Silicon Valley or Venture-Track startups have the benefit of being able to work off of a relatively fixed playbook; when there’s a premium to having your doc look like everyone else’s, it’s a bit easier to identify some of the common pitfalls.
While it’s impossible to name them all, particularly if your startup is in a regulated industry, or has unique circumstances (like a founder exit, a formerly busted cap table, or some unique third party contract–to name a few), we’ll go through a few of the most common mistakes around formation, contracts, employee / contractor management, and cap table, in this article.
You may have good reasons (especially tax ones) to have chosen an LLC, or a C Corp in a different state, or made an S Corp election; but if you intend to raise from VCs, you 'll likely have to change this structure. It' s generally cheaper & easier to do this sooner rather than later.
Especially if your valuation has not changed, the Board can typically ratify these grants; if these grants had vesting components, talk to a lawyer about 83(b) elections, in case the initial grants were not effective.
In some cases it' s easiest to just start your company over. In other cases you might accelerate the vesting while valuation is low. Which option makes the most sense for you depends on your valuation & depth of operating history. Note many people report never having received confirmation from the IRS, but it may be worth trying to check.
Grants under your EIP might not have been made validly, and stockholders should approve of the plan; consider checking with a lawyer on the validity of existing grants.
Consider that often times, end users of a SaaS product might need nothing more than a " right to access and use " your product during the term, subject to other restrictions. In rarer cases, customers may also need a "limited, revocable, non-sublicensable" license to reproduce or even modify some tangible work of authorship you've created, for limited reasons, if for example they need to access or re-create your code. Talk to a lawyer about these; they shouldn 't be the norm for SaaS. In other cases still, where you are building a custom deliverable for your customer ' s exclusive use--for example, a report--then an assignment of that IP alone may be appropriate--just be very careful that this assignment doesn 't give away your software or other core IP assets you don 't mean to give away! On IP, always talk to a lawyer, especially to bless your standard agreement!
An indemnification provision generally decides this: If a third party is hurt because of our relationship, and that third party sues you, customer, what will I (vendor) cover you for? And vice versa. As a vendor, you generally want these to be narrow. A limitation of liability provision decides, with some exceptions, what the maximum amount of liability you (or your customer) can have. Often times, vendors prefer lower limitations of liability, like one times fees paid in the last twelve months, and no " special" damages. Talk to a lawyer about whether you may benefit from different language, and how you should respond to an ask for " carveouts " , or exceptions, to these sections.
Clickwrap (i.e. when a user affirmatively indicates their consent to clearly displayed terms) tends to be more enforceable than browserwrap (when you simply display a link to your Terms on your browser, often at the bottom), so (a) and (b) help strengthen your chances of having a court enforce your Terms. The more clear and conspicuous the user ' s agreement to the Terms is, the better your chances. Consider adding explainer text about " some " of the key terms in your contract when you prompt the user to " agree " , and/or generally encouraging the user to review the Terms.
This tool might significantly improve your time-to-close as well as legal transaction costs. It works like this: On excel/sheets, create a row for each provision in your contract. Working with your lawyer, use columns to explain, for each of those provisions:
You ’d usually do this initially using what' s called a Confidential/Proprietary Information and Invention Assignment Agreement (CIIAA/PIIAA) together with an offer letter for employees; or a Consulting or Advisor agreement as applicable. If you didn't do this, you should do it ASAP, and make sure you get the assignment retroactively, or with a separate Technology Assignment Agreement. Pay them for past work separately for extra security.
This is a high priority to resolve! Strongly consider stopping that conflicting work, and mitigating some risk by replacing IP contributed while in conflict. In rare cases, (carefully) consider asking their employer for a waiver. Note that even if no third party time/resources were used for your startup ' s IP, depending on your contributor ' s agreement with their employer, there could still be conflict, and asking to see their agreement might be a breach of their confidentiality obligations or amount to a claim against you. In short, this one ' s tough--talk to a lawyer here!
Because this analysis is different in every state, and chances of a state audit are generally smaller than that for big companies, if you can 't afford the legal analysis, the risk of skipping that analysis early on could make sense--just do it as soon as you can, and certainly before headcount grows. Meanwhile, the very generalized rule is that if you exercise a lot of control over the service provider, tell them their schedule, and/or give them the tools to use, they look more like an employee.
At super early stages, all things equal, getting this wrong presents a relatively lower risk (but not zero risk!) of state audit. That said, it' s best practice to get it right--especially if you are potentially worried about the Service Provider bringing a claim. Especially when you have enough money for it, or before your headcount grows too much, it' s a good idea to look at this.
This can get tricky, especially when there are stock repurchases or terminated grants to consider. It' s easiest to fix before the value of the company changes, and while all your stockholders are friendly. Depending on facts, this may involve some combination of ratifying old grants, or cancelling old grants (with releases from grantees) alongside issuance of new ones. Look to fix this ASAP!
The Board needs to always have a position about the fair market value of the company (and therefore it' s stock), and should always approve stock grants. You should be able to defend the Board' s position on valuation in case the IRS ever comes knocking. In almost all cases, you want to issue stock (or set the exercise price of options to purchase stock) in an amount equal to that fair market value. A 409(a) valuation can often provide a safe harbor to challenges, and enable certain kinds of stock option grants as well--more on this shortly.
Your Restricted Stock Award or other stock purchase agreement may require that you give notice if you want to repurchase unvested stock. In most cases, it will require a payment for that repurchase, often equal to the original price it was sold for, but sometimes a different price. Either way, it' s best to clearly document your repurchase of stock (including your payment) so there are no questions.
Especially for Incentive Stock Options (ISO)- -have a 409A valuation in place before you issue any more options. We recommend you get in touch as soon as you can (and even before that 409A) to sort this out, since this is a firm tax requirement.
The Legal and Ops teams prides itself on being focused on B2B SaaS companies on a venture track; we know the landscape of the legal Jobs to be Done like the back of our hand–and, when things go wrong, how to fix them. Get in touch for a free consultation if you’re worried about any of these, or have questions about things adjacent to them.
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