2015 ncet expo: jim newman - legal pitfalls for start-up / early stage companies

TOP 10

LEGAL PITFALLS FOR START-UP/EARLY STAGE COMPANIES

September 18, 2015

Atlantis Casino ResortGrand BallroomReno, Nevada

JAMES NEWMANHolland & Hart LLP5441 Kietzke Lane, 2nd FloorReno, NV 89511JNewman@hollandhart.com775/327-3014

Non-Disclosure Non-Compete Non-Solicitation Don’t Take Employer Materials or Information Carefully Review What You Sign Your Former Employer May Bring Legal Action Against You and/or Your New Company/ Employer

1. EXERCISE CAUTION WHEN LEAVING YOUR EMPLOYER

Choice of Entity

◦ Corporation S or C Corp.

◦ Limited Liability Company

◦ Other Sole proprietorships or general partnerships are strongly discouraged

2. CONDUCT BUSINESS THROUGH AN ENTITY

Roles and Duties◦ Director/Manager v. Officer v. Employee◦ Contracting Authority

Actual v. “Apparent” authority

Respecting the Entity/"Separate" Legal Person

◦ Company Bank Accounts◦ Executing Contracts in Company Name◦ Helps to Avoid Claims of "Alter Ego" or Piercing the Corporate Veil◦ Personal Obligations

Guarantees

2. DOING BUSINESS THROUGH AN ENTITY

3. YOU NEED A SHAREHOLDER AGREEMENT

Not Always “Friends” Provisions of LLC Operating Agreement or Shareholder Agreement

◦ Management/voting◦ Transfer Restrictions

Equity is personal property and freely transferable [subject to securities laws] unless restricted by contract

◦ Triggering Events Marriage Dissolution Death Disability Termination of Employment

◦ Buy/Sell Terms◦ Valuation Method(s)

3. YOU NEED A SHAREHOLDER AGREEMENT (Continued)

Raising Capital is Difficult Double the Amount 3 to 6 Months Effort Time Consuming

4. UNDERCAPITALIZATION

Debt or Equity◦ Notes

Convertibility Senior to equity

◦ Equity Common Stock v. Preferred Stock

5. RAISING MONEY

Securities Laws Will Apply◦ Registration requirements and exemptions

◦ Anti-fraud rules Regardless of circumstances or exemptions, you can't commit

fraud in the sale of securities

◦ Both federal and state laws apply

◦ Why you care/remedies Rescission Regulatory action

5. RAISING MONEY (continued)

Select Your Investors Carefully◦ Fewer investors can be easier to manage◦ More sophisticated and/or experienced

investors may better understand your situation

◦ Experienced investors can also provide non-financial assistance to your company

5. RAISING MONEY (continued)

Initial Assignments of Property Confidentiality and Assignment of

Invention Agreements Consulting Agreements Loans and other arrangements Minutes and ownership records

6. GOOD RECORDKEEPING

Fiduciary Duties◦ To shareholders/members◦ To creditors

Securities Laws◦ Anti-fraud rules

Tax Laws◦ Withholdings on compensation

Fair Labor Standards Act◦ Wage, hour, O-T and other laws

7. PERSONAL LIABILITY ISSUES

Identify IP ◦ Patents◦ Copyrights and Trademarks

Advantages◦ Barriers to entry◦ Higher valuations

Non-Disclosure and Assignment of Inventions

8. PROTECT INTELLECTUAL PROPERTY

Don’t Be Surprised

It’s Your Business!

9. READ YOUR CONTRACTS

Attorney Accountant/CPA Banker Insurance Broker/Agent Others?

10. STAY IN REGULAR/PERIODIC CONTACT WITH YOUR ADVISORS