1. We’ll wait to grant founder shares—waiting will be better.
My legal team won’t let me write, “Waiting will NOT be better” because I’m not your lawyer and I can’t give you legal advice. What I can say, is that if you think waiting will be better, you should consult your lawyer to make sure they agree. You might also find it helpful to prepare for your lawyer consultation by reading about some of the cons of waiting to grant founder shares that I’ve written about in more detail elsewhere on our blog.
2. We should split founders shares equally—it will prevent conflict.
You should split based on who deserves what, not on what will avoid a fight. It is very unlikely that everyone deserves equal shares for their very different contributions. If you take the path of least resistance, then people will feel the shares they got were not the shares they deserved. It might not be as disruptive as a fight over different share amounts, but this is also a bad way to start off your company. It can be very distracting to have the founding team focused on how they didn’t get what they deserved instead of focusing on doing great work and making those shares worth some serious money.
3. I don’t need to setup a system to organize my documents yet. The documents are somewhere in cloud storage or my inbox and that’s fine for now.
Not setting up a system to organize your company’s documents makes it more difficult to handle them in a way that allows you to prepare for a due diligence. If you have any plans to fundraise, you should be ready for a due diligence at a moment’s notice. Solutions like Fidelity have data rooms built specifically for an investor’s lawyer to come in and perform a due diligence.
4. If I have the executed signature page and even if it isn't attached to the associated document, I'm all set. I can just put them together later.
Many founders think to themselves, “matching the signature on to the document is as easy as pinning the tail on the donkey—it’s something that will be a breeze to do later.” They have a signature page. Then they have the document it’s supposed to be attached to. They figure they’ll attach it later.
This is the wrong approach to managing your executed documents. It takes time and money to cleanup later, and will probably occur when you’re trying to fundraise and time is of the essence. This flawed mentality is similar to the “I’ll clean my room later” argument. What’s faster—putting away things as they get out of place, or waiting until you’re room’s a mess and then taking 5 hours to clean it all up? This is a lesson applies not only to rooms, but also to documents, and for a deeper dive, you can read more in “Pinning Down Your Legal Documents.”
5. I don’t have time or want to deal with setting up a Stock Incentive Plan (SIP).
This attitude may come from the misconception that you can somehow get away with not setting up a SIP. If you’re planning on growing as a company, you’ll likely set up a SIP because it allows you to more easily avoid running afoul of federal securities laws. For most companies, it’s probably inevitable on the paperwork timeline (which my colleague Jason Grover and I drew out, and you can see here). So if you understand that it will probably happen, you might consider talking with your lawyer and seeing if it makes sense for you to make one sooner instead of pushing it out to next year.
6. I founded this company so it’s mine, and I’m in charge.
I’ve written on this subject previously because it’s such a fundamental misunderstanding. At the end of the day, the capitalization table governs and tells the true story of who owns the company. It doesn’t matter if you started the company, if your blood, sweat, and tears went into the formation, or if the mission of the company is your life’s work. You will not control the direction of the company because you care the most and you have the title of “founder.” Your cap table will tell you who really controls the company’s direction.
7. Using my lawyer is expensive.
If you strategically manage the way you work with your lawyer then it is more cost effective to get their counsel. If you wouldn’t ask your lawyer to pick up snacks from the grocery store or ferry your children around town to their extracurriculars because it’s a poor use of their time and your legal budget, you should find it equally ridiculous to task them with administrative, low-value tasks like filling in templates, faxing things, and tracking down signatures. Would you ask your CTO to fax things or fill out Word documents? I certainly hope not. This is administrative work that doesn’t require specialized expertise.
When you work with your lawyer in a thoughtful way, the mistakes they prevent will save you more money than what they charge you. Your lawyer should be a trusted advisor, but you also have a responsibility to educate yourself around the basic corporate legal processes involved with running your company. Some examples of inefficient, low-value questions to ask your lawyer include: Do I have Bylaws? Where are they? Some examples of good questions: Should I set up a SIP now or later? Do I need a 409A or can I just use a board consent to establish FMV? Can you look at this board consent for my new share grants before I send it out to the board? See our blog post "Working Effectively With Your Lawyer" for more great ideas on when to involve your lawyer.
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Fidelity does not provide legal or tax advice. The information herein is general in nature and should not be considered legal or tax advice. Consult an attorney or tax professional regarding your specific situation.
Sample scenarios are for illustrative purposes only.