The Startup Legal Setup Guide
When you start a startup, it’s much more exciting to focus on building a product and a business than the legal details of incorporation and company setup. But these legal and structural details are important, and will have lasting implications for the entire future of your company. Mistakes like forgetting to file an 83(b) election or neglecting to register the business with your state and city could have severe tax penalties.
Even if you are working with a professional lawyer or an automated incorporation service like Clerky, it’s beneficial to have a personal understanding of the different steps in the process, and what options you may have. For instance, your incorporation charter could include a special provision to include Series FF stock, which allows founders to sell off a portion of their shares in a future funding round without increasing the tax burden for other employees (selling normal stock would cause the 409A valuation to increase, thus increasing the effective taxable value of other employees’ stock).
Over the years, a number of friends have asked me for advice about this legal setup process. For the sake of posterity, I’ve created a public Airtable Base containing the legal knowledge I’ve gained throughout the process of co-founding Airtable (and my previous startup, the YC-funded Etacts). Without further ado, here it is! You can create a copy of it (“Copy Base” at the bottom), at which point you can modify it to your own liking. If you have questions or feedback, feel free to drop me a line at firstname.lastname@example.org!
P.S. I recommend clicking “View Larger” below for maximum readability, and reading the long text within the cells by expanding each record or cell.
P.P.S. For a particularly fun example of a legal challenge oft-overlooked by many founders (even those with great legal counsel), take a look at the “File 83(b) Election” item (#17) under the Delaware Corp Checklist tab. Hint: it involves sending a form to the IRS within 30 days of receiving your stock grant, keeping multiple copies of that form in your personal archive, obtaining a timestamped proof of the mailing, possibly (or possibly not) receiving a confirmation letter from the IRS, then remembering to also include a copy of the form with your year-end personal tax filing, which will need to be done by regular mail instead of e-file, and also to include a cover letter. And oh, yes, this is often done by the founders themselves (almost always, in the case of YC companies), not by their company’s legal counsel. And if you don’t do everything right, you might be liable for a huge amount of additional taxes down the road!
While I tried my best to make this guide accurate, I certainly hope readers do not interpret this guide as a comprehensive substitute for proper legal counsel and research of their own — rather, it contains information which is designed to act as a supplement to those things, both of which founders should pursue.
In other words, it will hopefully help folks avoid false negatives in legal steps (i.e. forgot to file an 83b within 30 days or register with their city’s business department), expose them to lesser-known alternatives that their own lawyers may not have told them about (using FF preferred stock to provide a small measure of founder liquidity down the road without skewing 409A valuations), and understand why it’s necessary to do certain things (like adopt bylaws, file a Form D, etc).
The scope of the guide is strongly biased towards U.S. startups incorporating as a Delaware corp (a common approach, even for companies not based in Delaware itself).
And of course, no legal setup guide would be complete without a disclaimer from our lawyers : ).
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