Legal Issues for Startups

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Explores exit events, common mistakes with capitalization, IP, HR, equity compensation, financing, contracts, housekeeping and advisor selection.

Explores exit events, common mistakes with capitalization, IP, HR, equity compensation, financing, contracts, housekeeping and advisor selection.

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  • 1. Legal Issues for Start-ups Mick Bain Attorney Advertising
  • 2. WilmerHale 2 © 2014 Wilmer Cutler Pickering Hale and Dorr LLP The Exit Event If you’re building an angel-backed or venture-backed company, an exit is in your future  Exit will be an IPO or a sale – Either way, the underwriters/buyer will perform extensive diligence – Be ready with answers to their questions – If an IPO, the SEC will review your disclosure and you will be exposed to increased risk of liability for issues and increased scrutiny in the public markets – If a Sale, you will be required to indemnify the Buyer for certain problems (known and unknown)
  • 3. WilmerHale 3 © 2014 Wilmer Cutler Pickering Hale and Dorr LLP Plan Now – It is NEVER too early Build the company to avoid exit roadblocks Avoid common mistakes Get good advisors Establish sound processes Document everything
  • 4. WilmerHale 4 © 2014 Wilmer Cutler Pickering Hale and Dorr LLP Capitalization Mistakes Making oral promises Misunderstandings over percentages Misallocating founder equity and being too aggressive with vesting Do what it takes to avoid the “woodwork”
  • 5. WilmerHale 5 © 2014 Wilmer Cutler Pickering Hale and Dorr LLP IP Mistakes Failing to get IP assignments from co- founders/collaborators, employees, consultants  Honestly assess risks of claims by former employers  Not establishing policies to protect trade secrets; failing to properly use good NDAs
  • 6. WilmerHale 6 © 2014 Wilmer Cutler Pickering Hale and Dorr LLP IP Mistakes Improper use, documentation nor compliance with open source  Failing to keep track of filing deadlines  Failing to strategize over, and to make proper foreign filings  Failing to TM your company name
  • 7. WilmerHale 7 © 2014 Wilmer Cutler Pickering Hale and Dorr LLP HR Mistakes Background checks  Employees v. Independent contractors (IRS compliance and personal liability)  Not using at-will offer letters  Assignment of inventions, non-disclosure and non-competition agreements
  • 8. WilmerHale 8 © 2014 Wilmer Cutler Pickering Hale and Dorr LLP HR Mistakes Are they subject to non-compete and/or non- disclosure agreements with other employers?  Immigration compliance  Discrimination and sexual harassment claims/policies
  • 9. WilmerHale 9 © 2014 Wilmer Cutler Pickering Hale and Dorr LLP Tax Mistakes Select the proper entity type  280G problems  409A problems  Improper withholding (contractors v.employees)  Issuing stock for services
  • 10. WilmerHale 10 © 2014 Wilmer Cutler Pickering Hale and Dorr LLP Equity Compensation Mistakes Need compliant equity plans  Options not properly authorized (tax, accounting and corporate issues/liabilities)  Cheap stock and 409A compliance  State and foreign law compliance for equity plans (Rule 701, California, UK, etc.)
  • 11. WilmerHale 11 © 2014 Wilmer Cutler Pickering Hale and Dorr LLP Equity Compensation Mistakes Make and document 83(b) elections  Aggressive use of acceleration  Milestone-based vesting  Failing to follow RSA buy-back procedures
  • 12. WilmerHale 12 © 2014 Wilmer Cutler Pickering Hale and Dorr LLP Financing Mistakes Using finders and unregistered capital raisers; bad agreements  Non-accredited investors  Federal and State securities law compliance  Failing to provide for rights terminate
  • 13. WilmerHale 13 © 2014 Wilmer Cutler Pickering Hale and Dorr LLP Financing Mistakes Voting percentages and veto rights  Ambiguous language in equity contracts (e.g., warrants)  Failing to get proper waivers (e.g., preemptive rights)
  • 14. WilmerHale 14 © 2014 Wilmer Cutler Pickering Hale and Dorr LLP Contract Mistakes Source code escrow provisions  Third party consents required for change in control  Affiliate language in non-competes and licenses  Exclusivity and MFN Provisions  Non-competes  Be aware of Confidential Treatment requests at time of IPO
  • 15. WilmerHale 15 © 2014 Wilmer Cutler Pickering Hale and Dorr LLP Housekeeping Mistakes Poor or no records  Failure to follow corporate formalities – Hold regular board meetings – Keep minutes (good ones)  No proper authorization for stock, options and other equity
  • 16. WilmerHale 16 © 2014 Wilmer Cutler Pickering Hale and Dorr LLP Advisor Selection Mistakes Experience level with the SEC and in M&A transactions (including in the early-stage planning process)  Knowledge of what is customary  Good form files  Accountants not PAOCB certified  Independence issues with accountants – can they help you avoid problems (e.g., revenue recognition)?
  • 17. WilmerHale 17 © 2014 Wilmer Cutler Pickering Hale and Dorr LLP The Exit Event Goal is to focus on the economics of the event  Avoid having to negotiate from a position of weakness  Be prepared Wilmer Cutler Pickering Hale and Dorr LLP is a Delaware limited liability partnership. WilmerHale principal law offices: 60 State Street, Boston, Massachusetts 02109, +1 617 526 6000; 1875 Pennsylvania Avenue, NW, Washington, DC 20006, +1 202 663 6000. Our United Kingdom offices are operated under a separate Delaware limited liability partnership of solicitors and registered foreign lawyers authorized and regulated by the Solicitors Regulation Authority (SRA No. 287488). Our professional rules can be found at www.sra.org.uk/solicitors/code- of-conduct.page. A list of partners and their professional qualifications is available for inspection at our UK offices. In Beijing, we are registered to operate as a Foreign Law Firm Representative Office. This material is for general informational purposes only and does not represent our advice as to any particular set of facts; nor does it represent any undertaking to keep recipients advised of all legal developments. Prior results do not guarantee a similar outcome. © 2014 Wilmer Cutler Pickering Hale and Dorr LLP