Note to reader: Please share this with as many low budget startup founders (particularly in Texas) as you know. Friends don’t let friends waste money on crappy lawyers.
Update: If you’re looking for DIY-ish startup formation options, this is another viable alternative: Clerky
So you’re starting a company with virtually no budget for legal fees, and you just found a guy in Austin who’s willing to help you out on the cheap. He even bills $175/hr and seems to come well-recommended by other entrepreneurs. Awesome, right? For me it is.
It’s difficult to overstate just how often clients end up paying our firm more to close a transaction, sometimes substantially more (think 5-6 figures), because we have to clean up a mess created by some cheap local lawyer with “startup friendly” (read: questionably low) rates. Garbage sold at a low price is just expensive garbage. There’s one solo practitioner in particular who’s done work for two people I know, separate companies, and screwed up big time on both of them (2/2). One ended up closing a VC round at 2-3x the usual fees in order to clean up the disaster he created. Cheap is awesome until real investors hire real lawyers to actually read the documents your cheap lawyer drafted… or failed to draft.
I’ve previously articulated my views about going alone on startup legal issues, including a discussion on the growing number of DIY tools available online. There are so many multi-specialty legal issues that come into play in forming, growing, and financing a company, that I highly advise against trying to do things yourself, at least if you expect to raise professional venture capital and scale your business. The stakes are simply too high.
But, the reality is that no matter what every lawyer with a blog says, founders will keep trying to form their companies on their own. Given this reality, here’s my suggestion to all of Austin’s startup founders with zero funds budgeted for legal fees (and who can’t find a decent attorney who will be flexible): meet Docracy, read this post, and follow everything very carefully.
Lawyerless > Crappy Lawyer
The beauty of quality DIY online resources is that, while they will never provide the level of service that an experienced, quality attorney will provide, they sure as hell are better than relying on a crappy one. With the right contracts available for free online (via Docracy), the right guidance (via blogs, articles, etc.), and the patience to seriously read the instructions, you can stand a much better chance of not screwing your company up by doing things yourself versus hiring an incompetent attorney, trusting him to do things correctly, and then finding out two years later that he didn’t.
So here’s my free guide for using the power of the internet to form your own Delaware C-Corp based in Texas. If you are forming an LLC instead of a C-Corp, then for the love of all things good and holy, please get a competent lawyer. And again, let me reiterate: I do not think you should try to form your startup on your own. My desire here is to simply provide a helmet and a flashlight for those who are going to do it anyway, so that if they are ever able to afford a real attorney and raise serious funding, their legal history won’t be a complete nightmare. You will screw some things up, but hopefully the clean-up costs will be much smaller than those caused by Austin’s crappiest lawyers.
DIY Startup Formation – Powered by Docracy, Orrick, and “the Internets”
- Harvard Business Review – Top Ten Legal Mistakes Made by Entrepreneurs
- SHL – Should I incorporate in Texas or Delaware?
- Dan Shapiro – Vesting is a Hack
- Yokum Taku – What is an 83(b) election?
- Cap Table Management – eShares
- SHL – What’s my startup’s stock worth?
- Antone Johnson – 5 IP Mistakes to Avoid
- Delaware Secretary of State – How to Form an Entity in Delaware
Requisite Formation Docs:
- Certificate of Incorporation (Charter)
- Action by Incorporator
- Board Consent – Organizational
- Stockholder Approval of Indemnification Agreement
- Common Stock Purchase Agreement – with Vesting – Share price should be $0.0001 per share. Don’t forget the exhibits, especially the Technology Assignment.
- 83(b) Election
- SS-4 and Filing Instructions to obtain EIN
- Indemnification Agreement – for Officers and Directors
- Common Stock Certificate
- Confidential Information and Inventions Assignment Agreement
Steps (Order is important)
- Read all of the Background Reading – very very carefully.
- Figure out your Founder Common Stock distribution and Vesting details
- Execute and File the Charter in Delaware
- Execute the Action by Incorporator
- Execute the Board Consent (Make sure you designate at least a CEO and Secretary)
- Execute the Common Stock Purchase Agreements for each Founder, including all exhibits. – Set
- File your 83(b) Election immediately
- Fill out Common Stock Certificates
- Execute the Stockholder Consent
- Have the Secretary execute the Bylaws
- Did you file your 83(b) election yet? (30 days within Stock Issuance, or your toast)
- Apply for an EIN at the IRS Website
- Have officers and directors execute Indemnification Agreements
- Have all founders execute a Confidential Information and Inventions Assignment Agreement
- Register as a Foreign Entity in Texas.
- Keep digital copies of everything in a safe place.
Useful Forms to Possibly Use Later:
- Employment Offer Letter
- Consulting Agreement
- Non-Disclosure Agreement (NDA)
- Confidential Information and Inventions Agreement for Consultants
- Technology Assignment Agreement
- Terms of Service of Docracy
The above does not cover granting options to employees via a formal option plan, because, frankly, by the time you are granting equity to non-founders you’re insane for not having hired a lawyer – and the legal issues around options are complicated – real complicated.
Disclaimer: As I said before, you will screw some things up. And yes, trying this yourself is silly and irrational – much like a lot of things entrepreneurs tend to do. The above steps and documents might not even be the right ones for your startup’s context. I did not draft the above-referenced documents, nor do I vouch for their legal enforceability. You absolutely should hire a lawyer before trying to form your startup. But, putting all that side, if you read carefully and follow the above instructions, you will be probably be on better legal footing than 99% of the startups formed by terrible lawyers.