When do I need to hire a SaaS Contracts Attorney? Call SaaS startup attorney Andrew S. Bosin for a free consultation at 201-446-9643. An early stage SaaS startup company should incorporate and draft terms of service, privacy policy and customer agreements.
SaaS Lawyer Andrew S. Bosin based in New Jersey offers SaaS legal advice through his SaaS Law Firm and helps startups and entrepreneurs with Delaware incorporation and drafting founder and investor shareholder agreements.
Andrew also counsels clients on SaaS law and drafts and negotiates SaaS Subscription Agreements, SaaS Reseller Agreements, End User License Agreements (EULA), Master Service Agreements and Website Legal Agreements including terms of use (TOS) agreements.
What State to Incorporate In and Why
Based on legal experience in counseling SaaS startups and actually owning a SaaS startup with partners Andrew believes that if you need to raise capital to start your SaaS company or anticipate needing money in the next year or so to scale and support the business with employees, developers or contractors that you should give serious consideration to incorporating as a Delaware C Corp.
You should absolutely speak with your accountant before incorporating to make sure that a C Corp is suitable for the type of business that you will be operating if you are concerned about how much in taxes you will be paying.
With that said, unless you have tons of orders for your SaaS application before you have even incorporated the amount in taxes you “might” pay at some point should be the least of your concerns and making sales should be your top priority.
Why Startups love Delaware C Corps.
It is no mystery that VC’s love Delaware C Corporations. A C Corp from a business management standpoint is much easier to operate than an LLC which requires continual amendment of an operating agreement every time your entity makes a serious business decision.
With a Delaware C Corp let’s say you need to issue more shares to hire additional talent all it really requires you to do is to draft a resolution authorizing the C Corp to take such an action and then take a vote of the shareholders.
Typically, early stage growth companies consist of a few people with one or two owning the majority of the stock so voting and approving of such resolutions should be quick and painless in a Delaware C Corp.
Issuing too much stock to founders will result in a negative effect on investors
If a VC sees that you have issued most or all of the shares in the first round to the co-founders leaving no shares for key hires or investors your company will look like a bunch of amateurs. This creates two major problems.
First, the C Corp, if it wants to bring on new talent or take on investor monies will have to issues additional shares and everyone owning stock will get diluted; long story short everyone who received shares in the first round well they will be worth less. This does not look good optically for any startup pitching a VC.
VC’s will also stay away from startups where the founders have risk. Meaning, if a founder fully vests in shares when the C Corp incorporates what is holding that founder back from quitting his or her own startup with all of their shares if a better opportunity presents itself. A founder would be hesitant to quit his or her own startup knowing that they would be leaving stock on the table that has not yet vested.
If your company issues all of its stock immediately there will be no stock left over to attract key hires that you will need during the first year of your startup’s existence.
Any VC who is good at what they do will question why you now have to go an authorize the issuance of additional stock not only to hire additional talent but to feed the VC that is providing much needed capital. These early moves that you make in your startup will most likely affect whether you are successful or not.
A key hire who does not have an effect on the bottom line should not get a lot of stock upfront
Some startups fall in love with key hires because they have a good reputation or are well known in their industry. Without sales there are no investors and without recurring revenues your company will likely not survive. Thus, in the absence of much needed software development help the most important key hire is someone with a demonstrated record of sales in your vertical or industry.
You don’t want to overpay for this person. You need to be smart about the amount of stock that has been issued and put yourself in the shoes of a VC who is inquiring why your startup gave so much stock to a key hire when they have not proven themselves.
It is better to issue a key hire a little bit of stock upfront and then condition the vesting of their remaining stock on hitting certain milestones which should be reasonable. If they fail to meet their targets and they are fired or quit at least you can show your startup’s VC that your company did not give up much stock and in return took a risk on a proven individual.
Please call Andrew for a free consultation at 201-446-9643.
Email: andrewbosin@gmail.com
www.njbusiness-attorney.com.