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Legal Concepts for Founders

138 points by freediver 5y ago

rsp1984 5y ago
Big thank you to the authors. What a fantastic resource. It's very refreshing to see these concepts broken down in short and concise language, packed with information and no BS.
itsmemattchung 5y ago
Thank you for the resource, especially for someone who launched their first LLC almost a year ago. > Forming a corporation helps protect the founders from personal liability. If the corporation is sued, the assets of its founders are more likely to be protected. Hmm... I guess this means that by forming a corporation, there's no guarantee that a founder's assets will be protected.
- searchableguy 5y ago
  LLC veil can be pierced if they are the sole person responsible for the business. It is different case if there are multiple shareholders and employees though. All depends on the country.
  - invokestatic 5y ago
    Depends on the /state/ as well.
- cedricd 5y ago
  It can happen, but it's rare. Read up on 'piercing the corporate veil' if you're interested. It generally happens in cases of fraud, gross misconduct, criminal behavior, etc. In a more common scenario of a company going bankrupt through the normal course of business the founder's assets will be protected.
  - hef19898 5y ago
    One notable exception: bank loans, especially for new companies banks tend to ask for private guarantees to back up those loans.
    - avianlyric 5y ago
      That’s not really an exception. The banks aren’t piecing the corporate veil there, they’re simply asking a natural human to be party to the loan contract, as a condition of leading. Anyone can do that. You’re just forming a contract between both a corporate entity and a natural person, with clauses requiring the natural person to cover the obligations the corporate entity, if the corporation fails to fulfil its obligations. The natural person in this cases doesn’t have be a founder, or company owner. It could even be another larger corporate entity that’s less likely to vanish overnight. But none of this changes the protections a corporation gives its owners, it’s just that the owner are choosing to sign contracts that make them personally liable for failures of the corporation.
      - hef19898 5y ago
        You are absolutely right. Because a personally backed loan can be backed by anyone and is limiting the liability to whatever the loan guarantee was. Not additional liability for whatever liabilities come from the company. All that depends on the legal entity form used, which is especially in Europe quite interesting.
R0b0t1 5y ago
Seems like basic legal definitions. How do I structure my equity so that it isn't diluted by braindead investors? What do I need to know to convince investors that they're absolute mongrels who have no idea how to run a business, they just exist to give me their money because they lack real ideas?
- swampthing 5y ago
  I worked on this handbook quite a bit — thanks to OP for posting it on HN! A pleasant surprise :) To answer your first question, dilution has little to do with how you structure the equity and more to do with the price at which you sell it (and how much of it you sell). The more your company is worth, the less you will need to sell to raise the same amount of money.
  - R0b0t1 5y ago
    There's different types of equity that you need to use to frame your answer. Nonvoting equity is colloquially not seen as diluting your ownership because you retain the reigns. How to actually try to set such a thing up, especially when you're still private but wanting to transition to public, is extremely useful to founders and something I've not managed to find good information on myself. A bunch of older threads on here went down the path of "you're going to get fleeced by your VC, just accept it because they have infinite lawyers."
    - swampthing 5y ago
      There’s close to zero chance you can sell investors non-voting shares as an early-stage startup. There is non-voting equity that can convert into shares, but they will certainly dilute you even if they don’t convert and those shares will almost always have voting rights. If you’re anywhere close to taking your company public, you should have attorneys that can help you with preparing for that and point you to whatever information you’re looking for. At the time of investment, good VCs typically don’t care about any one investment enough to put much effort into fleecing you. My experience is that good startups aren’t at any significant disadvantage in terms of attorneys. Just make sure to get a good one that has done a lot of financings.
mndgs 5y ago
Interesting read for a European. A lot of things started falling into places. thanks for a valuable resource.
- traceroute66 5y ago
  Yeah, erm ... Europe != USA and the linked blog post is clearly written for the US audience. The US does a lot of things differently to Europe, perhaps most famously employment. The US (unsurprisingly) takes the capitalist approach and sides firmly on the side of the company. Europe stands firmly on the side of the employee. Employment Law in Europe is a very complex topic indeed. There are tons of things you can do as a US employer that in Europe would be guaranteed to put you infront of an Employment Tribunal with expensive results. Therefore I would strongly caution about trying to transpose an article about US company formation and operation to an EU context. You are likely to be wasting your time, frankly, as the nature is so very different.
  - bryanrasmussen 5y ago
    two reasons why it would be an interesting read for European - oh that's how it works over there, that's why I always hear people say X which up until now made absolutely no sense! As a European living and working in the U.S I now know about starting a company here, thanks.
    - traceroute66 5y ago
      I grant you point one, fair enough. However your second point makes no sense. Why, in that context, would you say "Interesting read for a European" ? If you're looking at it from the eyes of somebody living in the US wishing to establish a company in the US then you are no longer reading it as "a European".
      - joeamroo 5y ago
        You sound like a typical antisocial pedant.
santiagobasulto 5y ago
Off topic; I really liked the design and typography. Seems to be hosted on Gitbook (if case anybody was wondering the same thing).

138 points by freediver 5y ago

rsp1984 5y ago

Big thank you to the authors. What a fantastic resource. It's very refreshing to see these concepts broken down in short and concise language, packed with information and no BS.

itsmemattchung 5y ago

Thank you for the resource, especially for someone who launched their first LLC almost a year ago. > Forming a corporation helps protect the founders from personal liability. If the corporation is sued, the assets of its founders are more likely to be protected. Hmm... I guess this means that by forming a corporation, there's no guarantee that a founder's assets will be protected.

searchableguy 5y ago
LLC veil can be pierced if they are the sole person responsible for the business. It is different case if there are multiple shareholders and employees though. All depends on the country.
- invokestatic 5y ago
  Depends on the /state/ as well.
cedricd 5y ago
It can happen, but it's rare. Read up on 'piercing the corporate veil' if you're interested. It generally happens in cases of fraud, gross misconduct, criminal behavior, etc. In a more common scenario of a company going bankrupt through the normal course of business the founder's assets will be protected.
- hef19898 5y ago
  One notable exception: bank loans, especially for new companies banks tend to ask for private guarantees to back up those loans.
  - avianlyric 5y ago
    That’s not really an exception. The banks aren’t piecing the corporate veil there, they’re simply asking a natural human to be party to the loan contract, as a condition of leading. Anyone can do that. You’re just forming a contract between both a corporate entity and a natural person, with clauses requiring the natural person to cover the obligations the corporate entity, if the corporation fails to fulfil its obligations. The natural person in this cases doesn’t have be a founder, or company owner. It could even be another larger corporate entity that’s less likely to vanish overnight. But none of this changes the protections a corporation gives its owners, it’s just that the owner are choosing to sign contracts that make them personally liable for failures of the corporation.
    - hef19898 5y ago
      You are absolutely right. Because a personally backed loan can be backed by anyone and is limiting the liability to whatever the loan guarantee was. Not additional liability for whatever liabilities come from the company. All that depends on the legal entity form used, which is especially in Europe quite interesting.

R0b0t1 5y ago

Seems like basic legal definitions. How do I structure my equity so that it isn't diluted by braindead investors? What do I need to know to convince investors that they're absolute mongrels who have no idea how to run a business, they just exist to give me their money because they lack real ideas?

swampthing 5y ago
I worked on this handbook quite a bit — thanks to OP for posting it on HN! A pleasant surprise :) To answer your first question, dilution has little to do with how you structure the equity and more to do with the price at which you sell it (and how much of it you sell). The more your company is worth, the less you will need to sell to raise the same amount of money.
- R0b0t1 5y ago
  There's different types of equity that you need to use to frame your answer. Nonvoting equity is colloquially not seen as diluting your ownership because you retain the reigns. How to actually try to set such a thing up, especially when you're still private but wanting to transition to public, is extremely useful to founders and something I've not managed to find good information on myself. A bunch of older threads on here went down the path of "you're going to get fleeced by your VC, just accept it because they have infinite lawyers."
  - swampthing 5y ago
    There’s close to zero chance you can sell investors non-voting shares as an early-stage startup. There is non-voting equity that can convert into shares, but they will certainly dilute you even if they don’t convert and those shares will almost always have voting rights. If you’re anywhere close to taking your company public, you should have attorneys that can help you with preparing for that and point you to whatever information you’re looking for. At the time of investment, good VCs typically don’t care about any one investment enough to put much effort into fleecing you. My experience is that good startups aren’t at any significant disadvantage in terms of attorneys. Just make sure to get a good one that has done a lot of financings.

mndgs 5y ago

Interesting read for a European. A lot of things started falling into places. thanks for a valuable resource.

traceroute66 5y ago
Yeah, erm ... Europe != USA and the linked blog post is clearly written for the US audience. The US does a lot of things differently to Europe, perhaps most famously employment. The US (unsurprisingly) takes the capitalist approach and sides firmly on the side of the company. Europe stands firmly on the side of the employee. Employment Law in Europe is a very complex topic indeed. There are tons of things you can do as a US employer that in Europe would be guaranteed to put you infront of an Employment Tribunal with expensive results. Therefore I would strongly caution about trying to transpose an article about US company formation and operation to an EU context. You are likely to be wasting your time, frankly, as the nature is so very different.
- bryanrasmussen 5y ago
  two reasons why it would be an interesting read for European - oh that's how it works over there, that's why I always hear people say X which up until now made absolutely no sense! As a European living and working in the U.S I now know about starting a company here, thanks.
  - traceroute66 5y ago
    I grant you point one, fair enough. However your second point makes no sense. Why, in that context, would you say "Interesting read for a European" ? If you're looking at it from the eyes of somebody living in the US wishing to establish a company in the US then you are no longer reading it as "a European".
    - joeamroo 5y ago
      You sound like a typical antisocial pedant.

santiagobasulto 5y ago

Off topic; I really liked the design and typography. Seems to be hosted on Gitbook (if case anybody was wondering the same thing).