CORPORATE FORMATION WORKSHOP

March 11, 2016By: Evan Bienstock, Esq. and

Daniel DeWolf, Esq.

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Overview

Forming and Organizing the Company; Choice of Entity Founders Stock Equity Incentives

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The Form of Entity Limited Liability Company C-Corporation S-Corporation Jurisdiction of Incorporation

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Limited Liability Company – Pros and Cons Limited liability to owners (members) Flexible Structure Taxed as a partnership (pass through taxation) LLC must issue "K-1s" each year -- allocation of profits and

losses Difficult to issue equity broadly Investors sometimes object to LLC structure Easy to convert to corporation (depending on jurisdiction of

initial incorporation)Do investors like LLCs?

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C-Corporations – Pros and Cons Limited liability to owners (stockholders)More strict structure and governance Good or Bad? Board elected by stockholders and officers elected by Board "Double taxation"

Easy to issue equity incentives to employees, consultants and advisors (options, etc.)

Sophisticated statutory structureDo investors like C-corps?

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S-Corporation – Pros and Cons Limited liability to its owners / shareholders Tax benefits and losses passed through to the individual

shareholders (i.e., taxed as a partnership) Can have no more than 100 shareholders All individuals (no entities) No “foreign” shareholders Only one class of stock (i.e., no preferred stock) Simple conversion to C-corporation

Do investors like S-corps?

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Jurisdictions of Incorporation

Always Delaware?– Why?– Cost– Filing services– Body of law– Future objectives– What is "foreign qualification?"

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What Documents Do Founders Need to get Started (assuming a corporate structure)?

Incorporation Documents Founder Agreements (stock issuance documents) Consultant and Employee Documents Basic Third Party Agreements

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Incorporation Documents (assuming a corporation)

Certificate of incorporation; also called the "charter" By-laws Consents and resolutions Create a board Appoint officers

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Founders' Documents Assignment of Inventions Agreement

– Intellectual Property Assignment– Confidentiality– Non-compete?

Founders' Stock Documentation– Restricted Stock Agreement– Tax considerations (83b elections)– What is Vesting?– Acceleration of Vesting on certain terms

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Issuances of Stock to Founders Typically issued pursuant to a Restricted Stock Agreement Founders’ stock: should founders' stock be subject to vesting

and repurchase?– Type of stock? (multiple classes of stock)– Price?– Terms?

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What is Vesting? Ownership of equity is earned over time and/or subject to

becoming earned based upon certain events (milestones). For restricted stock (as opposed to options) structured as a “repurchase right” in favor of the company that goes away as the stock “vests”

A typical startup company vesting schedule for a Founder is monthly over 4 years (1/48th per month)

For other employees there is typically a cliff of 1 year (sometimes shorter); meaning no vesting until the cliff period is met (e.g., 25% after 1 year of service) – acts like a probation period

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What is an 83(b) Election?

General Rule – Founders are taxed on the fair market value (FMV) of shares they are granted as they vest, which FMV can increase overtime. Could be costly!

Exception – File 83(b)!– Choose to pay taxes on all shares up on issuance of shares– Must file within 30 days of grant - No exceptions!

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Consultants and Employees Basic offer letter – what does it contain? Employees vs. Consultants – considerations Intellectual Property Assignment Agreement / Disclosure

(non-compete?) Options

– What is an Option?– Option Plans?– Process for Granting Options– ISOs & NQOs– 409A

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Options – What is an Option? Right to buy stock at a fixed price for a period of time in the

future Options can be ISOs or NQOs Typically granted to employees, board members, advisors and

consultants Issued through an “Option Plan" What happens if the employee or consultant leaves or is fired Exercise of options Options are granted by the board of directors

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Options – Incentive Stock Options (ISOs)

An ISO is eligible for favorable tax treatment Key Concepts:

– No tax at exercise (purchase)– Unless alternative minimum tax (AMT) applies– Sale or other disposition triggers income

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Options – Non-Qualified Options (NQOs)

An NQO is any option that does not qualify as an ISO No tax at grant At exercise, taxed at ordinary income based upon the

difference of the exercise price and the then FMV = “spread” Sale - capital gain/loss

– basis = purchase price + ordinary income recognized on exercise– long-term capital gain/loss if held for > 1 year

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Third Party Documents

Consulting Agreement Non-Disclosure and Confidentiality Agreement

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Tips

1. Start with a capitalization table - "who owns what…"

2. Make sure the legal documents are good – hire good advisors

3. Will you need financings and if so, how much?

– Establish a budget with milestones and valuation inflection points

– Start thinking about who will invest

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Chrysler Center 666 Third Avenue New York, NYEMBienstock@Mintz.com+1.212.692.6869@Ebienstock

• Evan is a Partner in the firm's Corporate department. Evan’s practice involves all aspects of corporate and securities law for emerging growth, early stage and start-up companies in the digital media, energy and clean technology, sustainability and life sciences industries. He routinely advises clients on their growth and development and participates in a diverse array of transactions, from private placements of securities to mergers and acquisitions. He also counsels his clients on their daily corporate needs and has extensive experience assisting companies with compliance to federal and state securities laws.

• Evan’s corporate finance experience includes the completion of hundreds of venture capital and private equity financings, representing both the funds providing the capital and the companies seeking funding. He has been involved in the formation and financing of energy and clean technology companies in renewable markets, such as wind, coal, water turbines, waste treatment, and biofuels and regularly represents start-ups emerging from incubators, accelerators, laboratories and co-working spaces. 

• Evan lives in DUMBO, Brooklyn, and is deeply involved in the start-up community in New York City and regularly advises and mentors young companies and entrepreneurs on an array of legal and business issues that they face.

• He is an avid sailor.

Evan Bienstock, Partner

BIOGRAPHY

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Chrysler Center 666 Third Avenue New York, NYDDeWolf@Mintz.com+1.212.692.6223

• Daniel is Co-chair of the firm’s Venture Capital & Emerging Companies Practice Group and Chair of our Technology Practice Group. In addition to his active legal practice, he is an adjunct professor of law at the NYU Law School and he has a wealth of experience in private equity and venture capital, having co-founded Dawntreader Ventures, an early stage venture capital firm based in New York.

• Daniel's practice focuses on representing emerging technology companies, venture capital, private equity, sports and entertainment, corporate governance, and general corporate law. He is also an Editor of MintzEdge, an online resource for entrepreneurs that includes useful tools and information for starting and growing a company.

• Before joining Mintz Levin, Daniel was head of venture capital funds and a managing director of SoundView Technology Group, Inc. (formerly Wit Capital), a technology-focused investment bank. Prior to joining SoundView, he was head of the corporate and new media and e-law practice groups at one of the leading New York firms representing early stage and technology companies.

• Daniel has more than 30 years of corporate transactional experience, both as a lawyer and as a businessman, and has been an advisor to many emerging and developmental stage companies. He is a board member of several technology companies and a managing director of Dawntreader Ventures.

• Additionally, Daniel is an author of a leading treatise on venture capital called Venture Capital: Forms and Analysis (Law Journal Press, 2007).

Daniel DeWolf, Partner

BIOGRAPIES

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