Legal Tidbits for start-ups: the KISS principle in structuring your entity

 Most enterpreneurs are smart. Wicked smart. They grasp and manipulate concepts with lightning speed. They push the envelope. They ask "Why not?" not "Why?" That's what makes them successful.
But good enterpreneurs also know what they don't know - and what they don't need to know. For those things they turn to experts. Of course, they expect their experts to be smart. But sometimes, they confuse complexity with intelligence.
It's a simple idea. Enterpreneurs have to be able to translate their most complex business concepts into the "elevator speech." It's short, it's comprehensible - and it's necessarily a simplification of a huge amount of underlying research, creativity and work. The temptation to tell it all - to show the brilliance, the elegance, the innovation - must be overwhelming. Nonetheless, by now successful enterpreneurs have learned how to reduce complexity into simplicity.
The same thing is true with structuring a start-up. The temptation is to plumb the depths of a lawyer's expertise - in corporate, IP, tax - and create the perfect structure. But lawyers, like good enterpreneurs, resist this urge. The simpler, more elegant the structure, the better it is. Here is why:

Complex structures cost more. Simple structures are based on simple documents, easily adapted to the specific requirements. Even a simple startup package includes a dozen or so documents, so the less changes are required, the less time charges are incurred. It not only costs more to create these structures, but also to administer them year-to-year.
Complexity is unnecessary. For most start-ups, even through the angel and VC financings, simple legal structures suffice. Standard corporate charters, state of the art equity incentive plans, NVCA stock terms, plain vanilla NDAs are all that newly formed companies need.
Complexity is inefficient. There are certainly some creative ideas that enable larger institutions to attract investors, save taxes, institute a layered set of controls and allocate a sophisticated waterfall of distributions. However, these devices are only valuable if the entity generates lots of money, has unusual categories of investors or a specialized business model. Besides, enterpreneurs who advocate complex legal structures are distracted from focusing on their core competence. Management time is required to understand and refine complex structures and to administer them as the business grows and evolves.
Complexity is dangerous. No matter how good a lawyer might be, complex structures created from whole cloth (if only in part) may create unintended consquences. Certain contingencies might not have been properly anticipated and addressed. Investors might get cold feet when confronting an unusual structure. Unraveling complexity will inevitably be required - whether in an IPO or sale - and the cost in additional legal fees, taxes and management time is generally high.

Sophisticated enterpreneurs understand these risks and resist the temptation to use their creative talents to fashion a complex legal edifice. They will also resist investors who insist on such complexity. There is no better lithmus test of future compatibility than an investor's demand for a complex investment or corporate vehicle, when a simple convertible note or preferred stock would do.
By Gabor Garai. Gabor is a venture capital and emerging technology attorney practicing in Boston. He is chair of the Private Equity and Venture Capital Practice of Foley and Lardner, a national law firm that ranks #1 in BTI's survey for delivering superior client service and value. www.foley.com
The views expressed in this posting are those of the author and not necessarily those of Foley & Lardner LLP or its clients.