The Ledger
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Toles advises founders against incorporating in Delaware on day one
“An early stage startup frequently can't afford that cost, and I don't recommend incorporating in Delaware from day one. It's a capital expense that you don't necessarily need to operate on.”
Toles: Fire any attorney who fails to plan for business failure
“If the lawyer doesn't ask you what happens when the place fails, walk out the door and find a new transactional attorney to write your agreement, because if that question isn't asked, your attorney is not protecting you from what really, really matters.”
Toles: Best divorce protection is writing spouses directly into operating agreements
“I actually think your best case scenario is doing that third thing, because I gotta tell you, if you are spending the kind of time that most founders spend when they're founding a business, you are talking to your spouse, you are getting ideas from your spouse…”
Toles: Using LegalZoom for stock option plans leaves founders legally exposed
“I would never do something like trust a thing like LegalZoom for that sort of a thing. I think you're too likely to end up exposed if something goes south.”
Toles: Startups should avoid major white-shoe law firms until IPO or VC deals
“If you are a really successful tech company or startup, you will need to go with one of those firms when you are getting ready for your IPO, or when you are dealing with the deal that you finally cut with a venture capital company, and not before. Because thos…”
Toles: Companies planning an IPO eventually must become Delaware C-Corps
“If your eventual goal is to go public, and almost every tech company and startup is eventually to go public, at some point you're going to need to be a C Corp. And if you're going to go public and do an IPO, you're going to need to be a C Corp incorporated in …”
Toles: Co-founder lawsuits rarely happen over success, but rather commercial failure
“Lawsuits almost never happen over a company being successful. Now, there are exceptions. There was a lawsuit that happened because Facebook was successful, but that also happened because one of the founders did the other founder wrong. Usually, if you have two…”
Toles: A three-year-old LLC is an asset due to its credit rating
“An LLC that's been around for three years, In most states is an asset. Who owns the LLC when the company goes under? Because frequently with a startup, that may be the only thing you have that is worth anything after three years. And the reason the LLC is wort…”
Toles: Draft a shareholder agreement when selling equity to non-operators
“I think you create a shareholder agreement the first time you sell equity to someone who is not an actual operator. If, for example, I bring on a venture capitalist, there should be an agreement with that person where there's a shareholder agreement with them,…”
Toles: Business NDAs remain enforceable much longer than employee agreements
“The former sorts of NDAs, sort of the business opportunity ones,
Tend to be pretty enforceable for a pretty long time.
The latter tend to be enforceable for a limited period of time.
Usually that period of time is on the order of a couple of years, and usually…”
Toles: VCs refuse NDAs to avoid expensive frivolous lawsuits
“And so a lot of people don't want to sign the NDAs because they don't want to get sued for something that is actually not a violation, but looks like a violation from the outside.
Not because they're concerned they're going to lose the lawsuit because it's exp…”
Founders can use phantom stock before converting to C-Corps
“I just recently wrote a phantom stock plan for a company that's a S Corp and wanted to be able to issue shares to people before it became a C Corp, and there are ways you can do that, but you can't issue real equity, and that's a limitation.”