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Positioning Your Start-Up For Success:
Advice to Entrepreneurs Forming a
Company
Joshua D. Fox, Esq.

Attorney Advertising
Corporate Formation
Which type of entity should we choose?
 Possibilities:
–
–
–
–

Partnership
Limited Liability Company...
Corporate Formation
What Type of Entity Should We Choose?
Partnership
– “Pass through” tax treatment
– No limit on number ...
Corporate Formation
What Type of Entity Should We Choose?
Limited Liability Company
– “Pass through” tax treatment
– No li...
Corporate Formation
What Type of Entity Should We Choose?
Subchapter S Corporation
– “Pass through” tax treatment
– All ow...
Corporate Formation
What Type of Entity Should We Choose?
Subchapter C Corporation
– All owners have limited liability
– N...
Corporate Formation
What Type of Entity Should We Choose?
 Become a C-Corp if you want to:
– Obtain VC funding
– Go publi...
Corporate Formation
Where Should We Incorporate?
Delaware

8

© 2014 Wilmer Cutler Pickering Hale and Dorr LLP

WilmerHale...
Protecting Your Intellectual Property
 Who owns IP created prior to incorporation?
– You?
– People who collaborated with ...
Protecting Intellectual Property
 How do we make sure that the company owns all of its
intellectual property after incorp...
Establishing Relationships with
Employees and Independent Contractors
 Protect the company when establishing relationship...
Issuing Equity Prior to Fundraising
Allocation of Equity:
 Beware of splitting stock ownership 50/50 among two
founders
...
Issuing Equity Prior to Fundraising
Dilution:
 Plan in advance for equity grants to be made to new hires
 Dilution can b...
Issued and Reserved Shares
 Issued shares recommended = 2 million per founder
 Purchase price per share = $0.001 per sha...
Vesting of Equity
 Company’s right to repurchase unvested shares of founder
stock at original purchase price
–

Compare r...
Vesting of Equity
 Typical Schedule: Vesting over 4 years – 1 year cliff of 25%
and monthly thereafter
 Possible up-fron...
Vesting of Equity
 Acceleration of Vesting
– Option #2: Upon termination without cause (single trigger) –
Generally disfa...
Section 83(b) Elections
 Founder typically files 83(b) election when issued restricted
stock and paying fair market value...
Lock-Up and Restrictions on Transfer
 Lock-up
– Founder agrees not to sell shares during a specified period
following an ...
Voting Agreements / Rights of First Refusal
Agreements / Co-Sale Agreements
 Typically put in place in connection with a ...
Conclusions
Do the right (simple) things now - you’ll save time,
effort and expenses later.
 Form the Appropriate Entity
...
Contact
Josh Fox
joshua.fox@wilmerhale.com
781-966-2007

Wilmer Cutler Pickering Hale and Dorr LLP is a Delaware limited l...
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Positioning Your Start-Up For Success: Advice to Entrepreneurs Forming a Company

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Explores choosing an entity, where to incorporate, IP protection, employee and independent contractor relationships, issuing and vesting of equity, issued and reserved shares, and Section 83(b) elections.

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Transcript of "Positioning Your Start-Up For Success: Advice to Entrepreneurs Forming a Company"

  1. 1. Positioning Your Start-Up For Success: Advice to Entrepreneurs Forming a Company Joshua D. Fox, Esq. Attorney Advertising
  2. 2. Corporate Formation Which type of entity should we choose?  Possibilities: – – – – Partnership Limited Liability Company Subchapter S Corporation Subchapter C Corporation  Considerations: – – – – Tax Liability Number and Types of Owners Funding Plans Under which jurisdiction’s law should we organize? 2 © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 2
  3. 3. Corporate Formation What Type of Entity Should We Choose? Partnership – “Pass through” tax treatment – No limit on number or types of owners – All owners do not necessarily have limited liability – Not an investor-favored form 3 © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 3
  4. 4. Corporate Formation What Type of Entity Should We Choose? Limited Liability Company – “Pass through” tax treatment – No limit on number or types of owners – All owners have limited liability – Not an investor-favored form – Cost and time to administer 4 © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 4
  5. 5. Corporate Formation What Type of Entity Should We Choose? Subchapter S Corporation – “Pass through” tax treatment – All owners have limited liability – Limit on number and types of owners – Limit on classes of equity – Not an investor-favored form 5 © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 5
  6. 6. Corporate Formation What Type of Entity Should We Choose? Subchapter C Corporation – All owners have limited liability – No limit on number and types of owners – No “Pass through” tax treatment – Investor-favored form 6 © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 6
  7. 7. Corporate Formation What Type of Entity Should We Choose?  Become a C-Corp if you want to: – Obtain VC funding – Go public – Use equity to compensate employees 7 © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 7
  8. 8. Corporate Formation Where Should We Incorporate? Delaware 8 © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 8
  9. 9. Protecting Your Intellectual Property  Who owns IP created prior to incorporation? – You? – People who collaborated with you? – Former employers? – University?  Answer: It could be some or all of the above.  Answer: The Company does not own it (yet). 9 © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 9
  10. 10. Protecting Intellectual Property  How do we make sure that the company owns all of its intellectual property after incorporation?  Answer: – Assignment of inventions agreements – Non-disclosure agreements All Founders By: All Collaborators All Future Employees – Licenses from third parties (e.g., universities) 10 © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 10
  11. 11. Establishing Relationships with Employees and Independent Contractors  Protect the company when establishing relationships with founders and early-stage employees and independent contractors, not any single individual  Standardized terms covering – At-will employment (offer letters) – Vesting of equity – Assignment of inventions – Non-disclosure – Non-competition and non-solicitation 11 © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 11
  12. 12. Issuing Equity Prior to Fundraising Allocation of Equity:  Beware of splitting stock ownership 50/50 among two founders  Eliminate discussion of percentages; Translate into share numbers  Consider contributions to date and expected roles for the future 12 © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 12
  13. 13. Issuing Equity Prior to Fundraising Dilution:  Plan in advance for equity grants to be made to new hires  Dilution can be a good thing: – Dilution typically necessary to bring in cash or human capital to grow the business – Smaller piece of bigger pie 13 © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 13
  14. 14. Issued and Reserved Shares  Issued shares recommended = 2 million per founder  Purchase price per share = $0.001 per share  Total amount paid by each founder = $2,000  Purposes of initial cash contributions: – Adequate capitalization (limit liability) – Pay initial filing fees (Delaware incorporation and foreign qualification in other state(s))  Reserve: 20% for stock option pool (1 million shares if two founders with 2 million shares each) 14 © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 14
  15. 15. Vesting of Equity  Company’s right to repurchase unvested shares of founder stock at original purchase price – Compare repurchase of vested shares at fair market value (reduces incentives)  Protection for co-founders in the event one or more cofounders leaves  Helps ensure that co-founders’ equity better reflects actual contributions  Expectation of VCs and sophisticated investors that founders will stay on to build the company 15 © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 15
  16. 16. Vesting of Equity  Typical Schedule: Vesting over 4 years – 1 year cliff of 25% and monthly thereafter  Possible up-front vesting as “credit” for service provided to date  Acceleration of Vesting – Option #1: Upon change in control (single trigger) – Generally disfavored by buyers and VCs; Consider precedent; Possible 2550%, then reduction in number of years vs. retain original schedule) 16 © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 16
  17. 17. Vesting of Equity  Acceleration of Vesting – Option #2: Upon termination without cause (single trigger) – Generally disfavored by company/co-founders and investors (difficulty establishing cause) – Option #3: Following sale of the company, if termination without cause or for good reason (double trigger) – Generally acceptable (even 100% acceleration – often within 12-18 months of sale) 17 © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 17
  18. 18. Section 83(b) Elections  Founder typically files 83(b) election when issued restricted stock and paying fair market value for stock  Without making election, stockholder has taxable income as stock vests - difference between fair market value of shares that vested and the price paid for such shares  With election, taxed on difference between fair market value of all unvested shares at time of grant and the price paid for such shares – No tax payment when price equals fair market value  Within 30 days of Board approval of issuance  Consult a tax advisor (personal tax matter) 18 © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 18
  19. 19. Lock-Up and Restrictions on Transfer  Lock-up – Founder agrees not to sell shares during a specified period following an IPO – Typically 180 days  Company Right of First Refusal – If founder wishes to sell stock to a third party, company has the right to purchase the stock on the same terms as those offered by third party 19 © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 19
  20. 20. Voting Agreements / Rights of First Refusal Agreements / Co-Sale Agreements  Typically put in place in connection with a financing; Do not recommend such agreements among founders before financing - Voting Agreements • Election of Directors • “Drag Along” provisions - Rights of Refusal in favor of stockholders (investors) after company - Co-Sale Rights in favor of stockholders (investors) 20 © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 20
  21. 21. Conclusions Do the right (simple) things now - you’ll save time, effort and expenses later.  Form the Appropriate Entity  Protect the Company’s IP  Establish Relationships with Employees and Independent Contractors that Benefit the Company  Issue Equity in a Manner that Plans for the Future 21 © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 21
  22. 22. Contact Josh Fox joshua.fox@wilmerhale.com 781-966-2007 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/codeof-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 22 © 2014 Wilmer Cutler Pickering Hale and Dorr LLP WilmerHale 22
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