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Starting Up Right

Not long ago I attended an excellent business law seminar presented by Mr. Paul Swegle, an accomplished and experienced attorney from the Seattle area. Of all those things Paul presented and discussed in our 8 hour session, I highlight three for consideration by our business clients who want to start a company or are early in the process.

First, make a Founders Agreement / Shareholders Agreement. This contract is entered into at or prior to entity formation and answers questions about the expectations and obligations of the parties as they venture forth. What roles and responsibilities are each of the owners going to assume? How will they divide up daily operations, financial issues, tax matters, etc? How will ownership be divided? Are we giving equal shares for equal work? Is everyone expected to devote full-time? Are some part-time? What if someone wants out or passes away? What restrictions will there be on stock transfers? Answering these questions early can get partners started off on the right foot and reduce or eliminate partner disputes.

Second, conduct a "General Counsel Audit." Business owners don't necessarily love audits but this is a great mechanism to ensure your business has solid footing. The auditing attorney will examine: 1) the company's Governance Foundation, including the entity type, structure, domicile (home state versus Delaware), formation and other basic governance documents, 2) legal and compliance issues such as required federal, state, and local licensing, registration, and tax matters, including "nexus" with other states, 3) ownership and control, i.e., does the company have a complete and accurate cap table, 4) protection of IP and key assets, 5) how well the company is positioned to raise any necessary capital, and 6) whether there are any disputes looming with co-founders, vendors, employees, key customers, investors or others. Through this process, counsel can help identify opportunities for shoring up a company's foundation and assess whether there are potential problems or disputes to address.

Third, set up a Virtual Data Room. A few years ago I worked in a firm that had a very good e-filing system. As long as processes were followed, documents and data were easily located and retrieved. Organize this up front and make it as fool proof as possible so that in three, five, or ten years down the road when a suitor, such as a potential buyer, investor or partner, comes calling, material information is readily available for due diligence.

Starting a business is demanding, challenging, and exhausting, but also exciting, inspiring, and rewarding. Doing things the proper way in the beginning creates the strong and solid foundation requisite for a stable edifice to rise up. If you mess up the foundation, don't be surprised when cracks appear in the walls!

I thank Paul for sharing his knowledge and wisdom. If you have the opportunity to attend one of Paul's seminars, which he gives in entrepreneurial hot-spots around the country (like the Wasatch Front-Silicon Slopes), I highly recommend doing so!

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