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Ask HN: What agreements and legal structures should you have in place for a startup?

29 points by stuartk ↗ HN
I've just got involved in a new startup and been offered a founder's stake. There are only 2 of us, she is based in the US, I'm in the UK.

Just wondering whether to form a company straight away, or wait until some point before launch. I guess the 2 most important things are to protect ip, and ensure I get my stake in the future.

Any advice on this?

16 comments

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sharpn
If you have no presence in the US, you'll need to fill in W8BEN forms (available online) to avoid being taxed by both UK & US. There are other considerations too, as you mention, but I'm not familiar enough with them to advise. Hope that helps.
stuartk
Thanks for that, I'll check it out.
alabut
From the Ycombinator FAQ:

"Don't incorporate, though, if you can avoid it. Especially as an LLC. It's much more complicated for us to deal with existing paperwork than to start from scratch."

And as a personal note, I've found the same logistically - tinker together with friends on a project, see how you gel together, then worry about forming a company later.

There's also a contract that might help if one of you originally came up with the idea and recruited the other - you can create one that says basically that all the ideas and work belong to one person, the idea originator, but that they all transfer to whatever company you guys form if you actually get around to forming one.

I have zero legal experience, so take it for what it's worth, this isn't advice either way.

davidw
That FAQ is for people who want to apply to YC! I don't see that in the guy's message, above.
alabut
I was giving YC of an example of how to approach pre-seed funding startups - if you don't have revenue or funding, and angels or incubators offer to deal with the paperwork in forming your company as a condition of receiving their money, then all that matters in the beginning is rapid iterations to test out both the idea and team chemistry. Anything else is a distraction.
tptacek
It's good advice for 3 people with an idea and an application to YC. It definitely makes it easier for YC to set you up; we're in the process of converting from an LLC, and it is a huge pain in the ass.

It is one of the poorer pieces of advice on this site for someone who actually wants to run a company, and I wish YC would clarify it. To actually run a business, you need a incorporate for tax reasons, so you can invoice and be invoiced, so you can make binding, valid equity grants, and so your vendors, partners, and customers can't sue you for your house.

It will take you 2-3 hours, spread over 2 weeks, to set yourself up with an LLC and an EIN. It's not one of the Great Distractions you face starting up.

davidw
> converting from an LLC, and it is a huge pain in the ass.

Yeah, how so?

sachinag
It's just a fundamentally different structure - LLCs were invented in the 80s, so the conversion is a huge PITA. If you want the benefits of incorporation, you should strongly consider incorporating as an S-corp (if you qualify: must be US citizens, no more than 75 shareholders, all of whom must be natural persons).

To change from an S-corp to a C-corp is just one piece of paper. You're already a corporation, not an LLC, and you get the flow-through benefits and limited liability.

Brushfire
I've heard this from other people too, but as an owner of both LLC's and Corps in the past, why is it so difficult? Just sell one company's assets to a new company.

If everyone is on board for the 'new' structure, then this should be trivial. If you have investors, you grant them new shares equivalent to their old LLC member %.

LLC"s have huge advantages too, if you dont plan to raise money, or only do it from a few people. The fact that you can allocate losses and gains regardless of ownership % means that you can allocate tax losses to an investor who may only own 20%. Them taking a tax loss is effective to them not paying more taxes, so it is a form of benefit for them.

tptacek
The paperwork issues are a red herring. The same things will bite you in the ass any time you convert from any structure to any other structure; it's just a coordination problem.

There are minor tax benefits to an LLC, and there's a major simplicity benefit. The driver (for us) to move to S-Corp is to safely grant equity.

There is no reason to overthink any of this. Just do what's easiest. But don't run a sole proprietorship just because an entry in the YC FAQ says you're easier to fund without incorporating. News flash: YC isn't investing in you anyways; by all available evidence, your odds of being accepted are low, probably lower than your odds of just succeeding with the company.

stuartk
Davidw is right, I'm not going for YC.

I guess we will 'tinker' until the point of release.

Thanks

numair
Just remember, if you boot one of the guys with whom you are tinkering, and end up with a massive success, and that guy sues you, a significant number of people will always assume you were a selfish asshole who screwed the guy over. Journalists are likely to leap onto the story, and social news sites such as HN eat up the tale of the wronged "entrepreneur." (Who might even be one of those preppy douchebags at your college who spent more time acting pretentious and preparing for a failed bid at Olympic rowing glory than working on creating economic/social value, but I digress).

Legal contracts aren't warm and fuzzy, but they keep everyone honest; as you can gather from the scenario I outline above, this isn't even about money -- in the Internet age, reputational risk is everything. You never know when/why you might get spit upon, or by whom.

imp
It's probably best to talk to a lawyer. There will be paperwork at some point, but at least consult with one now so that you know exactly what you'll need to do and when. It could also be complicated because of your different countries. Only a lawyer will know all of the important details.
pg
The main things you have to do are incorporate the company, appoint a board (presumably you two), issue stock, and each sign agreements with the company saying that your work becomes the company's IP.

You should probably vest some or all of the founders' stock (the usual time is 4 years) as a way of deciding in advance what happens if you split. It is a huge distraction to negotiate that later.

Don't incorporate as an LLC unless you don't plan to either take investment or sell the company.

You should postpone incorporating only if (a) you're still not 100% sure you want to start the company, (b) you're not sure yet what the stock allocation should be, or (c) you want to get funding soon from YC or some other investor who would prefer to start with a clean slate.

Use a lawyer. And if this is a startup, get one who works with startups, because the issues with startups are different from ordinary businesses.

stuartk
From what I understand, a non-resident alien (i.e. me) can't be a member of a corp in the US, but can be a member of an LLC. What other options are there for a UK resident?
ivankirigin
I don't really understand why people shouldn't incorporate or even take investments before YC. Can't you just take the stock as advisory shares and buy convertible debt (if they even want cash)? Neither really affect or are affected by the valuation or current amount of investment.