A simple guide to legal and finance operations for new startup founders
Questions and concerns surrounding legal and finance topics are often mental barriers for startup founders, especially in the early days. As it turns out, approaching these areas as you are gearing up to launch is easier than you might think. While of course it takes work, the steps are attainable if you approach them with the appropriate mindset and obtain the appropriate help.
Hire a lawyer (or recruit one to work for equity)
If you don’t already have a lawyer experienced with startups to support you, find one. Seriously, don’t try to go it alone or use some online service and save a few bucks, this is where you need to plan to spend some money and/or equity to do it right. If you’ve gotten this far in our recommended operations stack, then you are already very committed to making your venture succeed; going the extra mile here shouldn’t be a problem.
While you can always Google around to find someone, a good idea is to ask your local venture capitalists and/or angel investors who they recommend. This also serves as a touch point so investors start to get to know you if they haven’t already (even if you are planning to bootstrap and not raise money, these are good people for you to know).
The initial conversations with attorneys will be free. Ask them all your questions, and it’s a good idea to talk to attorney at least 2–3 different firms so you get a sense for how they will work with you, what they recommend, and how much things will cost. You’ll learn a ton in these initial conversations alone.
Splitting up equity and forming your entity
If you’ve followed along this series thus far, you’ve hopefully not made any firm commitments regarding equity splits yet between your founders and advisors. If you have, obviously you’ll need to honor them, but for everyone else, follow your lawyer’s lead on how to set up the split and vesting schedules (yes, everyone — including you — should be vesting).
Your lawyer will also help you make the decision around what kind of entity to form. The general rule here is to go ahead and roll with the standard Delaware C-corp if you will be raising money any time soon, otherwise you can go with the less burdensome (and more tax advantageous) LLC with your state, s-corp elect it with the IRS, and plan to convert it to a C-corp down the road when necessary. But again, every situation is unique, so do what your lawyer recommends.
And you’ll be told this multiple times, but don’t forget to file your 83(b) election on time, which ensures you are taxed for your fully vested grant now so you don’t get nailed down the road when it’s worth a lot more.
Contracts, intellectual property, and trademark issues
Your lawyer will cover all this, but just so you are prepared mentally, be sure you have thought through the various contracts you’ll need:
- Standard contract for customers/clients (one that is favorable for your company, as most people don’t negotiate this much)
- Terms and conditions for your website/app.
- Employment contracts (very important to keep good records here)
- Confidentiality agreements (i.e. non-disclosure agreements, NDAs)
Also, you’ll want to have a full discussion with your lawyer about patent, copyright, and trademark issues around your business. Generally it’s best to not go overboard here and spend money you don’t have to, but at least go into the game with your eyes wide open regarding the risks.
Usually it’s a good idea to file for the trademark of your name and logo, and example of an easy thing you can do is to ensure a copyright statement exists at the bottom of every web page you publish. Actually enforcing copyright or trademark infringements is another story, but at least you’ve covered your initial bases.
Finances, bookkeeping, and financial modeling
Coupled with your legal formation process will be the question about where your initial startup capital comes from. Usually this will be amongst your co-founders and family members, and you’ll work them into the initial capitalization table (aka “cap table”) so it’s clear who owns what and how much cash has been put in.
When your entity is formed, you’ll get a certificate of formation and business ID with your state and you can grab an Employer Identification Number (EIN) easily online from the IRS. With these documents you can open a bank account and get your checkbook and credit cards setup.
As for bookkeeping, don’t skimp here or be lazy. Keep solid books and hire an outside firm or freelance bookkeeper if you don’t know exactly what you are doing. It is of course possible to do this on your own, but rarely is it worth it, as it involves both keeping your books up to date and filing all the appropriate paperwork with your city, county, state, and IRS as applicable.
Also, as an important note for those new to this, your Certified Public Accountant (CPA) should be a different person than your bookkeeper, as they are very different roles. Good CPAs will give you tons of tax strategy tips on a yearly basis in addition to filing your taxes; whereas your bookkeeper will work with you monthly to keep your books clean and reconciled with bank and credit card statements. Once books for the year are finished, your bookkeeper sends your CPA the necessary financial statements in order to prepare your tax returns.
Finally, if you haven’t yet followed our 4-part financial modeling series, you should. Every founder needs to understand the key drivers and assumptions behind their business and be aware of how various decisions will affect cash flow. A solid financial model will allow you to run mini-tests by changing assumptions and seeing how that affects things like income, expenses, and expected hiring schedules.
Author’s note, this is the 24th post in a series of articles outlining a framework for startup operations that my partners and I developed at Prota Ventures. We’ve recently built a web app that leverages the framework to help founders create new ventures. Check it out for free here. Finally, subscribe to my newsletter and I’ll let you know when I get new content up. Thanks!
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