What it Means to Be Fundable

954 views

Published on

This slide show outlines some of the key elements for which investors are seeking in companies seeking investment capital.

Published in: Business
0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total views
954
On SlideShare
0
From Embeds
0
Number of Embeds
41
Actions
Shares
0
Downloads
29
Comments
0
Likes
0
Embeds 0
No embeds

No notes for slide

What it Means to Be Fundable

  1. 1. What it Means to Be Fundable Presented by Bart Greenberg Manatt, Phelps & Phillips, LLP American Institute of Aeronautics and Astronautics July 22, 2008
  2. 2. You Have the “Right” Business Structure
  3. 3. You Avoided the De Facto Partnership <ul><li>What is it? </li></ul><ul><li>Problems: </li></ul><ul><ul><li>Ownership of IP </li></ul></ul><ul><ul><li>Vicarious Liability </li></ul></ul>
  4. 4. You Avoided “Wrong” State of Formation <ul><li>California vs. Delaware </li></ul><ul><ul><li>California is shareholder friendly </li></ul></ul><ul><ul><li>Delaware is management friendly </li></ul></ul><ul><li>Special Case of the So-Called Quasi-California Corporation </li></ul><ul><li>Why You DON’T Necessarily Want to Be in Nevada </li></ul><ul><ul><li>You will most likely pay taxes </li></ul></ul><ul><ul><li>The law is not as well defined </li></ul></ul>
  5. 5. You Kept it Simple! <ul><li>Don’t Over-Build at Start-Up. Avoid the Following: </li></ul><ul><ul><li>Multiple operating companies or special business units (Subs) </li></ul></ul><ul><ul><li>Related party engineering, development or service companies </li></ul></ul><ul><li>Restructuring Can Be Expensive and Involve Negative Tax Consequences </li></ul>
  6. 6. You Have the Right Team
  7. 7. You Didn’t Put off the Inevitable <ul><li>Most Start-Ups Tend to Be Too Quick to Hire and Too Long to Fire </li></ul><ul><ul><li>Don’t hire Just because someone will work for equity or for free </li></ul></ul><ul><ul><li>Things will get worse and much more complicated to unwind </li></ul></ul><ul><li>Avoid Urge to Hire friends & Family </li></ul><ul><li>Avoid Those With “Checkered” Pasts </li></ul><ul><li>Recognize Your Own Limitations </li></ul>
  8. 8. You Properly Handled the Inevitable <ul><li>DON’T Violate California Labor Laws </li></ul><ul><ul><li>An employee who is discharged must be paid all wages, including accrued vacation, at time of termination </li></ul></ul><ul><ul><li>An employee who quits must be paid all wages, including accrued vacation, within 72 hours of quitting </li></ul></ul><ul><li>ALWAYS get releases from liability on separation (even if you have to pay for it!) </li></ul>
  9. 9. You Protected Your IP
  10. 10. You Transferred IP into the Company <ul><li>Two Typical Approaches: </li></ul><ul><ul><li>Contribution for equity </li></ul></ul><ul><ul><li>Licensing arrangements </li></ul></ul><ul><li>Factors to Consider: </li></ul><ul><ul><li>Protection from creditors </li></ul></ul><ul><ul><li>Additional “Fields of Use” </li></ul></ul><ul><ul><li>Tax considerations </li></ul></ul>
  11. 11. You Have Clear Title to the IP <ul><li>The “Moonlighting” Founder </li></ul><ul><ul><li>Under Section 2870 of the California Labor Code, Employer owns IP unless: </li></ul></ul><ul><ul><ul><li>Employee developed entirely on her own time; and </li></ul></ul></ul><ul><ul><ul><li>Employee did not use employer's equipment, supplies, facilities or trade secret information </li></ul></ul></ul><ul><ul><li>Exception for any of the following IP, that: </li></ul></ul><ul><ul><ul><li>Relates at time of conception to employer's business, or actual or demonstrably anticipated research or development of employer; or </li></ul></ul></ul><ul><ul><ul><li>Results from any work performed by employee for employer. </li></ul></ul></ul>
  12. 12. You Have Clear Title to the IP (cont.) <ul><li>Other Employment Related Issues: </li></ul><ul><ul><li>Get employment agreement in place before employee starts work </li></ul></ul><ul><ul><ul><li>Obligations to execute assignments and to reasonably cooperate </li></ul></ul></ul><ul><ul><ul><li>Non-solicitation of employees, customers and vendors </li></ul></ul></ul><ul><ul><li>Check for pre-existing duties of confidentiality to former employer </li></ul></ul><ul><ul><li>Ask to see employment agreement from former employer </li></ul></ul>
  13. 13. You Have Clear Title to the IP (cont.) <ul><li>Issues Relating to “Work for Hire” ( i.e. , Contractors) </li></ul><ul><ul><li>GET consulting agreement in place BEFORE consultant starts work </li></ul></ul><ul><ul><li>Without a suitable agreement, you may “own” nothing more than a limited license to use what was developed, even though you paid for the work! </li></ul></ul><ul><ul><li>Negotiate for ownership UP FRONT, before a deal is pending </li></ul></ul>
  14. 14. You Used Equity Sparingly
  15. 15. You Avoided Oral Promises of Equity <ul><li>Oral Agreements ARE Enforceable </li></ul><ul><li>The Problems with Oral Agreements are: </li></ul><ul><ul><li>Terms are never well defined or fully thought out </li></ul></ul><ul><ul><li>Difficult for employer to disprove claimed existence of such an arrangement </li></ul></ul><ul><li>“ Sleeping Dogs” Tend to Wake Up When Exit is imminent </li></ul>
  16. 16. You Avoided Using Equity as Currency <ul><li>Know What is Market. How Much is Too Much? </li></ul><ul><li>Keep an Accurate Capitalization Table </li></ul><ul><li>Look for Alternative Ways to Finance the Business: Bootstrap! </li></ul><ul><li>DON’T Forget About Compliance with Applicable Securities Laws </li></ul>
  17. 17. You Made Sure Strings Were Attached <ul><li>Use of Restricted Stock and Vesting </li></ul><ul><li>ALWAYS use a probationary period </li></ul><ul><li>Repurchase Rights Upon Termination </li></ul><ul><li>All Equity Should Be Made Subject to a Shareholders’ Agreement </li></ul><ul><ul><li>Restrictions on Transfer </li></ul></ul><ul><ul><li>Rights of First Refusal </li></ul></ul><ul><ul><li>Repurchase Rights on Trigger Events </li></ul></ul><ul><ul><li>Tags, Drags and Shotguns </li></ul></ul><ul><ul><li>Proxies and Voting Agreements </li></ul></ul>
  18. 18. You Maintained Corporate Formalities
  19. 19. You Treated Company as Separate Entity <ul><li>Hold and Properly Document Meetings to Authorize All Requisite Corporate Actions </li></ul><ul><li>Maintain and Keep Separate: </li></ul><ul><ul><li>Minutes Books & Accounting Records </li></ul></ul><ul><ul><li>Bank Accounts </li></ul></ul><ul><ul><li>Insurance & Licenses </li></ul></ul><ul><ul><li>Contracts and Leases </li></ul></ul><ul><ul><li>Letterhead and Stationary </li></ul></ul><ul><li>Don’t Run Personal Items Through the Company </li></ul>
  20. 20. If So, You Avoided the Following: <ul><li>Alter Ego Liability (aka “Piercing of the Corporate Veil”) to Third Parties </li></ul><ul><li>Contracts May Be Voidable at Option of Third Parties </li></ul><ul><li>Liability to Equity Holders for Breach of Fiduciary Duties </li></ul>
  21. 21. The Opportunity is Exceptional
  22. 22. Products & Services <ul><li>The Product has Real Benefits (Rather than Just Nifty Features) </li></ul><ul><li>The Product/Service Addresses a Real PAIN in the Market </li></ul>
  23. 23. Target Market <ul><li>There is a Well-Defined Target Market that you Can Serve </li></ul><ul><li>You Meet the Needs of the Target Market </li></ul><ul><li>You Can Then Leverage and Scale to Other Target Markets </li></ul>
  24. 24. Marketing/Sales Plan <ul><li>Your Target Market is Not Defined Too Widely </li></ul><ul><ul><li>Attack the Target Market First </li></ul></ul><ul><ul><li>Then Seek to Fill Demand in Other Markets </li></ul></ul><ul><li>You Have Researched and Not Just Made Assumptions about Your Target Market </li></ul>
  25. 25. Marketing/Sales Plan (cont.) <ul><li>You Understand and have Identified the Mediums You Will Use to Advertise and Promote your Product </li></ul>
  26. 26. Competitive Analysis <ul><li>You DO Have Competition (and That is a GOOD Thing)! </li></ul><ul><ul><li>A business does not operate in a vacuum </li></ul></ul><ul><ul><li>Management must comprehend external factors that can impact the business </li></ul></ul><ul><li>Do Not Underestimate the Strength of Competitors </li></ul>
  27. 27. Management Team <ul><li>Do Not Assume that Previous Success in Other Industries Applies to Your Current Industry </li></ul><ul><li>Attract and Assemble an ACTIVE and Knowledgeable Board of Advisors </li></ul><ul><li>Make Sure Founders and Senior Management Have “Skin in the Game” </li></ul>
  28. 28. Operational Plan <ul><li>Understand the Process by which You Manufacture, Distribute and Sell Your Product or Service </li></ul><ul><li>Account for all Production Costs (Direct and Indirect) </li></ul><ul><li>Foresee and Plan for Contingencies to Meet Production and Staffing Challenges </li></ul>
  29. 29. Financial Projections <ul><li>Present Sales and Profit Projections that Are Realistic ( i.e. , no “hockey stick”) </li></ul><ul><li>Understand and Be Able to Articulate Financial Assumptions </li></ul><ul><li>Do Not Underestimate Expenses and Budget for Unexpected Costs </li></ul>
  30. 30. Exit Strategy <ul><li>Don’t Just Assume You Have a Business with the Potential to Go Public </li></ul><ul><li>Research and Explain how Your Investor will Specifically Recoup their Investment and a Sufficient Return </li></ul>
  31. 31. Questions?
  32. 32. What it Means to Be Fundable Thank you! Presented by Bart Greenberg Manatt, Phelps & Phillips, LLP (714) 371-2518 [email_address]

×