Should I Incorporate on My Own?
Formally incorporating a company is a significant milestone in a founder’s journey. What may have begun as an idea doodled on the back of a napkin is now an official legal entity. Given the mass availability of “do-it-yourself” incorporation websites today, many founders might be tempted to save some cash by simply filing the incorporation documents with the Secretary of State themselves instead of consulting with a lawyer. While the type of individual who has the drive and determination to start their own company is likely more than capable of creating their own set of incorporation documents from a template on the internet, this is often a mistake, because the process of setting up a company isn’t finished once you file your incorporation documents. There are several other important subsequent steps which, if not done correctly, can cause a massive headache later on at the most inconvenient of times—like when you’re trying to close your first round of venture financing.
After filing its incorporation documents, there are several other important initial actions a corporation has to take: the Incorporator has to resign, bylaws have to be adopted, directors and officers have to be appointed, and founders have to be issued stock (and perhaps file their 83(b) elections in order to get favorable tax treatment). If the corporation plans on hiring employees, it will probably want to create a stock incentive plan to reward early hires in addition to protecting its intellectual property by having workers sign information and invention assignment agreements. Importantly, there are a number of early corporate actions that the directors have to approve, such as obtaining an Employer Identification Number and opening a company bank account.
As you can see, properly setting up a corporation is a lot more complicated than simply filling out and filing a set of Articles of Incorporation based on a random template from the internet. Messing up some of these steps (such as the proper initial board resolutions) can be corrected later through subsequent corporate acts (which will likely require spending money on a lawyer). While others, such as failure to timely file an 83(b) election, have no recourse mechanism. Perhaps most significantly, correcting these mistakes costs not only money, but also time—time which might be of the essence if your company is running out of runway while trying to close a financing round.
Although it may be tempting to save some extra cash and use an online do-it-yourself service, the time and money you often save in future legal fees by avoiding mistakes and ensuring your corporate documents are tailored to the specific needs of your company often outweighs any cash that you might save upfront. It’s also wise to view the hiring of a lawyer to help set up your company as an investment in a relationship that will pay dividends in the future when you are trying to close your first round of venture financing. Chances are high that your future venture capitalist will be represented in the financing round by a corporate lawyer who specializes in these types of transactions. By forming a relationship with a corporate lawyer or firm who specializes in these types of startup situations at an early stage, you will be well-positioned farther down the road when it comes time to raise money through your first venture financing round.
After filing its incorporation documents, there are several other important initial actions a corporation has to take: the Incorporator has to resign, bylaws have to be adopted, directors and officers have to be appointed, and founders have to be issued stock (and perhaps file their 83(b) elections in order to get favorable tax treatment). If the corporation plans on hiring employees, it will probably want to create a stock incentive plan to reward early hires in addition to protecting its intellectual property by having workers sign information and invention assignment agreements. Importantly, there are a number of early corporate actions that the directors have to approve, such as obtaining an Employer Identification Number and opening a company bank account.
As you can see, properly setting up a corporation is a lot more complicated than simply filling out and filing a set of Articles of Incorporation based on a random template from the internet. Messing up some of these steps (such as the proper initial board resolutions) can be corrected later through subsequent corporate acts (which will likely require spending money on a lawyer). While others, such as failure to timely file an 83(b) election, have no recourse mechanism. Perhaps most significantly, correcting these mistakes costs not only money, but also time—time which might be of the essence if your company is running out of runway while trying to close a financing round.
Although it may be tempting to save some extra cash and use an online do-it-yourself service, the time and money you often save in future legal fees by avoiding mistakes and ensuring your corporate documents are tailored to the specific needs of your company often outweighs any cash that you might save upfront. It’s also wise to view the hiring of a lawyer to help set up your company as an investment in a relationship that will pay dividends in the future when you are trying to close your first round of venture financing. Chances are high that your future venture capitalist will be represented in the financing round by a corporate lawyer who specializes in these types of transactions. By forming a relationship with a corporate lawyer or firm who specializes in these types of startup situations at an early stage, you will be well-positioned farther down the road when it comes time to raise money through your first venture financing round.