FAQs

It really depends on the industry. For software startups, it’s become much cheaper to launch those products, so investors expect you to spend more of your own money developing your product. And many people have already launched and have gotten feedback from customers before they even seek outside funding. Investors always like that.

Our startup clients are sometimes asked by investors or government agencies to provide their number of authorized and issued shares – the difference between the two isn’t always easy to figure out.

Authorized shares are the total number of shares that a company is legally permitted to issue. This is a number that is designated in the company’s certificate of incorporation as the maximum number of shares that the company may issue. On the other hand, issued shares (sometimes referred to as outstanding shares) are shares which have been sold to investors, founders, or employees. Issued shares are drawn from the total pool of authorized shares and can never exceed the number of authorized shares. Additionally, because authorized shares encompass the total number of shares that may be issued by a company, this number can include different types of shares used by a company. Authorized shares include not just issued shares, but also types of equity awards, which may take the form of stock held for employee compensation or options.

You can think of the relationship between authorized and issued shares akin to marbles in jar. The authorized shares are represented by the total number of marbles in a jar. The issued shares are marbles pulled from the jar and sold to an investor. Marbles may be taken out of the jar (issued), put back into the jar (repurchased), or remain in the jar for future use.

Simple Agreements for Future Equity (SAFEs) were first introduced in late 2013 as a tool for startup companies, particularly those in early stages, to raise capital prior to a preferred equity financing and as an alternative to raising capital through convertible notes. SAFEs have become more and more attractive to both the companies that sell them and the investors that purchase them due to their reputation for being “simple.” In many ways, SAFEs are no different than convertible notes, in that companies can sell SAFEs without a valuation, and SAFEs convert into equity at a priced financing in the future, often at a discount. The main difference between SAFEs and convertible notes is that SAFEs are not debt securities but instead represent a contractual right to receive equity in the future through their conversion. As a result, SAFEs do not have an interest rate nor do they mature, and the holders of SAFEs are not considered creditors of the company that sells the SAFEs. So it is not surprising that SAFEs are perceived to be a simpler alternative to convertible notes and cost less to negotiate.

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It’s always better if you are paying someone than not. If you have volunteers and they are not happy down the road, there might be wage claims with the state Labor Commissioner. You need to determine whether your team members would legally be classified as employees or contractors because there are mandatory employer contribution and withholding requirements that apply to employees.

It’s important to have the right disclaimers with respect to warranties and limitations of liability, and to present them in the right way. We can help you set those expectations correctly with your customers.

An acquihire can take on many forms depending on the specific situation, but there are two structures that are commonly used. In the first, the buyer acquires the assets of the startup and hires its employees. Investors in the startup will receive at best a portion of their investment back. The founder will not receive any money for his or her equity in the startup. The second structure is similar to an employee recruiting arrangement. In this structure, the buyer hires the employees of the startup (including the founder) and pays the startup a modest fee prior to the company’s dissolution. 

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It’s always a good idea to have a relationship with any potential advisors intact at an early stage and definitely before you start asking investors for money.

It makes sense to consider incorporating when there is more than one person contributing intellectual property to the new venture. At the very latest, you need to do it before you launch a product publicly. For example, let’s say you have an app and you’ve sold it to a few people. You could potentially be exposing yourself to personal liability if you don’t incorporate.

Of course, it could also be too soon to incorporate. Maybe you go through ideas like water and you set a new company up every time. Then you might be incurring obligations for numerous companies and be required to file tax returns for each and every new one. That could cause a major headache.

First, you need to choose the right form of entity and state of incorporation. The main options to consider are a C corporation, S corporation or LLC. It boils down to whether you’re a typical California emerging growth company with a very clear path — in which case a Delaware C corporation is usually the right option — or whether you are something else.

This is something that the people involved need to figure out based on what they are putting on the table. The contributions of each founder need to be taken into account. For example, who brings in the intellectual property, the money — either directly or through relationships — and who puts in the time? The groups that are most successful are those that have already worked together and have confidence in the roles assigned to one another. And don’t forget that shares issued to the founders at inception — we call that the “founders’ round” — should be subject to vesting.

You need to start thinking about protecting your intellectual property very early on. It helps to bounce ideas off of people. But if you want to protect a potential patent, you might need to keep your idea confidential (and share it under a Non-Disclosure Agreement only) until you at least file for a provisional patent. Then again, there aren’t that many truly “original” ideas out there and patent protection may not be that meaningful for your product. It makes sense to talk through the costs and benefits of different approaches with your attorney early in the life of the startup.

In many cases, as soon as you finish your founders’ round. As shares start vesting over time, each founder needs to file an 83(b) election with the IRS within 30 days of getting those shares. It can be very expensive for a founder to miss the 83(b) filing date—as time passes and the company arguably increases in value (whether or not there is a financing or liquidity event) the founder will owe taxes to the IRS as the stock vests.

Many entrepreneurs still have paying jobs and work on their startup at night and on weekends. Others have already left their old job. In both cases, we need to look at your employment agreements and make sure you are doing the right thing. If the product you are creating is not related to your employer’s business, it may be OK as long as you work on it on your own time and with your own tools.

The great thing about the startup culture is that failure doesn’t carry a stigma. It’s almost a badge of honor. In fact, lots of investors don’t want to invest in someone who hasn’t failed at least once or even several times. Most start-ups fail and that’s a reality. And that’s why you want to bring in investors who have the same mindset and know that failure is a strong possibility.