Incorporation Documents

Action by Incorporator

This is an action by the person (often representative of a startup’s law firm) that does the following:

• Approves Certificate of Incorporation;
• Approves the Bylaws; and
• Elects initial directors (Delaware requires minimum of one director and California requires minimum of three directors, provided if California corporation has only two stockholders, it may have 2 directors; and if California corporation has only one stockholder, it may have only one director).

Bylaws

The Bylaws and the Certificate of Incorporation are the two core corporate charter documents of a Delaware corporation. The Bylaws outline the general rules and procedures for the conduct of the startup tech company, including the following:

• Authorized officers and procedures to appoint and remove officers;
• Size of the Board of Directors; and
  • Board/stockholder meeting notice provisions.

The Bylaws are generally considered a “boilerplate” document by lawyers and the startup community and startup company law firms have standard form Bylaws that they use for their clients. It is, however, an important document and should be reviewed carefully by technology company founders.

Certificate of Incorporation

The Certificate of Incorporation (also called the “charter” or “Articles of Incorporation” in California) set forth a startup’s initial authorized capitalization as well as the following:

• Name of startup;
• Address of registered office in Delaware and name of registered agent;
• Names and address of incorporators or initial directors;
• Nature of the business or purposes to be conducted; and
• Number of authorized shares and the par value of the shares.

The Certificate of Incorporation may also provide for limitation of liability of directors and officers and authorize the directors the power to amend the Bylaws. The initial Certificate of Incorporations of startups are generally boilerplate documents of three or four pages in length.

Initial Resolutions of the Board of Directors

This document completes the organization of the startup by doing the following, among other matters.

• Ratifies acts of the incorporator;
• Establishes the size of Board of Directors and ratifies election of directors;
• Elects officers;
• Approves founder stock issuances;
• Approves equity incentive plan and related agreements (if adopted);
• Establishes location of principal office;
• Establishes fiscal year;
• Approves form of stock certificate;
• Approves banking resolutions and auditors;
• Authorizes obtaining/registering with: (a) employer identification number; (b) Employment Development Department; and (c) State Board of Equalization;
• Authorizes obtaining insurance including: (a) workers compensation; (b) comprehensive general liability; and (c) fire and casualty;

• Approves form of indemnification agreement for officers and directors; and
• S-corporation election (if applicable). A subchapter S election must be made and filed with the Internal Revenue Service and State taxing authority no later than 2½ months after incorporation to be effective for that taxable year. The election is made by the corporation and must be approved by all the stockholders in writing.

Application for Employer Identification Number (EIN) on Form SS-4

This form may be filed on-line and is the form under which a startup receives a federal tax ID number (EIN).

Proprietary Rights Agreement (also called PIIA or Invention Assignment Agreement)

This is a form agreement to be entered into with all employees. The agreement sets forth with clarity ownership of a startup’s intellectual property. Get these signed at inception – should be signed by ALL employees and ALL consultants as of date of employment or date services first provided. Easy to get an employee to sign an agreement at time employment commences; much harder to get an employee to sign at time employment terminates.

Restricted Stock Purchase Agreement

Founders of startup technology companies often receive their equity ownership of the startup under restricted stock purchase agreements (also called founder stock purchase agreements). A restricted stock purchase agreement provides for issuance of shares of Common Stock to a founder in exchange for consideration paid or payable by the founder for such shares (which will be cash, contribution of IP, cancellation of indebtedness, performance of services or some combination of the foregoing). The shares are purchased for fair market value, typically $0.0001 per share, and the shares are often subject to right of repurchase by the startup. A right of repurchase is also commonly called “vesting.” The startup’s right of repurchase is at the lower of the original purchase price or fair market value on date of repurchase and usually expires over a four-year period as the shares “vest.”

Restricted stock purchase agreements for the core founder or founders or senior executives may include accelerated vesting or accelerated lapses of repurchase rights on certain events. A “single trigger” acceleration means that the unvested shares accelerate and become vested on a sale of the startup. A “double trigger” acceleration means that the unvested shares accelerate and become vested if the founder is terminated within some time period following a sale of the startup (generally, one year). For either single or double trigger acceleration, the accelerated vesting may be less than 100% of the unvested shares.

There is an important tax issue related to restricted stock that vests over time. Under Section 83(a) of the IRS Code, the excess of the fair market value of unvested shares over any amount paid for the shares will be taxed as ordinary income on the date the shares vest. Thus, if the value of unvested shares increases, the tax consequences of the general rule can be devastating to both the founder and the company because there is taxable gain whether or not the shares are liquid. There is a solution to Section 83(a) under Section 83(b) of the IRS Code. Section 83(b) allows the founder to file an election to be taxed in the current year for the difference between the fair market value of its unvested shares and the amount paid for such shares. This difference is typically zero.

Section 83(b) elections are virtually always filed for restricted stock received by founders. Founders should beware that 83(b) elections MUST be filed within 30 days of transfer of shares or they are subject to treatment under Section 83(a). There are no ways to fix a late 83(b) election.

Indemnification Agreement

An indemnification agreement is an agreement under which a startup provides procedures to indemnify the officer or director who is party to the indemnification agreement. Usually all executive officers and directors of startups enter into indemnification agreements.

Foreign Qualification

A startup company incorporated in Delaware is required to qualify to do business as a foreign corporation in any U.S. state in which it is “doing business.” The definition of doing business varies from state to state, but generally includes some type of activity beyond traveling and sales solicitations. After a startup is qualified to do business, it will be subject to annual franchise taxes in the state of qualification. If a startup fails to qualify in any state in which it is required to qualify, the startup will be subject to fines and possibly personal liability for its officers and directors.

Statement of Domestic Stock Corporation

A newly formed startup operating in California will need to file, within 90 days of incorporation, a Statement of Domestic Stock Corporation, which will set forth names and addresses of officers and directors and the agent for service of process. This form is filed with the Secretary of State of the State of California and must be updated annually.