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AdobeStock_839026665-300x200A founders’ agreement is a contract between co-owners of a business that outlines each of their roles and responsibilities, ownership interests, and rights in the business. It may be a standalone document or may be incorporated into a shareholders’ agreement, a partnership agreement, or an LLC agreement.  In this piece, we focus on pre-incorporation founders’ agreement—the first document we recommend be put together just as soon as two or more persons get into business together as co-owners. This will help protect the interests of each co-owner and avoid any potential disputes among them later.

So, what should founders include in a pre-incorporation founders’ agreement? Although the answer will vary depending on the line of business, a typical pre-incorporation founders’ agreement includes these items:

  1. Name of the parties and (potential) name of the business: The agreement should identify each party that will be bound by it. If the founders already have a name lined up for their business that should also be included in this agreement.
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AdobeStock_1329871997-300x200Alternative Dispute Resolution (ADR) offers a great way to settle disputes without stepping into a courtroom. Two of the most popular methods of ADR are mediation and arbitration. Both provide efficient, private alternatives to traditional litigation, but they are quite different when it comes to the process and the results. Understanding these differences is key when deciding which option works best for your situation.

Benefits of ADR

Both mediation and arbitration share some key advantages over going to court:

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AdobeStock_1242035808-300x200It is common for startup founders to forgo cash-based compensation and accept only equity in exchange for their services to their startups. Most startup founders assume wage and hour laws are inapplicable to them because they are the owners of their business. However, founders, much like non-owner employees, cannot, under most circumstances, work for free for their startups.

Under the Federal Fair Labor Standards Act, (“FSLA”), founders who qualify as employees, must be compensated with minimum wages and overtime pay unless an exemption applies. The most common FSLA exemption is the so-called “business owners’ exemption”. This exemption is available for founders who own at least 20% of their business and are actively engaged in managing it. However, even if a founder is exempt from the wage and hour requirements under FSLA, there is still the applicable state law to consider. For instance, California has no exemption identical to the FSLA’s business owners’ exemption for employee founders. Businesses subject to California laws must either comply with California’s minimum wage and overtime requirements or fall within an exemption to be exempt from such requirements—none of which, however, allows an employee founder to work for free for his or her startup.

So, then what should startups do? From a compliance perspective, if a founder qualifies as an employee, the startup should comply with FSLA and applicable state wage and hour laws. In practice, however, we have seen most startups take one of these three approaches. The first approach is to document the employment relationship and pay the founder a salary commensurate with his or her job functions. This is the approach that founders rarely choose, simply because usually startups are cash strapped and founders are more than willing to forgo cash compensation. The second approach is to document the employment relationship, set a salary for the founder in it, and then defer it, until the business has enough funds to pay the founder for his or her services. The pitfall of this approach is that salary deferral arrangements must comply with state and federal wage and hour laws, and often startups fail to come up with legally compliant deferral arrangements. The third and the most common approach is to remain silent on this issue completely, and only get the founders to execute agreements pertaining to their equity in the business, and confidentiality and invention assignment agreements.  Again, like the second approach, this approach too may cause significant liability under employment laws.

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AdobeStock_1049776145-300x200Texas entrepreneurs often embody a ‘do-it-yourself’ (DIY) ethos. In a typical startup, a compact team of committed individuals assumes various roles across the organization. While this approach can be instrumental in driving a company towards success, applying a DIY mindset indiscriminately can be detrimental and lead to significant costs for the business. Entrepreneurs must recognize when professional expertise is needed, particularly in areas with legal implications.

In recent years, we have seen several online services promote DIY legal services as an inexpensive way to help get a business up and running. But when it comes to understanding and complying with the multitude of federal, state, and local regulations that may affect a new business, legal advice is one area where you do not want to cut corners. Instead, you should strongly consider working with an experienced Texas start-up and financing attorney.

Beware of Legal Templates

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AdobeStock_1285714358-300x171In this second of our series of blog posts on common misconceptions around hiring and working for startups, we address a common misconception around classification of independent contractors. Most startup owners do not want to deal with the costs of hiring employees. So, many engage new hires as independent contractors. The common misconception is that getting these new hires to execute a well drafted independent contractor agreement is conclusive of their status as independent contractors. While such an agreement is one indicator of the parties’ intent to establish an independent contractor relationship, it is by no means conclusive and offers little by way of protection against employment related claims (especially in California) if factually the relationship is more akin to that of employer and employee.

Various factors go into the analysis of classifying a new hire as an employee or independent contractor. The analysis is not identical across the board and often the test to be applied turns on who is investigating the alleged misclassification. For instance, the test the IRS applies is not identical to one applied by the Department of Labor.

Under federal Fair Labor Standards Act (“FLSA”), the definition of employee is vague— employee is defined as “an individual employed by employer”. In analyzing an individual’s status under the FLSA, courts have looked at the totality of the circumstances including contractual language. The test, commonly known as the “economic realities test”, generally looks at these factors:

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AdobeStock_209431934-300x200In 2025, Texas employers will face several key updates to employment laws that could significantly affect workplace policies. While Texas maintains its reputation as a business-friendly state with fewer regulations, new legislation at the state and federal levels aims to address employee rights, workplace safety, and wage issues. Below are the key updates for 2025 that Texas employers need to consider.

1. Paid Family Leave Developments

Texas does not currently have state-mandated paid leave laws. However, employers should stay informed about federal changes that could affect their businesses. The current administration and Congress have been debating the possibility of a federal paid family and medical leave program, which could require Texas employers to provide paid leave for qualifying family and medical reasons.

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AdobeStock_190612024-300x200Once you have started your own business, one of the first decisions you must make is choosing the form in which you want to conduct your business – whether as a sole proprietorship (or partnership, in case of more than one founder) or by organizing your business in an entity form. Your choice will lay the foundations for your business and guide tax efficiencies, liability exposure, administrative ease, attractiveness to investors, and therefore, your ability to scale. Also, choosing a form that best fits your needs helps avert disputes and prevent misunderstanding among the stakeholders by defining their ownership, roles, and duties in the business.

Whether your business should be organized as a corporation, partnership, limited liability company (“LLC”) or a sole proprietorship, depends on various factors including your goals for the business, whether you intend to raise outside capital, whether your business will be a lifestyle business, your desired tax treatment for the business, whether you intend to offer equity to employees and service providers, and so forth. However, in this blog we limit our discussion to adding our two cents to the ever-going debate of whether a new business should organize as a C-corporation (“C-Corp”) or an LLC. Our conclusion, to no ones’ surprise we hope, is there is no one-size-fits-all answer.

Arguably, one of the biggest drawbacks of a C-Corp is the potential for double taxation. A C-Corp is a separate taxpayer independent of its stockholders. The income earned by the C-Corp is first taxed at the entity level and then again in the hands of its stockholders when the net income is distributed to them as dividends[1]. For the same reason, distributing cash to the owners on an ongoing basis is difficult to accomplish with a C-Corp (though by no means impossible). Also, to avail the protection from personal liability that C-Corp affords its owners (and to avoid the piercing of the so called “corporate veil”), it is important that a corporation complies with all corporate formalities stringently. LLCs (which also shields its owners from personal liability) offer much more flexibility in matters of corporate governance. Also, statutorily mandated fiduciary duties of the board of directors of a corporation cannot be eliminated by the corporation’s owners via a private agreement, whereas the members of an LLC have much flexibility to reduce (or altogether eliminate in some states) a manger’s (or managing member’s) fiduciary duties to the LLC and its non-managing members through the LLC’s operating agreement.

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AdobeStock_513700263-300x200As consumers increasingly seek eco-friendly products, some companies engage in “greenwashing” — misleading marketing that exaggerates or fabricates environmental benefits of its products or services, to appeal to environmentally conscious buyers. Greenwashing can include vague claims like “all-natural” or “eco-friendly” without providing evidence or proper certifications, undermining genuine sustainability efforts and eroding consumer trust.

While promoting green credentials become a central marketing strategy for many businesses, regulators respond with more rules to eliminate misleading and unsubstantiated green claims and increased enforcement activity against those guilty of such deceptive practices.

U.S. Legal Framework Against Greenwashing

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AdobeStock_1070496539-300x200Benefit Corporation and Social Purpose Corporation—alternatives to forming a purely “for profit” Business

What do you do when you want your business to incorporate positive social or environmental impact goals into its core objectives along with maximizing profits? In California, entrepreneurs who do not want to form a nonprofit but, nevertheless, want to structure their business to take into account a social purpose or a public benefit (and not focus only on maximizing profits for its shareholders) have the options of forming a public benefit corporation or a social purpose corporation. In a traditional corporation, directors and officers must prioritize shareholders’ interests above all else or risk being in breach of their fiduciary duties to them. In these alternative forms, the business must consider the interests of other stakeholders and not just its shareholders in making corporate decisions. Note, however, that, unlike nonprofits, neither benefit corporations nor social purpose corporations get special tax treatment. In many respects they are identical to a traditional corporation. Some of the main feature of these alternatives to a traditional corporation are briefly discussed below.

Benefit Corporation: One alternative to a traditional purely for-profit corporation in California is a benefit corporation. Under this structure, the corporation may pursue public benefit goals along with the traditional goal of maximizing profits for its owners. Benefit corporations are creatures of statute in California and are organized under the General Corporation Law of California. The articles of a benefit corporation must state “this corporation is a benefit corporation”. The articles may also identify one or more specific public benefit purpose(s) which may include:

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AdobeStock_199775106-300x200As we approach 2025, several new employment laws in Oregon will significantly impact workplace policies and operations. These changes address a range of topics, from wage requirements to worker classification and family leave. Below is a summary of the most important updates that Oregon employers should be aware of, ranked from most to least significant.

1. Paid Family and Medical Leave Expansion

Effective January 1, 2025, Oregon’s Paid Family and Medical Leave Insurance (PFMLI) Program will undergo significant updates. These include increases in the maximum weekly benefit for employees and broader eligibility for part-time and seasonal workers. Strengthened anti-retaliation protections will also be introduced, ensuring that employees returning from leave are protected, and that job reinstatement rights are clearer.

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