Law for Startups: Building Your Team and Getting Funded
This video is part two of a series of seven videos created by Anthony Rose, Founder and CEO of SeedLegals, who’d like to share his thoughts, advice, mistakes, and learnings from his extensive career in startups, so that you can avoid the same mistakes and get off to a running start when creating yours.
Once you’ve created a mockup and a prototype, and have gathered a few colleagues or mates together it’s time to grow, scale, launch etc.
When you get to the point of incorporating your company or raising your first round of funds there can be an “Oh my god!’ moment when you realise the amount of work that needs to be done. We’ve counted 25 things that need to be done for your first funding round before you can get back to doing the things you really want to be doing. SeedLegals was created to simplify this process and make it much easier for you.
One of the first most critical things you’ll want to think about is whether the person or persons you have started your venture with (who may perhaps be developers) should be your cofounder(s) or employee(s). It can be easy to get this wrong - get this wrong and your company will pay later. The key thing is the founder should be the person or persons who have the weight of the company on their shoulders on a daily basis.
You should think about IP assignment early on. As one idea leads to another it can become unclear whose ideas are whose. In the worst case scenario, IP disagreements may prevent you from being able to develop an idea whilst it’s on hold pending a dispute. You should do an IP assignment as soon as you incorporate or perhaps even earlier. If you forget about this you will have a hard time during your first round of investment - investors will be looking at your IP assignment (or lack of it).
The next question is do you develop a team in-house or do you outsource? If you’re building an app or product it may be better to outsource, whilst if the actual value is in the team and you are unsure of how the company will morph and what the product will look like in the future, then you can only achieve this by building a team in-house.
There are a couple of things to bare in mind when making this decision (which will likely lead you to opt for the in-house option):
One of the great advantages of choosing in-house is that you can sit and meet with people, share ideas and a common vision. There’s nothing like the camaraderie obtained in the process of building this.
Another important thing that distinguishes having a team and an outsource is that when outsourcing you will provide a spec and the people you contract will deliver that spec. This particular spec is almost certainly not going to be the final one, it will likely morph as you gain market feedback and grow etc, whilst if you have a team, the team will be delivering the outcome whatever that outcome might be.
If you cannot afford to go in-house then you may have to outsource anyway, just bare in mind that you may need to throw away a lot of what you’ve done before at the point that you get your real team together.
If you’ve decided to build a team in-house you will now need to decide whether to offer permanent positions or contracts? A contract is great when you can’t find somebody permanent or you haven’t raised enough money to take on someone permanently. Bear in mind that it is always best to avoid the situation of paying for a long-term contract position as you will end up paying twice what you would otherwise pay. A big advantage of permanent positions is that your people are going to have some stock options and feel a part of the future of the company.
Should your team be offered equity or should they be offered stock options? As founder(s) you will likely have around 30 - 40% of the stock each and your team will share the rest. It could be a good option to give your early founding team equity, however, very quickly you will want to switch to offering stock options as this will give you much more flexibility.