Traditional Company (LLC)

How can I check if the name is available for my Company?

Please head on the State of Delaware’s website to do a corporation entity search. Simply type in the name you would like and see what comes up. If a corporation or an LLC with your name is already listed, it’s probably better to chose another name.

 

How do you normally split up equity for a Company?

LLC’s issue what are known as Units. They are basically the equivalent of shares in a corporation and you divide the company by the number of units. So, for instance, we recommend authorizing 1 million Units. This is a pretty high number, which means that if you’re a single person LLC, you receive a high number of units.

It also gives you a lot of extra Units  just in case you intend to bring on other founders later on or issue units to employees.

If you are a multiple member LLC, then we will ask you what percentage of the company each founder will own and calculate your number of Units from that.  

 

How many Units will the founders own?

Each founder will start out with 100,000 Units, but don’t worry. If you are just one member, that’s 100,000 Units. Two Members: each receive 100,000 Units, unless you choose to split up your equity unevenly.

Don’t worry though. Founders will have 100% control of the company. The other Units will be available for distribution if you need them later.

 

Where are all the other Units?

The other 900,000 will just hang out in the treasury. If you own 100% of the issued units, then you own 100% of the company. If you’ve set up a multiple member LLC, then maybe there will be 800,000 in the treasury, maybe 700,000. It doesn’t matter how many extra Units there are authorized. It’s only the issued Units that count - i.e. the ones that are actually “sold” to the founders.

Why am I both a Member and Manager?

Life is full of surprises. You never know later down the road if you might want to add a partner to your business. We set up all LLC’s as Manager-managed, because it gives you more flexibility down the road. When you’re one person, it doesn’t really make a difference. You just sign everything on behalf of the LLC as a Manager or you can even name yourself CEO.

As your company grows, and you decide to bring on a co-founder or partner, it is helpful to have a division between the individuals who own the company (the Members) and the individuals who run the business (the Managers). Investors, for instance, don’t want to have to vote on the day-to-day running of a company. So they can be Members but not Managers. People are happier to give you money when no responsibility comes with it.

What are the standard formation documents?

A full company setup for a single member LLC should have the following documents. These are necessary to issue Units to the Members, set up your structure of governance, protect the company’s intellectual property, and get the ball rolling!

  • Certificate of Formation
  • Operating Agreement
  • Statement of Organizer
  • Written Consent of Action in lieu of Organizing Meeting
  • Intellectual Property Assignment Agreement
  • Certificate of Equity Ownership

If you’re a Multiple-Member LLC you will also receive the following documents:

  • Standard Equity Purchase Agreement with vesting, acceleration and drag along rights
  • 83(b) Election Forms

That’s why we charge more for multiple member LLC’s. They are more complicated.

What is vesting?

Ok. Let’s talk about vesting. Most multiple-member LLC’s subject the Units they issue to vesting. This is a situation in which you and your other founders receive all your Units  upfront. This means you can vote the Units and manage the company as you need.

However, for a period of time, the company has a right to repurchase these Units for $1. Over time, this right to repurchase diminishes. After 3 months the company can only repurchase 90% of the Units, after 6 months 80%, etc. After three years (which is the amount of time we recommend for founders) all the Units have vested and the holder owns them fully and outright.

So why do we do this? Look, sometimes things don’t work out, for good reasons and for bad. You start a company with a great co-founder, and then the cofounder gets an amazing job offer from Google, or runs off to become a surf instructor in Bali, or you realize after a while that you’re not a good fit.

One of the founders leaves, and the other founder or founders are left holding the ball. What’s worse, you have to find a new co-founder. But what are you going to if you don’t have any Units to offer the new cofounder because the old cofounder left with them? This is where the repurchase right comes in. The Company can claw back the Units that haven’t vested and can offer them to someone new to carry the torch. Vesting protects co-founders from both good and bad situations.

 

What is the standard vesting schedule that you recommend?

We recommend a three year vesting schedule for all founders with a six month cliff. This means that no Units vest for 6 months, at which point 1/6th of your Units vest. After that, the Units vest monthly for the next 24 months until everything is vested. We think this is enough. When you receive your first major round of investment any sophisticated investor will require that the founders re-start their vesting, so this should be more than enough to get you there.

 

 

What is a cliff?

Basically, none of your Units vest for the first 6 months. We think this is fair, because it takes about six months to get everything started and to make sure all the founders are committed to the project. After six months, you get all six months of vesting at once. If someone leaves before the first six months, they don’t leave with any Units. This saves you from losing Units to someone who’s not really up to the task!

I heard 4 years is standard? Why 3 years?

We think 3 years is more than enough for founders, even though 4 years is standard for employee hires.

When you receive your first major round of investment any sophisticated investor will require the founders to re-start their vesting. 3 years of vesting should be more than enough to get you to that first round of investment!

What is an 83b Form and when does it have to be filed ?

The 83b form is an option the IRS implemented which allows you to pay taxes based on the initial value of the Units issued by a Company, which is generally $0!

If you don't file this form then, you have to pay taxes on the shares as they vest overtime. This means, if your company is successful, that you might suddenly be hit with a giant tax bill a year or two down the road. 

The 83b form needs to be filed within 30 days after signing the post-incorporations documents. If you have vesting on your Shares, PLEASE PLEASE REMEMBER TO DO THIS!!!

What is a Manager?

A Manager is a decision maker in a company. Together, all Managers form The Board of Managers, which is the governing body for a company. Every year at their annual meeting, the Members of the company elect Managers to the Board. Delaware law requires that you have at least one Manager in a Manager-Managed Company. If you have more than one Manager, we recommend appointing an odd number of Managers so you don’t end up with a board deadlocked 50-50 board for a major decision.

Each Manager normally has one vote, though you can change this. All major decisions need to be ratified by the Board. You will need the Board's approval to sell your company. You will need the Board's approval to raise a round of financing. The Board appoints officers of the company like a CEO and approves all matters of major strategic importance.

So what is the typical setup?

A good number of Delaware LLC’s are Manager-managed. This means that Managers make all the decisions about the day-to-day business of the company and make the major decisions. If you like you can appoint Officers as well, and one person can fill more than one role. A Founder can serve on the board of Managers and be an officer of the Company (very common).

Here’s a typical setup for a two founder startups:

  • Startup Founder 1, Manager and CEO
  • Startup Founder 2, Manager

Why do we need Managers and Officers?

An LLC requires Managers to run it. Basically, they are like the Board of Directors for a corporation. The rational behind splitting up management of the Company from Ownership is to allow for passive owners for a company - people who just want to put in money and own a piece of the pie, but don't want to get caught up in the day to day management and operations.

As your Company grows, you may want to appoint Officers even though it is not required for an LLC. As the Board of Managers steps back and begins to make high-level strategic decisions, it can be helpful to have officers take over the actual management of the Company. It can also help distribute responsibilities among the founders. For instance, one founder can be CEO, another CTO (chief technology officer), another CMO (chief marketing officer) etc.

 

What is an Officer?

Officers can be appointed by the Board of Managers. Most LLC's when they start out do not appoint officers. Sometimes they have a CEO or President, but it is rare. However, as the Company grows, it can be useful to have officers represent the Company or even take over the day-to-day operations of an LLC. Most founders will be familiar with the CEO or President position, but a lot of businesses also have other officer positions.

 

What is a CEO ?

The LLC’s CEO or president is responsible for the overall day-to-day activities of the LLC. A lot of LLC's only have Managers and do not appoint officers. We generally set them up without Officers, but if you want to be CEO or President be our guess. We also think it sounds cool!

 

What is a Secretary ?

The Secretary maintains the corporate records of the LLC and prepares minutes of board and members. The secretary also provides certification for banks or other financial institutions and provides requested copies of company documents.

Most LLC's do not appoint Secretaries, and instead have their Managers sign in this capacity. However, if you have a number of Founders, it might be smart to appoint officers to carry out certain duties on behalf of the company, and in that case a Secretary is not a bad idea.

 

What are other officer positions?

Here are a few other officer positions:

  • Vice president. The vice president fills in when the CEO is unavailable or when the board assigns him or her specific duties.
  • Treasurer or chief financial officer. The treasurer is responsible for the financial matters of the company. In early stage startups, this will include daily responsibility for financial matters, keeping the cap table organized, and maintaining the financial company records.

What powers do Officers have?

It’s important to remember two significant facts about actions taken by officers:

  • Executive officers have the authority to legally bind the company
  • Officers are not personally liable for their acts while acting (lawfully) on behalf of the company

Afterwards, the powers of each officer depends on the tasks delegated to them by the founders in their role as Managers of the LLC.

Have any questions? Feel free to ask.