If I launched a startup... (commercial law)

[Jeromy Evans]

I stumbled upon this post by @startuplawyer Ryan Roberts. It's from
March 2010 but still doing the rounds and still relevant.
Source: http://startuplawyer.com/startup-issues/if-i-launched-a-startup

Do you think we could write an Australian version of this? Or is it
already documented?

For each item he provides a link to the justification/argument/
considerations about it so it's worth going to the source. The
comments are good too.
This is focused on startup businesses likely to seek VC funding in the
future.

US version:
"Here’s what I’d do in the beginning:
Incorporation
(1) Entity Choice: Corporation or Corporation
(2) State of Incorporation: Delaware
(3) Authorized Shares in Charter: 10,000,000 Shares
(4) Type of Shares: Common Stock
(5) Par Value of Common: $0.0001
(6) Initial Founders Issuance: 8,000,000 Shares
(7) Founders Equity Split: Depends on the Team, But Quickly and After
the Awkward & Difficult Conversations
(8) Vest Founders Shares?: Hell Yes
(9) Vesting Schedule for Founders Shares: 4 years with a One Year
Cliff
(10) Consideration for Founders Shares: Cash & IP
(11) Handling of “Lost Founders”: Lock Down the IP (then Wish Them
Well)"

AUS version:
I don't know the answers. Lets assume the founders believe in what
they're doing, expect to be around for several years and expect to
employ staff in Aus. [Is that a reasonable assumption anymore?]

1) Pty Ltd (for reasons previously discussed in this group, if you can
afford it)
2) Not sure it matters here as state taxes and law don't seem to
matter until you're big enough to pay payroll tax. There are small
state differences re grants, concessions.
3) Same argument as in the US applies. Granular enough to be flexible.
4) Ordinary shares
5-11 no idea! Mick from Pollenizer shared some docs ESOPs in this
thread: http://groups.google.com/group/silicon-beach-australia/browse_thread/thread/29637594fe624fc9

Thoughts?

Regards,
Jeromy Evans
http://www.linkedin.com/in/jeromyevans

[Elias Bizannes]

(1) Entity Choice: Australian law has four types of entities it recognizes in business -- sole trader, partnership, company and Trust. (Pty Ltd is a company.)

(2) State of Incorporation: Australian states have adopted the same corporations law across the country, effectively making it standard. The issue is a constitutional one, where the Federal parliament cannot rule commerce over the states. The way it was overcome was having each state adopt the same law. This is different from the US where each of the 50 states has it's own unique type of corporations legislation.

(3) Authorized Shares in Charter: 10,000,000 Shares 

>(same as US)

(4) Type of Shares: Common Stock (US) = Ordinary shares (Australia)

(5) Par Value of Common: $0.0001 

> (no difference just because it's Australia)

(6) Initial Founders Issuance: 8,000,000 Shares 

> (no difference just because it's Australia)

(7) Founders Equity Split: Depends on the Team, But Quickly and After

the Awkward & Difficult Conversations 

> (no difference just because it's Australia)

(8) Vest Founders Shares?: Hell Yes 

> (no difference just because it's Australia and *crucial*)

(9) Vesting Schedule for Founders Shares: 4 years with a One Year Cliff 

> (this is standard silicon valley, no reason why this can't happen in Australia)

(10) Consideration for Founders Shares: Cash & IP

> (no difference just because it's Australia)

(11) Handling of “Lost Founders”: Lock Down the IP (then Wish Them Well)"

>  (no difference just because it's Australia)

The only thing I will raise and where I could be wrong with the above, is that Australia has a different treatment for options that was stupidly introduced several years ago. Basically the government makes you pay tax for the theoretical future purchase of shares with the options.

Elias Bizannes
http://eliasbizannes.com

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[Aileen]

Thanks Elias =')

Aileen

> Elias Bizanneshttp://eliasbizannes.com

> >http://groups.google.com/group/silicon-beach-australia/browse_thread/...

>
> > Thoughts?
>
> > Regards,
> > Jeromy Evans
> >http://www.linkedin.com/in/jeromyevans
>
> > --
> > You received this message because you are subscribed to the Silicon Beach

> > Australia mailing list. Vistinghttp://siliconbeachaustralia.orgfor more

>
> > Forum rules
> > 1) No lurkers! It is expected that you introduce yourself.

> > 2) No jobs postings. You can usehttp://siliconbeachaustralia.org/jobs

[Jeromy Evans]

Thanks Elias. That's great!

StartMate have generously shared their Term Sheet, IP Deed of
Assignment, Subscription Agreement, Shareholders Agreement and
Constitution:
http://www.startmate.com.au/financing-docs
I hope to compare how consistent these are with the points 8-11.

cheers,
Jeromy

[Kurt Falkenstein]

The statmate docs are great, but everyone should note that the
structure of the investment it contemplates is not what everyone will
do. You should make sure the structure of the investment (the type of
shares issued in particular) is appropriate for your company/
circumstances.

As a lawyer who works with lots of startups my advice would be:

- Realise most lawyers work from a template/precedent - use the
startmate docs to check your documents are up to scratch; OR

- Use the startmate docs and get sign off from a lawyer to make sure
the terms of the deal are reflected in the documents and make any
adjustments (this is paying for someone else to take the risk);

Startmate say they want to take the cost of legals for funding down to
$2,000 - I'll take the Pepsi Challenge on that, but having worked on a
few, unless the founders are used to financial transactions, there is
a lot more than just preparing or reviewing documents. A good lawyer
should take the time to understand the business too. You have to
decide how much you are willing to pay to have *someonw who just does
the minimum amount possible because fees are low* or someone who
*truly cares about the success of your startup and wants to contribute
with their legal skills and will look to grow the value of the
relationship as you do*. It will all come down to whether your lawyer
is a necessary evil or a valuable resource. That really depends on
what you're doing and where you're going.

However there is a lot more to structuring a company than just signing
vanilla documents. You have to think about how you own your value for
the tax consequences of vesting shares, minimising your longterm tax
and protecting your assets. You need to implement the items and mange
them, which can also be complex. Directors resolutions, minutes,
consents, certificates etc...

Unfortunately what a template doesn't do (yet... watch this space) is
give you the options and pathways that an experienced advisor can. It
also can't pull you out of the sh*t if you find yourself there.

Great to see generic docs out, its not easy to do. However please note
these are not a 100% compliant funding solution - it is very good
reference though, use them.


Kurt

ku...@bridgeadvisory.com.au
kfalke...@rouselaywers.com.au
twitter.com/kurtfalkenstein

...startuplawyer.com.au coming soon!!