Attorney Ted Lustig addresses Ultra Light Legal Roundtable
Tuesday night’s Legal Round Table presented by Ultra Light Startups featured Ted Lustig, an attorney and partner with the full service law firm known as Seyfarth Shaw. Lustig took multiple questions from a group of more than 30 people as he gave legal advice on starting a company and 10 legal pitfalls for startup companies to avoid.
The attorney explained that when you start a company, you personally become responsible for all debts and obligations incurred by the organization. That’s why he says it’s important to file a charter with the state you plan to do business in as part of a long list of corporate formalities.
Lustig says critical step in separates you from your company’s potential liabilities. If a problem arises within the organization and you have not registered your company, the people suing you could go after your home and other personal assets.
He says once your company is registered, any document you sign when doing business should include the company name. Lustig also advises using company letterheads for all transactions and opening a business bank account. This includes obtaining an Employer Identification Number (EIN) for the business from the I-R-S.
Lustig’s 10 pitfalls to avoid when starting a new company:
1) DO NOT think that legal documents are a substitute for trusting your founders, employers, investors, customers or business partners. You never know what you may encounter.
2) DO NOT make your deals too complicated or change the terms of a deal once they are set. Keep your deals as simple as possible and resist the urge to change deals in midstream.
3) DO NOT assume that your company owns its intellectual property.
4) DO NOT sign license or development agreements without going over them word for word. Little words can make all the difference and a professional should scrutinize important documents first.
5) DO NOT think that you can just sell company stocks or equity to anybody you want. It is far too easy to violate securities rules and an attorney should be consulted before making such a move.
6) DO NOT allow your stockholder base to get too large. It is a Herculean task to assemble multiple stockholders on short notice. This can lead to great expense as well as costly delays.
7) DO NOT allow minority stockholders to cripple the company by giving them too much power. Restrict their voting rights from the outset to avoid trouble.
8- DO NOT allow angel investors to purchase equity in your company. Instead you should allow them to buy convertible promissory notes with a structured schedule.
9) DO NOT promise anybody a percentage of the company. Protect yourself by getting proper rules and procedures in order from the start.
10) DO NOT provide unrestricted stock to company founders. This protects the stock so that if someone decides to leave the company early – they would have to sell the stock back to the organization instead of becoming an absent partner.
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