Lawyer Jared Brubaker walks through incorporating a startup: authorize 10 million shares with 20% unissued for future grants, set up four to five year vesting with a one-year cliff, file 83(b) elections within 30 days, and transfer all assets to the corporation immediately to avoid problems later.
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Shares of stock is the basic unit of ownership in a company. The certificate of incorporation, that's the document that you file with Delaware to create your corporation and it states the number of shares that are authorized. That's the maximum number of shares that a corporation can issue. Typically with Silicon Valley startups, they start with 10 million. This is good for convenience because when you're offering, say, an employee 30,000 shares of stock, they can do the math in their head and that's— and figure out that that's about 0.3%. It can always be increased by amending the certificate of incorporation. Ownership percentages are based only on the stock that's issued. So, if you decided to authorize 10 million shares and only issued 2, To one each, the 2 founders, they would each own 50% regardless of how much was authorized. The recommendation that I generally give to companies is to leave 20% or so authorized but unissued so that you can deal with things like issuing stock to employees or contractors or advisors or whatnot without without amending your certificate of incorporation, which can— which isn't like too bad, but it is another step and it does involve dealing with state bureaucrats. So vesting is very important when issuing stock to founders or employees. And the basic idea is that if the founder or employee does not stay for a specified period of time, they'll forfeit some or all of their stock. The typical is 4 or 5 years with a 1-year cliff. What this means is that from the time that vesting starts to the first year— to just before the first year, nothing vests, and then at a year, 1/4 vests. What it means when it's vested is that it's not going to be forfeited. So if a founder were to join a company, stay for 2 years, and then be fired or then leave, they would end up getting half of their stock if it was a 4-year vesting. One thing that I sometimes advise companies is that with part-time founders or part-time employees that they vest more slowly to encourage them to transition to full-time. So vesting is recommended for founders because investors like founders to stay incentivized, they don't like the situation where There are 2 founders that get together, form a startup, they incorporate, they sign all the paperwork and then one founder goes on vacation for the next 4 years. That's— if you don't have the vesting, then that's much more difficult to work with because they own the stock and you can't buy it back from them. But if you do, then it's fairly easy to deal with that and founder breakups. It's an unfortunate fact that some percentage of startups see founder breakups and it's a lot easier to deal with it with vesting. So when there is vesting, you want to make absolutely sure that you make 83 elections. There are very bad tax consequences if you don't. It probably doesn't make sense to— it may not make sense to get into them, but just like make sure that they're filed. You have to mail a form into the IRS within 30 days. include with your tax return and keep records. So this is important for foreign people. If you don't have a Social Security number or ITIN, you can just write foreign in the relevant box and send it in. The group that manages the company is the board of directors. I like to encourage companies to to have all founders on the board of directors because you can make better use of Delaware laws. It has no impact on founder breakups because the stockholders can always remove board members or elect more board members. Yeah, for officers, you generally have at least the CEO and president and secretary, generally different people if there are 2 founders. Make sure that when you start, when the company is formed that all the relevant assets are assigned to the company. This is very important, but it's often forgotten. And again, in like a founder breakup situation, like you would hate to find that your bank account was actually in the name of one of your founders and they had all your money, which does happen. This happens sometimes. Or that your domain name is in the name of one of the founders or whatnot. So this is just a quick summary of the recommendations. Thank you.
