On October 23rd, 2014, we updated our
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Mel Baiada• Founder of BaseCamp Ventures,BaseCamp Business, and Bluestone, Inc.• Founding Donor of The Baiada Institutefor Entrepreneurship• Trustee of Drexel University
Our objective is to tell a formation story• Introduce the Problems• Present A Number of Solutions• Solicit Expert FeedbackYou determine the ending…
• NetConnectionZ.com–Technology start-up–Mission: to connectcomputers online–Objective: to grow rapidlyand make a lot of money
• NetConnectionZ.com–Three Core Founders• Bobby – Biz Dev• Brett – Tech• Taylor – Design–Former classmates–Began at StartUp Weekend
Characteristics of Our Founders:• Committed to long term success• Invested more sweat equity than cash• Awarded equity for services rendered• Able to defer cash payment until necessary
Characteristics of Consultants:• Provide services on a limited basis• No ongoing management responsibilities• Would prefer cash, but may accept deferredcompensation, e.g., a convertible note, equity,warrants, or other means
Characteristics of Employees• Hired to perform a service• Require cash compensation (with limiteddeferment), but may accept equity incentives• May, or may not, be committed to the long-term success of the company
At this moment, ourFounders are planningfor a flawlesslaunchof...
They don’t have timefor legal, but that’s okbecause they have gottento know each otherpretty well.
“The Forgotten Founder”
• Problem: company does not own its IP• Solution: IP assignment– Prevents ownership claims from long-lost founders• Absent a written agreement, the author, creator orinventor is the owner of the IP• Even if you pay for the creation of IP!!!– Ensures that the Company can build asset value
• Problem: arming the competition• Solution: non-compete & non-disclosure– Ensures all IP belongs to the company– Prevents a former team member from using yourIP to start a competing venture
• Problem: lack of motivation• Solution: compensation plans– Create short-term reward system– Provide team members with an opportunity toshare in the profits or earn additional equity– Clarify manner in which the team will becompensated (cash/equity) to avoid confusion
• Problem: dead weight• Solution: vesting provisions– Founders must earn equity over time– Permits company to reclaim unearned equity by• Terminating the Beacher• Recapturing vested and vested equity
• Problem: internal friction• Solution: decision making provisions– Deadlock resolution– Fairly and efficiently making tough decisions– Align decision making power with relativecontributions of equity or talent
• Problem: grinding to a halt• Solution: break-up provisions, transferrestrictions & repurchase rights– Reclaim vested and unvested equity– Pre-negotiated buy-out process– Block unwanted transfers
So how to planfor change?
Make the time to draftand negotiate aFounders Agreement
What would happen toNetConnectionZ if ourFounders skippedthat step?
• Lack of certainty amongst Founders–Increased risk of in-fighting and/or failure–Delays in product development• Future liability–From forgotten founders, backstabbers,investors, or other unknowns
• Harder to raise investment capital–Why invest in a product you don’t own?–Demonstrated lack of sophistication• Lower valuations–Cost of resolving internal squabbles–Stability equals value
BOTTOM LINE:your legalbills are not part of theproblem.
“The peace ofmind that comesfrom knowing thatyour business canhandle change.”
“The opportunity tospend more timedeveloping yourbusiness and lesstime fighting withyour co-founders.”
The Who, Why, When,What and How ofFounders Agreements
Who should be signing a FoundersAgreement?• All founding members who are committed tothe long-term success of the Company, but notmost consultants or employees.Why is a Founders Agreement necessary?
• Timing Issues– What if we haven’t talked yet?– What if there’s too much up in the air?– What if we change?• The initial Founders Agreement need not befinal or comprehensive!
• What should you consider including in aFounders Agreement?– IP Assignment– Vesting– Deadlock– Decision-making– Break-Up Provisions– Transfer Restrictions– Non-compete– Confidentiality
How should the process work?• Identify the concerns you want to address• Review the agreement as a whole to ensure itmakes sense.Who else should be involved?• Other entrepreneurs who have gone through it?• Outside mediators?
Let’s Hear From theExperts…
• Chris McDemus– Partner, Baer Crossey– Corporate, transactional& securities law
• Chris Miller– Partner, Pepper Hamilton– Corporate and SecuritiesGroup
• Jeffrey Bodle– Partner, Morgan Lewis– Emerging Business andTechnology Practice
• Recently saw an excellent presentation onFounders Agreements at Philly Tech Week• Have decided that vesting is important• But have conflicting ideas about the “best” way
• Form of Dynamic Vesting– Focus on milestones/events/triggers, rather thantime or hours• Setting Milestones– Consider important moments that move companytoward greater viability• Business Side: Sales, Revenues, Fundraising, customers• Technology Side: Development of Product
• Straight-line vesting over four years• Four year vesting with a one year cliff• Right to repurchase vested shares +obligation to forfeit unvested shares
• Relative Value–Instead of pre-determining the equity “pie,”determine the relative value of eachcontributor’s slice based on pre-determined“ingredients”
• Ingredients:– 1. Time (grunt/consultant/cash employee)– 2. Money (cash contributions/credit/loans)– 3. Supplies/facilities– 4. Intellectual property/ideas– 5. Professional relationships
• Relative value (% of pie) = individualcontribution / total contribution• Avoid assigning equity before we know thevalue of each Founder’s contribution
•Equity Splitbased on variety offactors•Create Milestones•Based on theCompany’s goals•Founder Vestingupon the meetingof those goals•Vesting based ontime served•No problem ifcompany changesdirection,•Departingfounders can’tcontrol withoutcontributing•RelativeValuebased oncontribution•Attributesunderstood valueto each ingredient•Allows forflexibility and forfair compensationWhich Vesting OptionWould You Choose?>>>>>Text a code to 22333,Tweet to @poll and a code,Submit a code to http://PollEv.com
Please complete a survey on our program at:ph.ly/prenupsurveyAlso complete a survey on Philly Tech Week at:ph.ly/ptw2013surveyFor additional information about how theELC can help your business, contact:Steven Rosard, Directorsrosard@drexel.eduwww.earlemacklaw.drexel.edu/ELC