Founders · Formation

Advise on incorporating vs. founders agreement?

Vinit Modi Co-Founder Campusly | Mobile Web & User Research Consultant | Strategic Leadership

March 24th, 2014

We are a growing to be a team of 5 and wanted advise on incorporating vs. drafting a founders agreement.

The idea is still in early stages - we are drafting requirements, mock-ups, etc. What have folks in such situations done before? How soon should I incorporate vs. spending time on the technical/marketing piece. 

The initial cost outlay to form a Delaware C-corp is about $2500-3500.
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Keven Ages Technology leader, RESTful advocate, design pattern enthusiast, joker and husband.

March 24th, 2014

I would go with an agreement if you're in your early stages. Mainly because if things don't work out with all the founders, it's much stickier to legally change things (assuming you're all board members).

IMHO, when you're in your early ideation stage, stay as lean & agile as possible.

I found a couple of articles for you that are much more detailed to your question and hopefully give you something to ponder.

Staying Agile in early stages of startup : http://blog.simeonov.com/2010/02/22/startup-founder-agreements/

Pros/Cons of C, S, etc corporations : http://www.inc.com/guides/starting-a-c-corp.html

Hope that helps.

Eric Rogness Technical Product Manager

March 24th, 2014

I'm not weighing in on the choice between the two, but Clerky.com gives you a Delaware C-Corp very affordably, and sets it up the way YC wants it. Together with eSharesInc.com for managing share distribution and vesting (free), you'll be set.

Sati Hillyer Looking to Hire a Ruby Engineer to join OneMob - 2015 Gartner Cool Vendor for CRM Sales

March 24th, 2014

I'm in a similar situation, I was thinking of using this service:
https://www.incorporate.com/incorporate_now.html?entityState=DE&pseudoEntityType=ccorp

$300 to get your del c-corp going. 

Or is there something better?

Jacob Kojfman Experienced technology and corporate lawyer, focusing on SAAS

March 24th, 2014

Hi Vinit, You may need both. A founders' agreement discusses how you will deal with issues amongst yourselves as founders, and if you incorporate you may also need a shareholders agreement so you know how to deal with something such as a buyout (i.e. what % of shares have to be purchased before you can force all the other shareholders to sell). The adv. of incorporating is that you won't need to constantly assign any IP to someone or worry about someone not assigning it, plus if you incorporate you may be able to shield yourselves from greater liability since it is the corp entering into the agreements. Please help me find a cure for breast cancer: http://www.runforthecure.com/site/TR?px=1283361&fr_id=1846&pg=personal Jacob Kojfman 604 318 4539

Vinit Modi Co-Founder Campusly | Mobile Web & User Research Consultant | Strategic Leadership

March 24th, 2014

I am happy to go with a founders agreement but it may not be legally enforceable. Any thoughts on the legality of the founders agreement? Is it enforceable? Any experiences? 

Also the charges I mention are for a vanilla incorporation - the quote is similar across three different law firms. 

The issue at hand is not the actual filing as a C-corp but the terms and conditions needed for the founders. Filing a corp is easy, getting the terms right is the hard part. 

Does anyone have a template of a founders agreement to share? I found several online but a lot of them are all over the place in terms of verbiage. 

Jacob Kojfman Experienced technology and corporate lawyer, focusing on SAAS

March 24th, 2014

As long as a contract does not include any illegal provisions or provisions against public interest, it should be enforceable. If your agreement says that no founder will sell shares to someone of a particular race, that would not be enforceable. Please help me find a cure for breast cancer: http://www.runforthecure.com/site/TR?px=1283361&fr_id=1846&pg=personal Jacob Kojfman 604 318 4539

Vinit Modi Co-Founder Campusly | Mobile Web & User Research Consultant | Strategic Leadership

March 24th, 2014

Thanks Eric for the two links - they look promising - will check it out!

Huan Liu Co-founder at Vimo Labs Inc.

March 24th, 2014

I would advise incorporating as late as possible. You get no legal benefits in your early stage, yet you need to spend the money and time to manage paperwork and tax. If your co-founding team do not trust each other, and need incorporation to have a peace of mind, then you may want to rethinking about the company. 

In my own case, I had an equity agreement with my co-founder, and two early employees through emails. All four of us are ok with it. We incorporated a month before our product, an iPhone App, hit the App store. The reason we incorporate at that point is that we want a legal entity to officially take on the liability. 

Rob G

March 25th, 2014

Vinit,  incorporation doesn't add much value to your product or get your product to market any faster and adds overhead (reporting, taxes, time, etc.) and expense.  when you do incorporate i would search for a more cost effective solution such as Clerky.com or Bizfilings.com - $2,500-$3,500 is way too much to pay for simple article of incorporation, bylaws, state filings, etc. Should be closer to $400-$800. 

Mike Moyer

March 25th, 2014

You can usually incorporate by going directly to the secretary of state web site. You don't need an incorporation service or even an attorney. You just fill out a few forms and pay a small fee.

If you are using a Grunt Fund (perfectly fair equity split) you can use the Grunt Fund operating agreement that can be found here: http://www.slicingpie.com/matthew-m-rossetti/ Or you can use a stand-alone agreement available here: http://www.slicingpie.com/clint-costa/

-Mike