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Thinking of finally launching that startup in this year, 2017? You’d be in for a ride, especially if you are a dropout college student in Africa.
One of the most important things is actually forming the company, which is something startup founders sometimes forget to do. I always think of the scene in Silicon Valley where he gets his first investor check and he goes to the bank and says, “I want to deposit this,” and the bank says, “You don’t have a company.” That’s something we’ll often see with founders. They’ll think about trademarking their name, or they’ll think about setting up their website before actually setting up the entity.
Similarly, founders should remember to issue stock to themselves. Something that’s really important is when you first start the company, the company is obviously worth nothing, so issuing your shares for nothing is an even exchange. But as soon as you start the company, you’re inherently building value every single day.
So if for one reason you decide to form a corporation but don’t actually take the steps to issue the stock to yourself, you’ll be heads down building the IP, and then you get your first check valuing you at however many million dollars. All of a sudden you’ve set a price tag for what the company is worth. If you go to issue (stock to) yourself then, and if you don’t pay equal value for those shares, you’re going to have a hefty tax bill.
Another important thing to consider is who you’re starting the company with. It’s a deep relationship that you’re forming. While things are great in the beginning, things come up. For example, one of your cofounders might decide that they can’t devote as much energy or time as they expected. Or they actually need to make a salary, they need to go get another job. So vesting is key—if someone decides to leave and not devote all of their time or any of their time, there should be a vesting schedule put in place so that they’re not walking away with 50% of the company.
Everyone is anticipating that there will be a lot more of it in 2017. Founders should understand the implications of raising funds with unaccredited investors.
When VCs are investing, there is an inherent risk and time frame that they’re expecting for the investment that they’re making, and they understand what goes along with it. Whereas if you’re raising with a non-accredited investor, they’re going to be less tolerant to risk, and there will also be a tightened disclosure obligation that the founders might not be ready to undertake.
From the words of lawyer Christina Oshan, cofounder and managing member of the J+O Firm in Brooklyn