Incorporation

Intellectual property rights showcase a startup’s value, ability to dominate the market, and stand strong in times of adversity. Specifically, with trademarks and patents, startups are 10 times more likely to secure funding from investors and about 3 times more likely to have favorable odds when exiting as evidenced by a study from the European Union Intellectual Property Office (EUIPO). Accordingly, the acquisition of IP rights, for startups are fiscally essential in providing a durable foundation and may be correlated with the increase in filing in Trademarks from 28% to 72 and Patents from 10% to 44% from the initial seed stage to later funding stages. There are two key reasons why these IP protections incentivize investors to engage with startups.

Branding in Market Domination and Innovation   

First, IP protections are perceived as unique signatures connecting startups with a strong brand identity. This is significant to investors for three key reasons. First, IP protections demonstrate a sense of identity to investors for a startup’s potential recognition in the marketplace. Second, investors view IP protections as vital pieces to the construction of a valuable portfolio because they can provide tangible capital in future business dealings. Third, IP protections demonstrate to investors the startup is protected against infringement. 

A Mark of Innovation Signaling Potential Leadership in the Marketplace, Longevity, and Liquidity During Times of Change

Second, IP protections, demonstrate a startup’s innovative nature. This is significant for investors for three key reasons. First, IP protections, especially patents, showcase a startup’s innovative qualities signal and demonstrate to investors the startup is unique and has strong technical capabilities. Second, IP protections, demonstrate to investors startups can establish dominance in the market because IP protections reduce competition by preventing the use of the startup’s mark. Third, IP protections signal to investors they are safe to invest because the startup could liquidate its assets for sale in unpredictable times of change.

Conclusion 

With IP protections, investors are incentivized to fund your startup, leading it to have the ability to achieve fiscal success and dominance in the global marketplace. If you are interested in the potential to achieve fiscal success, recognition, and financial support from investors, please reach out to Lloyd & Mousill, a team of visionaries, who will protect your vision and future goals. 

What is an LLC?

An LLC is a Limited Liability Company. It is a type of business structure that protects owners from being personally responsible for the company’s debts and liabilities. LLCs provide flexibility and certain benefits in regards to taxation. From an administrative perspective, they are not bound by certain requirements that are typical of corporations.

‍How do I form an LLC?

 To form an LLC, you must file a Certificate of Formation with the Secretary of State. Lloyd & Mousilli specializes in corporate law and can assist you with this process. Additionally, we can prepare all necessary corporate documents to ensure your LLC is properly organized from its  inception. 

‍How do I protect the name of my LLC?

Your business name can be protected through a registered trademark. Trademarking your business name ensures that it is protected in connection with the goods and services you provide. Trademarking your name puts you in the best position to take legal action against infringers. 

What is a Trademark?

A trademark is a word, phrase, symbol, and/or design that distinguishes the source of goods of one party from another. By applying for a trademark in the relevant goods and services class, you are protecting your business name within your industry. In other words, another company offering the same goods and services under an identical business name would be committing trademark infringement. 

‍How do I trademark my LLC’s name?

Lloyd & Mousilli specializes in intellectual property and can assist you with the filing of your trademark application. We can help you determine which class of goods and services is most appropriate, advise on your overall trademark strategy, as well as preparation and filing procedures. 

How Lloyd & Mousilli can help:

You can begin the trademark registration process by scheduling a free consultation with a Lloyd & Mousilli team member. If you would like to fast-track the process, you can complete our trademark intake form to provide us with the information we need to get started. 

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Think About Equity from the Start

When incorporating a start-up company, founders are typically concerned with growing their company and bringing in capital to execute their vision. To properly set the company up for growth, the company needs to have a sound policy for allocating equity. There is not just one correct way for all start-ups to allocate their stock. Rather, there are many considerations that founders must address. The path to a sound corporate equity structure starts from the very beginning. Even before incorporation, meet with your co-founders and discuss these issues to ensure you start the right way.

Dividing Stock Among Founders

After determining the amount of stock your company will authorize, which is the total amount of issuable stock, you will decide how much stock each founder will receive. The number of stock issued to each co-founder should be catered to each co-founders’ involvement and relationship with the company. If one of the co-founders has a passive role in the company’s business operations, it may not make sense to issue them the same amount as someone more involved. Although this may be a difficult discussion to have with your co-founders, it ensures that the ownership of the company rests with the members closest to it.

Executing Stock Purchases and Investments

After determining the appropriate amount of stock each founder should receive, founders will need to execute some form of a stock purchase agreement. This agreement will dictate the terms of each founders’ ownership in the company. The value of each share at an early-stage company will likely be very low, so the purchase price will be small, but it is integral to enter into this agreement.

In these agreements, companies should consider whether they want to include provisions like right of first refusal, IP rights, limitations on transfer, vesting schedules, and other language that will solidify the boundaries of a given shareholders’ interest. A right of first refusal provision will give your company the initial right to buy stock from an existing stockholder that is planning to sell their interest before they can sell it to any other buyer. IP rights provisions will dictate what intellectual property will belong to the company after a stock purchase. Limitations on transfer can include many different provisions that essentially prevent the purchaser from selling their stock unless certain conditions are met. Vesting schedules are discussed below.

Vesting Schedules and Other Restrictions

Founders should determine whether to implement a vesting schedule into their issued stock. A vesting schedule is a time-based restriction to issued stock, typically applied to founders’ and employees’ stock. It incentivizes critical members of the company to stay for the long-term by preventing the member access to all their issued stock until they have been at the company for a certain amount of time.

Founders may feel like a vesting schedule is an unnecessary restriction on their interest in the company but there are a few reasons that implementing a vesting schedule is a good idea. First, potential investors love, and often request vesting schedules. From the investor’s perspective, a vesting schedule provides some assurance that the company’s key members are in it for the long haul. Second, a vesting schedule also provides an assurance to co-founders. It may seem unlikely that any of your fellow founders would abandon the company, but it is helpful to provide an extra incentive to make sure.

Option Pools for Future Use

It is also important to decide how many of the corporation’s authorized stock will be available to issue and how many will be saved for later issuance. As your company grows, you may want to offer employees some type of equity package as compensation. To do so, you would want to set up an option pool that you can eventually pull from. Typically, an option pool should make up about 10-20% of total authorized stock, with the remaining stock allocated among founders, advisors, and investors. It is crucial to decide on an option pool early on because it will dictate your corporation’s total available stock.

Compensate Advisors with Equity

Start-up companies usually benefit from hiring advisors or consultants that are not typical employees but have some sort of expertise that brings value to the company. Allocating equity to advisors is a practical consideration because the start-up may not have enough money to pay a typical compensation and it can be attractive to investors. Since advisors will usually not be involved with the management of the company, they will not be issued a large portion of the company’s stock. When deciding to bring on advisors, consider the value that they are adding and how much time they will be dedicating towards the company, and allocate stock accordingly.

Use a Capitalization Table

A capitalization table, or cap table, is a document (usually on a spreadsheet) that provides a layout of the company’s ownership distribution. After tackling the equity issues raised in this article, it is important to keep an updated cap table that documents how your company has allocated its stock and to whom they allocated it to. Therefore, the table will include all the stockholders, how much they own, what type of stock they own, how much stock the company has issued and how many are still available for issue.

There are several different software platforms that you can use to store your equity documents and produce a cap table for you. Carta and Pulley are two examples of commonly used platforms. The best way to make sure your cap table is properly constructed and regularly updated is to hire a law firm to manage this platform for you. Hiring a law firm administrator is especially helpful for start-ups engaging in multiple financing rounds because expressing the specific terms of each financing instrument can be difficult.

Lloyd & Mousilli is Here to Help

You should consider hiring Lloyd & Mousilli to successfully implement your company’s equity allocation plan. Our firm has helped form hundreds of startup companies, and we have the experience and expertise necessary to set your company up for past, present, and future equity allocation.

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