Start-ups and emerging companies demand focus on the bottom line (and most directly cash flow) for survival and growth. Lacking the freedom that comes with an influx of outside capital, bootstrappers must find ways to responsibly conserve cash. Unfortunately, this frugality is often to the detriment of building key elements of legal infrastructure and can cost the company far more in the long run due to failure to effectively establish or protect the value of the business. The challenge is to understand, prioritize, and budget for what is essential. Ideally, companies retain trusted counsel who understand their business and provide cogent, personalized guidance. Unfortunately, bootstrappers often fail to obtain the counsel they need, choosing instead to rely on general source materials (borrowed or copied, or "standardized form documents") which can be applied out of context and thus fail to create the intended results. There are several common elements of legal infrastructure that should be considered. These legal "action items" are often triggered by fairly predictable stages in the company's lifecycle. START UPThere are a few action items that should be addressed at the start of any company. Corporate Structure. For almost any company, the creation of an entity for liability protection is a necessity. The entity provides a "corporate veil", which in most cases protects owners' personal finances from issues (such as lawsuits, contractual obligations, etc.) that may affect the business. There are several different entity types, requiring varying degrees of complexity and maintenance. Factors such as ownership structure, funding strategy, tax considerations, growth and transition plans, or planned equity incentives all affect entity selection. Equity Owners' Agreement. An equity owners' agreement is a critical document for any entity with two or more owners. This document establishes owner equity and rights in the company, which in turn determines the distribution of profits. It is essential to define owner duties and responsibilities, including any required contributions. If these are left unclear, a partner who has quit contributing to the success of the company may still be entitled to the benefits of full ownership. Finally, major contingencies are taken into consideration, such as the unexpected death or retirement of a partner. Intellectual Property. A successful company builds its value through positive brand awareness over time. As brand equity grows, it begins to obtain actual, tangible dollar value. Federal trademark protection protects the brand name from imitation and value dilution. Other forms of intellectual property, such as copyright, patent, and trade secrets are often advisable to protect a company's inventions, original works, and property formulas. A review of a company's intellectual property portfolio can determine which aspects of the business can be protected, and the costs versus the value created by that protection. Basic Contracts. Basic vendor, client, and employee contracts need to be designed or reviewed (if not drafted) by company legal counsel. GROWTHAs companies grow, other legal building blocks become necessary. Growth generates additional income, but often creates additional risk. Contracts. Company contracts, including vendor and client agreements, need to be reviewed periodically to ensure they remain relevant. Employment. Employment collateral needs to be appropriately established, i.e., confidentiality and non-compete agreements, employment manuals, policies/procedures, contracts, compensation plans, or stock incentives, to support legal compliance and employee retention. High growth companies often need to bring in management quickly and require compensation agreements that are affordable to the company through creative equity or incentive plans. Tax. It is important to review and update corporate documentation on an annual basis in order to ensure accuracy, compliance with regulations, and minimize potential taxes. TRANSACTIONSEvents often drive the need for legal support. Establishing a solid legal foundation enables a company to be ready for key opportunities or challenges. Funding. The time may come when additional funding is required to achieve business goals. A company taking on investment must be prepared to intelligently negotiate with investors to minimize the loss of equity and comply with all Federal and State securities laws. Mergers, Sales, and Acquisitions. The terms of these transactions and the full range of implications for the company and all members must be fully considered throughout. Litigation. It is very important to take threats of litigation seriously and to wisely consider affirmative suits to protect the company. A strong legal foundation will not protect against all threats, but it will enable the company to be better prepared and make informed decisions. It is important to identify the key legal requirements up front to protect a business (and the people in it) from liability, while establishing business structure, ownership, and value. Dollars spent early and wisely will save your company money. ——————- Richard J. Ressler is the managing general counsel of MWR legal (Moster Wynne & Ressler, P.C.). Mr. Ressler manages the firm's "outsourced" general counsel practice and serves as corporate and securities counsel to startups and emerging companies. firstname.lastname@example.org.
Read more detail on Recent Business Law Posts –