If you’re starting a new business, there are several essential agreements you’ll need to establish in order to launch a Delaware C-Corp. These agreements include the certificate of incorporation, action of incorporator, initial board consent, bylaws, Restricted Stock Purchase Agreement, notice of stock issuance, 83(b) election and a Confidential Information and Invention Assignment Agreement. In this post, we’ll take a closer look at each of these agreements, what they entail and why they’re important.
Every situation is unique, so it’s essential to work with legal counsel to understand what’s best for you. If you’re looking for counsel, feel free to reach out to us here.
Certificate of Incorporation
A certificate of incorporation establishes the existence of a corporation in the state of Delaware. It contains essential information about the corporation, such as its name, purpose, registered agent and the number of authorized shares. The certificate may also include provisions on liability protection for directors and officers, establish different classes of stock and outline any preferences certain classes of shareholders may have.
To form a Delaware C-Corp, the certificate of Incorporation must be filed with and approved by the Delaware Division of Corporations. Any amendments to the certificate of incorporation require an additional filing and approval. If you would like to learn more about the certificate of incorporation, click here.
Action of Incorporator
The person who actually signs and files the certificate of incorporation is called the incorporator. The action of incorporator is a legal document that records the initial actions taken by the incorporator(s) of a corporation. This document is generally where the bylaws are adopted, and (very importantly) the authority to run the company is transferred from the incorporator to the company’s board of directors. Technically, until the action of incorporator is executed, the incorporator, not the founders, have legal authority over the company. If you would like to learn more about the action of incorporator, click here.
Initial Board Consent
An initial board consent is a legal document that records the initial actions taken by the board of directors of a corporation. This document is typically adopted as a written consent in lieu of a board meeting but is sometimes adopted at the first organizational meeting of the corporation. The board consent typically covers:
- election of officers
- issuance of founder’s stock
- establishing the fiscal year
- empowering officers
- management of financial matters
- empowering officers to manage the company
If you would like to learn more about the initial board consent, click here.
In a Delaware C-Corp, bylaws are a set of rules and procedures that govern the corporation’s internal affairs. They are essentially the operating system of a startup. They outline the roles and responsibilities of the corporation’s shareholders, officers and directors, as well as procedures for holding meetings, voting and conducting other important business activities. Bylaws are an important document for a Delaware C-Corp, as they help ensure that the corporation is well-managed and operates smoothly. If you would like to learn more about bylaws, click here.
Restricted Stock Purchase Agreement
The Restricted Stock Purchase Agreement (RSPA) is a crucial document that gives founders an ownership stake in the company. It is a contract between a corporation and its founders that governs the sale of restricted stock. Typically, founders purchase shares in the company at a nominal price (often $0.0001 or $0.00001/share) using cash, the transfer of intellectual property or a combination of both. Restricted stock is a type of common stock that is subject to certain restrictions, such as a vesting schedule or transfer restrictions. This type of stock is often used to incentivize employees or stakeholders to remain with the corporation for a specified period of time.
Founders should work with legal counsel to draft the RSPA and ensure compliance with state and securities regulations. If you would like to learn more about restricted stock, click here.
Notice of Stock Issuance
Some startups issue actual stock certificates, but most startups don’t.
Stock certificates are physical documents that represent ownership in a company. In the past, they were commonly used to indicate a shareholder’s ownership of a specific number of shares in a company. However, in recent years, the use of physical stock certificates has become less common, particularly among startups for a number of reasons. First, there is a high amount of administrative burden on the startup to manage the certificates of a high number of employees. This is especially challenging when employees leave prior to fully vesting their stock. Second, many startups now register their stock electronically, which eliminates the need for physical stock certificates. This can be more efficient and cost-effective, as it eliminates the need to print and distribute paper certificates. The move away from physical stock certificates reflects the trend toward greater efficiency, flexibility and sustainability in business practices.
So, most startups use “uncertificated shares.” With uncertificated shares, there is no physical certificate to transfer when shares are bought or sold. Instead, ownership is transferred electronically through a process called book-entry transfer. This is typically managed by the startup’s secretary and managed on a cap table management platform like AngelList, Pulley or Carta.
And that brings us to the notice of stock issuance. Startups that use uncertificated shares often issue a notice of stock issuance in lieu of a stock certificate. It’s a simple one-page document that details the shareholder’s name, number of shares and vesting schedule.
An 83(b) election is a tax election that allows individuals who receive restricted stock to pay taxes on the stock at the time it is granted rather than when it vests. This can be beneficial for individuals who anticipate that the value of the stock will increase significantly between the time it is granted and the time it vests.
To make an 83(b) election, the individual must file a written statement with the IRS within 30 days of receiving the stock. It is important to note that the 83(b) election is a personal (not company) tax election. Although many companies will draft an 83(b) election for a stockholder as a courtesy, it is ultimately the stockholder’s responsibility to file within the 30-day window.
If you would like to learn more about the 83(b) election, click here.
Confidential Information and Invention Assignment Agreement
A Confidential Information and Invention Assignment Agreement (CIIAA), sometimes referred to as a Proprietary Information and Inventions Assignment Agreement (PIIA) or a Tech Assignment Agreement, is a contract that outlines the terms and conditions of employees’ and contractors’ obligations to maintain confidentiality and assign intellectual property rights to the corporation. This agreement is used to protect the corporation’s intellectual property, trade secrets and other confidential information. The CIIAA is designed to safeguard the corporation’s valuable intellectual property and confidential information. If employees or founders have prior intellectual property that they want to retain ownership of, they should ensure that the agreement makes that explicit. The agreement should be carefully drafted with the assistance of legal counsel to ensure compliance with applicable laws and regulations.
The above documents have become the standard set of Silicon Valley docs for startups. But from time to time, there will be additional agreements, including:
- Indemnification Agreement. The Indemnification Agreement adds an additional layer of liability protection for directors and officers.
- Shareholder Agreement. The Shareholder Agreement sets forth any rules all shareholders need to abide by. This typically includes provisions like the right of first refusal, tag along and drag along rights. Note that since most RSPAs cover these points, the shareholder agreement is often redundant.
- Founders Agreement. A Founders Agreement in a startup is a legal document that outlines the rights, responsibilities and obligations of the company’s founders. It is typically created at the very early stages of a startup (often before the company has been incorporated), and serves as a blueprint for how the company will be run and how decisions will be made. This is generally less relevant once all of the above documents are executed.
In conclusion, there are several essential agreements that need to be established in order to launch a Delaware C-Corp. These agreements include the certificate of incorporation, action of incorporator, initial board consent, bylaws, Restricted Stock Purchase Agreement, notice of stock issuance, 83(b) election and Confidential Information and Invention Assignment Agreement. These documents help establish the corporation’s existence, outline its purpose and internal procedures, and provide legal protection for shareholders and officers. While there may be additional agreements required for certain circumstances, the aforementioned documents are the standard set of Silicon Valley docs for startups.
Founders should work with legal counsel to ensure compliance with state and securities regulations when drafting these documents. If you’re looking for counsel, feel free to reach out to us here.