I lead Baker Donelson's Emerging Companies team and focus my law practice on entrepreneurs and their companies, particularly on matters related to entity formation, fundraising, and customer contracts. I am also a technology lawyer. I have been mentoring at the EC since day 0 and am often called in to brainstorm about strategy, customer development, and pitches.
Should you set up an LLC or a corporation?
Think upfront on how you will fund your company, then plan accordingly. If you plan on seeking investment, starting as a corporation makes sense. But if you aren’t sure that you’ll raise money, typically it’s best to incorporate as an LLC -- you can switch later if needed. It's also important to note that being an LLC doesn’t mean you can’t ever raise money. Simply put, investors will give a list of terms, and part of that includes converting to a corporation as part of the investment.
Keep states in mind when establishing a corporation; Chris points them toward Delaware. Every venture fund has their deal documents set up for Delaware. Origin states matter less when forming an LLC. “Most of the Fortune 500 are Delaware corporations.”
If you go the Delaware route to incorporate your business but plan on doing business in a different state, you must qualify your “foreign” corporation to do business in that state
Do you really need a Lawyer when setting up an LLC?
If there is only one person involved in creating an LLC, a lawyer isn’t really necessary. But if multiple owners are attached, Chris suggests to get a business lawyer involved. Remember, “This is not a Disney movie."
How To Best Prepare On The Front End When Setting Up Your Entity
One of the keys to establishing a good business is being upfront about any potential pitfalls before they happen. Chris speaks about having more than one owner, and how to establish the groundwork for getting over that hurdle.
“Unanimous votes are awful, I hate them. But they’re a necessary evil.” Sometimes requiring a unanimous vote is the answer.
Business owners need to keep dispute resolution in mind before reaching a dispute, otherwise it becomes a messy topic, and difficult to change.
“Circumstances change, and people leave. Sometimes it’s for good reasons. Sometimes it’s for tragic reasons.”
The assumption that the founders or owners will always be working together changes over time. Chris says that understanding this is on the front end is important
An Overview Of Types Of Stock
Stock options are options to require stock in a company. As long as you meet the requirements in an agreement, you have the option to buy stock at a certain price. Having a stock option does not mean you’re a shareholder, that comes into play once you’ve bought stock.