Start-Up Q & A

By Peter Kelman, Esq.

This column appeared in substantially the same form in the Boston Software News, July, 2000.

Question:        I am thinking about starting my own company.  Do I really need to see a lawyer for legal advice?

Answer:          This is a tough question.  Certainly with all the information available to individuals, whether via the web or in the business section of a bookstore, it is tempting to say that legal advice need not be dispensed by a lawyer.  I suppose the difficulty for do-it-yourselfers is to determine which of the many sources is the right one for you.  In that regard, a lawyer’s experience becomes the value he or she adds to your situation.  The chances are that a lawyer has helped other clients go through what you are planning and can help you make the decisions that are best suited to you.  Absent that kind of advice, it is hard for a lay person to know if they have made the correct choices.  Another perspective on this conundrum is to consider whether you are going solo on your venture or in it with other people.  If you are undertaking a solo venture (e.g. making the transition from employee to consultant) exposure to others may be sufficiently minimal that you can set up shop yourself.  However in any enterprise involving several individuals, it is probably a good idea to seek professional advice to prevent business from getting in the way of friendship.  That way if something goes wrong, you can blame your lawyer instead of yourself.

Question:        There are so many forms of doing business, partnerships, S corporations, C Corporations, llc’s, proprietorships, how do you choose the correct entity?  Why can’t I just enter into business as a person?

Answer:          You can do business as an individual, but there are risks and limitations to doing business that way.  Each of the other forms of doing business offers certain advantages to the individuals involved; but each also contains certain drawbacks.  Unfortunately one size does not fit all.  Many individuals choose some form of corporate entity to minimize risk to personal assets.  If properly set up and maintained, a corporate entity has an economic life of its own, and if the corporation fails, only its assets and not your personal assets are at risk.  Corporations also offer certain tax advantages that individuals may not be able to take.  If you decide to set up a form of corporation, then such factors as the initial profitability of your business, the composition of your ownership structure, sources of funding and your mechanisms for motivating employees all should be taken into account to determine the right form for your business.

Question:        My business needs money to develop our next product.  Everybody talks about venture capital.  What about banks?  What is the difference between money from a  bank and money from a venture capital firm?

Answer:          Money is money and the money you get from a venture capitalist is the same money you would get from a bank.  The difference lies in what you need to do after you get the money to be relieved of your obligations to the lender.  Typically a bank gives money to a business and expects to be paid back the money along with interest.  The bank has “lent” you the money; you must return it.  The bank’s loan is your company’s debt.  As long as you pay meet your payment schedule, the bank will let its loan be outstanding.  Venture capitalists want a different kind of payback.  They don’t require you to directly return their money; instead, they want a piece of your company by acquiring equity (stock) in your company.  Venture capitalists make their money when your company undergoes a “liquidation event”, i.e. is bought by another company, goes public, or receives more financing.  Then the venture capital group gets money for the stock it owns in your company.  While a bank may be very patient with its loan, venture capitalists often have a much shorter timetable for your company to transform itself and return money to its shareholders.

The questions and answers presented in this column vastly oversimplify what can be highly complex issues of law.  The point of this column is not to provide definitive legal advice on specific topics, but rather to sensitize readers to general legal issues described from the 10,000 foot perspective.  In no way is this column intended to substitute for advice one would receive from an experienced practitioner on a particular issue.

Copyright 2000, Peter Kelman, all rights reserved.