Submitted by: Stanley P. Jaskiewicz, Esquire, Spector Gadon & Rosen P.C.
As March Madness winds to a close, new tech firms should heed the timeless advice of UCLA legend John Wooden: “If you don’t have time to do it right, when will you have time to do it over?”
Especially after this year, when “The Social Network’s” tale of how not to start a tech company, and the lawsuits and stress that follow, has earned over $224 million.
But stories like the bumps in the creation of Facebook.com are not so interesting when they involve your company, and the legal fees you have to pay to fix them. Yet the fights dramatized in the movie are no different than those fought in boardrooms and courthouses across America.
For entrepreneurs, the movie teaches one clear lesson: the failure to properly document a new company just opens the door for thousands of dollars of legal fees to sort out the mess.
For the majority of businesses that prefer to invest in growth and development, rather than in lawsuits and legal fees, let me highlight some of the most common disagreements which could have been avoided with the help of seasoned advisors.
In its simplest form, dividing equity should be easy – if the founders put in $10, $20, $30 and $40, they will get, respectively, 10%, 20%, 30% and 40% of the equity, however it is denominated.
But the real world is rarely that neat. There may be reasons to give one person more or less because of other non-cash contributions, or services provided to the company.
Once equity rights have been agreed upon, they should in fact be issued, on paper, and recorded in an equity ledger. A verbal understanding about who will get what can quickly be forgotten as the size of the pie increases.
Every company must answer, “Whose word is final?” But the answer is not always clear in the limited liability company, today’s business entity of choice. For example, some LLCs are “Manager managed,” with a manager who has the authority typic