Founders are self-starters by definition. They need to continually learn, progress, and grow. Though many skills can be acquired directly through the process of launching and running a business, legal is one of the few exceptions. Becoming your own lawyer is rarely an ideal path to success, and can even lead to future startup-killing liabilities.
This guide is designed to shed light on when, why, and how you should go about finding legal support as you build your business. There are many opportunities for you to tackle some of the legal legwork on your own—and in the early days, it’s true that many founders choose the fast and dirty route—but by running counter to that shortsighted mentality, you can build the legal foundation today that will protect your company for a lifetime.
In this guide you will learn about:
- The first legal steps to take as a startup
- How to approach incorporation
- Major legal roadblocks (patents, trademarks, agreements)
- Common immigration legal concerns
- How to find and vet lawyers
Don’t ask a lawyer, ‘Can I do it?’ Ask, ‘How can I do it?’ They can come up with solutions for your problem.” - Adeo Ressi
The Foundation: Incorporating Your Business
Up until a certain point, founders can get away with launching an early-stage startup without yet incorporating. However, as soon as you want to open a company bank account, raise money, apply for a loan, hire an employee, or really do anything that generates any risk related to the venture itself, it is time to incorporate your business.
For the purposes of this guide, we will focus on the standard C-Corporation (C-corp), as it is the most prevalent type of corporation for technology companies, and the only U.S. entity structure amenable to raising capital from professional investors. While U.S. based founders can also pursue an S-corp or pass-through entity structures—which can confer some tax advantages or loosened filing/reporting requirements—for founders who plan on raising any capital, the C-corp is unquestionably the best choice.
The idea behind incorporating your business is to protect your personal assets and liabilities from any debts or obligations that the business generates. If you have a co-founder, regardless if anyone leaves the company, you can assure that all intellectual property (patents, copyright, trade secrets) and other business-related assets can remain tied to the business entity.
Prior to incorporation, you are de facto considered either a sole proprietor or partnership (if you have a co-founder). Through either of these statuses, you are personally liable for any issues tied to your budding business. It is for this reason that it is highly advisable to make incorporation a top priority as your venture begins to firm up in its early days.
The Delaware C-Corp
As noted, C-Corps are not pass-through entities, meaning they are taxed both through corporate income tax, as well as at the level of the founders’ personal incomes generated from the business. Delaware is a very business-friendly state, and offers several key advantages to founders—however, chief among them is that professional investors strongly prefer to invest in Delaware C-corps, since they are most familiar with the corporate laws and governance requirements of the state.
Many large companies are incorporated in Delaware, including many international companies, similarly choose to opt for Delaware’s business-friendly environment. For example, Delaware judges are knowledgeable on business dealings, and court-related litigation in DE does not involve a jury. This is less common in other states. For these reasons, it also means that most lawyers who work specifically with startups are also most familiar with Delaware-related business law—and again, investors are keener on working with founders that incorporates there. There are also several founder-friendly laws in Delaware, such as the ability to add seats to the board without unanimous board member approval.
The only caveat to all of this is that your company cannot conduct business within the state of Delaware, or it will be subject to state income tax, for which companies incorporated in DE but not doing business in the state are exempt. When working with a lawyer, they will assist you through each step of the process, including identifying a registered agent, which is a requirement for incorporating in Delaware while conducting business elsewhere. A registered agent simply agrees, and in most cases are paid, to accept any legal-related paperwork associated with the corporation.
Incorporating in Delaware
The following steps provide a rough outline of how to incorporate in Delaware:
- Name your company
- File a certificate of incorporation (forms and instructions)
- Costs ~$89 upfront
- Commercial registered agents charge between ~$50-$150 per year
- Set up a corporate records book
- Build corporate bylaws (have a lawyer write or at least review these)
- Appoint corporate directors
- Hold an initial board of director’s meeting – typically, bylaws are adopted here.
- Issue initial stock
- Comply with Delaware Annual Report and Franchise Tax Requirements
- Comply With Other Tax and Regulatory Requirements such as obtaining an EIN (Employer Identification Number)
Trademarks and Patents
Incorporating is not a heavy burden for most founders. While you should work with a lawyer to ensure a smooth incorporation process, it is not always entirely necessary, as legal technologies and service providers can provide boilerplate frameworks. However, having a lawyer review all agreements, bylaws, and other foundational paperwork is still highly advisable.
In addition, for any startup that plans to develop proprietary technology, products, or novel concepts, it is important to work with a lawyer who specializes in intellectual property. This is because the processes involved are complex, but are designed to reduce risk and protect your company for the long term.
Starting off, you should at least understand the difference between the main types of intellectual property: patents are filed for new products that are being invented (novel and useful), while trademarks are for protecting everything from slogans to logos or even symbols. From here forward, IP become increasingly more complicated—but here are the general steps to help you conceptualize the process:
Conduct a patent or trademark search
It’s important to ensure that your slogan or newly invented idea is, in fact, new. Even if a product or concept doesn’t do particularly well on the market, it’s still possible that a concept you believe is your own, does, in fact, exist elsewhere, and has the legal documentation already in place to protect the invention.
It should be noted that while these systems do have every U.S. trademark and patent in them, the platforms are not the most intuitive, so it’s possible to overlook something. A patent lawyer will be able to conduct a more thorough search. You can also explore the Google Patents tool, which may return better Search Engine Results from keywords than the USPTOs own website databases.
Completing patent and trademark filing requirements
The United States Patent and Trademark Office (USPTO) offers all the necessary documentation to file for a patent or trademark. Although it is not fully necessary to file for a trademark, not doing so increases risks for your business in a legal sense. Without a trademark, another business is able to do their due diligence in searching for existing trademarks, and if yours does not appear, they can pursue it themselves. There are legal ways to defend against this, but it will be significantly more costly than the average trademark filing fee of between $225 and $600.
Unlike trademarks, patents are significantly more complicated, and based on the utility or design concepts that you are creating. A utility patent filing, or one that protects how an invention functions or is produced, only costs ~$70 to $280 to file upfront—while the associated fees in having a IP lawyer assist in the process significantly higher than this, they depend on the law firm. But down the line, not having a patent protection may cost much more, as a competitor could scoop your IP or go to market with a reverse-engineered copycat.
- Utility patent application: ~$70
- Utility patent search: ~$300
- Utility patent examination: ~$360
Design patents, which focus on protections the specific design elements of a product, are also relatively more affordable, but require specific formats be followed in submitting the designs.
- Design patent application: ~$90
- Design patent search: ~$60
- Design patent examination: ~$230
In all cases of IP, it’s common to work with trademark or patent lawyers to expedite the process and help ensure USPTO filings go according to plan.
The Provisional Patent
If you’ve watched Shark Tank, you’ve probably heard a dozen of founders use the term “patent pending.” This is not the same thing as having filed for a patent—instead, it is the process of filing for a provisional patent. The term is often misused, and there is an important distinction to be made. In most cases, a provisional patent is used as a one-year holdover, protecting your invention temporarily, while you work with your patent attorney to get everything in order for filing for proper utility patent protection.
The process of filing for a provisional patent is far more informal, is cheap, and does not take long, as no human at the USTPO even reviews the actual application—by filing, you are automatically granted provisional protection over your claims; but these claims still need to be defensible, or the provisional patent is just worth the paper it’s printed on. You can refine your IP claims when you file for the full utility patent protection, but to the very best of your ability you should make strong and specific claims to all novel and useful components of your invention even at the provisional patent stage.
Track and Wait
Once you’ve filed for patent protection, the waiting game begins. If filed electronically, both filing systems have a tracker where you can monitor the status of your filing, and see any updates or approvals—but this can take a long time, often years.
A Note About Sharing IP
As with all things associated with starting a business, there are IP disclosure risks involved along the way. However, getting feedback on your ideas and concepts is incredibly important in the earliest days, and holding back on sharing your work because you perceive that certain information should remain proprietary can be a huge mistake. Fortunately, filing for a provisional patent is one way to protect you here—ensuring you have your patent-pending information protected, while also letting you comfortably disclose the outlines of what you are working to develop.
VCs, mentors, and other founders are far less likely to go out of their way to try to steal your ideas outright if they know you hold a provision patent, and are moving forward with filing for full patent protections. As Founder Institute Adeo Ressi notes: nobody is going to steal your stupid startup idea.
Immigrating to the U.S.
Like patents and trademarks, immigrating to the U.S. to start a business is a complicated process. Mix in a current political environment pushing back against immigration in general, and you’ve got a mountain rather than a hill to climb. That said, immigrating to the U.S. is not impossible. Nitin Pachisia of Unshackled Ventures, a an early-stage venture fund focusing exclusively on immigrant-founded U.S. companies, explains,
Those on Visas and at the point where the company needs to be incorporated, should go ahead and do it. If your attorney says you can't, find a better attorney. U.S. corporations are formed everyday by every imaginable citizen everywhere in the world.
Due to the complexities of immigration and the current political environment, an immigration lawyer can help to provide the most viable current paths forward. With that said, there are options for building foundations in the U.S., doing business, or even working your way into America.
The most common entry for entrepreneurs seeking to start a business in the U.S. is through the B-1 Visa. This allows founders to enter for a brief period of time, but comes with a great deal of caveats and restrictions. For example, a founder can’t express outright that they are going to come to the states to start a business. It’s primarily a vehicle for starting conversations, or even joining an accelerator or incubator.
E1 and L1 Visas
Founders that already have a business launched in their home country have two options for starting to do work in the U.S. Although outright these will not lead to immigration, they do open the doors for working in and with consumers in America. For starters, the E1 Visa allows established companies to send senior or skilled employees to the U.S. to carry out a substantial trade.
On the more complicated front, businesses looking to start a U.S. branch can use an L1 Visa to do so. This allows a foreign country to set up their U.S. operations with a specific business plan, and even bring over manager-level or higher professionals in from other countries.
Invest Your Way In
Unlike an L1 Visa that focuses on developing a U.S. branch office, founders are able to start a business directly by investing their way into the country through an E2. An E2 visa allows investors to put between $100k and $1 million into a business or venture, and then be within the U.S. to manage their investment. This visa allows investors to be in the country between 3 months and five years, and the visa can be extended indefinitely.
Work Your Way In
Though investing your way into the states is a direct way to immigrate and build a startup in the U.S., many large tech companies will hire highly skilled specialists through the H1B Visa. This visa acts as a lottery, letting in only a certain amount of skilled workers each year. Visa holders are only able to work for the companies that sponsor the visa, but it does pose an opportunity for them to start building a startup on the side, too.
Learning and Research
One of the more common ways for would-be founders to build a startup in the U.S. is by first going to college as international students. By getting an F1 Visa or student visa, foreigners are permitted learn at established education institutions. It’s at this point that they typically would file for an H1B visa to work for a U.S. based company.
There is also the option of a J-1 Exchange Visa, which allows research scholars, professors, and exchange visitors to participate in educational programs. This can include an internship, professional training, or seminar.
Choosing the Right Lawyer
Like most professions, lawyers come in all varieties. From specialists who can help a founder from Europe immigrate to the U.S., to the entrepreneur simply seeking to incorporate, there are plenty of options to consider. When choosing a lawyer, the most logical path forward should always focus on building a foundation that reduces legal risk.
For the simple activities like incorporation, in most cases there are self-help solutions and turnkey services that can get the basics covered; however, once it comes time to hire an employee, bring on a partner, or seek out investors, the paperwork and agreements put in place can have long-term effects on the business. By working with the right lawyer, what seems like a costly choice today can in fact become an investment leading to savings later on. With this in mind, founders should draft up a list of all their projected legal needs, including where you may need support in the short-term - incorporation, staffing, fundraising, etc. - and ensure in any initial conversations with potential lawyers that they have a background covering each of these topics.
Questions to Ask a Lawyer
Selecting a lawyer starts with a conversation or interview. Below are some questions that should be asked during an initial conversation:
1. How many startup clients have you worked with, and why are you interested in working with more startups now?
2. What is an example of a successful startup client that you have helped, and what is an example of a situation with one of your startup clients that did not go as planned?
3. Can you describe the team, the roles, and the billable rate of the resources that will be working on my account from your firm, and how do you anticipate that an average legal matter, such as a partnership agreement, will be completed?
4. What is the best way for me to work with you and your team to get the highest quality work for the lowest fees, and do you offer any discounts or fee deferrals for companies in our position?
5. What are the three best pieces of legal advice that you can give a founder or startup in my position that may help us be more successful?
Location, Pricing, and Referrals
Beyond legal specializations, there are a few other components to your legal relationship that are worth considering, such as location, pricing, and client referrals.
Location should be leveraged as a strategic element, to build direct connections and support where your intended consumers are located. If you are planning on seeking out a relationship with investors in California or Texas, a law firm in those areas makes the most sense. For immigrating entrepreneurs, finding an American immigration attorney and localized one may both be necessary.
Pricing is a second area of concern, and not all startup lawyers function the same. In some cases a law firm may offer a deferral of their fees during your initial setup and paperwork, as an investment into your company and token of good will, hoping to gain further business from your company as you grow. By saving you a few dollars in ensuring your bylaws and incorporation procedures go well today, they will retain your business on larger needs when they arise. Other firms may even offer mixed-equity solutions, where your upfront costs are lowered in trade for a certain ownership stake in the company. Then of course, you have the more common firms that range from fixed-fee, hourly, or even hiring a lawyer as staff.
Lastly, but most importantly, ask for a referral. You want an unbiased opinion from another founder that has and is still working with the firm. Unfortunately, there are not many reliable review websites (e.g. like Yelp for attorneys) to gain a firm grasp of a particular lawyer’s worth, ethics, and support levels. So ask for a referral (or multiple): in most cases, a firm should have no issues connecting you with an existing client prior to signing a retainer or other agreement.
Frequently Asked Questions
- Do I need to incorporate?
The short answer is yes. Without incorporating, you are adding unnecessary risk to both yourself and your business, reducing your ability to raise outside investments, and downplaying your own credibility.
- Do I need a lawyer in order to incorporate in Delaware?
No, but you may want one to ensure you navigate the processes effectively, and avoid going through any unnecessary steps in your specific case. Most startup lawyers are familiar with Delaware law.
- Should I keep my valuable IP a trade secret, or patent it?
If you’re confident that your IP cannot be reverse-engineered or revealed to the public, keeping it as a trade secret is acceptable. It does however pose some risks. It should be noted that a trade secret is more difficult to enforce than a patent, and as soon as the secret becomes public, anyone may use it at will.
- Should I make employees sign an NDA?
Many startups don’t really need an NDA; however, if you believe your IP is both valuable and worth protecting, asking employees to sign an NDA is a common protective measure. It is important to note that many NDAs are unenforceable. If you want an NDA to be enforceable, you will need the support of a lawyer.
- Should I make prospective investors sign NDAs?
No. If you’re uncomfortable disclosing the details of your innovation, find a way to explain it in layman’s terms without spilling your secret sauce.
- Can I work on my startup while holding a day job?
Many founders start this way, but ultimately it depends on the agreement you have with your existing employer. Some companies may frown upon or outright decline employing people who moonlight or are building their own companies. And some companies may even make employees sign have onerous agreements that lay claim to any IP they develop while employed for the company. If this applies to you, proceed with caution. Ultimately, you will almost be guaranteed not to succeed in fundraising until you commit to your venture full-time, so bear that in mind as you look to plan your startup’s roadmap for moving forward.
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