What Documents Do I Need When Forming My Startup?

What Documents Do I Need When Forming My Startup?

One of the more confusing parts about forming a startup is sorting through the dozen or so documents that may come into play. Below are the basic organizational documents to consider when forming your startup. Which documents are applicable to your startup may differ, depend on your startup's specific circumstances (e.g., number of founders, alignment of founder expectations, financing plans, whether or not there will be non-founder employees, tax elections, etc.), but these are the versions we typically see.

  1. Articles of Incorporation - This is the charter document that is filed with the secretary of state to create the corporation. This will set the name and address of the corporation, the authorized number of shares, the terms of each class and/or series of capital stock, and either opt-in or out-out of various other matters governing the corporation and as described in the applicable state corporation statute. Sometimes this charter document will also set the initial board of directors. In Washington, this charter is called the articles of incorporation, and in Delaware this charter is called a certificate of incorporation. See our prior post comparing incorporating in Washington versus Delaware.
  2. Bylaws - This document outlines the rules and procedures that govern the internal management of your startup, such as how directors are elected, how meetings of directors and shareholders are conducted, and what officers the organization will have and a description of their duties. Many of the items in a company's bylaws are merely a restatement of what is prescribed in the applicable state corporate statute.
  3. Organization Consent (or Minutes of Meeting) - This is the instrument required by law by which the board and initial shareholders approve various formation actions and organizational matters (e.g., the issuance of founder stock, appointment of the officers, approval of banking resolutions, etc.). Sometimes, preceding its organizational consent, a startup will also have an "action of incorporator" where it elects the initial board of directors and adopts the bylaws. 
  4. Assignments of Property - These are the instruments by which each founder contributes their ownership in the business plan, and related IP, to the company in exchange for their founder stock. In a community property state, it is advisable to have this instrument also executed by each founder's spouse.
  5. Investment Letter - A letter signed by each founder acknowledging basic securities law restrictions applicable to their founder stock, and often includes a lock-up agreement in connection with an IPO and consent to receive shareholder notice via email. Sometimes instead of an investment letter, companies will use a more formal subscription agreement (as you would with early investors).
  6. Employee Nondisclosure and Invention Assignment Agreement - This agreement should be executed by each of the company's employees and officers to ensure that the company owns all intellectual property and inventions created by such person on a going-forward basis. This agreement will also include provisions regarding confidentiality and other employment matters, and will often include provisions prohibiting such person from competing with the company's business or soliciting its personnel for a set period following termination of service. These non-competition and non-solicitation provisions are advisable (if permitted under applicable state law) to both protect the company, and are expected by institutional investors, particularly with respect to key employees and founders.  See our prior post regarding the enforceability of non-competition and non-solicitation provisions.
  7. Notice Regarding Ineligibility for Unemployment Benefits - If your startup elects to not pay unemployment taxes for its officers (as permitted by Washington law and as a cost saving matter), this notice document is necessary to satisfy a Washington law requirement to notify such officers of the company's election not to cover its officers' unemployment benefits.
  8. Founders' Stock Repurchase Agreement - This is the agreement that subjects a founder's stock to repurchase if the founder's service with the company prematurely terminates, with such company repurchase right lapsing on a set vesting schedule (often a two-year period). There are a myriad of variables and choices to consider when subjecting a founder's stock to these types of restrictions. In my opinion, this agreement is a very useful tool to force a discussion among founders regarding what each founder expects (in terms of time commitment) from the other.
  9. 83(b) Election Letter to IRS - If any of the founders' stock is issued subject to repurchase, then such founder may choose to file an 83(b) election with the IRS. For an 83(b) election to be effective, it must be filed with the IRS within 30 days of the purchase date. The tax ramifications for failing to file an 83(b) election can be severe. See our prior post discussing 83(b) elections.
  10. Buy-Sell and Voting Agreement - This is an agreement among the founders that prohibits each founder from selling/transferring his or her shares to a third party without first offering the same to the company and other founders (other than in the case of certain permitted family transfers). Sometimes, this agreement will also include a voting agreement, whereby each founder agrees to elect each other to the board of directors. This agreement is often terminated once the company takes an investment from institutional investors (and replaced with similar rights/restrictions that run to such investor).
  11. Stock Option Plan and related form of Notice of Grant of Stock Option and Form of Stock Option Agreement - Startups often desire to reduce initial cash expenditures by granting personnel equity as partial consideration for services provided. A stock option plan is the most standard way to make such equity grants (and the cleanest from a securities law perspective). The stock option plan will set forth the framework and rules governing stock options to be granted by the company. The stock option agreement will set forth the specific provisions applicable to a given grant, which may vary as determined by the company's board of directors, and the notice of grant of stock option will specify the economics of each grant (e.g., number of shares, exercise price, vesting schedule, vesting commencement date, etc.). See our prior post discussing the key considerations when creating your first stock option plan.
  12. Form 2553 S corporation election - If you choose make your startup an S corporation (vs. a C corporation), you generally will need to file your Form 2553 S corporation election with the IRS within 75 days of formation. Here is a link to the IRS's FAQ re S corporations.
  13. Initial Annual Report - Washington requires each corporation to file an Initial Annual Report with the secretary of state, which includes basic corporate information (e.g., officers, directors, business location, phone number, email address and brief nature of business).
  14. Federal Tax Registrations - Each corporation will need to obtain a Federal Employer Identification Number (EIN) from the IRS. See the IRS website for additional information at http://www.irs.gov/ (click on "businesses").
  15. State/City Tax Registrations - If you anticipate that your startup will be liable for any state or city taxes, then you will also need to file a Business License Application. The filing of this application with the state triggers the various state agencies to send documentation to your company to set up necessary accounts (e.g., L&I, Employment Security, etc.). This application does not have an exact due date, but it is a good idea to file the Business License Application as soon as you can after incorporating. We have also found that some banks will require the filing of a Business License Application in order to establish an account. The Washington department of revenue has an informative website and currently offers online filing of the Business License Application. The Washington department of revenue website also provides a link to each city in Washington, including tax information. You should check with your accountant if you are unsure whether (or where) you need to file. Also note that the Washington department of revenue indicates that you need to file a Business License Application when you first start, or change or update your business. In addition, you will need to file, or re-file if you:  
    • get a new city or specialty license;
    • change the ownership of a business;
    • open, change or add business locations;
    • register or change a trade name (also known as a "DBA");
    • hire employees; or
    • change your unemployment or industrial insurance coverage.

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