You have a strategic plan, an MVP (minimum viable product), a management team, a place to work, and your first investor. But before you take that investment, there are some key legal issues you may want to consider before formally launching your InsurTech company:
Generally, there are two choices: A limited liability company or a C-corporation (the “Entity”).
There are good reasons for each. What is critical is that some kind of Entity is formed and the business is operated through the Entity. Entrepreneurs should remember that: (i) an Entity provides a liability shield against personal liability for the Entrepreneur, Officers, Employees and Investors; and (ii) Investors will want tangible evidence of the ownership stake they have in the Entity, either in the form of stock or membership interests, which ultimately is the vehicle through which profits are realized. The most efficient way to provide both a liability shield and to share in the growth of an Entity is to form either a limited liability company or C-Corporation.
The Entity should be formed before any commercial agreement or material negotiations are entered into. Remember, under certain circumstances, even verbal promises can be enforced!
Every state in the United States permits the formation of an Entity under its laws. However, there are generally two jurisdictions most often considered:
State in which Principal Place of Business of the Entity is located
Founders, Officers, Employees and Investors all have different economic interests and expectations for the future. Managing these expectations through shareholder agreements; employment agreements; investor rights agreements; and designations clarifies expectations, helps to avoid conflict and enhances the likelihood of the success of the Entity. Hence, it is important to understand these different economic interests and expectations from the beginning and to resolve the differences and document the same before moving forward.
To further manage the different expectations of Founders, Officers, Employees and Investors, early discussions about the issues listed below further enhance the likelihood of the Entity’s success.
The following documents assure that an Entity is properly formed, remains in good standing and serves as a liability shield for Founders, Directors, Officers and Investors, including:
The following agreements further insure clarity between Founder, Directors, Officers and Investors and can assist to ensure an Entity’s success. Such agreements need not be burdensome and can help avoid lengthy disputes or litigation, including:
Regular meetings documented by accurate minutes or consents to memorialize matters to ensure that common ground is established and maintained. Accurate financial statements are critical to the operational success of Management and robust investor relations.
Uniform choice of law provisions, jurisdiction and venue selection and agreed to methods of dispute resolution (arbitration vs litigation) – detailed in documents which memorialize commercial relationships – help avoid lengthy disputes or litigation and create greater certainty among constituents.
Establishment of appropriate robust intellectual property protection is critical to the success of the Entity and protection of the investment.
The post Top Ten Legal Issues Every InsurTech Entrepreneur Should Understand appeared first on Insurance & Reinsurance.
Visit our Insurance & Reinsurance Blog for the latest news and developments.Visit the blog
Sign up for our newsletter and get the latest to your inbox.