How to Navigate Formation, Incorporation, Equity Allocation, and More

How to Navigate Formation, Incorporation, Equity Allocation, and More

KO partner John Gaddis and attorney Samantha Pjesky recently co-hosted a webinar with Ascent CFO Solutions’ founder and CEO Dan DeGolier on navigating incorporation, formation, equity allocation, and more. If you’re looking for a toolkit to set up a new business or if you’re preparing an existing entity for your first financing, engaging counsel for the first time, or just getting your company organized, check out the recap and access the full video recording below for practical legal and business tips and best practices from advisors who have guided countless founders and entrepreneurs.

Key takeaways include: 

  • Important considerations for founders before incorporating
  • Advantages and disadvantages of various types of business entities
  • High-level best practices for cap table management, vesting, and equity allocation

What are the key considerations for setting up a new business and ensuring its success?

Before incorporating, it’s crucial to organize your team. This includes defining roles and responsibilities, time and financial commitments, and performance expectations. For multiple founders, discuss and agree on who will hold key positions such as CEO, CFO, and CTO and what those roles and responsibilities include.

In addition to getting your dream team of founders in place and aligned, consider leaning on experienced external advisors, to provide guidance on cap table management, doing your accounting correctly from the beginning, having an accurate cash flow forecast, and more.

What considerations should founders keep in mind when transitioning from an old employer to a new company?

Founders should review any existing contractual obligations, such as non-compete and non-disclosure agreements, to avoid potential legal issues. When leaving a previous employer, it’s advisable to maintain a positive relationship and be mindful of messaging about the transition.

How should the company handle equity allocation?

Once everyone is on the same page regarding expected contributions, make equity contingent on performance and strongly consider making stock subject to vesting/forfeiture if applicable.

For more info on how to handle someone who isn’t performing, 50/50 ownership, time-based and milestone-based vesting, and more, check out the video below. It’s important to consult with tax advisors and ensure all equity-related agreements are properly documented.

Why is it important to choose the right form of entity for your business?

The choice of entity can impact liability protection, tax treatment, and operational flexibility. Consider factors such as asset protection, transferability of ownership, and ease of raising capital when choosing the right form of entity for your business.

What are the options for setting up an entity, and how should founders choose?

The most common options are S corporations, C corporations, and LLCs. The video below discusses various advantages and disadvantages of types of entities, including long-term implications like taxation, future fundraising plans, and other factors to consider before choosing. For any type of entity, it’s important to have good documentation and corporate governance in place to limit your risk.

Can you convert your entity or tax classification down the road?

It’s possible to convert your entity or tax classification as your business evolves. However, the process can be complex and may depend on various factors such as the state of incorporation, ownership structure, and fundraising history. Proactively considering these factors can help save time and money in the future.

In summary, founders should be thoughtful about the equity split, establish clear vesting schedules, seek guidance from legal and financial advisors, and choose the right entity type based on their company’s legal needs and long-term considerations.

Tune in to the full webinar video recording below:

John Gaddis is a corporate partner at KO Law whose practice focuses on corporate and business transactions and general corporate and business law, including company formations, mergers and acquisitions, debt and equity financings, public offerings, strategic alliances, and general corporate representation. Reach John at [email protected].

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