Many entrepreneurs have a good understanding of statutory limitations and regulatory constraints on the operations of the businesses they are starting. That understanding often comes as a result of familiarity gained from years of experience operating in an industry. Other entrepreneurs may be newer to an industry, or despite their comfort level and expertise with an industry, may not have a solid grasp on the scope of laws and regulations affecting a startup’s operations. Therefore, it is often helpful for early-stage entrepreneurs to assemble a team of specialists who can provide guidance early so as to avoid regulatory headaches and disruptions to a business later on.
Issues can vary widely depending on a business’s industry and the structure of its model and operations, but typically involve, at a minimum, matters related to tax, employment and intellectual property (IP). A significant number of businesses we work with utilize technology in their operations, and for those businesses IP can take on even greater importance. Attorneys who have worked with startups frequently are able to anticipate issues in advance of the company itself seeing problems, and by doing so can present a company with a menu of options that can help offset or reduce risk. Examples include:
- Informing a company of best practices when hiring and compensating employees.
- Reviewing a website’s or an application’s processes related to revenue generation to confirm whether such processes comply with applicable laws regarding payment mechanics.
- Ensuring that a company has obtained proper rights to use certain data or property on its website or in its application.
First-time entrepreneurs may either consider the risks low and therefore disregard them, or view them as items that can be addressed later, after the company obtains some traction. Ignoring or deferring these matters can carry significant risks in certain cases, as companies may unwittingly be setting themselves up for interruptions or severe financial hits to their businesses later on. For those reasons, we oftentimes suggest that a company connect at an early stage with legal counsel and advisors to vet elements of their model and their key decisions with experienced personnel who are highly attuned to the legal and practical risks involved in running a business in a specific industry. Investing time on the front end can dramatically reduce the prospects for problems later on, and thereby help entrepreneurs improve their prospects for success.
We’re excited to introduce a multipart and ongoing series about the basics of (and some advanced topics related to) equity for startup employees and contractors. The “Human Capital” aspect of any enterprise, especially a technology company, is its most valuable asset, and we hope to highlight the…
Stock options are the most common form of equity incentive for early-stage startups. A stock option grants the option holder the right to purchase a specific number of shares of the company within a fixed period of time at a preset “exercise” price, generally following the satisfaction…
The Human Capitalist Series P.3: How Are Stock Options Taxed, and Which Are Better, Incentive Stock Options or Nonstatutory Stock Options?
The U.S. federal taxation of stock options for U.S. taxpayers depends on whether the options are classified as incentive stock options (ISOs) or nonstatutory stock options (NSOs). Incentive Stock Options (ISOs) ISOs may provide a tax advantage to the holder if (i) the optionee does not sell…