LEGAL ISSUES FOR GAMINGCOMPANIES AND THEIR FOUNDERS Anil Advani Managing Partner Inventus Law
Life Cycle of a Startup Licensing and other Employee Matters IP MattersFormation EXIT: Strategic ACQUISITION Debt vs. Equity Partnerships SMALL BIG BRIDGE ANGEL ROUND CUSTOMER CUSTOMER ROUND INITIAL SERIES A SERIES B SERIES C SERIES D PUBLIC OFFERINGFoundersStock Option Plan Selecting and The big Negotiating with VC’s question: IP Protection when and how to exit????
Equity Structure: Founders and Third PartiesIdentifying the “Real” Founders – Need to be fair, not equal, among the founders – Single Founder versus multiple founders – Co-Founding with Friends and Relatives – Founders versus Founding TeamInitial Capital Structure – Initial Authorized: 10MM shares of Common Stock • Founder Stock : 7-8 MM • Option Pool: 2-3 MM – Terms of Founder Stock /Options: • Issue stock to Founders early to avoid tax issues ; 83(b) elections: file on time (within 30 days of purchase)! • Acceleration: Single Trigger versus Double Trigger; Wrong acceleration terms could hamper acquisition • Vesting for Options: Straight 4 year vesting; 1 year “cliff”, with monthly vesting thereafter
Financing OptionsSeed Financings: • Founders, Friends, Family, Angels, Early Stage VCs – Incubators: YC, Idea labs, Citrix Accelerator, Startups500, Tandem, and Alchemist – Convertible Notes with a “kicker”, either a discount or warrant coverage • Typically between $250k to $1MM • debt that converts into preferred equity in the “next qualified financing” • Avoid any additional rights to seed investors, although institutional investors may require right to lead the next round, management rights, board seat and protective provisions • Look out for any issues that may affect future financings.Venture Capital Financings: – Valuations – Preferred StockStrategic Transactions: – Licensing Arrangements – Revenue Share; Affiliation Agreements; Reseller Agreements – Mergers and Acquisitions
Venture FinancingThree Main Components of Venture Financing Process – Pricing/Valuation • Percentage of the Company to be sold (Pre and Post Money) • Liquidation Preference – Management/Controls • Board Rights • Protective Provisions; Covenants • Drag-Along Rights – Liquidity Rights • Co-Sale/Right of First Refusal • Registration Rights • Anti-Dilution Protections • Redemption RightsTime, Process and Expense – Time: 2-3 months from start to finish; Legal fees (both sides), Investor expenses – Process: IP diligence, Legal diligence, Schedule of Exceptions; Financing Documents
Strategic TransactionsLicensing Arrangements – License Terms: • Exclusive versus Non-Exclusive • Geographical Limitations – Ownership of IP and “Work Product” – Other Material Provisions: Term, Termination, Assignment, and Indemnification.Partnerships – Revenue Share Agreements: Zynga- Facebook Agreements – Affiliate Agreements – Reseller AgreementsMergers and Acquisitions – Set up right legal structure – Ownership of IP is critical – Contract terms play a big role in valuation