This is Part 2 in the Strategic Legal Roadmap series. In this note, we look at the legal roadmap as the business is setting out, at or near inception.
Certain formative business and legal decisions set the overall direction for the business and affect downstream decisions for years to come. How the business is conducted when times get tough may determine whether it ultimately succeeds or fails. Essential power dynamics are written into certain key documents. And, would-be investors doing due diligence want to see ownership and management clearly and have a clean, up-to-date repository of company documents and filings.
Your General Counsel would advise you to carefully consider decisions related to…
- Formation & Governance. What is the mission of the business? What does it do? This may have implications for its form (partnership, non-profit, corporation, limited liability company). As the company grows, it is essential to have a plan for how owners enter and exit and how profit and loss are shared. Voting rights will determine who maintains control over the company and the power of investors to affect the leadership and direction of the company. How is the operating agreement or bylaws amended?
- Capitalization & Shareholders. For corporations, what types of security will there be – common, preferred, options? How are they converted? How many securities? What percentage of ownership? What valuation? What liquidation, and anti-dilution provisions? Preemptive rights? How does voting work? What about dividends?
- Founders, Officers, Employees. What are the founders’ relationships to the company as concerns equity ownership, vesting rights, insurance, indemnities, benefits and the like? What incentives are offered to employees? Options? Warrants? Stock? What vesting periods and other conditions?
- Filings. Have you filed your annual report(s)? Have you recorded votes and member actions? Have you paid taxes in the states you do business? Are there licenses, permits and other forms of government approval or validation necessary?
These “platform” issues for the business are usually addressed as it formally starts up, but they may occur later, as the business merges with another business or converts itself from LLC to Corporation (or vice versa).
To many entrepreneurs, these can be dull and difficult issues. Who wants to worry about voting rights when we are trying to get the product into the marketplace? They are nevertheless the most important issues you will ever deal with if indeed “Success” is your objective.
A big company might employ a “General Counsel” for strategic guidance in these platform issues. But if you don’t have such a General Counsel, this email series should at least provide you a strategic roadmap for you to consider in your own decision-making. Look forward to our next installment, Protecting Revenue & Profit, in our next email.
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