For startups, the typical steps for forming a corporation are:
- File a certificate of incorporation, signed by the incorporator, with the Delaware Secretary of State.
- Once the Delaware Secretary of State accepts the certificate of incorporation, the incorporator adopts bylaws for the company, sets the size of the board of directors, and elects the initial board of directors.
- The board of directors appoints officers and authorizes the issuance of shares to the founders.
- The founders purchase their shares from the company and become stockholders. If their stock is subject to vesting, the founders usually make 83(b) elections.
- The founders enter into confidentiality and IP agreements with the corporation, known as CIIA or PIIA agreements.
Stock Plan Setup
- The board adopts and the stockholders approve a stock plan.
- The corporation qualifies to do business in its home state (assuming it's not located in Delaware).
You might hear some people talk about the need to have a shareholder agreement. Startups following the standard process outlined above rarely need a separate shareholder agreement. Shareholder agreements are more commonly used by traditional small businesses, although some startup lawyers outside of major startup ecosystems use them as well.
It is important to make sure the company formation paperwork is done correctly. Unfortunately, it is practically impossible for most people to correctly complete the documents on their own, unassisted. This is true even when using forms or document generators provided by law firms for marketing purposes. Consequently, most startups use an attorney, software (such as Clerky), or both. Software helps take care of the clerical aspects of the paperwork, while attorneys are useful for legal advice.
Regardless of whether you are evaluating an attorney, software, or both, the most important criteria to consider are completeness and legal quality.
Completeness is relatively easy to evaluate. All experienced startup attorneys will be very familiar with the full set of steps above. With software, it is important to make sure the software will fully handle at least the full set of incorporation and post-incorporation setup steps. This is important because when software leaves the process hanging in the middle, it makes it more complicated to complete the company formation. The legal expense of doing so is almost always significantly greater than had the startup completed all of the first five steps together in the first place.
It's hard for non-lawyers to discern the quality of legal paperwork. Absent obvious mistakes, issues with legal quality often escape detection until a VC or acquirer performs legal due diligence. Most startups never make it that far, unfortunately, so they never find out whether their formation was done properly. Even when startups make it to a legal due diligence process, they usually don't publicize any issues that are discovered. All this makes it difficult to tell which lawyers and software produce high quality legal documents, and which are not. If you have access to fellow founders who have raised or been acquired for a significant amount, one imperfect approach is to ask around and see what lawyers or software they used without issue.