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2012 Paul Sweeney

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  • 1. Legal Pitfalls to Avoid When Starting Up RamenCamp Paul Sweeney May 12, 2012© 2012 Foley Hoag LLP. All Rights Reserved.
  • 2. These materials have been prepared solely for general information and educational purposes. The information protected does not constitute legal advice, nor does it establish any form of attorney-client relationship with the author or Foley Hoag LLP. Specific legal issues should be addressed through consultation with your own counsel, not by reliance on this presentation or these materials. Attorney Advertising. Prior results do not guarantee a similar outcome. © Foley Hoag LLP 2012. United States Treasury Regulations require us to disclose the following: Any tax advice included in this document and its attachments was not intended or written to be used, and it cannot be used by the taxpayer, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.© 2007 Foley Hoag LLP. All Rights Reserved. 2012 Presentation Title | 2
  • 3. INTRODUCTIONS Corporate lawyer at Foley Hoag LLP Named one of the “Top 20 Startup Lawyers in Boston” Named one of “Ten Most Innovative Lawyers in US” by the ABA Journal Over 100 venture debt and equity financings since 1998 – Examples: • SCVNGR (Highland, Google Ventures, Balderton - $15M) • Kyruus (Highland, Venrock - $5.5 M) • Vanu (Charles River Ventures, Norwest - $32 M) MIT 100K Bus Plan Comp / HBS Business Plan Comp© 2007 Foley Hoag LLP. All Rights Reserved. 2012 Presentation Title | 3 3
  • 4. Overview Legal Pitfalls For Startups Emphasis on practical advice Questions© 2007 Foley Hoag LLP. All Rights Reserved. 2012 Presentation Title | 4
  • 5. Knowledge is power© 2007 Foley Hoag LLP. All Rights Reserved. 2012 Presentation Title | 5 5
  • 6. #1 – Waiting Too Long To Form Entity Protect yourself and your assets from personal liability Establish clear ownership rights in corporation’s assets (e.g. IP) Issue equity (“Founder Stock”) to founders early to avoid tax nightmare© 2007 Foley Hoag LLP. All Rights Reserved. 2012 Presentation Title | 6
  • 7. #2 – Failing to Establish Clear Relationships Among Co-Founders Control: How will decisions be made, and who will make them? President & CEO Equity: How will we divide the equity among ourselves? Contributions: Will any of us be investing cash / IP in the company? How will this be treated? Succession: What happens when one of us leaves? Forced Departure: Can one of us be fired? By whom, and for what reasons?© 2007 Foley Hoag LLP. All Rights Reserved. 2012 Presentation Title | 7
  • 8. #3 – Casual Distribution of EquityWarning Signs: “We promised her 3% of the company and agreed that she wouldn’t get diluted.” “We’ll re-adjust the equity distribution as we go along.” “I can’t remember what I said he was getting, but I probably have it somewhere in an email.” “We all thought that it was best to focus on building a great company, not wasting time on paperwork!”© 2007 Foley Hoag LLP. All Rights Reserved. 2012 Presentation Title | 8
  • 9. Taking Stock Don’t promise percentages; always speak in terms of # of shares and what they currently represent Avoid giving anti-dilution protection to founders or employees Understand the need for future option pool Keep accurate cap table and stock ledger – they really do matter!© 2007 Foley Hoag LLP. All Rights Reserved. 2012 Presentation Title | 9
  • 10. #4 – No Reverse Vesting 100% of founders shares are issued day one, but company has right to repurchase at the price paid by the founder (usually nominal) if founder leaves. Shares vest over time (usually 4 years) Full or partial acceleration if change of control or termination without cause Keep vesting simple and linear Consider past activities Angel / Venture investors require it anyway Critical tax consideration – 83(b) Election© 2007 Foley Hoag LLP. All Rights Reserved. 2012 Presentation Title | 10
  • 11. #5 – Casual protection of IP Everyone who creates IP on behalf of company should be bound by NDA/Assignment of Inventions Agreement Everyone with whom you share proprietary information should be bound by NDA – always disclose cautiously and gradually Disclosure of inventions may preclude patentability or spoil trade secret protection Be aggressive with protecting your IP!© 2007 Foley Hoag LLP. All Rights Reserved. 2012 Presentation Title | 11
  • 12. #6 – Violating Agreements with Former Employers 2 common issues – non-compete/solicit, and IP Solution: Review and understand the terms of agreements that you’ve signed Solution: Be careful of hiring from former employer Solution: Require all employees to disclose contractual obligations or represent there are none Solution: Beware of landmines – e.g. customer lists, marketing materials, employee data Solution: Don’t use employer’s computers, phones, etc. to conduct your own business© 2007 Foley Hoag LLP. All Rights Reserved. 2012 Presentation Title | 12
  • 13. Final Thoughts© 2007 Foley Hoag LLP. All Rights Reserved. 2012 Presentation Title | 13 13
  • 14. Final Thoughts© 2007 Foley Hoag LLP. All Rights Reserved. 2012 Presentation Title | 14 14
  • 15. Questions? Paul Sweeney Partner (617) 832-1296 psweeney@foleyhoag.com© 2007 Foley Hoag LLP. All Rights Reserved. 2012 Presentation Title | 15