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Category: Legal Technology

Formation options for Colorado Startups

Published September 19, 2018 by E/N

Background reading:

The following are a few points that any startup entrepreneur needs to keep in mind in terms of forming their company from a legal perspective.

First, formation is not the same thing as incorporation.

Incorporating a company is literally the act of filing a document in Delaware (or another state). It achieves 1% of what needs to happen in a proper startup formation. A full formation involves forming a Board of Directors (or if an LLC, Managers), issuing equity with vesting schedules, assigning IP, forming an equity plan, and a number of items. When comparing offerings from different firms, pay very close attention to what is actually included in a package, because it’s easy for firms to leave things out in order to appear to offer a lower price.

Second, don’t assume you want a “standard” Delaware C-Corp.

If you read info from Silicon Valley – and most content out there is from SV – you’d think 100% of tech startups are C-Corps. That’s not true. Yes, most are, but your particular business model and growth trajectory may make it a less obvious choice. See: More Tech Startups are LLCs. 

Be aware of fully automated options.

There are fully automated and safe options like Clerky, if you are comfortable with no customization and a very standard structure. If keeping legal costs to an absolute minimum is a top priority, Clerky is far safer than a DIY project with templates.

LegalZoom and RockeyLawyer are not appropriate for a startup, because they are designed for small businesses, which have much simpler/less complex needs.

Most startups hire law firms. Hire one right-sized for what you’re building in the next 5 years.

See: Checklist for Choosing a Startup Lawyer and Why Startups hire law firms, not a lawyer.   Most startup-specialized firms have fixed fee packages for formations that will allow for more flexibility/customization (and guidance) than a fully automated approach, without incurring excessively high costs.

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Why startups hire law firms, not a lawyer.

Published September 19, 2018 by E/N

Background reading: When a startup lawyer can’t scale. 

When navigating startup legal issues, it’s very important to learn the distinction between “startup” and “small business,” because it’s not always clear, given that both start out small.

When someone says “small business” they are referring to something like a coffee shop, or a restaurant. For the first several years, the customers will be geographically local. If it takes any investment at all, it will likely be 1-2 local “partners” putting in money. Equity likely isn’t used much for compensation purposes, because the much slower growth of its value means it won’t incentivize employees as much as cash will.

“Startup” on the other hand, refers to a company that (naturally) starts out small, but whose customer footprint will likely be more national and international, and is likely to scale faster than a small business. Startups still differ in their types of growth trajectories, with Silicon Valley being well-known for building / emphasizing hyper-growth “Unicorn” startups. See: Not Building a Unicorn for our perspective on how smaller startup ecosystems often build companies that behave differently from what SV produces.

But the main point here is that startups face much more complex legal issues, and a higher volume of them, than small businesses do. And that requires a different type of legal infrastructure to get the work done.

The legal market can be separated largely into 3 categories: solo/tiny firms, boutique firms, and very large firms (BigLaw). BigLaw is structured for billion-dollar companies, and startups on that path; and is priced accordingly. Solo/tiny firms are well-designed for small businesses, including small apps likely not looking for much scale.

Boutique firms are designed for the “middle market” – higher complexity and volume than small biz, but much leaner and lower overhead than BigLaw. E/N (our firm) is a boutique firm. 

At any given time, a seed or Series A stage client of mine will have a commercial agreement being drafted, a few option grants in process, an NDA to be reviewed, and perhaps 1-2 other projects in play. If they were waiting on me, personally (a Partner) to handle all of it, they would be waiting far longer than they can afford to. Expecting a Partner (who has many clients) to do all of that work is also ridiculous and inefficient; the law equivalent of asking a Neurologist to check your temperature, treat a cold, and give you a simple vaccine. Overkill.

So firms designed for scaling startups have paralegals, junior lawyers, senior non-partners, word processing professionals, and technology – an infrastructure to get different levels of work done efficiently and on time, with Partner oversight. That’s necessary for startups, who often operate on compressed timelines, and can’t wait very long. 

If you’re a startup, and not a small business, make sure you hire a firm with the right infrastructure to get things done efficiently and promptly. Otherwise, when you need your lawyer most, you’ll be faced with a several week (or month) wait that could kill a crucial deal.

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