Starting a corporation | Kathryn McCall

Can you hear me okay? Yeah. Everybody? All right. You don't need a mic. Huh? You don't need a mic. I don't need a mic. I'm a former cheerleader. I can talk. I'm an attorney. I can talk. I also brought with me Miles Guttenkunz from our law firm. Miles is a first-year attorney at our law firm and also works with startups and entrepreneurs. So we're double-teaming you today. We're going to have office hours after this. You can come to both of us. Ask any questions that you have and we will try and answer them to the best of our abilities. I was asked also, in addition to talking about common legal mistakes that startups make, to also talk just a little bit about the basics of corporate formation. I understand a lot of you are coming over here from overseas looking to form companies in the United States, but may not necessarily know the ins and outs of how do you form a corporation, what is a corporation, what goes into it. Why do I need to go to Delaware? Why Delaware? Where is Delaware? What is Delaware? So I'll cover just a little bit about that to sort of bring you up to speed. And then we'll get into sort of what I see as the 5 most common mistakes that I see startups make all the time. And it's not just beginning entrepreneurs. I have clients who are on their 3rd or 4th company and they still make these mistakes. So if you do one of these mistakes, You're not alone and the experienced guys do it too. So just to start off, just a corporate formation, a little intro. There's a lot of different types of business entities. You can be a sole proprietorship, you can be a partnership, a corporation, or a limited liability company. Now, most startups, most venture capitalists, most entrepreneurs form a corporation. So what is a corporation? It's an independent legal entity. So a corporation has a life of its own. It's like a person. It can enter into agreements and contracts on its own. It can act on its own through its directors and its shareholders. The owners of the corporation are the shareholders. A corporation is formed under the state in which it's incorporated. So what that means is if you're in California, and you incorporate your company in California, you're a California corporation. You can also incorporate in Delaware, Wisconsin, Illinois, all of the different states of the United States, which makes it fun for us because then there's laws and corporate laws for all of the different states of the United States. And then the corporation itself— and this is really important— the corporation is liable for its acts. Not the individual shareholders. So this is, you know, if the corporation does something wrong, the corporation's assets are on the line, but the shareholders and the board members, their personal assets aren't on the line unless you haven't done the proper setup or maintained the proper formalities. So how do you form a corporation? What happens? Basically, you take a document— it's called either articles of incorporation or a certificate of incorporation— you march that down to the Secretary of State's office of the state in which you're going to incorporate, and you file it. It's about a one-page document. It's fairly simple. Now you're a corporation. After that, you draft bylaws for your corporation. What your bylaws are is a set of rules and regulations that detail how your corporation is going to operate. So how are you going to hold meetings? How often are you going to have meetings? How do you give notice of those meetings? Who are the officers? And not specifically like in terms of the person who the officer is, but what type of officers are you going to have? A president, a CEO, a treasurer, a CFO, a secretary. What other officers? And then how those officers get elected. And then who the shareholders— how shareholders get stock certificates. It's just sort of a governing document. It's a fairly standard document. So I have some clients who just kind of look at it and go, yeah, whatever, that's 20 pages, I'm not reading that and I'll probably never look at it again. You'll just, as my attorney, tell me what I need to do. I have other clients who read it in detail, which is great, and then they ask questions and how does this work and what does all of this do. Most of what's in the bylaws is pretty much driven by statute. So there's not really a lot of change that you can do. And you're— in general, you want it to be a flexible document. Then what do you do next? Well, you elect directors. Now, who elects the directors? Initially, when you just set up your corporation, you have a person who's called an incorporator. That's the guy who marched down to the office and filed the certificate of incorporation. Usually that's your attorney. That's right. That would be me. I, as the incorporator, would then appoint the initial directors. Say, okay, I'm bowing out, I'm resigning, and I'm going to appoint these 3 people as the initial directors. Now the corporation has directors. From that point on, the directors take over and they appoint the officers. Now why do you need directors and officers? Your directors are sort of at the top of the food chain. They direct the overall governance and goals and direction of the corporation. Your officers carry out the directives of the directors. So your officers are the people, the CEO and the CFO, they're in it every day, in the grind, you know, managing the company, making the company work. Whereas the directors meet every once in a while and they say, we want to go in this direction or we are going to do this. or they approve certain actions, certain what I call the big-ticket items that the company is going to do. They might also approve large contracts, large agreements. I usually recommend to the CEOs that you want your directors to approve those big-ticket items because you want their support. You want to let them know what's going on because they can fire you. So you want them on your side. Usually the CEO is also on the board of directors. Just makes it easy because the CEO is in the trenches every day, knows what's going on. So then he can be on the board, get to know all the board members, talk to all of them, let them know, you know, tell them what's going on, what are the problems, what are the issues for the company, and then get the advice. Question? Are the directors the members, like your members? Directors do not have to be shareholders. Okay. So directors don't have to be shareholders and officers don't have to be shareholders either. Your shareholders are the owners of the company. Right. So then once you appoint the officers, then you issue stock to the various different shareholders. Now in the beginning, you know, if you're a founder, let's say you've got 2 or 3 of you are founding a company. Generally in the beginning, if there's 3 of you, you're going to be— all 3 of you are going to be on the board. All 3 of you are going to be the CEO, the CFO, and the secretary. Not that you're all those, but one is going to be the CEO, one is going to be the CFO, one will be the secretary, and then you're most likely also going to be the 3 shareholders of the company. And then as you expand and get investors, that makeup will shift and change over time. But directors don't have to be shareholders and officers don't have to be shareholders. And that's the basics of setting up a corporation. It's not that tough. It's not that hard. And what's hard is getting your startup off the ground and getting funding and making it work. But yes? If you hire an attorney to do everything, how much would that cost on average? It depends upon the attorney and who you go to. We have a package that we offer to To startups, it's about $2,500 to do all of that. You can go to— there's other services out there. I'm sure you've heard about them. I won't mention them by name. But you can get things for like $149. I would caution you against doing that. You want to treat your startup with respect. And if you're going to get a canned legal document off of the internet, off of the web, and use that, it may not really take into consideration what the needs are of your company. So if you go to an attorney, and especially an attorney who operates in this space and works with startups, we know what the venture capitalists are looking for. Yes? But we can change all these things, right? You can change all of these things, yes. In theory, we could start with something like random, very cheap, and then if we get like funding or something, Yes. You can change things later on unless, of course, you make— do something where it's difficult to change or possibly maybe you're not getting along with your co-founders and it gets more difficult to change things later on or something comes up and it's not a contingency that you thought about because you're just using canned legal documents and it's maybe an impasse that you can't get over. But yes, that's one of the things I love about corporate law is you can change just about anything. There are some things I can't fix, but I can fix just about anything out there. It's just going to cost you more money. And it will probably cost you more money to fix things on the back end than it would be if you just set it up on the right way. And we'll talk a little bit about when I get into mistakes about things that happen and then how that can impact you on down the road.