Written by Kaylina Ryan. Video credit: Samantha Scott, Esq.
Everyone could use a couple of extra bucks, especially in the startup world. Pre-seed founders spend countless hours perfecting their product and slaving over sales in order to make their company look enticing to investors. With so many other factors to think about, it’s easy to overlook these three simple legal practices that will make your startup look more attractive to VCs.
1. Structure your company as a Delaware C-Corporation.
Regardless of where your company headquarters is, most VCs want your certificate of incorporation to be filed in Delaware. This is due in large part to Delaware’s well-established business laws which offer some predictability to how legal issues will play out. Additionally, Delaware has passed laws that provide protection for a company’s board of investors. Because most VCs will want to join your board of investors, these protections can make your startup a more appealing investment.
(Learn more about incorporating your startup here)
2. Make your founder’s shares subject to vesting.
However great your idea may be, investors are primarily investing in the skills of the founders. VCs want to make sure that the founders are going to stick around and see their ideas come to fruition. Most commonly, investors want a four-year vesting schedule with a one-year cliff. This means that after one-year, a founder will get 25% of their shares. Every month after that, the founder will continue to receive more of their shares until at 4 years when they receive 100%. This kind of vesting schedule provides VCs with the peace of mind that the founders they have just invested in will continue to work with the company and put the VCs’ money to good use.
(Vesting can also be referred to as restricted stock purchasing)
3. Make sure the company owns all intellectual property.
The last thing any founder wants is to create an idea and then have somebody else profit from it. To prevent this, you must ensure that any product prototypes, logos, or code have been filed with the US Patent and Trademark Office. You should also have all your employees and consultants sign an “IP assignment” contract. This ensures that your company will own all intellectual property created by your employees. An IP assignment should be signed by everyone from a graphic designer making a logo, to a programmer writing code.
(Learn more about the IP Assignment Agreement here)
Though these three steps aren’t hard to do, many founders simply don’t have the bandwidth to stay on top of their legal work in addition to everything else they need to oversee. Schedule a free consultation with a Savvi.Legal General Counsel to go over the things you can do to prepare your company for its next round of financing.