When we incorporated the company through LegalZoom, it was completely fucked up, so I met up with a couple of lawyers in town for help.
Here are the issues with our current equity structure:
Currently our incorporation document states we have 1 million shares of Common Stock and 9 million shares of Preferred Stock. There are 2 issues with this structure:
- LegalZoom made a mistake in our Bylaw document by assigning 2 million shares of Common Stock to my partner and 2 million shares of Common Stock to me. This does not add up because we only have 1 million shares of Common Stock in the company.
- Having Preferred Stock built into our equity structure doesn't make sense. Preferred stock only means something if there are certain terms attached to it, but we haven't set any terms. And most founders* don't need to set special terms because they are majority share holders. Investors dictate certain terms for their equity to have some sort of control and benefit because most of them are not major share holders.
* Founders could get something called "Founders Share" which gives founders certain additional benefits, rights, or bonus, but it takes more money and complicated to structure it that way.
This is the equity structure that the lawyer recommends:
- Founders: 7 million shares
- Employee Pool: 1 million shares
- Investor Pool: 2 million shares
But since we are planning to raise $600,000 from Angels, we need to figure out how much equity we are going to give up for that amount of investment before we fix our equity structure so that we don't have to amend it again later.
If we are gonna give up 50% for $600,000, the equity structure would be like this:
- Founders: 4 million shares
- Employee Pool: 1 million shares
- Investor Pool: 5 million shares
Since we are Delaware corporation operating out of Texas, do we have to pay foreign state tax?
- No, because all of our transactions are done online
On LegalZoom's Compliance Calendar, it says "INFORMATIONAL ALERT: REVIEW OF STATE TAX OBLIGATIONS. What obligations do I have, and what documents do I need to file? And when are they due? How do I file them? How much would it cost?
- Don't worry about it for now. In Delaware, you just need to pay annual incorporation fee, which is around $300
When is the best time to have the annual meeting if the fiscal year of our corporation ends on March 31?
- It's more complicated to have a fiscal year ending in March. Let's keep it simple on Dec 31.
- Having an annual meeting is not a big deal. It could be done over the phone. We just need to keep track on the minute book and file one form.
Our EIN paper says we need to file Form 940, 944, and 1120. What are they?
- They are related to employees. It's not a big deal since we don't have any employee at the moment.
- But we should hire an accountant soon just in case we are overlooking any necessary documents.
How should we distribute shares to our employees/contractors?
- We need "Restricted Stock Agreement" form
- Doing all the paper work together for everyone is cheaper than doing it individually.
- The lawyer will give us a template so we can make any necessary changes or do additional paper work for new employees down the road on our own.
How much does it cost to start the patent process?
- Let's worry about that later after we fix incorporation papers
- The lawyer will introduce us to a software patent lawyer
And here is a list of questions the lawyers suggested the founders should talk about before doing the paper work:
1. How do you resolve disputes?
2. The goals each of you have for the startup
3. The goals each of you have for yourself
4. Duties, job descriptions, and hour commitments
5. Who pays for what?
6. Who gets paid first and why?
7. What happens if one of you wants out?
8. What happens if one of you wants to sell the company, raise capital, or end it?
9. What happens if one of you gets disabled or dies?
10. What happens if things take longer than expected?
11. Whether launching other startups or moonlighting is ok.