if the company is in a strong position.
Additional question added with an edit: If someone wants to start a company with the goal of never going public (i.e. Bill Gates has talked about regretting going public and only did so because they needed better liquidity for employee options and I believe they were coming close to the shareholder cap) -- what should someone be thinking about nice and early?
2nd additional question: I've heard of unique corporate structures, like where an LLC owns a C-Corp. Any suggested resources for learning some basics there? One well known startup that I won't name has this setup
3rd additional question: If you a friend of yours was starting a company and you were almost certain that they'd eventually be doing $10s of billions in net income, what special things from a legal sense should they look into setting up early that are hard to change later on? (e.g. incorporation in Ireland or things like this)
Ah sorry, I wrote my first answer before seeing your edits. I'll just number my responses here for convenience.
2. It shouldn't change much early on... it would probably be premature optimization to think about it early on, to be honest. The shareholder limits can lead a company to go public, but I think the laws have changed since Microsoft's time to make this less of an issue. Of course, you still have the issue of shareholder liquidity, so I suppose you will want to plan to be able to buy back people's equity :) Also, VCs will usually have demand registration rights that can force the company to go public at some point (never seen those negotiated away though).
3. Usually startups are more forced into more exotic corporate structures due to having some pre-existing business that is hard to convert into a DE C-corporation. So it's usually not something they sought out. I don't know of any good resources for these types of setups unfortunately - in general, the less standard something is, the more I think an attorney should be involved. I would only recommend DIY approaches in areas where there is a ton of standardization.
4. It sounds counter-intuitive, but for startups, I don't consider there to be any special things to look for. VC backed startups are all setting up to be massive successes - if there were any significant issues with respect to highly profitable companies, they would have likely been addressed.
Which is not to say that you won't need to change things later on - but the optimizations that are not done up-front are skipped because the opportunity cost in the early stages is not worth it. Many startups do not get off the ground because too much time was spent on hyper-optimizing legal / tax up front. It's usually better to just go with the beaten path on the legal front, and focus on the business.
But yes, ultimately, there will probably be some off-shoring involved in optimizing that kind of massive success.
I am not a lawyer, but getting something like this in requires that you have a very strong hand in your negotiation position with potential investors. If you have dozens of investors all competeting to put money into your startup and you don't need the best valuation, then you are in a position to ask for this, otherwise it is just going to be another reason for investors to pass.
Very few startups are in a position to negotiate super-voting shares - it is a bit like a group of teenagers in new punk band worrying about what they are going to do with all the millions they will make when they release their first record.
* Which states require the existence of typical officer positions? Perhaps list out what California, Washington state, and New York require.
As noted in the Officers section of the handbook, Delaware doesn't require any specific positions.
Under the "internal affairs doctrine" of U.S. federal law, it's doubtful that another state can technically require that a Delaware corporation appoint a specific officer position, but some states purport to do so and it's most pragmatic to simply comply with their requirement. For example, California and New York (though not Washington) require that Delaware corporations doing business within their borders disclose the following specific officers:
- CA - CEO, Secretary and CFO
- NY – CEO
* What is the distinction between CEO and President? CFO and Treasurer?
For early stage startups, there’s not much distinction between CEO and President or CFO and Treasurer. Generally, the board of directors determines the officer positions and duties. In many cases this is spelled out in a startup’s bylaws. For example, under the bylaws on Clerky, the CEO has general supervision and control of the business and other officers. The President has the same duties as the CEO, but is subordinate to the CEO. The CFO and Treasurer also have similar duties – to handle the startup’s financial matters, including deposits, maintaining books, etc., but the CFO supervises and directs the treasurer’s responsibilities.
* What are the pros and cons of formally naming all the co-founders as officers of the corporation (assuming the typical 2-3 founder situation)?
One of the pros of naming all of the co-founders as officers is convenience. Everyone has the ability to sign things (bank account, tax returns, etc.) and it’s handy to not have to track down one specific founder. For some teams, for whatever reason, having all of the founders hold an officer title seems to improve the dynamic amongst the founders.
A potential con is the time spent on these sort of corporate formalities, but that’s not usually an issue when there’s a healthy founder relationship.
* Which states require the existence of typical officer positions?
WA, like kbagby explained for DE, doesn't require any particular officers (unless a particular company's bylaws required certain officers).
In all four of CA, DE, NY and WA, the corporation law allows for the same person to hold more than one officer position simultaneously. If you find yourself organized in a state that requires particular offices, you might check to see if that state also allows this flexibility.
Thanks for the suggestion! We have all the pages listed out in the navigation - you might have to click on the hamburger menu in the upper left if you're on a mobile device. Or let me know if I misunderstood :)
One of our illustrious editors will respond to your questions!
Bit of a non standard question: we drop ship and/or resell a lot of items from retailers. Sometimes this is against the retailers terms of service. How bad is that legally? At worst, could it be criminal, or civil only? (Some stores ban resellers altogether, some just have restrictions.)
Definitely outside my area of expertise :) I suspect it's only civil, assuming your products are not regulated in some way. But I really can't say for sure - sorry!
1. Law can be a morass and who then can you rely on when trying to understand it via online resources? Well, for startup legal issues, the answer now is the Clerky Handbook: thoroughly and carefully vetted by those who have lived and breathed this stuff for decades while working in the trenches with founders of all stripes. If you want reliability, you can’t ask for better.
2. The Handbook has scope limitations and that is understandable: to be useful for founders, the core part of the Handbook must by definition be strictly bounded or it loses effectiveness by injecting more nuance and complexity than is needed to convey the fundamentals. If the need is there (and I assume it will be), nuance and complexity can be added with adjunct materials.
3. To date, the Clerky founders have done a superb job of taking legal complexity and turning it into simple and streamlined processes - how to do a Delaware C-corp, how to do convertible notes, etc. This Handbook extends this to the idea of simplifying legal understanding, which is no small feat. In the end, it may look simple and easy but this is incredibly hard to do and all the more reason the accomplishment is to be commended.
4. The hand of YC seems to hover in and around most startup innovations of the past decade and this Handbook is no exception. So many barriers to founder success have come down in recent years and founders have YC to thank for much of this change. Add this Handbook to advances in which it has had a role.
5. The startup world is an amazing place. One advance after another, nonstop over many years. Now add this online resource to the list as a great reference platform to which many quality people have contributed. As it grows and develops, it will do great service for the common betterment now and for many years to come. Great work and kudos to those who drove this effort!
Thanks for the kind words George - and thanks for being an editor :) I completely agree with you on the scope limitations - we're looking forward to pushing the boundaries out a bit more over time with additional articles.
This is awesome. For anyone who's starting a company, Clerky is by far the best way to do all the legal legwork. I've used a number of companies to try to save time (including Stripe Atlas, which is kind of a disaster) and wish I'd just done everything through Clerky.
Well, they screwed up filing docs for a friend of mine, we haven't gotten an EIN after a month, and the bank account with SVB is really limited (SVB won't do a credit card for those accounts, for example).
I used them primarily to get the bank account with minimal fuss and now I'm regretting it. :)
Would you mind sending me an email (my HN username @stripe.com)? I work on Atlas and I'd be happy to look into what went wrong and what we can do to fix things.
Patrick how is SVB getting around the KYC regulations? It seems impossible for any bank following the regulations for non-US resident founders to open a US business bank account.
SVB and Stripe are complying with all of our legal obligations. You'll forgive me if I generally abstain from more detailed commentary on internal operations of my employer.
I do not believe your understanding of the regulations to be accurate. Are you of the opinion that it is impossible for e.g. Toyota to have a US bank account? No, of course not. That would be crazy. So if the mental model has a Toyota-shaped hole, what other holes does it have?
I only speak from my personal experience. In the past (pre 2001) it was possible to set up a business bank account in the USA if you weren't a US resident (I opened one back in 2000 which I now wish I didn't close in 2005). I tried again in 2012 and it proved impossible due to the changes in the KYC regulations. If SVB and Stripe have figured out how to get around the KYC regulations I wish they would share their knowledge with the greater startup community.
I am sure Toyota opened their accounts pre-2001 so I am not sure they are the best example.
I'm a huge fan of Clerky and have been ever since one of the Founders spent an incredibly long time answering questions from aspiring founders on Reddit. I learned an immense amount just reading his responses and am a much more informed person as a result.
Consequently, I'm far too big of a fan to critically evaluate their work. Shit, I'd give their grocery list rave reviews...:)
But seriously, thanks for publishing this. I can't count how many founders struggle with the kind of information that your handbook covers. This is an absolutely wonderful gift.
This is really great. One feature request: it'd be great to be able to view the whole handbook as a one page document (e.g. I want to save it to Instapaper to read later) or as a complete PDF.
Great idea - we gave PDFs to the editors for reviewing purposes (because it's easier to mark those up than a webpage), but we'll see what we can do to get that in shape for public consumption.
Love this. As a founder with an engineering background I often struggled with all sorts of legal terms and concepts. And it always seemed that people made me feel dumb every time I asked something like: "what's the difference between between LLC and Inc", or "what is a stock option?".
I think that in fields outside of science and engineering people are more quick to judge you when you make seemingly simple questions...
That was a huge motivation in writing this. I've found that it's common for people to gloss over legal questions with a surface-level answer, and use a variety of tactics (including making the other person feel dumb) to dissuade any follow-up questions (usually because they want to hide their inability to answer follow-up questions).
This is great--I like the style and the level of detail. My inner pedant also appreciates "Sometimes mistakenly referred to as a CIIAA Agreement."
One minor suggestion: you have foreign qualification on the "Process" page but you might create a separate topic area reviewing when and why this is required. It's something that an early stage company can easily overlook. Ditto for local business licensing.
Two questions, I am about to incorporate and I am thinking about doing it in Wyoming instead of my home state of NY, what does Clerky think? And how can I buy some Clerky stock?
It depends on what kind of company you're looking to build. If you're going to be looking to raise money, especially from an accelerator or VC, the standard approach is to form a Delaware corporation.
But for other types of businesses, there can often be no standard approach. Out of curiosity, why are you looking at WY in particular?
As for your second question - unfortunately, there's no way to do so at the moment :) But thanks for the sentiment!
Thanks! Feel free to email us at support@clerky.com and we can see if we can help (assuming you have a DE C-corporation). I'll keep an eye out for your email :)
We've gotten a ton of questions from founders over the years - this handbook is what we always wished existed, so that we could point people to it. There are already a lot of great blog posts by attorneys out there, but we thought it was also important to have something that (1) helps founders build a solid foundation of knowledge rather than piecemeal, (2) covers the terminology and practices used across startup law firms (thanks to our incredible editorial board), as opposed to one attorney or one firm, and (3) is kept up-to-date as laws or market practices change.
We're very excited to be finally sharing this with the community - please let us know what you think!
A few notes:
* This is very much aimed at startups of the type that might apply for YC one day, seek angel or VC money, etc. Obviously there are many other kinds of businesses, but it's really hard to write something that is broadly applicable, unfortunately. My apologies in advance to founders of other types of businesses.
* The content that we have has been thoroughly vetted, by more top-tier startup attorneys than you can shake a stick at. That said, the scope of the handbook in terms of topics covered should be considered a first cut, as should the presentation. We have many articles on the todo list, and also have some ideas for how to better present some of the more complex concepts.
Finally, feel free to use this thread as an opportunity to ask any general questions you might have about legal issues for startups - my cofounder Chris and I (we're both startup attorneys) will do our best to answer. Some of our editorial board might pop in from time to time too!