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Incorporation Issues for GrowthCompanies

The Founder Institute

Seattle, Winter 2012

Andy Aley

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About this Presentation

This presentation is provided for general informational purposes only, isnot made available for the purpose of providing legal advice and is notdelivered in the course of an attorney-client relationship. While thispresentation is intended to provided general information relevant to theintended audience, no warranty is made as to the informations accuracy.This presentation is not a substitute for competent legal advice from anattorney licensed to practice in your jurisdiction.

Circular 230 Disclosure: The income tax principles, rules, and outcomesdiscussed in this presentation are intended to be used solely for general

informational purposes. The information contained in this alert is notintended to be used, and cannot be used, for the purpose of avoidingfederal tax penalties.

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Whats this all about?

Building a solid foundation for growth. Avoiding time loss at a more critical moment.

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Why Incorporate?

Liability issues Multiple founders Intellectual property development Seeking investment Stock sales and tax issues Hiring employees / contractors Visa requirements

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Entity Choice

C Corp Basics Common choice for growth companies. No limitations on foreign or entity shareholders. Ability to issue multiple classes and series of stock. Earnings are subject to taxation once at the corporate level,

and once at the stockholder level.

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Entity Choice

S Corp basics Potentially beneficial to pre-funding companies or bootstrapped

companies.

Profits and losses pass through to shareholders. Ownership limitations prohibit non-U.S. shareholders and most

entity shareholders.

Multiple classes of stock are prohibited.

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Entity Choice

LLCs Profits and losses pass through to equity owners. No restriction on foreign or entity ownership. Costly to implement multiple classes of equity. Costly to implement equity incentive plans. Most professional investors avoid LLCs. Generally not recommended for growth companies.

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Jurisdiction

Delaware Familiar to investors nationwide. Well defined corporate law. Efficient secretary of states office. Greater formation and maintenance expense ~$500 to form /

potentially large annual franchise tax.

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Jurisdiction

Washington Limited corporate case law, courts tend to follow Delaware. Less expensive to form and maintain ~$250 to form / $60

annually.

Investor unfamiliarity could be a disadvantage, some investorsmay require re-incorporation in Delaware.

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Corporate Governance

Directors:

Elected By ShareholdersBroadly responsible forcorporate oversightOwe fiduciary duties tocompany and shareholders

Officers:

Appointed by and generallyreport to board of directorsResponsible for carrying onthe companys businessOwe fiduciary duties tocompany and shareholders

Corporation

andShareholdersFiduciary

Duties

all you (for now)

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Equity

Issued = stock that a stockholder actuallyowns.

Authorized = total number of shares that thecorporation may issue.

Reserved = authorized but unissued sharesthat have been reserved for a specific purpose(e.g. option plan, convertible security).

Fully Diluted = all issued and reserved shares

Approach carefully: mix ups can cost ownership %

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Classes of Stock

Common Stock

Basic economic and voting rights. Economic rights are equivalent to other common holders,

subordinate to preferred.

Possible to provide for varied control rights by creating classes ofcommon stock.

Preferred Stock

Superior rights compared to common holders (e.g. liquidationpreference, anti-dilution).

Founders and employees typically hold common stock, VCs andinstitutional investors typically hold preferred stock.

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Class F Stock

Specific to Founder Institute

10 Votes per Class F Share Right to appoint a Class F Director with two

votes

Protective provisions requiring specific approvalof Class F

Corporation would authorize Class A CommonStock and Class F Common Stock

A sufficient number of shares must be reservedfor conversion of Class F to Class A Class F is easily convertible to Class A

Not a requirement, and not one-size-fits-all

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Restricted Stock Agreement

Designed to ensure that equity stake is aligned withinput to the Company over time.

Founder stock subject to repurchase right/risk offorfeiture that lapses over time. Repurchase/forfeiture is triggered by defined events

(e.g., termination for cause, voluntary resignation)

Vesting may be fully or partially accelerated onchange of control

Potentially beneficial tax treatment

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FI Warrant Terms

Entitles the Institute to purchase 3.5% of the fully-dilutedshares of the company, measured after a QualifiedEquity Financing.

Exercise Price = QEF price Security = QEF securities (e.g. Series A) Term = 5 years from QEF, or 10 years if no QEF or IPO. Redeemable for $100,000 Founder Termination Payment

Payable by company to FI in the event of involuntarytermination

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Whats the process?

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GSB and FI Companies

Engagement Terms

$1,750 flat fee for incorporation. Covers out of pocket costs offiling.

Deferral of up to $5,000 for other legal needs (excludesimmigration).

First Steps

Complete incorporation questionnaire. Meet with one of us to discuss questions and particular needs. Be sure to let us know about immigration issues, third-party IP

contributions, obligations to current employer, etc.

Return engagement letter, complete any open items, deposit flatfee.

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Incorporation: Whats included

GSB prepares a set of incorporation documents based onquestionnaire and consultation

Certificate of Incorporation Bylaws Restricted Stock Agreements Invention Assignment / BPA Restricted Stock Purchase Agreement Director Indemnification Agreements IP Assignment Option Plan / Agreement Founder Institute Warrant Board and Shareholder Consents State Filings and Notices

We also provide a few useful documents for future use

Three forms of NDA selectable for different circumstances Form of Independent Contractor Agreement Trial access to GSB AdviceOnline HR Product

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Questions?

Peter Cancelmo Andy Aley

206-816-1332 206-816-1361

pcancelmo@gsblaw.com aaley@gsblaw.com

Scott Warner Stephen McKay

206-816-1319 206-816-1524

sgwarner@gsblaw.com smckay@gsblaw.com