Common Startup Legal Mistakes: Entity Form Mismatch

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With the proliferation of legal documents available online, more startups have begun putting together their own legal work. For a simple entity, this might not be a problem, but if you’re trying to do something more complicated, you may run into trouble.

As one example, many startup founders have learned about the importance of vesting agreements through blogs and popular books, such as Brad Feld’s Venture Deals. But not all founders understand the context in which vesting occurs and what it means. For example, I have had a number of startups try to get me to set up restricted stock agreements with vesting schedules for their LLCs or partnerships. Unfortunately, that’s not possible, because restricted stock agreements are only permissible for corporations, because only corporations have stock. LLC ownership interests are called “units,” not shares or stocks. You can’t issue stock in your company if your entity choice only allows units. And if your entity choice only allows for units, your restricted stock agreement won’t carry with it the force of law.

This is an honest mistake, but it underscores the importance of at least consulting with a qualified attorney as you get your business started.

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