#save a cd

[safdiepllc]

CD's for Questions #2: Guide to Bootstrapping Startup Legal Costs

Question: What's the best way to bootstrap without losing out down the road?  Asked by @evilldave

CD Saved: RJD2, "Since We Last Spoke."

If you're bootstrapping a tech startup, you want to save money, but not at the cost of making any fatal mistakes that would jeopardize your ability to raise funds and otherwise run a successful business.  It's always best to have an attorney looking over your shoulder, but if you simply don't have the money to hire an attorney, the incorporation process is relatively straightforward and is ripe for bootstrappery.  

Bootstrapping will take longer than if you just hired someone to do it.  I'd only advise bootstrapping in the context where you are not rushing.  For purposes of this discussion, we're talking about a tech startup which will be seeking vc financing.

1. Certificate of Incorporation.  This document is filed with the secretary of state that forms your entity.  You can find text of a certificate of incorporation at Orrick's website.  I annotated another form here.  For the relevant terms contained in a certificate of incorporation, see Ryan Roberts' post.  Delaware has a form of certificate of incorporation posted online; don't use it, but you can use the cover letter.  Unless you have a friend who lives in Delaware, you will need to hire a service company to serve as agent for service of process in Delaware.  One of the cheaper outfits is Vcorp.

2. Bylaws.  In the pre-financing stage, you can put together your own bylaws.  A form can be found at Orrick's site.  Again, I've annotated another form here.  

3. Action of Incorporator.  This is the paper trail selecting the initial board of the corporation.  A form can be found at Orrick's site.  What's that?  I've annotated another form here. 

4. Obtain an EIN.  Never pay someone to do this for you.  Go to the IRS's site and do it yourself.  

There are other basic items a startup needs to do from its inception, such as issue restricted (vesting) stock to the founders, file 83(b) elections, sign intellectual property assignment/confidentiality/employment at will agreements.  Orrick's site has forms for these things; as does Goodwin Procter's.  However, my opinion is to get an attorney for these steps.

RJD2, "Since We Last Spoke."  Discovered RJD2 flipping vinyl at Halcyon, the Brooklyn cafe/record shoppe on Smith Street during the heyday of turntablism. There's nothing on this CD as magical as "Ghostwriter" from his previous release, but it will still make you want to wear a velvet jumpsuit.  Standout track: "1976."  

@evilldave:  Sweet tunes are coming your way!  Wife Safdie says move to the groove!

For an explanation of the whole "CD's for Questions," see here.

[safdiepllc]

CD's for Questions #1: S-Corps vs LLC's

Question: Any reason to incorporate as an S-Corp rather than LLC (in NY)?  Other than cost of publication?  Tweeted out by: @jasongelman.

CD Saved: Think About Life, "Family."  For the whole "CD's for Questions" explanation, see here.  

[First things first: if a startup will be seeking VC financing, they should know that prior to closing that financing, the startup will have to be a c-corporation.  VC's will not invest in pass-through entities, like LLC's and s-corps.  Delaware law makes it easy from a corporate perspective to convert these NY entities into a Delaware c-corp (the state preferred by VC's).  Plenty of startups initially form their entity as a pass through, take the benefit of the losses on their personal income taxes and then convert prior to a VC financing.  However, depending on the business, there may be adverse accounting ramifications to a conversion.] 

I generally favor LLC's because of their flexibility.  As products of the 90's, LLC's tend to have less corporate formalities than corporations: internal governance and economic understanding among the members tends to be more the result of contract law, set down in the entity's operating agreement.  

As a result of its recent vintage, there are some uncertainties with respect to the LLC form.  For instance, how much in the way of fiduciary duties can a NY LLC contract away?  These issues are still being litigated; legal blogs are atwitter with recent Delaware case law on this issue.  

On NY's LLC publication requirement, depending on the circumstances, I may advise startups not to comply.  More detail can be found here.   

S-Corps tend to be more rigid and limiting.  For instance, there can be only one class of shares in an s-corp.  An investor cannot be issued equity with any economic or control preferences as compared to another shareholder.  The number of shareholders in an s-corp is capped at 100.  No foreign shareholders are permitted.  And only individuals can own shares of an s-corp.    

The one advantage I've found with an s-corp is a potential savings in the self employment tax.  For a good description of how it works, see here.  But I know other accountants who are not comfortable with the trick.

Again, I generally favor LLC's, but I've seen other skilled advisors go the s-corp route.

Think About Life, "Family."  I discovered Think About Life on an online blog and since then have caught them live around half a dozen times.  Each time is a better dance party than the last.  You can cancel your gym membership.  "Family" is their sophomore release;  this CD is from the Canadian pressing on Alien8 from May 2009.  Standout track: "Havin' My Baby." 

@jasongelman: Sweet tunes are coming to you!  Wife Safdie sends her gratitude.