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The author of this book is not a lawyer and has no legal expertise so take this chapter with a big grain of salt.
You should have a company lawyer; they can separate fact from fiction.
See:
Keep the following documents handy and findable because you'll probably need them someday (the link talks about a Series A due diligence procedure, but i imagine you might need these for other reasons too):
todo
some types of insurance:
Discussion:
Documents:
Documents:
Discussion:
http://www.seriesseed.com/ https://www.seriesseed.com/posts/documents.html Cooley's fork: https://github.com/CooleyLLP/seriesseed/
Discussion:
https://nvca.org/model-legal-documents/ (old version: https://web.archive.org/web/20120502152028/http://www.nvca.org/index.php?option=com_content&view=article&id=108&Itemid=136 )
Apparently http://www.idisclose.com creates relevant documents for you for private placements?
Note on legal expenses: interacting with the legal system is so expensive that really only big companies can afford to do so. This is ironic because one of the goals of the law is to protect 'the little guy', but it's true. Unless you have access to a lot of capitol, try to stay out of situations where you will have to hire lots of lawyer-hours (such as suing someone else, or engaging in an industry that is highly regulated).
You may also want to avoid things like filing patents, because it costs a lot of money and because like anything, interacting with a system now increases the chance that you will interact with it more later.
You may even want to settle if you are sued and you think you are in the right, to avoid having the pay for lawyers (lawsuits have sometimes been referred to as 'the sport of kings' because small companies cannot really afford to participate in them).
I'm not saying that you shouldn't have a lawyer, you should, because talking to a lawyer early may prevent you from having to talk to one more later, e.g. it may be a net reduction in legal interaction.
An exception to this is things like registering a company which reduce your potential liability. These cost a little bit of money but you should do them.
Four things you can do to reduce your liability (i am not a lawyer and this is not legal advice):
An example acquisition story: http://trevormckendrick.com/how-i-sold-my-bible-app-company/
list of things the due diligence wanted: documentation of:
also:
list of legal points that they had to argue over:
Seller hired an M&A firm for $5k once he got the draft APA (says he should have hired them sooner).
Seller says the 7 months of due diligence before closing was harder than the entire 3.5 years of running the business before that! Not only a ton of work, but psychologically difficult. He had to threaten to walk to get his indemnification cap (and he wasn't bluffing).
It is very important that when a company shuts down, it does not have outstanding payroll or tax obligations, as the founders or executives could in some cases be held personally liable.
"Corporations are not particularly hard or expensive to start, maintain, or dissolve - but you need to be at a stage of life where a thousand dollars here or there is not a major burden. If you are not yet at that stage, that is a different story and there is no doubt that forming or dissolving an entity such as this will normally set you back a thousand or two on either side." [1]
If you incorporate a C-corporation, have no-par value stock or have a very tiny par value, and don't issue too many shares, or under some states you might face extraordinarily large tax bills [2] (if this happens to you, you may be able to get off the hook using an alternative valuation method based on assets [3]).
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The CEO is not allowed to cause (or possibly, even to permit) your company to break the law.
The CEO is not allowed to cause (or possibly, even to permit) the company to enter into obligations that you know or should have known the company cannot fulfill.
The CEO is not allowed to place their own interests above that of the company.
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If the company might fail, there may be pressure on the CEO to permit the company to enter into obligations that the CEO knows it cannot fulfill (eg to hire employees that the company will not be able to afford to pay; to make purchases that the company will not be able to afford to pay; to spend money that is or will be owed in taxes). This would be illegal. The best thing the CEO can do is to cause the company to resist these pressures (and if the company is already in this situation, to try and come to an agreement with employees/suppliers/the government). The next best thing the CEO can do is to be fired by the Board for refusing to go along with these pressures. After that, the next best thing the CEO can do is to resign. The worst thing the CEO can do is to cave in and execute these illegal plans. As long as your are CEO, for the most part others cannot force the company to take action against your wishes, and therefore you will be held responsible for the actions that the company takes.
In some cases the CEO may want to insist on written records of legal advice that they were given by their lawyer, and orders that they gave, in order to provide evidence that they did not knowingly cause the company to break the law.
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" It's worth mentioning that incorporation by itself doesn't get you very far in terms of protecting against personal liability. It's really just the first step in company formation. You'll want to appoint directors and officers as well. And to protect against departures, IP issues, etc., you'll also want to issue stock with vesting to founders, and have everyone enter into IP agreements.
We've automated all of this at Clerky - you can do everything completely online using our software. We do a ton of company formations. If anyone has any questions on the topic, feel free to ask! " -- https://news.ycombinator.com/item?id=11994919
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note: lawyers (and other business services such as bankers) form a big part of the social network that you use to eg ask for an introduction to someone, assess some other company or person's reputation, etc
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note:
if you incorporate in Delaware, it is recommended that you set a non-zero par value for your shares so that you can use the 'assumed par value' method of paying Delaware taxes, which is much lower than the alternative [4] [5] [6] [7]. (in [8], it also suggests setting the par value so that your initial capital deposit is equal to the par value * authorized shares, and maybe that's a requirement, i'm not sure; [9] sort of recommends issuing founder shares at a multiple of par value). Note that each year, Delaware sends you a letter demanding an unreasonably high amount of taxes, but if you go to their website to actually log in to pay your taxes, you find that you can use the assumed par value method to compute a much lower number [10] [11].
If you dissolve the corporation later, again in Delaware you will get a huge initial bill, but there is an alternative valuation method that gives you a more reasonable amount [12] [13]
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https://www.themuse.com/advice/what-startups-should-know-about-hiring-a-lawyer
https://news.ycombinator.com/item?id=4536470
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https://stripe.com/blog/atlas-llc?c
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https://blog.ycombinator.com/a-standard-and-clean-series-a-term-sheet/
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