So, you’re ready to incorporate! There are many options for founders now on how to incorporate, from filing themselves, using online vendors such as LegalZoom or Clerky, and of course working with attorneys. One question founders have asked me is when should they work with an attorney to incorporate, and when is software sufficient? There are a lot of scenarios where it makes sense to work with an attorney, and I’ll provide some examples of what I’ve seen in my practice. The gist is that incorporating online is convenient and fast, but sufficient only for standard cases. Here, I’ll list some “non-standard” cases so you get an idea.
Equity Scenarios
- Modifying the employee stock option pool. Most startups reserve 10-20% of the authorized shares for an employee stock option pool in the very early stages. This is standard in most scenarios, and founders considering reserving more or less for employees should consult an attorney.
- Multiple classes of stock. Some startups want to have multiple classes of stock, such as dual-class common stock, where one of the classes has more voting power than the other. In this scenario, an attorney can properly set that up from the get-go, and also tell you whether it’s necessary to structure your equity in this way from the beginning, or if it’s better done down the road when the company is more mature.
- Non-standard vesting schedules. The standard vesting schedule is a 1 year cliff, with monthly vesting afterward, for a total vesting period of 4 years. Some founders want to have a 3 or even 5 year vesting schedule, shorten the cliff, or vest on a cadence other than monthly, and may choose to grant different vesting schedules for certain employees. Another example of non-standard vesting schedule is back-weighted vesting, such as 10% vesting in the first year, 20% in the second, then 30% and 40% in the third and fourth years.
In all these scenarios, it’ll help to consult a corporate attorney to structure your company properly and determine which arrangements suit your business.
Founder Scenarios
- H1B Visas. Sometimes, founders who are sponsored on an H1B visa by their current employer want to depart and start a new company. The startup will now need to sponsor the founder’s H1B and ensure sponsorship is properly transferred. It’s also important to coordinate the founder’s departure date and start date at the new company so as not to invalidate the visa. An immigration attorney can walk you through departure and start dates, incorporation date, and other visa options available.
- Prior employment. Founders may want to start a company that is competing in the same space as a prior employer. Depending on the founder’s role and the status of the prior company, it may be helpful to speak with an employment attorney that represents individuals at the incorporation stage to make sure there aren’t any issues with non-competes, confidentiality or IP.
What other scenarios have you encountered where speaking with an attorney early on helped you on your startup journey? Feel free to share your thoughts at michelle@michellemaesq.com.
