Top Legal Mistakes Startups Entering the US should Avoid

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TiE Open House Event

Ashitha discussed those legal strategies that every startup should be mindful of while launching your product in international markets. These issues range from corporate structuring to securities compliance, option plans to equity issuances and IP strategy to labor laws.

Take away’s from the session: Learn about the top 10 legal mistakes that start-ups can avoid. Specifically relevant to Indian entrepreneurs looking to enter the US market.

Presentation by Ashitha Bhagwan
@ TiE Open House on September 25, 2013

Published in: Business
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Top Legal Mistakes Startups Entering the US should Avoid

  1. 1.     ©  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   abhagwan@rroyselaw.com Linkedin:  h-p://www.linkedin.com/in/ashithabhagwan   TwiEer:  @ashithabhagwan  
  2. 2. 2   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   ©  Ashitha  Bhagwan  
  3. 3. 3           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  
  4. 4. 4   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   ©  Ashitha  Bhagwan  
  5. 5. 5   7.  Viola/ng  Employment/Labor  Laws       Minimum  Wage   Laws  apply  to   startups   Employee     v.  Independent   Contractor   classifica@on   Post-­‐ termina@on   restric@ve   covenants   ©  Ashitha  Bhagwan  
  6. 6. 6   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?   ©  Ashitha  Bhagwan  
  7. 7. 7   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   ©  Ashitha  Bhagwan  
  8. 8. 8   5.  Lack  of  tax  planning       409A     83(b)   Deferred   CompensaCon   Plan   ©  Ashitha  Bhagwan  
  9. 9. 9   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  
  10. 10. 10   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  
  11. 11. 11   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  
  12. 12. 12   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  
  13. 13. 13 Ashitha  Bhagwan   abhagwan@rroyselaw.com   Ph:  650-­‐521-­‐5740   PALO  ALTO   1717  Embarcadero  Road   Palo  Alto,  CA  94303   Ques/ons?     LOS  ANGELES   11150  Santa  Monica  Blvd.,  Suite  1200   Los  Angeles,  CA  90025   SAN  FRANCISCO   135  Main  Street,  12th  Floor   San  Francisco,  CA  94105  

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