I recently had the opportunity to sit down with Priori startup lawyer, Christine Wong. With over ten years of experience, Christine provides virtual in-house counsel services to startups and small businesses, handling entity formation, contract negotiation, general corporate management such as maintaining board minutes and preparing for and conducting annual meetings, and negotiating business transactions such as acquisitions, mergers and bringing in investors. Christine answered questions sourced from aspiring entrepreneurs on how to start your business and what legal pitfalls to avoid.
Where do I start if I have a brilliant idea for a business?
If you have a great idea for a business, there are a number of threshold issues you must consider. First, you need to determine if your business idea is actually your own. While you may think your idea is original, there are a number of factors that may limit your ability to proceed with your business idea. For example, your idea may infringe upon another company’s already existing intellectual property rights or it may belong to your current employer, depending on the terms of your employment agreement. A lawyer can help you answer these questions by searching intellectual property databases and reviewing your current employment documents, such as Non-Compete Agreement and Proprietary Information and Inventions Agreement.
Second, you want to know what steps are needed to develop your idea into a commercially viable business. This may include determining whether you need to bring in a partner or co-founder, hire a specialist like an engineer or chef or raise funds to build a prototype. Identifying these threshold issues will help your lawyer advise you on what the proper next steps whether it makes sense for you to move forward to structure your business and form a legal entity.
Why should I form a business entity, and how do I know which entity is right for me?
In a word, the reason you need to form a business entity is “protection.” By forming a business entity you create separation between you as the individual and you as the business. Thus, you can shield your personal assets from the debts and liabilities of your business.
Because forming a business entity provides essential protection to entrepreneurs, you’ll want to consult a lawyer to ensure you choose the right structure for your business. There are a number of different entity types and many factors to consider when determining the right structure. Among other things, you’ll want to consider the level of structure and formality, the possible tax advantages, your business model and plan, where you want to conduct business, sources of investment, and desired result -- remain private, take the company public or become a target for acquisition.
Your lawyer can help you choose the right entity by raising all the necessary considerations, and also by relieving the administrative burden of organizing, drafting, and filing the proper documentation with state and federal authorities.
What governance documents should I have in place prior to operating my business?
In order to form your chosen business entity, you’ll need to file a number of documents with the appropriate state and federal authorities. The specific documents you need to file vary based on your entity type. For example, if you form a corporation in New York, you need to file a Certificate of Incorporation and have corporate bylaws. But, if you are forming a limited liability company (LLC) you’ll need to file Articles of Organization and have an operating agreement. Despite the difference in names, these documents are used to establish the rules on how your company will be controlled and directed, such as ownership rights, decision-making powers, distribution of profits, etc.
In addition to your main organizing documents, there is a laundry list of other documents your specific business may need to implement before getting up and running. Some common examples include a Founders Agreement, Shareholders Agreement, Stock Purchase Agreement, Asset Purchase Agreement and Non-Disclosure Agreement. A lawyer should tailor these documents to your business’s specific needs in order to properly protect your business and prevent costly liability that will slow you down before you even get started.
Where can I find sources of initial fundraising and how can a lawyer help me?
Often when you are just starting a business, the most viable sources of fundraising result from bootstrapping or raising funds from friends and family. While it is tempting to treat this type of investment informally, that will often lead to disputes that prevent your business from growing and also damage personal relationships. Therefore, you should hire a lawyer to establish and memorialize the terms of investment from partners/founders and family and friends, just as you would from an angel investor or venture capitalist. This will help you preserve your interests and equity, as well as avoid the unsolicited direction on how to manage your business’s resources at Thanksgiving dinner.
There are many questions and decisions, both large and small, when starting a business. If you want more information on these or any other questions about laying a strong legal foundation to start your company up the right way, reach out to Priori today. A Priori attorney can guide you through these important early-stage decisions based on the specific nature of your business and your future plans. You can schedule a free consultation with Christine Wong, or another one of Priori’s lawyers for free here!