The three (two) documents of startup incorporation

in #startup6 years ago

Hi,
I'm not a lawyer.
This is not legal advice.
Over the past 20 years, I have incorporated in several countries and have read and analyzed a lot of legal documents and the following is what I have learned.

There are 3 potential documents - possibly 2 (or even one if you really want to be concise).

The first document - articles of association/constitution
Most jurisdictions demand (in law) a constitution/articles of association (AOA) document. In most jurisdictions you the following articles are necessary - meaning you can add to them, but not omit them:

  1. Company name
  2. Company Goals
  3. Company stock capital and its distribution between the founders (which means that you also need to state the founders, either in this article or in a separate one)
  4. Type of entity (is it a partnership or a limited liability company or whatever other entity is defined)

Those 4 basic demands are usually what is required by law.
It means that in most places, in order to comply with the law you could (and many do) file a very short document that looks like this:

  1. Name: NewCorp
  2. Goals: To do whatever is deemed legal to do
  3. Stock Capital: 1,000,000 shares issued with the face-value of one euro-cent per share all. All shares are owned by John Doe.
  4. NewCorp is a limited liability corporation

You are also required to provide an address - but not always as part of this document

Most constitutions/AOA include a governance article that defines the decision-making procedures (this is not normally required by law, because in most places it is covered by the law - so in absence of any other definition the default is simply to do as stated in the law...).

*The second document - The founders' agreement *
The founders' agreement (FA) is relevant only if there is a time gap between the moment of starting to work on a venture and the moment of incorporation. If there is no gap - there's no need for this document and everything in it can be covered in the shareholders' agreement (see below). During the time before the incorporation, there are no shares to hold so there can be no shareholders' agreement.

The founders' agreement (FA) delineates the business relationship between the founders. The term "founder" is formally used for tax purposes. It means that giving shares to a "founder" is not a tax event. In natural language, that term got other meanings. If there's no FA, there's still no problem to refer to the founders in the shareholders' agreement.

The third document - the shareholders' agreement
So the next important document is the shareholders' agreement (SA). In fact, as long as the articles required by law are in it, it can be merged into the constitution/AOA. The reason why this is not normally done is that there seems to be no good reason to provide the government with information about your business relationships and private contracts if that is not legally required.
The founders' agreement and the shareholders' agreement should be quite simple. In my mind, they should only add to the constitution what is not required in it - mainly governance and remuneration such as salary and allocation of vested shares/options. This many times implies a cap table, vesting mechanisms, and warrants ("legalese" for articles that provide protections for shareholders in case of possible eventualities - for example the "tag along" and "drag along" warrants that protect minority shareholders by limiting the possibility of a majority shareholder from selling her shares and forcing a new majority shareholder on a minority shareholder, or for protecting the majority shareholder's right to sell, by limiting the right of a minority shareholder to refuse to sell shares (in case of an "everything or nothing" deal.) In many jurisdictions, these issues are covered by the law and so this may be superfluous. In general, try not to add language that is also well defined by the law.

Adding a bit about the company and other fluff is very common but not necessary.
Articles that delineate roles and responsibilities are needed only as much as they are needed for defining governance.
Cap table and ot

So?
Well, the documents that are normally drawn are almost always heavily redundant with articles and words that add nothing to the letter of the law. It means wasting time on understanding them, debating them, agreeing on them. It is wasteful and adds unnecessary friction and billable hours.

Less is more in my eyes.

I hope this gives you a better view of what the process of incorporation should include.
I will tell you this - I printed and read the Israeli corporation law (years ago - and every now and then I take another look). It's ~100 pages. It was interesting - not a terrible read. It is something that every person that opens a company should do - IMHO.

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