First – we’re excited for next week’s lessons learned session – here are the recommendations for both the video and presentation from class 9’s slideshare.
Thank you Peter Fusco of Lowenstein Sandler, for braving broken ribs to teach us about the essentials of startup law, having seen 480+ pre Series A companies:
(thanks to John Bachir for detailed notes)
The benefits of the Delaware-based C Corp:
If your company plan is to be a tech company, incentivizing with options, looking for venture investors, you want to be a Delaware C Corp to start.
Investors understand the structure —officers, directors, shareholders. Becoming a Delaware C corp is the easiest process, and it’s the most common.
Why do some NYC companies opt for LLC?
This is only optimal if they are services-oriented, such as consulting.
For the technology-based company wanting to raise capital and incentivize with options – they are tricky.
The promised big advantage is that the LLC is not taxed as an entity. The members are taxed, usually in ratio to their ownership percentages. But for a negligible profit technology company, by the time you take advantage of pass-through taxation, you’ve been funded and converted anyway.
There are significant complications with convertible debt deals and any seed or VC money raised outside of the US
For a group of people that are talented consultants, who also create products – then structure an LLC, and when you are serious about a product build, spin out a C Corp subsidiary, or spin it out completely.
Why you should figure out who owns what, early
This is the top thing founders don’t do but they should: don’t figure out who owns what.
Conversations are had, but not formalized, and 6 months later, people remember things differently.
The first thing you do, talk about who has what equity/percentages. the earlier you get your stock, the less value there is, and the valuation from a tax perspective is more honest.
83(b)! 83(b)! If there is one thing to remember!!
First, figure out how you are going to split the company.
Then, issue equity agreements.
Then stock restriction agreements, and file your 83B!!!
An 83(b) election lets you decide at the start of your vesting agreement to be taxed for the entire amount that will eventually vest at the present value.
83(b) is important! otherwise the IRS taxes you every time restriction lapses. The company is worth little today, but the company could be worth a lot of money later.
Vesting is good to protect founders against one another in beginning. 2, 3, or 4 years vesting. longer vesting is more in investors’ favor. Investors are investing in a team mostly — they have to see that everyone is appropriately motivated. With restricted stock you have it all up front, but company has the right to buy it back..
If you file 83(b), then you either pay tax on gain, or fair market value, then you don’t pay tax again until you pay tax on capital gains from sold stock.
How do we deal with some founders putting in money, while others are working?
If someone puts in money for server space, incubator space, put it in as a convertible note. A simple 1-page founder notes with a grid on the back, and note the expenses to pay off the contributing founder when you are funded.
For further questions – reach out to Peter and join him and his team at the various NYU Incubator office hours sessions.