Incorporating your startup is not enough. You need to get it organized. Organizing a corporation involves several steps, and at a minimum includes:
- Organizing resolutions of the directors (including adopting by-laws, determining a financial year-end, appointing an accountant, choosing a bank and issuing shares to shareholders).
- Subscription letters for shareholders (i.e., each founder needs to tell the corporation how many common shares it should issue).
- Payments for the subscribed shares (yes… you have to pay for your shares, even if they are issued for a nominal amount).
- Issuance of share certificates.
- Organizing resolutions of the shareholders.
- Acceptances of office by directors.
- Preparation of corporate registers.
Although this is a good start, your investors are going to expect a few more things when they review your minute book. Take a look at these optional, but highly recommended, steps:
- Each founder should execute a confidentiality and intellectual property assignment agreement. Why? Because without this, the founders own the intellectual property and not the company.
- Investors may also require that each founder execute a founder agreement (or employment agreement) which includes restrictive covenants, such as non-compete and non-solicitation provisions, to protect the company from the founder in case the latter decides to jump ship.
- Finally, each founder should execute a (reverse) vesting agreement (also known as a restricted stock agreement).
- Planning on issuing options to employees? Might as well adopt a stock option plan while you’re at it.
Lastly, there are shareholders agreements (assuming you’re not flying solo). Not all startups opt for a full-blown shareholders agreement at the time of organization because, admittedly, they can get a bit expensive. The decision to go forward with a shareholders agreement before your first investment should be taken after speaking with your lawyer.
And when it comes time for your first round of investment, the investor may simply require that the existing shareholders agreement be replaced by the investor’s preferred model agreement (likely one or more of the CVCA model documents). Be careful – it doesn’t mean the investor’s model isn’t good for the founders either, but you should get this reviewed by your legal advisor before you sign it so you understand what you’re getting into.