© Ashitha Bhagwan
TOP LEGAL MISTAKES STARTUPS ENTERING THE US MARKET
SHOULD AVOID
SEPTEMBER 25, 2013
IRS Circular 230 Disclosure: To ensure compliance with the requirements imposed by the IRS, we inform you that any tax advice contained in this communicaCon, including any aEachment to this communicaCon, is not intended or wriEen to be used, and cannot be used, by any taxpayer for the purpose of (1) avoiding penalCes under the Internal Revenue Code or (2) promoCng, markeCng or recommending to any other person any transacCon or maEer addressed herein.
Ashitha Bhagwan [email protected] Linkedin: h-p://www.linkedin.com/in/ashithabhagwan TwiEer: @ashithabhagwan
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10. Failing to iden/fy the right market-‐entry strategy
Market Entry Op@ons
Third Party Presence
Sales Rep Distributor OEM/VAR Franchise
Direct Presence
Branch Office Subsidiary
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9. Choosing the wrong en/ty structure
EnCty Form Liability Flexibility TaxaCon
S Corpora@on Limited Liability
Formal but flexible capital structure
Pass through
C Corpora@on Limited Liability
Formal but flexible capital structure
Double taxa@on
LLC Limited Liability Very flexible Pass through
Partnerships General Partners – unlimited liability
Can be flexible One level of tax
Liability shield
Delaware is not right
for everyone
Credibility
© Ashitha Bhagwan
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8. Failure to establish intellectual property strategy
Trademarks Copyrights Patents
Trade Secrets
Jurisdic@on specific
Privacy Policy and Terms of
Use
Inven@on assignments
Prior Employer’s IP ownership
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7. Viola/ng Employment/Labor Laws
Minimum Wage Laws apply to
startups Employee v. Independent Contractor classifica@on
Post-‐termina@on restric@ve covenants
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6. Not complying with Securi/es Law
Sale of Securi@es
Accredited Investors?
State and Federal Securi@es filings
Broker Dealer
Registra@on/ Exemp@on available?
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6. Not complying with Securi/es Law
Failure to comply with securi@es
laws
Injunc@ve relief
Rescission of securi@es
Criminal prosecu@on
Fines
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5. Lack of tax planning
409A
83(b)
Deferred CompensaCon
Plan
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4. Lack of adequate corporate structure resul/ng in entrenched management
Tag along rights
Drag along rights
Lack of vesCng schedule
Buy sell agreements
Using % while
spliWng up equity
Right of First
Refusal
Using stock as currency
Veto rights
© Ashitha Bhagwan
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3. Not using the right equity compensa/on structure
75 -‐85% Founders/ Common Stock
15 -‐25% Op@on Plan
Typical Equity Structure
Issue opCons when valuaCon is low to realize a return on investment
Establish vesCng schedules for opCon grants
OpCons are securiCes, and have to comply with securiCes laws 409A compliance -‐ mandatory for opCon plans
© Ashitha Bhagwan
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2. Failure to ensure compliance with FCPA and immigra/on laws
Check the immigraCon status of all founders: if sponsorship is required by the startup, you need good immigraCon counsel.
AnC-‐bribery laws apply to all U.S. persons and certain foreign issuers of securiCes Also applies to foreign firms and persons who cause a corrupt payment to take place within the United States.
© Ashitha Bhagwan
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1. Subs/tu/ng legal counsel with online incorpora/on services
Check State law
enforcement
Templates could = missing
provisions
Obtain ownership documents
Get legal counsel in the beginning
Hire a lawyer but do your
homework!
Business permits, State
qualificaCons and county permits
© Ashitha Bhagwan
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Ashitha Bhagwan [email protected] Ph: 650-‐521-‐5740
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