I am starting a software business and I am not entirely sure how to proceed with incorporation and drafting an operating agreement.
I have one co-founder and we’ve been working together for a few months validating our product with our target market but have not started building. We are ready to start building but we’d like to have a business entity set up with a business bank account so that everything can stay organized under the business.
We’re not sure where to start or who to work with. I’ve found some start-up attorneys through Google searches and have considered options like Stripe Atlas and Clerky but I’m not sure how important it is to have a lawyer handle everything vs. an automated “service”.
Does anyone have experience finding the right attorney to work with or using a service like Stripe Atlas?
Is this your first startup? A lawyer may be worth the investment since they can help you game plan how equity is structured. This can materially impact any rights, responsibilities, and even eventual control of the company. Examples:
-Are you going to leave unissued equity?
-Will there be equity preferences for founders?
-Antidilution clauses for investors?I would recommend an attorney who specializes in startups in your industry. They’ve usually seen most of the worst types of mistakes and can help you avoid them.
BTW, Corporations have bylaws, LLCs have operating agreements. Those terms are not interchangeable since they refer to completely different legal entities.
It is usually a good idea to go to a lawyer for the shareholders agreement, but I suggest you do a lot of research and develop some understanding yourself. If you are just going to some random lawyer and you don’t have much to contribute you are probably just as well off downloading something from the internet, which is probably what the lawyer would do anyway.
The entity you choose to incorporate as depends on the outcome you want.
(FYI I’m not a lawyer, but have founded several companies and have wasted $ on lawyers during the early stages when templates or lower cost services will do)
Want to run a small business? Do an LLC or S Corp, the tax advantages are better than a C Corp. You can do this for a low cost on an automated platform or yourself using free state-website guides/forms.
Want to raise money and offer shares to investors? Set up a C Corp right away. Register it in Delaware. Investors don’t like wasting time on non-standard corporate structures for no reason.
Want to run your transactions using Stripe’s API? Then Stripe Atlas is a great option.
For your operating agreement, there are plenty of good templates out there for you and your cofounder to fork. Most important thing though is you take a lot of time to make sure you both feel fairly compensated and motivated to put 5+ years into this.
Lawyers can be really really helpful when running a startup, but most of the setup stuff can be boilerplate and not require a legal expert’s time.
I used IncFile.com and incorporated in Delaware. They have a free option, but I opted for the $199 option which included an operating agreement, EIN number (necessary for the bank account), and everything else I needed.
I work at a law firm and have attorneys at my disposal, and still I chose this path because it was easiest and most painless.
The only thing else you need is an agreement between you and your co-founder. You can use mine if you send me a DM.
Note: this is not legal advice.
Stripe Atlas works fine. You’ll need to get a Certificate of Good Standing on your own, but email Stripe for help. Clerk is pretty much the same (both are YC alumni). Both come with enough compute credits to offset their cost, and it’s a better option than most, IMO, in this thread (unless law firms are giving out AWS and OpenAI credits). I’ve also used Cooley and Gunderson Dettmer in the past and had a good experience
I represent exclusively investor-side and the benefit to engaging counsel is showing some sophistication. A lot of my funds and angel’s feel like they’ll have to hold the founder’s hand through simple things.
For example, LLCs have operating agreements (or company agreements in other states). Corporations have a charter and bylaws.
Good rule of thumb and not legal advice: if you’re going to have more than a few investors -> incorporate. If not -> just form an LLC. If for some reason you’re thinking S corp -> please hire a lawyer.
Make sure you hire a lawyer who understands the Slicing Pie model for fair equity splits. Stripe and Clerky don’t use Slicing Pie and without it your equity split won’t be fair. There is a list of lawyers on the slicingpie.com site: https://slicingpie.com/slicing-pie-contracts-and-lawyers/
If you do not plan to raise capital setting up an LLC is super simple.
There are plenty of templates for operating agreements.
The most important aspect of your operating agreement is to clearly define who is responsible for what.
If you plan to raise capital then you will want to form an Inc. There are many states where the laws are advantageous such as Delaware. These are a little more complicated but if you need any help give me a ping and I can get you on the right path.