Legal · Agreements

Shareholders/Operating Agreement Pro Bono?

Ahren Alexander CEO + Product Engineer at Audiovert, Inc.

August 25th, 2015

My startup is in a delicate place, incorporated but without legal infrastructure like a shareholders or operating agreement.  We've received a lot of positive feedback and encouragement for our idea and prototypes (see audiovert.com), but as college students, we don't have the liquid capital to afford the necessary guidance in crafting such documents.

We'd be willing to apportion equity in exchange for legal service, but pro bono, for the good of a few dedicated college students :) would be amazing. 

Would anyone be willing to help us out or know someone who would?  Thanks so much.

David Still Founder of Start-ups, Entrepreneur, Financier and Advisor

August 25th, 2015

Years ago I was in your position with my first startup. For free, a lawyer (Lawyer X) helped me start and document my ideas and business; became lead counsel under engagement with his large law firm; asked for and was granted management shares (Class B, C and D); was voted Secretary of the Board; became a non-voting Board Manager; managed up to 15 lawyers who handled all of our legal work; named as the Executor of my Will; and became a good friend.

When my new company was valued over $400 million Lawyer X then left his law firm and joined the institutional investor who had funded my company - as a partner and managing director. He switched from being our corporate, and I believed personal lawyer, to being my boss. He later became president of the institutional investor. He then got ownership in the institutional investor's shares (Class A). Within a few months after being our lawyer he owned all classes of shares (A, B, C and D) (big conflict), and became a voting Board Manager; member of the investment committee; and failed to remedy a long standing default by the institutional investor regarding managements' class C and D shares - in an operating agreement that s/he drafted.

Bottom line her/his status went from serving a "prospective client" (State Rules of Professional Conduct) to "defendant and counter-claim plaintiff" in a series of very large law suits in Federal District, Federal Appeals and State courts that spanned seven years. As a Wharton MBA and Temple Law graduate I should have known better. So-called "service bartering" is generally a very appealing approach but can be a very bad idea. At a minimum you should understand your risks and the rights of a minority shareholder.

Never again have I used so-called "free counsel" for my start-ups. I have obtained seed money (can be good idea) or did the documents myself (also a bad idea but better than the other bad ideas). Nothing is free and, if the money gets big (value of your and Lawyer X's shares) the complexities of the relationship are massive, and the winner of any disputes will likely be the party with the most money for legal fees and costs. It is unlikely it will be you.

Further, it is unlikely that a good lawyer (one who has a written legal duty and skills to protect you) will conduct free legal work without an engagement letter for equity. Also, keep in mind that once you sign an engagement letter with a lawyer's firm your "free friend" no longer represents "you" - 99% of the time s/he will represent the company.

I could write a book on issues that can occur if large money becomes involved and your lawyer's loyalty is to money in his/her pocket and not the original founder. In my view, the duty will always be to your company and money in her/his pocket - not you. There are lots of rules of professional ethics on these matters, none of which really matter in a serious dispute.

If you want to contact me I will discuss "business advice" on how to handle your issue. However, I cannot and will not give legal advice.

David Still Founder of Start-ups, Entrepreneur, Financier and Advisor

August 25th, 2015

PS. FYI Only - "Pro Bono" generally denotes work undertaken for the public good without charge, especially legal work for a client with a low income.

Juan Zarco Managing Director, Silicon Valley Ventures Growth Partners llp

August 25th, 2015

How about "gratis"?

I think that given the " startup" setup is simple, he can follow just the standard filings before employing an outside counsel. Once investors begin sniffing around, then he can seek counsel.

Rodney Frost Training Media Specialist

August 25th, 2015

AhRen

"business in a box". It's a program with hundreds of documents you may need for many times of scenarios. I'm in a similar situation, and it has proved immeasurable in getting me to where i need to be.

http://www.biztree.com/

cheers!

~Rod

 

Juan Zarco Managing Director, Silicon Valley Ventures Growth Partners llp

August 25th, 2015

https://orrick.com/Practices/Emerging-Companies/Startup-Form   Best regards, JUAN RAMON ZARCO  |  +1 (650) 843-9212 AllRest TechnologiesSVVGPBlog: jrzarco2001.wordpress.com, Linkedin:www.linkedin.com/in/jrzarco Email:jrzarco@svvgp.com,jrzarco2001@yahoo.comTwitter: @Zarko2001 Palo Alto, CA 94304  USA  Cell: 703-376-4893 Fax: 832-565-0995                                Proprietary and Confidential

Kwame Esq. Venture capital Investor in African Innovation

August 25th, 2015

Thank you for your message. I will have limited access to email until mid-September. If this is urgent, please send a text or WhatsApp message to +1 762-233-3310. Otherwise, I will be dedicated to checking messages each Wednesday from noon until 3pm New York time. Please send messages on Wednesday before noon if you seek a timely response. Much thanks for your patience and support.

Ahren Alexander CEO + Product Engineer at Audiovert, Inc.

August 25th, 2015

Big thanks for the insightful anecdotes, resources, and clarification on pro bono vs. gratis!  

Juan Zarco Managing Director, Silicon Valley Ventures Growth Partners llp

August 26th, 2015

Hi Ahren,

For what you need, the website link I sent earlier (add an "s") has a checkout list that will help put the stuff together.  You are in an early stage and there is no need to have complicated documents -- just the basics. So you'd know, standard fees for the basic in Silicon Valley  -- incorporation, bylaws, for the Delaware State -- is about $3k. Other things, such as Illinois filings, agreements, can run an additional $2-3k.  Read the linked documents carefully.  They should be simple and to the point. That way you avoid what happened to Still. (Or maybe that lawyer had no scruples.)

Benjamin Olding Co-founder, Board Member at Jana

August 28th, 2015

I've seen it done right once - an experienced lawyer did the work for equity.  

As David points out, this normally creates a severe conflict of interest (highlighting you're working with the wrong legal professional).

However, as part of the deal, the lawyer put the shares in the name of a charity of his choosing (where he was not the executor).  I thought it was a quality move all around - and net the docs got done by an experienced lawyer (who had accumulated plenty of personal wealth at that point anyway) for $0 cash.

The way we did it, however, was just wait until we had a signed term sheet, and then negotiated a fixed fee for all the finance & incorporation documents we needed retroactively to setup everything up and close the first round ($25k if I remember correctly), contingent on the round closing - with the additional upside for the lawyers they'd be our general counsel afterwards.  This is pretty common if you're working with quality investors - the lawyers want to be around good investors, so they'll go well out of their way to deal with your cash flow.  All you need to do is talk to 2 quality law firms to negotiate this - they'll both want your business.  There's no rush until you have a term sheet though (i.e. a contract).  Until then, don't forget to file your state and federal taxes...  (yes, you have to file no matter what as well as - surprise! - pay fees even if you lose money).

Usually I tell people to avoid incorporation until you have cash flow (put the losses on a Schedule C of your personal taxes), but since you've already gone down this road, just try to keep your nose clean and raise some money as fast as possible so you can afford to pay for real legal and accounting services.  Great businesses aren't usually built creatively cutting corners on legal and accounting fees - they're built by spending your mental resources on your product.

Kenneth Larson Retired Aerospace Contracts Manager, MicroMentor Volunteer and Founder "Smalltofeds"

August 29th, 2015

Feel free to examine the operating agreements, contingent hire agreements, teaming agreements, non-disclosure agreements and others at the second, vertical Box Net "References" cube in the left margin of "Smalltofeds" .com.
You may also feel free to work with them as your see fit to tailor them to your organization as your grow.