How to Incorporate Your Business Mashed Report

Should founders stock be subject to vesting before a venture financing?

Generally yes. Even though the founders stock is issued and outstanding, the company can have the right to repurchase the shares. The right of the company to repurchase the shares will lapse over time or upon certain events, similar to vesting of options. There are two primary reasons for subjecting founders stock to vesting even before a venture financing.1. If...

By Yoichiro (“Yokum”) Taku | Corporate & Securities Partner at Wilson Sonsini Goodrich & Rosati

What should the vesting terms of founder stock be before a venture financing?

I think that founders stock before a venture financing should be subject to the same general vesting terms as one would expect after a venture financing. A typical vesting schedule is four year vesting with a one year cliff. This means that 25% of the shares will vest one year...

By Yoichiro (“Yokum”) Taku | Corporate & Securities Partner at Wilson Sonsini Goodrich & Rosati

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What is Series FF stock?

I've been asked by a few people about the Series FF stock that has been advocated by the Founders Fund. Matt Marshall of Venture Beat reported on this invention in December 2006. See here for an Inc.com report in March 2007. Michael Martin blogs about economic incentives associated with the...

By Yoichiro (“Yokum”) Taku | Corporate & Securities Partner at Wilson Sonsini Goodrich & Rosati

What is an 83(b) election?

Failing to make a timely 83(b) election with the IRS is something that could lead to disastrous tax consequences for a startup company founder or employee.Founders typically purchase stock pursuant to restricted stock purchase agreements that allow the company to repurchase "unvested" stock upon termination of employment. Similarly, employees may...

By Yoichiro (“Yokum”) Taku | Corporate & Securities Partner at Wilson Sonsini Goodrich & Rosati

What is qualified small business stock?

Under Internal Revenue Code Section 1202 , a taxpayer (other than a corporation) that recognizes gain from the sale or exchange of "qualified small business stock" held for more than five years may exclude 50% of such gain from gross income for regular income tax purposes. The amount of gain...

By Yoichiro (“Yokum”) Taku | Corporate & Securities Partner at Wilson Sonsini Goodrich & Rosati

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Should founders pay for their stock in cash or contribute intellectual property?

If a founder owns intellectual property that he or she plans on contributing to a company, the founder may want to pay for founder stock by assigning the intellectual property rather than paying cash. Even though founders typically purchase stock for $0.01 or $0.001 per share, the aggregate purchase price...

By Yoichiro (“Yokum”) Taku | Corporate & Securities Partner at Wilson Sonsini Goodrich & Rosati

What is Class F common stock?

Extremely founder-friendly provisions in the certificate of incorporation for companies. These provisions include a special class of super-voting common stock, called "Class F" common stock, which is named for "Founders." * Voting. The COI includes Class A common stock, which has one vote per share, and Class F common stock,...

By Yoichiro (“Yokum”) Taku | Corporate & Securities Partner at Wilson Sonsini Goodrich & Rosati

How many shares should be authorized in the certificate of incorporation?

I usually advise companies to authorize around 10 to 15 million shares of common stock. Around 8 or 9 million shares are issued to founders with a 1 million to 2 million share option pool, for a fully-diluted base of around 10 million shares. The remaining authorized but unissued shares...

By Yoichiro (“Yokum”) Taku | Corporate & Securities Partner at Wilson Sonsini Goodrich & Rosati

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How do you calculate Delaware franchise taxes?

A corporation's Delaware Annual Franchise Tax Report is prepared by Delaware calculating the corporation's annual tax obligation using the "authorized shares" method, reflecting a very large annual franchise tax obligation for most corporations. However, use of the optional "assumed par value capital" method of tax calculation will typically result in...

By Yoichiro (“Yokum”) Taku | Corporate & Securities Partner at Wilson Sonsini Goodrich & Rosati

What inspection and information rights does a stockholder have?

Most states allow stockholders to demand access to a corporation's books and records, and a stockholder list, as long as the stockholder has a proper purpose and meets certain procedural requirements.Delaware General Corporation Law Section 220(b) provides that "Any stockholder, in person or by attorney or other agent, shall, upon...

By Yoichiro (“Yokum”) Taku | Corporate & Securities Partner at Wilson Sonsini Goodrich & Rosati

What trademark and other legal issues are involved in selecting a company name?

[The following post is courtesy of John Slafsky and Aaron Hendelman in WSGR's Trademarks and Advertising Practices Group.]Among the most important tasks in the founding of a new company are the development and clearance of a company name. There are two very different sets of legal issues, and a host...

By Yoichiro (“Yokum”) Taku | Corporate & Securities Partner at Wilson Sonsini Goodrich & Rosati

What is par value?

Par value is the minimum price per share that shares must be issued for in order to be fully paid. I typically recommend that par value be set at $0.001 or $0.0001 per share. Thus, if a founder purchases 8,000,000 shares of common stock, the minimum price that the founder...

By Yoichiro (“Yokum”) Taku | Corporate & Securities Partner at Wilson Sonsini Goodrich & Rosati

What does fully-diluted capitalization mean?

"Fully-diluted" capitalization typically includes (1) all outstanding common stock, (2) all outstanding preferred stock (on a converted to common basis), (3) outstanding warrants (on an as exercised and as converted to common basis), (4) outstanding options, (5) options reserved for future grant, and (6) any other convertible securities on an...

By Yoichiro (“Yokum”) Taku | Corporate & Securities Partner at Wilson Sonsini Goodrich & Rosati

What do you need to do before you quit your job to form a startup company?

There are various things a potential founder of a new startup company needs to do before quitting their job.1. Review all agreements with your current employer. Most employees may have signed an offer letter and a confidential information and invention assignment agreement, as well as other documents such as a...

By Yoichiro (“Yokum”) Taku | Corporate & Securities Partner at Wilson Sonsini Goodrich & Rosati

What is a certificate of incorporation?

A Delaware corporation is considered to exist when its certificate of incorporation has been filed with the Secretary of State. Generally, the certificate is brief because very few items must be covered in the certificate to make it effective.The certificate must include: * the name of the corporation (this name...

By Yoichiro (“Yokum”) Taku | Corporate & Securities Partner at Wilson Sonsini Goodrich & Rosati

What are bylaws?

The bylaws of a corporation set forth various procedures affecting the governance of the corporation. Delaware law allows a corporation's bylaws to contain any provision relating to the business of the corporation, the conduct of its affairs, or the rights or powers of its stockholders, directors, officers or employees, so...

By Yoichiro (“Yokum”) Taku | Corporate & Securities Partner at Wilson Sonsini Goodrich & Rosati

What state should I incorporate in?

I think there are three primary choices for the state of incorporation for most technology startup companies: (i) Delaware, (ii) the state where the company has its headquarters (i.e. California), and (iii) the Cayman Islands.Almost all of the companies that I represent that intend to receive venture financing are incorporated...

By Yoichiro (“Yokum”) Taku | Corporate & Securities Partner at Wilson Sonsini Goodrich & Rosati

What type of entity should I form?

C corps, LLCs, and S corps differ significantly in the areas of taxation, ownership, fundraising, governance and structure, and employee compensation. Almost all technology startup companies that I work with are C corps. Any company that raises venture financing will need to be a C corp in order to issue...

By Yoichiro (“Yokum”) Taku | Corporate & Securities Partner at Wilson Sonsini Goodrich & Rosati

When do I need to incorporate a company?

Founders of startup companies often wait to incorporate a company until they are confident that their concept is viable or fundable. At some point, however, an entrepreneur will need to formally incorporate a company. Several reasons exist for taking the step to incorporate. * More than one founder. If there...

By Yoichiro (“Yokum”) Taku | Corporate & Securities Partner at Wilson Sonsini Goodrich & Rosati