Startup Funding Espresso – Legal Issues Around Equity

Legal Issues Around Equity

Hello, this is Hall T. Martin with the Startup Funding Espresso -- your daily shot of startup funding and investing.

There are several legal issues surrounding equity to consider:

You must have a legal entity to establish equity ownership.

There are several types of legal structures including LLC, C-Corp, and more.

The LLC is easy to set up and launch the business. 

Delaware C-Corporation is the preferred legal structure by investors.

Start with an LLC and move to a Delaware Corporation when investors require it.

Be careful promising equity as they will come back to claim it at a later date.

Issuing equity falls under the domain of securities law.  

It’s important to have a lawyer review terms sheets and other legal documents impacting equity issuances to ensure compliance.

Make sure options provided to employees are properly documented.

Review the tax implications of equity with your accountant so you understand the impact on the business. 

Be careful with convertible notes and other deal structures so you understand the impact of the fundraiser on your cap table.

Watch out for key terms in the terms sheet such as “most favored nation.”

This term can give investors the same terms as provided to other investors.

Watch out for these legal issues with your equity.

 

Thank you for joining us for the Startup Funding Espresso where we help startups and investors connect for funding.

Let’s go startup something today.

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