Entrepreneurs often get caught up in the business and product development of a growing business and they fail to pay attention to the initial equity rights and company ownership matters. Eventually these matters need to be taken care of, but ideally, should be handled as soon as the business is formed. A few reasons this is important include the following:
Documents will ensure that all founding members agree on their roles and respective company ownership.
It may affect the issuance of equity including the payments at the early stage when the fair market value of the equity is low before there are any increases in value and gains in assets. It also allows the executives the ability to pay lower prices for equity and reap more benefits with growth.
Maintain and understand capitalization of the company and have this documented by equity award documentation so the company is able and ready to provide these materials to potential investors if they request this information.
The above information is just a few of the reasons why capitalization of your company should not be overlooked during the earliest stages of planning your business.
Put it in Writing
Often the founders of a startup business will come to a verbal agreement as to what percentage of the business each of them will own without putting it into paper documentation. This can cause extensive, and expensive, disagreements and cleanup problems later on when there are issues about the initial agreements.
Anyone participating in a corporate structure should sign written agreements that reflect their acquisition options and equity. Even those forming an LLC should be certain to have a written operating agreement. All documents should reflect the rights and privileges of the parties involved and ownership to avoid future disagreements.
Additional Documentation Necessary
Beyond the operating and ownership agreements you should have created, you also need to create and maintain a capitalization table as well as any related documentation. This should be done not just for the first founder, but for additional employees and consultants that are promised equity or offered equity, as well as any paperwork that is evidence of such arrangements. Investors and acquirers of the business will want to know the terms of the company, the valuation, who controls decisions, and who has rights or privileges to the company and how this could impact their investment.
Contact a California Business Planning Attorney Today
The attorneys at Verhagen Bennett LLP regularly advise our clients on how to document equity issuances and create and maintain capitalization tables. New businesses often have questions regarding corporate transactions, tax and compliance matters, licensing and permits, and more. We have advisors available to assist you with these questions and all aspects of planning your business and getting it off to a good start.
You will need a good attorney to continue to guide you as you grow your business. Whether you are just getting started, growing your business, or maintaining your established company, contact us today to schedule a consultation.
© 2019 Verhagen Bennett LLP — This article is for general information only. The information presented should not be construed to be formal legal advice nor the formation of a lawyer/client relationship.