Company Formation – Startup Checklist

Startup Checklist

Here is a checklist to help keep track of many of the important matters that must be considered and addressed in connection with starting up and beginning to operate a new business.  Note that this is a generic starting point and you will need to work with your team, counsel, and advisors to complete the picture based upon the specific needs of your business.

 Preliminary Considerations – Making a Clean Break

•  Contractual Restrictions.   Review all existing agreements with current employer for potentially restrictive noncompetition, assignment of inventions, nonsolicitation and confidentiality provisions.
• Beware of Pre-Termination Development Efforts.   Beware of potential issues involved with beginning to develop a new business prior to leaving your current employer.  Ownership of developed ideas and assets may become entangled with existing employer.
•  Handbooks/Policies.  Review employment handbooks and policy manuals, and if you are at a University as a student or professor, consider University IP policies to determine if there are any restrictions on starting a new business or ownership rights that need to be addressed prior to or in connection with starting the new business.

Founders Matters

•  Identify Founders.   Identify the key players who will commit to the success of the business, provide valuable skills and intellectual capital, and are prepared to devote significant time and effort to the new enterprise. 
• Confirm No “Lost Founders”.  Consider whether there are any individuals who may have contributed in some meaningful, even if limited, way to the business and who may, even if unlikely, have some claim to the business idea or the initial intellectual property developed.  If necessary, clear potential conflicts and claims with such individuals.    
• Address Founder Restrictions.  Determine whether any founder is subject to restrictions that need to be addressed, such as a founder being subject to an applicable noncompete, nonsolicit or confidentiality agreement, a founder being subject to policies (such as university IP policies) that may complicate ownership of intellectual property developed by such founder, a founder needing to make a clean break from his/her current employer, or a founder not able to devote the same degree of effort as the other founders due to other professional or personal obligations.  
• Address Founder Noncompete Issues.   Discuss Founders’ being subject to noncompetes to benefit the new startup.
• Divide the Pie; Vesting.  Resolve among founders how to “fairly” divide the founders equity amongst the group.   Discuss need for and terms of vesting of founders shares.
• Early Issuance of Equity:  Consider applicable tax aspects of issuing stock to founders, including importance of purchasing stock early to support lower price for founders stock.

General Organizational/Corporate Matters

•  Choose the Entity.  Consider entity formation options (mainly, C Corp, S Corp, LLC), and evaluate related liability, tax, employment, venture financing, and other matters related to choice of entity. 
• Name the Entity.   Consider names for the business and potential differences between corporate name, domain names and trademark rights, and search state entity databases, domain name registrars and, if applicable, USPTO site to determine availability of desired name.
• Prepare/File Organizational Documents.   Work with counsel to prepare, review and execute organizational documents that reflect agreed upon capital structure, governance and related formation matters.   
• Prepare/Execute Founders Agreements.  Work with counsel to prepare, review and execute agreements with the Founders reflecting governance/control matters, vesting matters, and noncompete and confidentiality matters.
• Stock Vesting Matters.  If vesting of founders’ stock is applicable, work with counsel to prepare and file 83(b) election. 
• EIN Number: Obtain Federal Tax Employer Identification Number for entity.  EINs are needed for, among other things, opening bank accounts and making payroll.   EIN can be applied for online at www.irs.gov.
• Open Bank Accounts:  Open corporate bank account after company is formed and EIN number is obtained to deposit payments for founders stock and to establish financial separation between founders and company.
• Foreign Qualification: Discuss with counsel issues relating to operation in jurisdictions outside of state of formation, including state and local taxes, business regulatory environment and foreign qualification and related fees. If necessary, apply for foreign qualification is other states at formation or at appropriate time thereafter.
• Local Requirements:  Evaluate need for local permits depending on nature of business being conducted.  If necessary, apply for and obtain local permits.

 Corporate Records

•  Maintenance Records:  Develop system for maintaining complete, accurate and accessible corporate records, including board and stockholder records and other business records.  
• Forms of Consents/Minutes:  Work with counsel to develop forms of minutes and consents evidencing Board and stockholder actions.
• Board Actions:  On an ongoing basis, Board should be consulted with, and will be required to approve, a broad range of corporate and other material matters.  Discuss with counsel scope of Board authority and responsibility, and the importance and manner of documenting Board actions.
• Stockholder Actions:  On an ongoing basis, startup’s stockholders will be required to approve certain material corporate matters.  Discuss with counsel scope of stockholder authority and typical requirements for stockholder approval, and the importance and manner of documenting stockholder actions.
• Capitalization Table:  Develop and maintain a complete and accurate capitalization table. 

Seed Financing Matters

•  Seed Financing Generally:  Discuss with counsel manner/structures for obtaining and securing seed financing.  
• Don’t Do It Alone:  Securities laws are implicated even in very small seed financings.   Avoid selling (or promising to sell) securities prior to discussing regulatory requirements and recommended process  with counsel.

 Employment and Consultant Matters

•  Employment Matters Generally: Consider importance of employment letters and business protection agreements, risks relating to deferring salaries of employees in advance of a funding round, importance of at will arrangements and avoiding agreeing to severance provisions with employees, and proper classification of employees as exempt/nonexempt.
• Form Employment Letter/Business Protection Agreement:  Develop with counsel forms of employment letters and Business Protection Agreements to be used in connection with hiring employees.
• Consultant Matters Generally:  Discuss with counsel importance of entering into written consulting agreements to secure ownership of developments created by consultants, and proper distinctions between consultants and employees. 
• Form Consulting Agreement:  Develop with counsel a form of consulting agreement to be used in connection with engaging consultants.
• Payroll Matters: Establish good payroll practices, including ensuring that each employee and consultant completes and executes necessary INS and IRS forms and that startup properly withholds taxes and makes necessary tax filings related to payments made to employees and consultants.
• Workers Compensation Insurance:  Discuss with counsel need to obtain workers compensation and unemployment insurance and the requirement to make appropriate state filings related thereto.
• Posting Requirements:  Federal and state laws require employers to hang posters that provide information to employees about applicable state laws (e.g., FMLA, OSHA).  See Department of Labor, “Poster Page: Workplace Poster Requirements for Small Businesses and Other Employees,” http://www.dol.gov/osbp/sbrefa/poster/matrix.htm.
• Record Retention:  Adopt and implement record retention policies and procedures related to employees.
• Employee Handbook:  Adopt employee handbook and related policies (hiring, vacation, leaves, harassment, electronic communications, substance abuse, etc) and procedures related to same.
• Foreign Employees:  Discuss possible filing and other requirements prior to hiring any foreign nationals.

 Option Plan and Benefits

•  Option Plan:   Consider establishing an Option Plan upon formation and, if a Plan is to be established, the size, terms, rules and implementation of such a Plan.    Work with counsel to prepare Option Plan and related form Option Agreements.
• Option Grants:  Discuss with counsel procedure for granting options, including necessity to obtain Board consent, FMV requirements, and specificity of vesting and other key terms. 
• 409A Valuations:  Discuss with counsel necessity of issuing options at FMV and the appropriate procedures for compliance with 409A, including when it is preferable to obtain an independent valuation of the startup’s common stock
• Benefit Plans:  Consider timing and process for properly adopting and implementing medical, retirement and similar plans and programs for the benefit of startup’s employees, including the need to obtain Board approval of such plans, the need to make certain disclosures to employees, and the need to make certain IRS and other filings related to such plans and programs. 

 Intellectual Property Matters

•  IP Matters Generally:  Discuss with counsel intellectual property matters generally, including desirability/feasibility of prosecuting patents and/or trademarks, securing and protecting IP from founders, employees and others, avoiding IP conflicts with other parties, and desirability of conducing a freedom to operate investigation.
• Trademarks:  Discuss with counsel procedure and expense for securing trademarks in company name or other marks or designs.   If appropriate, work with counsel to complete desired trademark searches and filings.   
• Patents:  Discuss with counsel scope of possible patentable ideas and, if appropriate, work with counsel to coordinate development and prosecution of patent filings.
• Copyrights:  Discuss with counsel need/desire for copyright registrations and appropriate use of applicable copyright notices.
• Domain Names:  Secure domain names and desired alternatives and discuss with counsel issues relating to any conflicts between domain names and TM rights of others.
• Website/Privacy:  Work with counsel to develop and implement appropriate website terms of use and privacy policy and related privacy and registration procedures.  
• Software Development:  As applicable, all third party developers should execute an appropriate assignment of inventions provision with respect to their software development efforts for the startup.
• Indemnification:  Ensure that IP licenses include appropriate indemnification for infringement and related claims.
• Nondisclosure Agreements:  Protect confidential and trade secret information through appropriate use of NDAs.   Work with counsel to prepare form for use by startup.

 Other Matters

•  Insurance:  Consider timing and desirability of obtaining business insurance, including commercial, EPL and D&O coverage.
• Accountants:  Develop relationship with and engage accounts for business.  

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