The ultimate legal check list for Danish start-ups and founders
“A start-up messed up at its foundation cannot be fixed.“
Kristian Holte | [email protected]
#1: Create the right framework early on
Agree on how to split the equity between co-founders. It doesn’t have to be an equal split. The individual contribution may have different value or co-founders may not be equally involved.
Incorporate an ApS or IVS right away to formalize ownership. An I/S may be right choice in some cases. Create a register of shareholders to ensure who owns how much.
Enter into a simple shareholders’ agreement dealing with key issues such as:
- Level of founders’ work commitments
- What happens if a founder leaves or does not perform
- Whether a founder can sell shares, how and at what price
- Product rights (intellectual property)
- Possible non-compete and non-solicitation clauses
#2: Protection in case founders don’t click
Put a vesting plan in place for founders’ shares. Vesting protects founders against each other. If a founder no longer wants to work for the company, he shouldn’t keep his shares.
Structure the vesting as warrants or options in case you don’t want to have to buy back a founder’s shares in case he leaves. The earlier you put vesting in place, the better you can argue to later investors that the remaining vesting be shortened.
Also use vesting in relation to employees, directors, suppliers and other stakeholders who receive shares.
#3: Attract the right people on the right terms
Use incentive compensation in the form of bonuses, options or warrants as appropriate. Know the tax consequences for the recipients and the company.
If your company uses warrants or options, put a plan in place as early as possible while the value of your company is still low.
If you hire salaried employees (“funktionærer” in Danish) remember to comply with the special rules of the Danish Stock Option Act. Be aware of the risk of share re-purchase clauses which may be invalid if unfair.
Also, remember that non-compete clauses for salaried employees are not free and not always valid.
#4: Get the intellectual property right
Clear any conflicts with your employees’ former employers who may claim your company’s intellectual property.
Transfer any intellectual property to the company created before the incorporation of the company.
Insert intellectual property clauses in employment, co-operation and consultant agreements that make your company the owner of the intellectual property.
Register any important business names as trademarks internationally as early as possible. Domain name registration is not enough.
Take control of your legal documentation from the start. Choose a central, secure and legal location online to store all legal documentation. This includes articles of association, minutes of general meetings, employment agreements, shareholders’ agreements as well as intellectual property documents including trademark, domain and patent registrations.
Prepare the documentation in English from the start. Use dual-language versions of the documents that must be in Danish such as the articles of association. English documentation makes many things easier later in relation to investors, business partners and potential acquirers.
#6: Know thy term sheet
Know the terms of the term-sheet if your company is raising angel and/or venture capital. Be aware of several potentially unpleasant term such as control rights, incentive pool, liquidation preferences and anti-dilution.
Calculate the financial consequence of various terms in likely scenarios.
Hire a start-up lawyer to help you.
#7: Prepare for the storm
If your company is successful you will certainly face legal pressure. Either from established players, the public, industry associations, competitors or others.
View this as a compliment. It is proof that your company is already so successful that some perceive it as a threat.
Kristian Holte | [email protected]