Legal 101 for Startups

Intro 00:01
Welcome to Startup Success, the podcast for startup founders and investors. Here you’ll find stories of success from others in the trenches as they work to scale some of the fastest growing startups in the world, stories that will help you in your own journey. Startup Success starts now.

Kate 00:17
Welcome to Startup Success today, we have Charu Satia in studio, who is a partner and a startup attorney at Silicon Legal Strategy. Welcome.

Charu 00:29
Thank you, Kate. Excited to be here. Thanks for having me.

Kate 00:32
We’re really excited to have you here. We haven’t had a conversation like this on the podcast before, so this is great. I know you’ve been at Silicon Legal Strategy for I think, almost 10 years, is that correct?

Charu 00:45
That’s right, this December will be 10 years. For me.

Kate 00:47
That’s great. So you have a lot of experience with startups. I think it would be helpful if you could just first give us an overview of Silicon Legal Strategy for everybody listening.

Charu 00:59
Sure, I’d love to. Silicon Legal Strategy has been around for I want to say 16 or 17 years. I joined, like you said 10 years ago. And we really are ECVC counsel specialists. So we’re corporate transactional attorneys, who are like adopted counsel for startups. We can handle all of your corporate transactional needs throughout the lifecycle. So from formation through building your customer base, hiring your team, through financing, and fundraising, of course, and then M&A or whatever exit is best for you. I would say companies-side is about 60 to 70% of our business, and the balance is representing venture capitalists in their deal flow.

Kate 01:40
Wow, that’s fascinating. I didn’t realize you worked through the whole lifecycle. So literally from inception to possibly IPO or M&A?

Charu 01:51
Yeah, definitely a lot of M&A work. We have had a client, one of our clients Expensify recently went through an IPO. We’re still their counsel, so we can work with you through the long run. Of course, in the event of an IPO, we’d bring in some IPO counsel to support that. We’re a little bit of a small shop to handle an IPO on our own, but it just goes to prove that we can work with our clients and stick with them. Because as they grow, we grow with them through through each milestone in each phase.

Kate 02:15
That’s great. So I’m guessing it’s like a factional basis that you work, you know, as needed with your clients.

Charu 02:24
Definitely, definitely. There’s no like mandatory minimum number of hours or anything like that. Most of our startups are too small to need a full time GC in house, right. So our goal is to kind of be there for you on an as-needed basis, have that open line of communication so that whenever you need us we come in. So a lot of times, there’s a lot of work at the beginning, setting up the company during the formation, and then the founders will kind of go do their thing for a couple months as they solidify the product, figure out their next steps before hiring or fundraising. And then maybe they’ll come back to us after three to six months saying, okay, hey, I’m ready to bring in this key employee, can you help me figure out what to do? Or we’re gonna raise a SAFE round? Can you walk me through this? So it’s definitely kind of as-needed. Our goal is to just always keep the relationship warm, because you just don’t know when something’s going to come up. So we’re just ready and available whenever our clients need them.

Kate 03:19
That’s great. I mean, obviously, I’m a big proponent of fractional resources coming from Burkland, so that’s fantastic. Do you work with the same attorney when you engage Silicon Legal or do you assign an attorney to a startup?

Charu 03:36
For sure, yeah, we have a dedicated client team for each of our startups. So for example, if I had a client named ABC Corp, we would have an email address for them called ABC Corp at Silicon Legal.com. And whenever they need anything, they can email that handle, and it would go to their dedicated partner associate and paralegal, and that team would stick with them through all their needs, whether it’s formation or commercial agreements, or financings. Now as the as the client grows bigger, as they have more demand than we just add to the team. So maybe we add a second associate after a year when they have more work coming in the door, need more hands on deck, But the great thing is because you have that dedicated team, we retain all that client history. So when we’ve worked on your commercial agreements, we have that knowledge when we have to disclose it in a disclosure schedule and in your fundraising down the road. So we feel like there’s a lot of efficiencies, there’s a lot of depth in the relationship. And it makes sense for us and for our startup clients to have that kind of ongoing, dedicated relationship.

Kate 04:37
Absolutely, because then you’re not starting over every time and like you said, you have that history, you know each other you know how they work. That’s great. It’s interesting, because we work with a lot of early stage startups, and they tend to put off legal counsel, right, it’s like they just see it as an expense. I mean, talk us through that, why is it important to engage legal counsel in early stages? And what are some areas where you recommend a founder does?

Charu 05:09
For sure, you know, and I get it, you know, you’re taking a chance to go out there and start your own business. And the first thing you think of is not legal counsel, How am I going to impact the world, right? Is this Is it worth leaving my day job to do this? And so those are kind of your primary questions you’re asking yourself. I think the reason to engage legal counsel is that you want to bet on your success, right? You know, this podcast is called Startup Success, and you want to go into it thinking, I am going to be successful, so I want to make sure I have the strongest foundation right now. Because cleaning it up after the fact can take a long time, it can be a distraction, and it can be pretty expensive to make up for lost time, or correct things that maybe weren’t done in the most optimal way. So I really think of it as investing in your own future and betting on yourself to say, let me bring in someone who’s a specialist at this corporate transactional work, making sure I’m authorizing the right number of shares, making sure I’m locking down my IP, making sure I’m getting the equity I need, so that when I am successful, when I am at that M&A phase, or IPO phase, I’m not leaving money on the table, because I didn’t invest the right amount of time and perhaps, you know, make that financial commitment to making a solid foundation upfront.

Kate 06:27
That makes a lot of sense, especially where it can come get back and bite you down the road. So is that where you primarily recommend founders in the early stages around equity that you advise them to reach out to counsel there? And where else would you say,

Charu 06:47
Yeah, it’s really when you’re setting up the company. So when you want to incorporate, right, you know, there are fundamental questions of like, should I have an LLC? Should I have a C Corp? Should I be in Delaware? Should I be in California? You know, a lot of folks will come to us saying, Well, I started this idea six months ago, I wanted some protection, so I went for an LLC for tax reasons. But now I want to raise VC funding. And then we’ll have to go through a flip where you, you know, you roll your LLC into a C Corp, because the investors aren’t going to want to invest in an LLC. So there are a lot of things that council can do to kind of, with our experience, let you know, like, if this is your goal, if you want to go the VC funding round, this is kind of the shape your company should have. This is the structure you should use in terms of entity and this is the equity you should give yourself. So you have the most to gain from this endeavor as well. So it really comes down to you know, all the way down to setting up the entity, putting together your your founder equity, and then things like locking down the IP. You want to make sure that that entity owns the IP, not an ex co-founder, not a software developer who came in for two months, not a vendor that you worked with for a little bit. So you want to make sure that IP is locked down because the investors are going to want to invest in that IP. You also need to name the directors and officers of the business, make sure that you have proper corporate governance in place, that you’ve approved the equity issuances, and other certain things that you need to have in place. Also, there are certain tax and securities filings that you want to take care of. There are a handful of things to take care of when you’re just forming the company. And then after that, you know, it’s worth investing in your commercial agreements. You know, depending on your product, let’s say you have like a SaaS offering, your next step might be a Privacy Policy and Terms of Service. So you want to invest in putting those policies together as you bring in consumers to use your website, making sure you’re collecting their data properly, etc. Or your next step might be fundraising. So there’s all these different stages where having legal counsel can be super helpful. And Silicon Legal is, you know, happy to help and all those steps.

Kate 08:54
That’s a long list and it makes a lot of sense all those areas. Where can it go wrong in the due diligence process for an investment or M&A if you don’t have these things set up properly?

Charu 09:08
Yeah, you know, if you haven’t set it up properly, or you haven’t had that open line of communication with your counsel, the worst case scenario is the investor realizes the issue through the diligence process. And so then you’re kind of coming at the problem with your weight on your heels, and you can’t dictate the script on like, how do you manage something that may have gone in a non-ideal way? Right, like everyone has a history everyone has like an employee who left or has an engagement that didn’t work out, we’re not we’re not trying to say that everything’s going to be perfect and peachy keen. But when these kinds of like obstacles arise, did you take the right steps to clean it up to minimize risk and you know, to manage it in like an efficient and kind of professional way? And when investor’s council discovers that in the diligence process, then there’s kind of just more heightened scrutiny on their review. And they’re going to be looking at everything with wider eyes to say like, Well, what else is under the hood here? So one, you’ve kind of planted a little bit of a seed of doubt that like, Can we really trust that this organization is well run and is organized? Whereas, you know, if you work with your counsel openly up front to say, hey, I have this sticky termination, and it didn’t go down ideally, what can we do? Or then at that time, we can say, hey, let’s put together a Separation Agreement, let’s get a release in place, let’s take these precautions to minimize risk. And then in the future, we can convey to investors, hey, we had a non-ideal situation, these are the steps we took, this is why there’s low risk, and you shouldn’t have any concerns investing in our company and moving forward. So it’s really a question of, like I said, kind of like being in control of the situation, showing that you can handle difficult situations, and that you’re not just kind of like shoving things under the rug, hoping they won’t be discovered one day. You want to avoid any skeletons in the closet and kind of just get ahead of any of those issues that come up.

Kate 11:09
That’s such good advice because we’ve seen this just with our clients. When the investor points it out, like you said, it’s a whole different conversation than when you’re proactive about it, or, you know, you talk about it with someone on your side, if you know what I mean. That makes a lot of sense. So I always see, I’m gonna admit, I’ve used it’s at startups Legal Zoom. I had a founder who was like, I don’t want to spend a lot of money let’s use Legal Zoom. Yeah, tell us about that. Because I do see founders try to go the very, very inexpensive route for sure.

Charu 11:49
You are not alone. It’s okay. It happens, and I get it. You know, like I said, sometimes you have to make choices about where you’re going to spend your cash. It’s just the reality of the situation. So a lot of clients will come to us having used Clerk Key or Legal Zoom, whatever.To some extent, they’re fine, The templates can work. I think the question is, when there are the blanks to fill-in in these templates, are you using the the right numbers. And the right numbers are the ones that follow the market standards, you know, when you’re setting up your company, and it is relatively, you know, cookie cutter, which is why these kinds of platforms can exist. But there are right and wrong inputs, you know. There are inputs that are the inputs that the investors want to see that are kind of the cookie cutter presentation of what the company’s capitalization should look like. And others where, you know, I had a client a week ago, that was like, Well, I read a blog that for this tax reason, I should only start with 1500 shares. And I was like, Okay, well, we’re gonna have to, like amend and restate your charter and kind of start over to get you back to the 10 million structure we want to work with. And so, you know, I think it’s a question of, are you familiar with the right inputs? Do you want to spend your nights and weekends and weeks reading all the information online to figure it out? I mean, most of the time, I tell my founders this isn’t what you left your day job for, right? This isn’t what you put everything on the line for to figure out the authorized shares. No, you know, trust somebody else with that, Leave that to somebody else who deals with this every day. And then you guys focus on what you’re really great at, which is like making an impactful change with whatever it is you’re developing. It can be a distraction to try and figure it out on your own. And sometimes when you do, there’s a nuance that the online template can’t capture. And sure enough, by the time you come to Silicon Legal, or whoever your counsel is, they’re going to look through the documents and say, Okay, well, maybe you got 70%, right. But for this other, you know, balance of this, we’re gonna have to help you clean it up. And then you’re almost spending as much money as you would have if you just gone to the lawyer in the first place and done the full package from the beginning. Right. So you’re kind of delaying an expense, but it’s pretty much inevitable.

Kate 14:05
And the cleanup can be very expensive, like you said, we’ve seen that.

Charu 14:10
And time-consuming, you know, a lot of times, you know, you set up with, let’s say Legal Zoom, and you go to counsel because you’re like now I have a term sheet. Now this matters. But instead of being able to just flip a switch and run with your diligence and go, you have to tell the VC, oh, sorry, I need a couple of weeks to clean things up with my attorney, you know, and so it kind of delays things, it slows down the momentum because you have this distraction now that you have to deal with.

Kate 14:38
And again, going back to the you know, we say this all the time as well, why using you know, like a company like or an organization like yours, the founder can focus on product development, working on their passion, why they started this company in the first place and leave it to the experts. It makes a lot of sense. I mean as we’ve talked through this, this has been so helpful. Anything else you want to flag that founders should think about in terms of legal strategy in those early days?

Charu 15:14
Yeah, I mean, there’s like I said, you know, IP is the key one. Make sure that all the IP you develop, let’s say you were working on the business for six months before you locked it down and incorporated. You want to make sure that all that technology is now assigned to the company. And you want to make sure that any technology developed going forward is assigned to the business, both from you and key players around the table, like anyone who’s touching the tech. And you want to make sure that also once the company has that IP, that it maintains it. So when you have a customer agreement going forward, you’re not giving it away, you’re giving limited access, just the amount they need when appropriate restrictions in place.You want to make sure when you’re working with vendors, let’s say you have someone do something as simple as making a logo for the business, right? You want to make sure you own those, the rights and the trademarks that come with that, you know, small project, you may have delegated out to make sure that you’re getting your money’s worth, and they’ve created it in the appropriate way. So there’s a lot of nuance to IP to be thinking about. Even when it comes down to like founder equity, there’s nuances there, too You want to issue it early on, and you want to do it at the ground zero price right before the companies gained too much value. Otherwise, you don’t get the benefit of that delta, right, of like the increase in the company’s value. And that’s what equity is all about. It’s all about the sweat equity, where you’re incentivized to stick around. And you want to make sure that you know, it’s subject to a standard vesting schedule, because that keeps you and your co-founders all kind of weighted down and committed. And it shows the investors that hey, we’re not going anywhere, you can have faith in us that we’re around. One trip up I see with a lot of my founders will sometimes try to kind of over optimize with like rebalancing the equity amongst themselves. And oh, why don’t I trade this with this person. And we can just shift this with that and juggle. And you know, there’s tax consequences to trying to like trade shares, you want your shares to be issued originally from the company. It’s just definitely like a distraction and kind of additional expense and time wasted where you don’t have your eye on the prize. You’re just kind of like, almost like a sibling rivalry, like dealing with like, a shakedown amongst the founders. So there’s a lot of reasons why getting your equity issued early-on with super clear market standard terms can give you the benefit of like, QSBS, you know, tax benefits in the long run and you know, making sure 83b’s are filed. So it’s not just “nice to haves” there’s some technicalities also associated with getting founder equity done early and and crisply.

Kate 17:57
Wow, as you were talking, I was thinking of like, all the different startup books and movies, I’ve seen where that didn’t happen. And all the drama fights legal battles. I mean, you’re explaining exactly what you need to do to prevent that perfectly. This has been super helpful. You gave a lot of advice to founders listening, we always kind of wrap up with just any last general advice for the startup founders listening, just from what you’ve seen over your almost 10 years with working with startups, which I’m sure is quite a bit.

Charu 18:35
Yeah, I think it really comes down to you know, betting on yourself, right. You know, if if you treat yourself and your company like it’s going to be successful, then other people will see it in that same view, right. So have faith and put your best foot forward and enjoy the ride, but also trust in the team that’s there to support you, right? So surround yourself by partners who are similarly business oriented, that are value partners that are in it with you for the long run, because then you’re building those relationships that you’ll be able to cash in on in the future, you know, when it really matters. So I think definitely don’t downplay your success or your potential and surround yourself by by like minded, supportive business partners. So I think will help you get over the finish line and reach your goals.

Kate 19:23
Great advice. I agree. I think that makes such a difference. So most importantly, where do listeners get more information on Silicon Legal Strategy, where can they find you all for? Sure.

Charu 19:35
So you can go to our website, which is siliconlegal.com You can email me at Charu at siliconlegal.com You can find us on LinkedIn, so I’m on there Silicon Legal Strategy has its own page and all our contact information is on there. We’re happy to chat with you whenever you’re ready to start that step.

Kate 19:55
Wow, this was so helpful. We have not done an episode like so I really appreciate you coming on. I mean, I think everyone listening will have learned a lot and I know I did. So thank you.

Charu 20:07
Thanks, Kate. I really appreciate it was a real pleasure talking with you.

Intro 20:10
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