‘The Legal Standard’ in my opinion is making sure that you structure your company in alignment with your industry and stick to the basics. For me that was setting up Zypp (my app) to be able to receive investment from a VC (Venture Capital) firm in the case we pursued that route. Silicon Valley investments in startups are usually done via convertible notes or a SAFE (see article below for more information on both).
Having the wrong legal structure can result in heavy delays while raising capital in order to get the right documentation executed or may lose you the investment completely. As a founder, it’s important to do your due diligence so you don’t look like an amatuer to investors or more importantly so you’re able to recognize the difference between a good and bad deal. After a long process, Zypp ultimately went with a convertible note while raising our friends and family round and I feel confident we’re set up for more successful raises in the future. Many thanks to our lawyer Lindsey for getting us on track and gracing the cover of our inaugural newsletter called RSVP. Lindsey is a partner at Smith Shapourian Mignano, a women and minority-owned boutique law firm in San Francisco, representing startups and small businesses. Lindsey took a very engaged and roll up the sleeves approach while restructuring Zypp to match ‘The Legal Standard’ that many of today’s successful startups use.
What we had to do:
- Reincorporated the company
- Change the structure from an s-corp to a c-corp
- Issued Convertible notes instead of stock agreements
- Formed Ambassador Agreements
- Terms of Service
- Privacy Statement
- Trademark (consulted me on how to go about this myself and worked out great)
There are many more factors that go into company structure that we won’t discuss today but here’s an outline of a few I’ve learned along the way (tax implications, number of shareholders you can have, cliffs, vesting terms, number of shares to start with, common stock vs preferred stock, etc) all of which you should be aware of. As a founder, it’s your job to familiarize yourself with as much industry jargon as possible.
How to get your legal in order
Before you say “I’ll just do it myself on Legalzoom” keep reading below for a few of my ‘DIY’ (Do It Yourself) tips. I tried that approach early on and it failed me miserably.
Things I would use legalzoom for:
- Drafting quick agreements like an LOI (letter of intent usually not binding) or a simple operating agreement with no more than a few owners
- Registering a company as a sole proprietor
- Researching legal terms
- Getting a free consultation from a legalzoom certified lawyer
Hiring a lawyer online: Why and How-to
- You don’t have a lawyer in your network and online is your only option
- DIY isn’t an option because the structure you need is too complicated
- Read all their reviews AND contact a couple previous/current clients
- Find a lawyer that is hyper focused on your industry and has a track-record to prove so
- Your budget conscious; online has more options so prices can be cheaper
- Legalucy.com is a good site that walks you through figuring out the legal help you need
Ask a friend: This is what worked for me
I was very lucky to have a lawyer friend in San Francisco who gave me the referral to Lindsey which ended up working very well. The reason it was a good fit is because her firm targets ‘startups and small businesses’ so she knew exactly what I needed and how to get it done. Side note; stay away from lawyers who say they do it all. Lindsey has no problem referring me to someone in her network if I am needing financial assistance, questions about valuation or anything else that doesn’t fall in her wheelhouse.
- Find a lawyer with a laser focus on the industry/niche that aligns with your market. If you look at how fast legislation changes you would know it’s impossible for any lawyer to know it all.
- Ask a friend that’s already in the industry you’re entering for a referral to a good lawyer in the space.
- Your lawyer should listen to your needs and propose the best options. If they ask what you want to do without providing a definitive solution then RUN. In my experience, there is always “The Legal Standard” to do paperwork and your lawyer should know what that is OR they are just going to waste your time and money.
- Remember it is ALWAYS your job as the captain of the ship to research, educate yourself and understand what you’re signing off on as owning a business comes with a lot of responsibility, especially when you take other people’s money.