Starting and running a successful startup requires a lot of work. From developing your product or service to building your team and finding investors, there are countless tasks to keep track of. However, amidst all the hustle and bustle, there’s one crucial thing that often takes a backseat but can profoundly impact your startup’s success: the organization of your legal documents. In this article, we’ll guide you through the vital process of keeping your startup’s legal documents organized.
Why Organization Matters
Keeping clean corporate records is essential for startups. If you start doing it properly from the beginning, it will be much easier than trying to organize everything during due diligence. In the past, corporate records were kept in a physical binder, but nowadays, it’s more common for them to be stored in a shared drive. Here’s why it matters:
- Due Diligence. Potential investors, buyers or partners may conduct due diligence to evaluate your company’s health and value. During this process, they will want to review your legal documents. If your documents are not in order, it could cause delays, reduce the value of your company or cause the deal to fall through entirely.
- Regulatory Compliance. Startups must comply with a variety of laws and regulations. By keeping legal documents organized, you will have a better chance of demonstrating compliance if authorities or auditors request documentation.
- Dispute Resolution. Legal documents can provide evidence in disputes with customers, employees, suppliers, competitors or regulators. These might relate to intellectual property rights, employment contracts or commercial agreements. Clear and accessible documents can expedite resolution and minimize potential harm.
- Operational Efficiency. When documents are easy to locate and understand, it makes it easier to run the business smoothly. This reduces the time and effort spent searching for documents, and it can help you avoid misunderstandings that could lead to legal problems.
- Risk Management. Organized documentation can help identify potential risks early on, allowing your business to mitigate them before they become significant issues. This includes both legal risks (like contract risks or noncompliance with regulations) and business risks (like not understanding obligations under a contract).
- Business Continuity. In the event of unforeseen instances like the departure of a key employee, having organized legal documents ensures business continuity. Other team members can pick up where they left off without confusion or delay.
- Corporate Governance. Organized documents promote good corporate governance. They provide a clear record of the decisions made by your company’s directors and officers, and help ensure that those decisions are made in accordance with your company’s bylaws and the law.
- If you’re seeking venture capital or other forms of investment, you’ll need to have your documents in order. These will likely be closely scrutinized during the fundraising process, and any irregularities could potentially scare off investors.
For these reasons, it’s important to develop good document management practices early in the life of your startup. This could include using a secure document management system, routinely reviewing and updating documents, and working with legal counsel to ensure that your documents are legally sound and up-to-date.
How to Organize Your Startup’s Legal Docs
There’s no correct way to do this. The most important thing is that it’s logical and user-friendly. Here’s an example of a folder and document structure:
- Incorporation Documents
- Articles of Incorporation or Certificate of Incorporation
- Operating Agreement (for LLCs)
- Employer Identification Number (EIN) confirmation letter from the IRS or similar tax ID documentation
- Board and Shareholder Records
- Board meeting minutes
- Shareholder meeting minutes
- Written consents and resolutions
- Equity Issuance Records
- Stock certificates
- Stock ledger
- Stock option agreements
- Stock option plan documents
- Securities exemption filings (such as Form D)
- Executed Agreements
- Employment agreements
- Independent contractor agreements
- Advisor agreements
- Confidentiality and non-disclosure agreements
- Intellectual property assignments
- Vendor and supplier agreements
- Customer contracts
- Template Agreements
- Standard employment agreement template
- Standard independent contractor agreement template
- Standard non-disclosure agreement template
- Other reusable legal templates relevant to the business
- Capitalization Table (Cap Table)
- Document that outlines the ownership structure of the corporation, including shares owned by shareholders, options, warrants and other equity securities
- Regulatory Compliance Documents
- Business licenses and permits
- Annual reports
- Any industry-specific compliance documents
- Financial Records
- Bank account records
- Bookkeeping records
- Annual financial statements
- Tax returns and filings
- Intellectual Property Records
- Trademark registrations
- Patent filings
- Copyright registrations
- Insurance Policies
- General liability insurance
- Professional liability insurance
- Workers’ compensation insurance
- Property insurance
- Corporate Policies and Manuals
- Employee handbook
- Code of conduct
By keeping the above records organized and easily accessible on a shared drive, a new corporation ensures legal compliance, efficient operations, and preparedness for potential growth opportunities and challenges.
In conclusion, keeping your startup’s legal documents organized is essential for ensuring compliance, mitigating risks and positioning your company for growth. By developing good document management practices early on, you can save yourself time, effort and potential headaches down the road. Whether you choose to keep physical copies in a binder or store everything on a shared drive, make sure your documents are easily accessible and up-to-date. By doing so, you’ll be better prepared for potential due diligence, regulatory compliance requests and dispute resolution.