It really does seem impossible to make 500 million friends without making a few enemies. The adage, popularized by the film The Social Network, returned to relevance last week as Snap Inc. (Snapchat’s parent company) filed an S-1, revealing the company’s intentions to pursue what could be the most-hyped public offering of the year.
Disclosed documents revealed that a third founder, Reggie Brown, had been pushed out of the company during its first few months. An independent source alleged that it was Brown who vocalized the idea of “an app where pictures could disappear.” Eventually, Brown would extract a settlement of $157.500 million for his early contributions.
Many entrepreneurs, seeking to avoid the burdens of legal fees, avoid retaining counsel until the emergence of a tangible predicament. However, countless stories prove the opposite approach to be more rational: a strong legal foundation can prove to be an indispensable asset from inception to exit.
I caught up with Jeff Laretto, an attorney at Wilson Sonsini Goodrich Rosati, the acclaimed Silicon Valley law firm known to have advised Apple in its IPO and Google since its inception. We discussed three distinct and pressing legal decisions that every founder must consider.
1. Forming your company: When, why and how?
The first legal question that often confronts founders is that of entity formation and timing. “You form a company in order to protect your personal assets,” explained Laretto. “As soon as you begin commercializing products and entering into agreements with third parties, you’re exposed to liabilities. By forming an entity, you can generally shield your personal assets from those liabilities.”
There is considerable debate regarding the best structure for your startup. According to Laretto, one core consideration is: “Do you want to be the next Facebook — and thus have a pressing need for significant capital? If so, a c-corporation is distinctly advantageous. Corporations are the structures that are the most tax-amenable to venture capitalists — and the body of law governing corporations is broadly understood and consistent.”
LLCs may be potentially tax-advantageous for some business, especially those that…