You’ve been burning the midnight oil on a startup for a while now and all of a sudden – it’s working! You’re ready to level up. Customers are signing up, some money is coming in, and you’re thinking about raising the next round.
But – you cut some corners when starting out because money is tight, you didn’t exactly have a ‘legal’ budget, and your focus was really on development.
That’s ok – you’re not alone. This is very common. This article will highlight the things you need to lock down before you present yourself to investors:
1. Have your Incorporation Documentation On-Point
As a tech startup, you’ve probably done enough research to register a Delaware C Corporation, file your Articles of Incorporation, and have some Bylaws in place. You should also make sure you have the following:
- Administer enough shares. 10 million at a $0.0001 par value is a good place to start.
- Have a Stock Plan and Stock Ledger in place.
- Have Stock Purchase Agreements for yourself and co-founders with a vesting schedule.
- Have a Shareholder Agreement – determining the rights of shareholders and defining when those rights can be exercised.
- Have Bylaws specific to your company, and make sure you’re already in the habit of doing meetings and taking minutes.
2. Transfer Your Intellectual Property
There have been (many) cases where investors refuse to partake in a round because intellectual property (everything from the name, logo, to the code itself) is owned by individuals or long-gone contractors, and not the corporation. Don’t fall into this hole. Make sure you’ve transferred your intellectual property using:
- Technology Assignment Agreements – from founders to the company in exchange for stock.
- Confidential Information and Invention Assignment Agreements – from both employees, and consultants – transferring over any rights to inventions to the company.
3. Have an Up-To-Date Cap Table
A Cap Table is a table providing an analysis of a company’s percentages of ownership, equity dilution, and value of equity in each round of investment by founders, investors, and other owners. You should have this in place, even if just you and your co-founders are the only ones who own stock. You’ve got options for Cap Tables:
- Download a free spreadsheet from many sources online. Here’s one from Cooley.
- Use software (recommended) like Carta, Captable.io, or CapShare.
4. Figure out Data Privacy and Security Compliance
Data Privacy is a big deal now, and it’s only going to get bigger. The General Data Protection Regulation (GDPR) in Europe applies to all European Union Citizens, and pretty much every software company in the world. The California Consumer Privacy Act (CCPA) comes into effect in 2020, and is basically GDPR for the United States. Have a plan around Data Privacy and Compliance. This means, amongst many others:
- Get consent from all of your users to use their data – and make sure the consent is in plain, easy to read language.
- Make sure your data is hosted in protected environments, and encryption at rest and encryption in transit in place.
- Keep audit logs of who has access to your users data, and what they’re doing with it.
- Allow your users to contact you and request that you delete their data.
- Make sure you are only using data for specific purposes, and nothing else (don’t sell your data for money without telling your users you’re doing so).
- Have compliance policies and procedures in place, for both general protection of your data – and in case there is a breach.
- Have a Security Policy published on your site outlining what technical and administrative security measures you take as a company.
- Make sure your vendor’s are compliant (more on this below.)
- Don’t just write it, and not do it.
5. Have a Sales Contract
If your startup is a software as a service (SaaS) – your sales contracts should be air tight to make sure you get paid, and aren’t held liable.
- Licensing of your SaaS to the customer
- Restrictions of use of your application
- Limitations of liability
- Disclaimers of warranties
- Intellectual Property and Copyright rights
- What law governs the contract
- Notice of changes to terms
- Business contact information
- What happens if your customer violates terms
- How the customer can end the contract, and penalties around it
7. Have a Service Level Agreement
Customer service is absolutely critical to your startups success. Unhappy customers = churn. Churn = death of a startup.
The Service Level Agreement (SLA) is the promise of service you’re making to your customers regarding the quality, availability, and responsibilities of your company.
Some of the information an SLA should include:
- The service you are providing
- Promised uptime
- How to report issues or submit support questions
- Response and issue resolution time-frame
- What happens if you don’t meet your commitments
8. Do a Vendor Contract Review
SaaS companies have dozens of vendors ranging from hosting providers to consultants. Believe it or not, a bad vendor contract with poor terms can cost you a deal.
That’s why you should review, negotiate, renegotiate, and amend all of the vendor contracts you have in place. The last thing you want is for a deal to fall through because your off shore development team owns the IP to the app they built for you.
9. Do a Vendor Compliance Audit
As mentioned above – GDPR is here, CCPA is coming, and it’s only a matter of time until more robust regulations are passed worldwide. That’s why it’s important to ensure that your vendor’s are compliant with data privacy compliance standards.
Reach out to all of your vendors handling data and ask them for their data security policies and procedures. For example, if GDPR is relevant to you (and it probably is), make sure that you ask all of your vendors for a Data Protection/Data Processing Addendum to their terms of service. This agreement lays out information around data being processed and the security around it.
If you’re handling sensitive data, and one of your vendor’s doesn’t have their stuff together – it puts you at risk as well.
10. Have Employment Contract Packages
Now that you’re for real, you should make sure you have proper employment contracts with the appropriate provisions in place. This includes:
- Stock option plans and vesting schedules
- At-Will employment provisions
- Confidential Information and Invention Assignment Agreements – transferring over all inventions to the company, and making sure confidential information stays confidential.
- Required Commitments and Expectations – the promise that work hours are dedicated to work for the company.
- Company Policies – vacation days, sick days, leave policies, and benefits.
- Non-compete agreement – to make sure your employees don’t jump ship to a competitor right away.
- Termination Agreement – the promises being made if and when the employee leaves.
11. File Your Trademarks
You don’t want to go-to-market complete with website, marketing material, and all the works – only to get a cease and desist letter from a shoemaker in Oregon telling you they own the rights to your name and logo.
I’ve written an entire article on How Trademarks Work, but here’s the gist of what you need to do:
- Research – make sure the name and logo, or anything similar to it, aren’t already registered in the United States Patent and Trademark Office Federal Register, State Registers, or in Common Law.
- Understand why your mark might get rejected, and what your recourse is.
- File your trademarks with the United States Patent and Trademark Office.
- Follow the application, and respond to any Office Actions and objections the USPTO might have.
Research and register your trademarks early, and avoid having to go through a comprehensive rebrand later.
Let Us Help
Kader Law regularly works with startups that are bound to hit the gas and go. I personally have over a decade of experience working at startups in sales and growth, and seeing them from start to exit.
We offer packages, both on retainer or for a flat rate, to handle everything mentioned in this article.
Choose a time below for a free initial consultation.
This post is not legal advice, and does not establish any attorney client privilege between Law Office of K.S. Kader, PLLC and you, the reader.