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Answers to 5 Frequently Asked Questions for Startup Founders

Below are answers to questions regarding various stages of startup companies.

1. I am in the early stages of starting my business. What basic legal issues do I need to be aware of at this time, and where should I start?

Starting a new business is an exciting and challenging undertaking. Begin by reviewing existing agreements you may have with your employer, as they may contain IP assignment provisions or restrictive covenants that could limit or harm your new venture. Next, consider how you should protect your business idea: use NDAs, IP contribution agreements, and consider the applicability of patents, copyrights and trademarks. Next, decide how your company will be structured. When evaluating which form of entity is right for you, identify tax considerations and the location and jurisdiction of your business. Finally, draft governing documents such as your articles of incorporation, bylaws, shareholder agreements and operating and partnership agreements. Consulting with financial, accounting/tax and legal professionals earlier in the process will help you avoid future problems and anticipate key steps as your business grows.

2. My startup is beginning to expand, and I may need to raise capital to keep up. What do I need to consider as I evaluate funding options?

Your projected funding needs will be key. If you don’t need a lot of money you may prefer debt to equity, as it will allow you to expand without diluting your ownership or control. However, early-stage investors may not be willing to lend your business money unless there is the potential for upside; convertible debt can be a solution. The real risk of selling equity at an early stage is that you give away too much of your business for too little. You need to have a realistic sense of the attractiveness of your business to potential investors. Also, securities offerings done right aren’t cheap. Working with advisors, including industry experts, financial, tax/accounting and legal professionals before you begin to raise capital is a smart way to better position your business.

3. I have a fast-growing private company in Washington, and am worried about keeping up and managing my company’s growth. How can I best prepare for rapid expansion?

Look for ways to nurture your growth by developing relationships or strategic partnerships with other businesses or individuals who can further your goals. This may include targeting certain businesses for merger or acquisition opportunities. Plan out your expected financing needs by considering whether credit or equity rounds best suit your objectives. Be prepared to devote more time to managing your workforce. In addition to polishing your employment policies and processes, you’ll need to pay more attention to compensation and benefits, immigration compliance and whether you’ll need additional office space. Proactively seek the advice of your accountants, lawyers and financial advisors as you take your business to this exciting next stage of expansion.

4. I’ve been thinking about selling my business. What should I be doing now to prepare my business for sale?

You should start by creating an exit plan that includes your personal goals (i.e., estate planning), as well goals for the future of your business. This will help you hone your preparation and decision making during the sales process. Purchasers will want to review your financial, business, legal and other records, so it will greatly improve the efficiency of the process to make sure you are organized in advance. You should engage with your professional advisors (tax, financial, legal, etc.) before you start looking for purchasers to ensure your accounting, tax and legal house is in order. Additionally, if your advisors discover that any cleanup is necessary, you’ll be able to handle it before it can adversely affect your business’s sales prospects.

5. I’ve decided to sell my business, and started my preparations to sell. What does the sales process look like?

You should already have an exit plan. As part of that plan your tax, accounting and legal advisors should be assisting you as needed. For example, your plan may involve engaging brokers or investment bankers to help you find a buyer. Your lawyers should help you revise and negotiate any broker or banker contract. Your business records should be in order, and you should be careful to keep them that way. If you’ve engaged a broker or banker, he/she will help you navigate the actual sales process, but your accountants and lawyers should be engaged to review and revise letters of intent, draft and revise deal documents, and assist with due diligence.

Brenton Twitchell is an attorney in Ryan Swanson’s Business Group and can be reached at 206-654-2242 or [email protected].

Because each situation is different, this information is intended for general information purposes only and is not intended to provide legal advice on any specific facts and circumstances. Ryan, Swanson & Cleveland, PLLC is a full-service law firm located in Seattle, Washington.

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