The Four Words you need in every Service Agreement!
And more advice from Wendy Heilbut, an attorney and angel investor with legal expertise which bridges the gap between traditional law and innovative growth. As the first partner and founder of Jayaram Law’s New York City practice, she has worked with visionary companies including Rebecca Minkoff’s Female Founder Collective, Refinery29 and Ankura Consulting Group.
Note: The information provided on this blog post does not, and is not intended to, constitute legal advice; instead, all information, content, and materials available on this post are for general informational purposes only.
1. Be careful with advisor equity!
At a very early stage, you need your advisors, and you should reward them with some equity in your company. But, that equity needs to be commensurate with the amount of guidance that they are offering. I have seen companies give their advisors 1, 2, 3 %, and up of their company. At that early stage, that might not sound like much, but it is a tremendous amount. Say your company is worth $5M. If I am giving someone 1%, that's $50K. If I was to pay that person a salary of $50K, what should I expect from them? Maybe that advisor is giving you tremendous support, but that could be a full-time salary for an employee. So, you should ask yourself, is this person giving you that kind of support? What I recommend is 25 basis points for an early-stage advisor. For the companies I advise, I have a standing call once a month, and I am available for consult in between. Compensation should tie to what the advisor is offering. In the advisory agreement, make it explicitly clear what you are looking for from that person.
2. Don't go it alone, seek advice for crucial decisions.
When you are setting up your initial fundraising round, there are so many things to consider. Proper guidance is essential. Even if you don't know anybody, think of your dream investor. Reach out, not for funding, but advice. You can say that you are putting together your first investment round and that you are trying to figure out how to structure your ask. You are going to need to figure out what your valuation is, what you are going to fundraise, and how long you are going to keep your fundraising window open? Also, are you raising on a convertible note or a SAFE? You can find information online, but these questions are very particular to your company.
3. Company formation do's and don'ts.
If you plan on fundraising through the traditional path of angels, micro VCs, VCs in the next 18 months, I would start with a Delaware C Corp. For traditional fundraising, the company has to be a Delaware C Corp. A Delaware C Corp is a little more expensive and more to mange than an LLC. If you are not going to fundraise in the next 18 months, I would say start an LLC and get your business off the ground. You can still fundraise, and you can still give equity. We do conversions to C Corp all the time. It is a simple process to change status.
If you are a consumer-facing brand, I always recommend going down the trademark path straight away. You are going to have a hard time getting investors excited about your brand if you don't have some trademark protection. You don't want to be in a position that you could get sued for the name of your company. If you have some technology that is patentable, you need protection on that as well.
4. Don't create a service agreement without these four words!
Regarding contracts, services agreements, and user agreements, one thing I always hammer home is these four words WORK MADE FOR HIRE. A lot of companies get started with independent contractors. Some of them show up with their own agreements. One thing that they all should have is this "work made for hire" concept, which means that anything that this person does for you is made for hire so that you own everything that they do. Without that language, you can get into a scenario where they can claim ownership. Let's say that ten years from now, you are a huge, successful company; a contractor may come back to you and say that they own whatever they created for you.