Most startup legal work is routine, but only if you understand the handful of ideas every routine document assumes. A founder who knows what the board can do alone, why the company cannot sell stock to just anyone, what "fully diluted" means and why options need a 409A valuation reads a term sheet faster, asks better questions and avoids most of the mistakes lawyers are later paid to unwind.
This handbook explains those ideas in the order founders meet them. It starts with what a corporation is made of, then covers formation (splitting equity, vesting, the 83(b) election), fundraising (SAFEs, notes, preferred stock and the securities rules) and hiring (employees and contractors, equity compensation, 409A).
One idea runs through all of it. A corporation divides power among three groups: stockholders own it, the board manages it and officers run it day to day. Nearly every legal question a startup faces comes down to which of those groups has to act. "Can we issue these shares?" means "has the board approved it?" "Can we sell the company?" means "has the board approved it, and have enough stockholders voted for it?" Once you know who decides what, the rest follows.
It assumes a Delaware C corporation. If you are still deciding whether and where to incorporate, start with Startup Incorporation for Founders.
Contents
- Core concepts
What a corporation is made of: its agent and incorporator, its board and officers, its stock and its contracts.
- Formation
The steps of starting a company, splitting equity, founder vesting, the 83(b) election, paying for shares and stock plans.
- Fundraising
Fully diluted ownership, convertible notes, SAFEs, preferred stock, and the securities rules for raising money.
- Hiring
Employees and contractors, advisors and interns, equity compensation, 409A and acceleration.
Notes
- Public benefit corporations
A Delaware corporation that commits to a public benefit alongside profit, and what that changes.