Corporate housekeeping

You’ve determined that your new venture is going to require outside investment. There are a few things you can do to make your company, if not more attractive to investors, at least not unattractive:

• Keep it simple. There are countless ways that a young company can complicate its capital structure. Given two similar opportunities, investors will head for the one that is easiest to understand and requires the least modification before closing. For example, a simple capital structure of common stock issued to a small number of founders and well-chosen angel investors and an option plan for key employees, contractors and advisors is attractive. There are also capital structures that are unattractive. These include: multiple classes of shares and/or convertible notes issued to numerous friends, family and non-strategic investors and individual options granted to non-core advisors with no option plan. Fewer stockholders with fewer rights will dramatically speed up your time to closing a new investment. So will a well-constructed cap table spreadsheet that clearly lists all of the shares, options, and other securities, if any.
• Organize your corporate records. It may seem unimportant at the time of incorporation and the early days of your company, but you can save yourself time and money by keeping an organized record, electronic or otherwise, of all of your legal documents, such as: articles of incorporation, by-laws, resolutions, consents, or minutes of meetings from the board or stockholders, stock purchase agreements, stock certificates, contracts, non-disclosure agreements, and employment/contractor agreements. You should keep records of board decisions, even if there has been no formal board meeting. When an experienced investor begins due diligence, they will want to review all of these documents. If your house is in order, you can focus on negotiating the investment, instead of cleaning up corporate records.
• Protect your intellectual property (IP). Before you incorporate your company and afterwards, have every founder, developer and advisor that you work with read and sign an IP and confidentiality agreement that is well-drafted and assigns all inventions and other IP developed for the company to the company. Also, if you are bringing IP into the company that was developed before the company was incorporated or otherwise outside of the company, have the person contributing the IP sign a specific IP assignment to the company that transfers the IP to the company. These two documents are easy to obtain from legal counsel with experience in early stage investing. Keep copies of these handy—investors want to know that the company’s confidential information and IP is protected.
• Good corporate hygiene includes good employment practices. Employment laws place numerous obligations on your company with which you must comply. For example, employees must be paid at least minimum wage. A simple employment letter of hire and a contractor agreement are must-haves. Investors will ask to see your employee and contractor agreements primarily to ensure that salaries, vacation, benefits and termination entitlements are reasonable.

Questions? Email us at startups@dentons.com.