Startup Complexity

One of the things that drives me crazy about properly setting up a new software startup is the amount of work it takes to get the corporate structure right. It is not anything like setting up a regular limited company which operates in a local market. There are many issues that must be considered that are not immediately obvious up front. For example:

  • Since the company will raise money from Friends & Family, Angel Investors and perhaps Venture Capitalists in multiple rounds, it is very important to structure the Articles of the Company to enshrine rights to the Founders and other early stage investors that keep the more “professional” investors in line when subsequent financings are done.
  • Since there are executives with significant share positions, there must be mechanisms in the Articles that guide dispute resolution between them. These could be managed with Shareholder’s Agreements but they only work in the beginning and significantly complicate issues once Angel and VCs get involved.
  • The biggest assets of most high tech companies are the people. It is important to retain and reward them (employees and directors) with a share of the company. This is usually accomplished with an Employee Stock Ownership Plan (ESOP). This plan must be properly constructed to reduce the tax liability of the Company and the Employee/Director and to make it fair to new participants as well as encumbents over the lifespan of the plan. It must also be designed so that everyone “earns out” their option grants i.e. they don’t get a huge windfall for “signing on” but not “delivering the goods” over their term with the company.
  • Many Angel Investors expect the Company to qualify for Provincial investment tax credits. With the potential for multiple international investors (including international employees), it is vital that we structure the Company to preserve our access to these tax credits.
  • Given that there is high probability that the Compay will be sold in a few years and that this transaction will generate significant financial returns, it is important at this early stage to do some tax planning for that event and structure the share holdings via a family trust.

Every company manages these requirements in some fashion or another. It is my hope and goal to handle these things early and as cost effectively as possible (I hate paying lawyers huge fees for what is mostly boilerplate text). Fortunately I have access to some good advice on these topics from Bill Diamond, CFO of Time Search Inc.  He has been through all this before and is willing to sign on as an advisor to the Company. Score one for networking via the West Coast Whisky Society…

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