You’ve incorporated and consulted an attorney in the process if you felt it was necessary. What’s next? Here’s a list of tasks to complete post-incorporation, with an eye to prioritizing getting the critical legal documentation in place. My next 2 posts will focus on post-incorporation next steps when it comes to basic corporate governance and company operations, to get founders running at a small scale so they can focus on building an amazing product.
Founders
The founding team needs to document their commitment to the company by signing employment agreements with proper IP assignment, getting equity issued to them as stock, and filed with the IRS as an 83(b) election.
- Equity
- Restricted Stock. At the very early stages with no significant fundraising or 409A valuation, the company’s share prices are very, very low. That means purchasing stock outright will have a minimal tax burden for founders and early employees. Because of the favorable tax treatment, it often makes sense for founders and very early employees to be issued restricted stock, rather than ISOs or NSOs. To document that and the vesting schedule, you’ll need to sign a Restricted Stock Purchase Agreement (RSPA) and file an 83(b) election with the IRS.
- 83(b) Election. The 83(b) election document must be filed with the IRS within 30 days from the issuance of the equity, and gives the shareholder the option to pay taxes on the income gained from those unvested shares, in this case, FMV of the shares. Because the FMV and the purchase price of the stock are the same at time of issuance, the taxable gain is zero. If the election isn’t made, founders may have income to report as the stock vests, which could be substantial if the value of the shares increases over time as the company grows, leading to potentially massive tax consequences.
- IP assignment and official employment
- Founders will also need to assign all their IP rights to company work product to the new company. It’s typical for founders to work on the company product prior to incorporation, in which case the IP belongs to the founder, and not the company, until it is properly transferred to the new entity. IP assignment provisions are typically written into employment agreements as a Proprietary Information and Inventions Assignment Agreement attachment. Here, it’s critical for founders to sign an Employment Agreement with the company to document both the employee relationship as well as assign all IP rights to the company work product to the new entity.
Company Contracts Templates
In addition to the RSPA, Employment Agreement, and PIIA templates founders sign, they’ll need other document templates on-hand so they can proceed with hiring consultants, employees, and working with vendors, customers and partners. Some of these templates are listed here:
- Consulting Agreement
- Employment Agreements and offer letter
- Advisor Agreement
- Restricted Stock Purchase Agreement
- NDA (mutual and 1-way)
- Letter of Intent
Track Equity
Now that you’ve issued equity to the founders and maybe even employees and consultants, it’s time to track that equity so that at any given time, founders know how much equity has been issued and to whom, and their respective vesting schedule. This tracker is called a capitalization table, or cap table. VCs always review the cap table during due diligence and it’s important to keep it updated. At the early stages, an Excel spreadsheet or Google Sheet is often sufficient, with companies moving to Carta and other cap table management software as the company grows.
