Gust Launch Guide to Startup Legal Needs

Ryan Kutter , ESQ., RELATIONSHIP MANAGER , GUST INC.

21 Jun 2017

Startups are more than just a product or service built to scale: they’re legal entities which come with legal processes and regulatory responsibilities that can sometimes seem arcane and difficult to catalogue—especially to first-time founders. Every stage of a company’s growth seems to multiply the compliance and risk management challenges facing the startup.

Gust Launch provides a platform that allows high-growth founders to incorporate and form their company, adhering to all the standards and best practices investors expect. We offer the only Company-as-a-Service platform out there, but there are many companies providing legal assistance through software. One thing we all have in common: none of us can automatically solve all the legal challenges facing a company. For many, you need the services of a lawyer, since the processes depend on the many variables inherent to your specific venture, which is why Gust Launch introduces founders to lawyers and discounts their bills for legal assistance with the things we can’t directly automate.

This guide explains most of the challenges startup founders can be expected to face, and where they can look to handle each challenge as it arises. It’s not an exhaustive list, since every startup is different, but most founders should plan to deal with most of these issues—and as for the rest? They’re part of why every startup needs a lawyer.

Incorporation and company formation, the Gust Launch way

Gust Launch handles all the aspects of creating a company from scratch by incorporating each startup as a new Delaware C-Corp. For a thorough walkthrough of these processes and how they work, see Gil Silberman’s post, “The difference between incorporation and company formation.”

Here are the processes Gust Launch guides founders through, listed in discrete elements:

• Preparation and filing of Delaware Certificate of Incorporation: creating and submitting paperwork to the state of Delaware filing for the creation of a new corporation with the reserved name.
• Preparation of Bylaws: the bylaws contain the operating rules to specify the organization, structure, and governance functions of the corporation.
• Preparation of Action by Incorporator: this step typically appoints the first board members to the board of directors.
• Initial Board Consent: the newly appointed board ratifies the Action of the Incorporator, adopts the bylaws, appoints officers, and more.
• Preparation and filing of form SS-4 for Employer Identification Number: after incorporation, the company must file this form with the IRS to receive an Employer Identification Number (EIN), which is necessary for paying taxes and useful for reporting taxes withheld on behalf of employees.
• Foreign Qualification in state where company is located: if a company intends to operate outside of Delaware, they must file for their state’s equivalent of Foreign Qualification so they can do business in their state as a Delaware company.
• Preparation of Founders’ Restricted Stock Purchase Agreements: the company must issue stock to its founders or other first shareholders so that someone owns the company.
• Preparation and signing of Stockholder Agreement: this document explains the rights and responsibilities of stockholders, including the transferability of shares and some other terms.
• Preparation of 83(b) elections: stock grantees can choose to file 83(b) elections, which have consequences for the taxation of capital gains.
• One-Way Non Disclosure Agreements and Mutual Nondisclosure Agreements: these documents exist to create protection for intellectual property, and are critical in many common situations for early-stage startups.

All of these documents and processes can be performed by startup founders independently, with the aid of guided software experiences designed by experienced startup lawyers. Gust Launch takes care of all of the above for founders because they are regular and repeatable enough to be automated. For everything else:

You will still need a lawyer

Regardless of the products and services that we develop, every startup will need a lawyer to be successful. Every startup’s specific legal needs are different. Companies also have needs specific to their individual situations, such as negotiating a commercial lease for office space and responding to cease and desist letters.

That is why we have developed a legal partner network. Gust Launch customers have access to our curated legal partners that can help with all the company’s legal needs beyond the processes listed above. Our partners have agreed to give one hour a month in free time to Gust Launch subscribers and to waive their initial retainer fees (which are generally around $2500). They have all joined our network because they understand that the integration of legal automation with trusted counsel creates better financial and legal outcomes for startups.

Startup legal needs that require lawyers

There are many parts of running a startup that emerge from the challenges facing each specific venture. For these, a lawyer with relevant experience can identify and alleviate problems before they happen by tailoring the documents and processes to the startup’s particular situation, or by dispensing advice that addresses issues before they happen.

Although it’s not an exhaustive list of all legal needs any given startup might need to address, these are some of the most common services and solutions lawyers provide to high-growth companies:

Common agreements like advisor agreements, proprietary information and inventions agreements, consulting agreements, and vendor agreements.

• These are typical agreements that startups use to formalize their relationships with entities that are not a part of the company but may be helping it in some capacity. These agreements help give all parties involved an understanding of the relationship they are forming and the extent of obligations each party owes to each other.

Employment related agreements such as the at-will employment offer letter, prior inventions, and other exceptions to IP agreements.

• When startups need to hire, they will want to make sure they give their employees documentation that forms the basis of the employee’s relationship with the business (such as whether they are an employee or an independent contractor). Additionally, the company will want to ensure that new employees understand the policies and requirements of their company. These kinds of agreements usually explain that the work the employee produces will be owed solely by the company in exchange for the employee’s compensation.

Ongoing routine bylaw amendments and board resolution support tools

• Milestones, big changes, and certain actions require the board or shareholders to vote on the proposed changes to make them legally effective. These documents are the processes that record and formalize those changes to the corporation.

Creation of employee stock option plan, including the preparation of stock issuance/stock option plan, preparation of option grant, and preparation of stock issuance agreement

• Since most startups can’t generally pay salaries that compete with those offered by larger corporations, they issue stock options as a way to incentive and compensate their employees, with the expectation that at liquidation the stock will have generously appreciated in value. The documentation that supports this process specifies how many shares the option plan will set aside, how the shares will vest, and ways in which the employee can exercise those options.

IP support tools

• Companies need to be diligent about properly protecting any IP that it or its employees generate. This can include filing state and federal trademark applications and even potentially pursuing a patent. Additionally, the company will want to make sure it owns all its IP, which can be transferred through assignment of IP agreements.

Fundraising

• When a company is ready to take on investors it generally accepts capital through several instruments, including preferred stock, convertible notes, SAFE notes, and KISS notes. These various agreements track the terms and rights for each group of investors. In addition to the agreements, startups need to ensure they are following state and federal securities laws. Ensuring compliance involves navigating a myriad of state and federal securities regulations based on the type of investors and the states where securities will be sold.

Gust Launch’s scope is always growing

To address some of the above needs, we are constantly developing new features and services that will be available as part of Gust Launch, both within our base package and as components of add-on services designed to handle more specific challenges. For example, some of our current developments are tools and services to help startups tackle hiring and fundraising. While we can’t yet discuss the specifics of those offerings, we can say that we approach each challenge by incorporating input from experienced startup lawyers, automating processes, and removing roadblocks according to established startup best practices while passing significant cost savings to our customers. Another benefit of our approach is that it collects all the documents and information together in one place, complete with an audit trail of all signatures and changes.

Every startup’s journey is unique, so this post may not cover every challenge your particular company will face. For more information on any of these topics, consult an attorney.

Startup lawyers: if you’re interested in hearing more about the opportunities we’re working on, we’d love to hear from you. Please contact us at lawpartnering@gust.com.

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