5 tia presentation 'legal issues for startups' 20130126
TRANSCRIPT
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Vivek Boray
Attorney-at-Law
De Franceschi & Shefayee, LLP
(www.dfscounsel.com)
Legal Issues
WIRELESS:U/N: tia
P/W: colgate
THOUGHT INTO ACTION INSTITUTE
January 2013
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THOUGHT INTO ACTION INSTITUTE
Agenda• Why Legal?
• Incorporation/Entities
• 3rd Parties
• Intellectual Property
• Equity Structure
• Founders’/Shareholders’ Agreement
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Agenda• How Much Does It Cost?
• How Much Does It Really Cost?
• How Do I Make Money/Sustain?
• What Do I Do Now?
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Why Legal?• Limit Liability
• Third Parties
• Structure
• Rule of Law
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Incorporation And Entities• Incorporation – Key Consideration for Type of Entity
o Liability for shareholders
o Tax considerations
o Investors
o Non-Financial/Public Purpose
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Incorporation and Entities• Types of Entities
o Limited Liability Corporation (LLC): limited liability for shareholders; favorable tax treatment; the expenses of formation are higher than for forming a corporation (Operating Agreement); good option for “lifestyle” businesses, or boutiques
o “S” Corporation: limited liability for shareholders; favorable tax treatment
o “C” Corporation: limited liability; double taxation; a requirement for any venture backed company
o “B” Corporation: limited liability; public benefit; fiduciary duty to think beyond finances
o Non-Profit Corporation: regulated by state and IRS; be sure you have good accountant
o Partnerships; Sole Proprietorship: unlimited liability; favorable tax treatment
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Incorporation and EntitiesCorporation• Limited Liability
o Importance
o “Piercing the corporate veil”
• Three pillars of a Corporation: o Owned by SHAREHOLDERS
o Directed by DIRECTORS
o Managed by OFFICERS
o Why these pillars?
• Number of Shareholders, Directors and Officers: o In Delaware, New York, New Jersey, Connecticut and
California, a corporation may have only one shareholder and one director.
o A president/CEO, chief financial officer/treasurer and secretary are the officer positions generally filled.
o In Delaware, all officer positions may be filled by one person.
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Incorporation And Entities• Jurisdiction: Delaware versus other jurisdictions
o Because Delaware has a well-developed body of corporate
law, incorporation in Delaware is a requirement by most venture
capital investors, avoiding the time and expense of
reincorporation at the time of going public
o Delaware corporations doing business within New York or
California are required qualify as a foreign corporation in the
state and are subject to state franchise taxes
o Certain foreign corporations are subject to California or New York laws
nonetheless if they are qualified to do business within those states
• Choosing a Company name: o Delaware requires corporations to include
“corporation”, “incorporated”, “limited” or the like or an
abbreviation thereof in the company name. California has no
such requirement.
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Incorporation Process (DE)• File Delaware Certificate of Incorporation – 1 day
• Appoint Director(s) and adopt Bylaws – 1 day
• Approve Organizational Minutes – 1 day
o Board of Directors appoints Officers: President/CEO, CFO and
Secretary
• Get Tax ID and open bank account – 1 day
• Issue Stock – 3 days
• If you set-up a presence in the US outside of
Delaware, you will have to qualify locally. 1-3 days
depending on the state.
• Could have a fully functioning company within 3-4 days.
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3rd Parties• Employment Issues
o Moonlighting
o IP Ownership
o Non-compete provisions
o Non-solicitation provisions
o Immigration
o These issues could apply to Founders as well
• Third Parties
o Employees
o Consultants & Advisors
o Board members
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Intellectual Property• Intellectual Property is a Business Asset.
• Have an IP strategy from the start.
• There are 5 main ways to protect it:o Patents: preliminary, utility, design
o Copyrights: automatic and registered
o Trademarks: marking, use, Lanham Act
o Trade Secrets: keep your secrets secret
• Invention Assignment: present and future
• Founders contribute all previous IP in exchange for
stock shortly after incorporation.
• Building a business vs. IP
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Equity StructureInitial Capital Structure• Total Authorized: 10MM shares of Common Stock
• Difference between Authorized and Issued and Outstanding Capital
• Founder Stock: 4-5MM o Issue stock early to avoid tax issues
o Vesting (look back period for vesting)
o Acceleration: Single Trigger versus Double Trigger
o 83(b) elections: file on time (within 30 days of purchase)!
o Class F Shares/Founders Preferred Stock
• Option Pool: 1-2MMo Vesting: Straight 4 year vesting, 1 year “cliff”, with monthly vesting
thereafter
o Acceleration: Could hamper acquisition
• Outside Investors: Preferred Stock
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Founders’/Shareholders’ AgreementWhy?
Typical provisions:
• Right of First Refusal
• Co-Sale
• Board Composition
• Drag-Along
• Protective Provision
• Typical parties: Founders, Holders of Options and Restricted Stock
• This agreement will usually by superseded by later agreements
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How Much Does It Cost?• Incorporation:
o To incorporate: $320 in Delaware (state and filing agent
costs)
o To organize the corporation: $0 ($2,500 fixed fee, assuming
no complications)
o Delaware yearly costs (fees and minimum tax): $450/yr
• Dissolution:
o Settle outstanding liabilities.
o Pay all your taxes.
o File Certificate of Dissolution-$100 fee, 24 hrs to process
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How Much Does It Really Cost?• To form and organize a start-up corporation: $2500 -
$5000, depending on complexity
• Visa: $2000 - $5000, depending on type
• Shared workspace at an incubator: $500/mo
• Apartment and utilities: $1000 - $1500/room/mo
• Food and entertainment: $200/week
• Car: $500/month
• 12 month reserve of cash and emotional capital
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How Do I Make Money?• Startup-Exit via an IPO or M&A (mostly M&A)
• Lifestyle Business-Developing & maintaining a
customer base
• Non-Profit-Mission & Funding
• But, to get there: listen, validate and adapt
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What Do I Do Now?• Discuss
• Organize
• Assign
• Document
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THOUGHT INTO ACTION INSTITUTE
Vivek Boray
Attorney-at-Law
De Franceschi & Shefayee, LLP
(www.dfscounsel.com)
Q&A
Thank you!
• Vivek Boray
• http://www.linkedin.com/in/viveknboray
• Skype: Vivek Narahari Boray
• Twitter: @vibo78