Question: My co-founder and I have been working on our startup for some time now. We have put in considerable time and money and now want to do things in a more structured way. We are thinking of incorporating. What are the pros if we pursue this?
Answer :
Injecting structure in the way you do things is always good. A business entity with which to carry on your startup is one such structure.
The most attractive feature of corporations is that they offer limited liability for the shareholders. Since the law treats corporations as separate and distinct from their shareholders, the liability of corporations are not (with some exceptions) the liability of their shareholders, and vice versa. So the shareholders are protected in the sense that their exposure would be limited to what they’ve put in (or promised to put in) the corporation as capital for which they have received (or will receive) shares.
You can also view corporations as a “basket” where all intellectual property output (ideas, designs, concepts etc.) of shareholders, employees, consultants etc. which are related to the corporation’s business would be placed. Otherwise, these intellectual property output would be “floating” around.
The ease by which shares may be transferred, subject to restrictions agreed upon by the shareholders or imposed by law, is also one of the key features of corporations.
Downside? Some find the cost of set up, strict regulation (SEC reportorial requirements etc.), adherence to by-laws, respect for the rights of shareholders (even minority shareholders) cumbersome. But I believe the advantages incorporation affords outweigh these.
Question: I am the founder of a new e-commerce startup. As I am aiming to scale I need people with relevant skills and experience to help me. I want to offer work to some key people whom I know would be tremendous assets to my startup. But having limited revenue at this time, I cannot offer these people salaries at market rates. I want to offer them shares in my company as part of the compensation package I am intending to offer. What should I consider before making the offer?
Answer :
I’m glad things are looking up for you.
Offering shares to employees/consultants as part of their compensation package when the cash component would not be enough to attract top talent is a good strategy. But important consideration must be made on the following to determine how many shares you should be offering or in case things don’t go as planned with the hire or engagement.
Firstly, determine the realistic value of the shares you will be offering. This could be the subject of some negotiation between you and the prospective employee/consultant. You must assign a reasonable value to the shares that reflects, among other things, the business traction your startup has achieved and its growth prospects. Overvaluing shares might turn off prospective hires, and undervaluing them might not work out for you as you will have to offer more shares which might lead to unnecessary dilution of shares, including yours.
Secondly, put a vesting agreement in place. Vesting means that the employee/consultant will not own the shares offered to them in one fell swoop but will have to earn them over time. This ensures that they will remain with the company long enough to earn these shares. A typical vesting period is four years, where the employee/consultant earns 25% of the shares promised if he/she remains with the company for at least one year (called the cliff), and the rest over a period of four years in equal monthly amounts.
Question: We just moved to new corporate offices recently. What should we do to make the move “official”?
Answer :
Change of principal corporate address can be simple or complex.
If you are moving to new corporate digs within the same city or municipality, all that is required is for you to submit a new General Information Sheet (GIS) with the SEC stating the new corporate address within 15 days after the move. Amending the Articles of Incorporation to reflect such new address is optional. (see SEC Memorandum Circular No. 16, Series of 2014).
If you are moving to an address outside the city or municipality declared in your Articles of Incorporation even if within Metro Manila, you’re in for a ride. Firstly, you must amend your Articles of Incorporation stating the new corporate address. Then you must retire the old business address with the local government offices (barangay, city etc.) concerned. This might involve securing clearances as per local rules. You then have to register the new address in the new city or municipality. You must also notify the BIR of the move and have your tax files transferred to a new Regional District Office, if needed. Only after you’ve gone through this process can you file the amended Articles of Incorporation with a new GIS with the SEC. Have fun.
