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Insights
Management Rights Letter: Granting Institutional Investors Oversight Access
When startups take money from venture capital funds subject to ERISA or similar regulations, those funds need a special document: the Management Rights Letter (MRL). This short but powerful agreement ensures the investor has sufficient rights to “manage” their investment, helping them comply with legal requirements.
Indemnification Agreement: Personal Protection for Startup Directors and Officers
When startup leaders make tough calls - hiring, spending, pivoting - they expose themselves to personal liability. The Indemnification Agreement serves as a legal shield, protecting directors and officers against lawsuits, claims, and costs incurred while serving the company.
ROFR and Co-Sale Agreement: Managing Share Transfers While Preserving Cap Table Control
In venture-backed startups, control of the cap table is critical. The Right of First Refusal and Co-Sale Agreement (ROFR/Co-Sale) helps founders and investors maintain that control by regulating how shares are transferred - particularly when founders, early employees, or other major holders want to sell.
Voting Agreement: Aligning Shareholder Power in Key Company Decisions
While founders often assume they’ll control their company post-funding, the Voting Agreement tells a more nuanced story. This document outlines how shareholders agree to vote their shares on critical company matters, including board elections and future financing approvals.
FAQs
Open allDoes the state of incorporation affect federal taxes?
No. Federal tax treatment is the same regardless of where you incorporate. Only state-level taxes and franchise fees differ.
Is incorporating in my home state a good idea?
Yes, if you are not immediately seeking outside funding, your home state often provides lower costs and simpler compliance.
Why do most startups incorporate in Delaware?
Delaware offers a specialized court system, predictable legal outcomes, and corporate governance flexibility that investors prefer.
What type of business structure should I choose for a startup?
Many startups begin as LLCs or C-corporations. The right choice depends on factors like your fundraising goals, tax strategy, and management style. A business attorney can help determine the best structure for your situation.
Can I wait to incorporate until after launching my product?
While you can wait, incorporating earlier protects you from personal liability and establishes credibility with customers and partners.
Do I need to incorporate before seeking investors?
Yes. Most investors require a legal entity with clear IP ownership and equity structures in place before they will invest.
When is the best time to incorporate my startup?
You should consider incorporation when you have created intellectual property, added co-founders, prepared for a product launch, started hiring employees, or plan to raise outside funding.
How do I change my registered agent?
You can change your registered agent by filing a form with your state’s Secretary of State, paying the required fee, and officially designating the new agent.
Can I serve as my own registered agent?
Yes, but it is not recommended. Acting as your own registered agent means your personal address becomes public, and you must be available during business hours to receive legal documents. Most founders choose professional registered agent services for privacy and reliability.
What happens if my business does not have a registered agent?
Without a registered agent, your business may lose good standing with the state, incur fines, or even face administrative dissolution. You may also miss critical legal documents.
Can founders or directors of a non-profit get paid?
Yes. Founders and directors can receive reasonable salaries for the work they perform, but excessive compensation or private benefit is prohibited under IRS rules.
Do non-profits pay taxes?
Most non-profits are exempt from federal income tax on mission-related income, but they must still pay taxes on unrelated business income. State and local exemptions may also apply.
How long does it take to get 501(c)(3) tax-exempt status?
The IRS typically takes 3 to 12 months to review and approve an application, depending on the complexity of your activities and the completeness of your filing.
What is the first step in starting a non-profit organization?
The first step is defining a clear mission and purpose. This ensures your organization qualifies for IRS tax-exempt status and guides your governance structure.
Can a Multi-Member LLC continue if one member leaves?
Yes. With a properly drafted operating agreement, the LLC can continue operating even if members withdraw, pass away, or transfer ownership interests.