A FRIEND, SUCCESSFUL ENTREPRENEUR AND now advisor to a leading tech incubator asked my opinion about an online forms provider that promises to incorporate your business and give you and file the organizational forms, stock plans and restricted stock agreements you need for a modest fixed fee.
Should you use such a service when you form your new company? Does the online service site provide a budding entrepreneurial team with what it needs to get started? If you use the site, should you have a qualified attorney review the paperwork before it is signed and filed? Are there risks to using such a site that new entrepreneurs should be wary of?
Of course, the knee jerk reaction of any lawyer who has advised entrepreneurial clients for a career is probably going to be negative. After all, the service web site is careful to acknowledge that it is not providing legal services while, at the same time, touting the "we have provided legal advise to start up for years" aspects of their founders and advisors backgrounds. No mention is made of tax or accounting issues at all, which can be important in choosing an entity for a business.
But is there value in the service? And, can you use it confidently in forming a new company and dividing up the initial equity round? The answer is a qualified yes, if you are comfortable in accepting the choices made by the service to incorporate you in Delaware in a C corporation. Of course, that's a big "if" and you still have to make critical decisions about how to divide up the ownership of the company. The restricted stock documentation is a good idea, and available on the site I reviewed, for a number of reasons but shouldn't you get some counsel on the alternatives and mechanics?
The particular site I reviewed offered incorporation in Delaware, form bylaws and initial minutes to form the company and issue the initial stock. I assume it included standard stock forms to fill in. It also offered restricted stock agreements and invention secrecy and assignment agreement forms as well as related board consents, all important stuff when you are starting out.
I think you might save a few bucks with a site like this without compromising the future of your business if you engage a qualified lawyer to help you evaluate the decisions you are making by using the documents. The site reviewed was open to lawyer involvement (without charge) and allowed revisions to be made to the documents.
Use the lawyer for what lawyers do best, helping you make decisions about type of form to select, using equity to incentivize performance, protecting intellectual property, and understanding the tax consequences of you decisions. Then if your plan for formation fits the model promoted by the site, use their documents with a quick review by your lawyer to take care of the mechanics. And, while you are at it start a relationship with a good accountant. Numbers and the planning that accompanies numbers are going be very important going forward.
More of a risk taker? Then you might just use the service after getting agreement from your formation team and informal advisors, if you have them. Do your best and pour your efforts and limited resources into testing whether your idea has legs. If it does, you can revisit the decisions on formation that you made then.
But one caveat. If you are going this alone, you might consider starting with a single member LLC agreement instead. It's easy to prepare, gives you a flow through organization (so you can write off losses to your personal tax return) and creates a see-through entity that merges into your personal tax return as long as you only have one owner. You can then revisit the organizational form later when you add parties or raise money.
Of course, you'll want to check with your lawyer or accountant about that.
Photo copyright 2016 from Newspaper Rock in Canyonland National Park.
The venture moola blog comes to you from Atlanta, Georgia. Find it at readjanus.com. Copyright Clinton Richardson.
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Clinton Richardson, has been writing for decades. His critically acclaimed venture strategy books first appeared in 1987 and are now in their 5th edition. His Ancient Selfies is an International Book Awards Finalist and an eLit Award Gold Medal Winner. Ancient history and capturing photographic moments are among his passions. See his photo galleries at TrekPic.com.