I recently attended a talk by Craig Sherman of Wilson Sonsini Goodrich & Rosati about Corporate Structure and Common Problems. The event was organized by StartPad, an excellent Seattle-based entrepreneurial organization through which we rent our office space and hence get the opportunity to intermingle with and work alongside other startups.
The talk was great! I won’t summarize the entire thing, since you can find the deck here. But, I did come away with two high-level points that are arguably applicable even beyond corporate structures:
Disclaimer: I am not a lawyer, and I cannot be held responsible for accuracy of the information below. Use at your own risk.
Keep things “standard”
Your time is at a premium. You likely want to use that time to innovate in how you serve your customers or how you make money and not in constructing complicated corporate structures. If you keep things standard, you can use your lawyer’s document templates with minimal changes. If not, you will be spending time and money on customized documents. Further, keeping things standard removes a source of potential friction and/or extra due diligence time when you are raising money.
As an example, consider an S-Corporation structure over an LLC structure if you are planning on raising money. An S-Corporation is less flexible. But, as a result, it is more of a known quantity.
Hope for the best, but also plan for the worst
The reality is that many startups fail. Even those that succeed have hiccups along the way.
As an example, consider vesting founder shares. This way, if a founder leaves, you have a) enough “room” in your capitalization table to find a replacement, and b) you can still raise money because investors are less likely to feel that they are overcompensating a departed founder. Vesting is something you should consider up front, since readjusting the capitalization table later in the process can have significant tax consequences.