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:
- Formation of an Entity: What and Why?
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.
- Timing: When to Pull the Trigger and Form the Entity?
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!
- Jurisdiction of Formation: Where and Why?
Every state in the United States permits the formation of an Entity under its laws. However, there are generally two jurisdictions most often considered:
- Delaware is the most popular formation jurisdiction due to its extensive legal history and court system which provides to investors a robust understanding of their rights and privileges.
State in which Principal Place of Business of the Entity is located
- Entrepreneurs sometimes form the Entity in the state where its business operations will take place or where the most members of the management team reside. While initially less expensive, this may not provide investors with the same statutory protections, favorable case law or experienced Chancery Court that the State of Delaware provides. Moreover, when an Entity raises capital from venture funds or angel groups, the Entity will be required to re-domesticate in Delaware.
- Managing the Team: Expectations of Founders, Officers, Employees and Investors
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.
- Anticipating the Future
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.
- Key Issues for Founders: Divorce, Death, Disability and “Dismemberment”
- Key Issues for Founders and Current Investors: Rights for New Money; Rights of First Refusal and Co-Sale; Information Rights; Protective Provisions
- Key Issues for Founders and Investors: The Exit: When is Enough Enough?”; “What is a Home Run?”
- Key Issues for Founders, Investors, Officers and Employees: Enterprise Failure including Reorganization or Liquidation
- Required Documentation
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:
- Corporation: Articles of Incorporation and Bylaws, OR
- Limited Liability Company: Articles of Formation and Operating Agreement
- Annual Filings
- FEIN Numbers
- Qualification To Do Business (state)
- Workers’ Compensation Insurance
- Unemployment Insurance
- Minute Books / Consents and Resolutions
- Highly Recommended Documentation
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:
- Termination: At Will; Just Cause; Change of Circumstance
- Independent Contractor Agreements
- Confidentiality and Non-Disclosure Agreements
- Maintaining the Entity: Key Items to Keep and Maintain
- Minutes of Shareholders or Member Meetings (both Annual and Special)
- Minutes of Directors or Managers Meetings (both Annual and Special)
- Financial Statements
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.
- Internal Process and Procedures
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.
- Intellectual Property
Establishment of appropriate robust intellectual property protection is critical to the success of the Entity and protection of the investment.
- Provisional Patents
- Process Patents
- Utility Patents
- Foreign Patents
- Copyrights and Trademarks
- Trade Secrets
- Enforcement of Intellectual Property Rights
The post Top Ten Legal Issues Every InsurTech Entrepreneur Should Understand appeared first on Insurance & Reinsurance.