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Important Issues Prior to Incorporation

Adv. Vered Horesh

In order for your revolutionary idea to actually materialize, you need a detailed plan. Here are a few important issues you need to pay attention to prior to incorporating a company:

  1. Your relationship with your current employer – If you are employed, you should review your employment agreement and look for provisions which may prohibit you from engaging in any other activity or under which you are required to transfer the intellectual property to your employer (such that the intellectual property you create will belong to your current employer). As long as your current employment agreement prohibits you from engaging other activities in parallel, you may need to obtain appropriate consent from your current employer.
  2. Your relationship with the other founders – If you are developing the idea with other people, it is advisable to arrange your relationship through a Founders Agreement which will include provisions regarding the allocation of share capital, assignment of intellectual property, corporate governance, etc. The founders may believe that the relationship between them is strong enough and therefore they do not need a written agreement, however, because everyone is in a good relationship at first, it is advisable to agree upon certain future events and how you will cope with issues.
  3. Make sure that the intellectual property of the company remains its property and that information stays confidential – It is advisable to make sure that anyone who developed, is developing or will develop intellectual property for the company, is subject to an undertaking which gives the company all rights in the intellectual property they have created. This simple action will ensure that also in the future when the company’s value will be high, no skeletons will emerge from the closet and claim that the intellectual property is theirs. In addition, you should also ensure that anyone exposed to the intellectual property and company secrets will be bound by a confidentiality obligation prior to disclosure.
  4. Think of the best time to incorporate – On the one hand, if there is a lot of intellectual property created prior to incorporation, transfer of the intellectual property may be a tax event and therefore it is better to incorporate as soon as possible. On the other hand, the establishment and management of a company has considerable costs and you should consider whether the new company will have sufficient funding (whether through equity investment, shareholders’ loan by the founders, current income or other financings) to pay its employees and service providers, or if it’s necessary to obtain financing or some income for the Company’s activities. If you are interested in recruiting investors, make sure that your revolutionary idea is indeed ripe for investment with an organized business plan and that you are ready to answer all of the investors’ questions.
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