Incorporation And Other Early Stage Legal Issues New

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Incorporation And Other Early Stage Legal Issues New

  1. 1. Incorporation and other early-stage legal issues August 11, 2009 Yoichiro (“Yokum”) Taku Jesse Chew Direct: (650) 354-4251 Direct: (650) 565-3839 ytaku@wsgr.com jchew@wsgr.com www.startupcompanylawyer.com Troy Foster Direct: (650) 565-3600 tfoster@wsgr.com
  2. 2. When do I need to incorporate a company? • Pitching investors at TheFunded Founder Institute • More than one founder working on project • IP creation • Hiring employees or third party contractors • Option grants • Launching product/service • Corporate liabilities (i.e. office lease) • Start long-term capital gain • Visa issues DOC# 2
  3. 3. What situations might require special consideration? • Founder is an employee of another company • Founder is not a U.S. citizen/permanent resident • Founder already has incorporated an entity – LLCs, S corps, non-DE corps • Most of the business is non-U.S. • Pre-incorporation agreements DOC# 3
  4. 4. What documents should I review if I still am employed? • Offer letter • Proprietary Information and Invention Assignment Agreement • Conflict of interest policy • Other employee documents DOC# 4
  5. 5. What if I already incorporated a company? • If non-DE corporation, then create a DE parent holding company using Founder Institute form documents – Eventually dissolve existing corporation before end of year • If DE corporation, then amend and restate Certificate of Incorporation using Founder Institute form documents • If investors or non-founder equity holders, then probably leave things alone unless something is broken DOC# 5
  6. 6. Why shouldn’t I incorporate an LLC? • Venture capital investors do not want Unrelated Business Taxable Income and cannot invest in LLCs • Stock options difficult to grant • Complicated to mimic typical preferred stock rights in an LLC operating agreement • Attorney fees are higher • S corporations are okay until they have entity shareholders DOC# 6
  7. 7. What happens during the incorporation process? • Founder needs to sign WSGR engagement letter and provide a check to cover out of pocket expenses • Founder fills out incorporation questionnaire • WSGR reviews to ensure completeness • WSGR checks for obvious trademark issues on name and sends summary report • WSGR provides founder with customized incorporation documents DOC# 7
  8. 8. What incorporation documents are created? • Certificate of incorporation • Action by incorporator • Bylaws • Certificate of adoption of bylaws • Initial board consent • Initial stockholders consent • At-will employment, confidential information, invention assignment and arbitration agreement DOC# 8
  9. 9. What incorporation documents are created? (continued) • Equity incentive plan • Stock option agreement • Restricted stock purchase agreement • Indemnification agreement • WSGR will also provide forms of offer letter, consulting agreement and NDAs as part of incorporation process DOC# 9
  10. 10. What happens during the incorporation process? (continued) • Founder signs certificate of incorporation – WSGR files with Delaware Secretary of State – Confirmation back within 24 to 48 hours (expedited filing available) • Other documents signed • Founder obtains employer identification number (IRS) • Open bank account • Deposit checks for founders stock • 83(b) filing – founder responsible (WSGR will NOT file) • Securities law filings (WSGR will file) DOC# 10
  11. 11. Should I worry about trademark issues? • Do you own research before deciding on a name • Please review WSGR Guide to Trademark Issues for a New Company which we will send with initial company name screening (or online below) – http://www.startupcompanylawyer.com/2008/03/07/what- trademark-and-other-legal-issues-are-involved-in-selecting-a- company-name/ • Please fill out business description in incorporation questionnaire • Basic WSGR trademark search to avoid any obvious issues (~$400) – Included in incorporation process for Founder Institute companies • In-depth search (~$1300) • Trademark application ( ~$4500) – If not controversial DOC# 11
  12. 12. What should the company’s capitalization table look like? • Authorized – Class A common – 15,000,000 – Class F common – 9,000,000 • Fully-diluted capitalization at initial formation – Class A common – none – Class F common – 9,000,000 – Option pool (Class A common) – 1,000,000 • Please note that there is an extra 5,000,000 shares of Class A common authorized for future issuances DOC# 12
  13. 13. What happens if I have additional founders or need to sell stock to investors? • Newly issued shares are sold by the company – Founders do not sell their existing shares • May require amending the Certificate of Incorporation if there aren’t enough authorized shares • Need to amend and restate the Certificate of Incorporation to create preferred stock at the time of a financing DOC# 13
  14. 14. What is Class F common stock? • Super-voting (10 votes per share) • Election of Class F director (with 2 votes per director) • Protective provisions • Convertible into Class A common stock DOC# 14
  15. 15. What happens to Class F when investors invest? • Companies like Google, Broadcom and at least one mentor company with top tier VCs has super-voting common stock • Company potentially has additional leverage when negotiating with VCs (more chips to trade) • All of these “founder favorable” provisions can be eliminated upon a financing, but it is simply a negotiation • The best way to preserve some of these provisions is to outperform competitors because only elite companies will have real leverage DOC# 15
  16. 16. How should founders stock vest? • Stock is issued and voting, but subject to repurchase by the company if the founder is terminated for any reason • Vesting commencement date – Credit for pre-incorporation time • Founder Institute recommendation – 1/48th per month with no cliff – Acceleration – single trigger upon a change of control – Please note that this is very founder favorable DOC# 16
  17. 17. What is in the restricted stock purchase agreement? • Purchase price – Typically set very low (i.e. $0.001 per share) – May not be appropriate if founder is contributing valuable IP • Repurchase right/vesting/acceleration • Right of first refusal on transfers • Escrow of shares • IPO lockup • 83(b) election DOC# 17
  18. 18. What are out of pocket costs of incorporation? • Certificate of Incorporation – Delaware fees - $130 – Filing service fees - $135 – Accelerated filing available ($40 for 24 hour, $500 for two hour confirmation) • Qualification to do business – California - $350 (includes state and filing service fees) – Other states • Agent for Service of Process – Delaware - $185 – California - $185 (most use business address) – Other states DOC# 18
  19. 19. What are out of pocket costs of incorporation? (continued) • Securities filings – CA 25102(f) – ~$25 (depends on issue price) – CA 25102(o) – ~$200 (varies based on issue price) Attached consent to service of process needs to be notarized – Form D - $300 per state (rare) • Franchise taxes – Delaware - $75 minimum + $25 filing fee – California - $800 minimum • Recurring costs – Agent for service of process – State franchise taxes DOC# 19
  20. 20. How do I keep incorporation costs to a minimum? • Be educated • Completely fill out incorporation questionnaire – Do not make WSGR ask for follow-up information • Do not make changes – Every change requires time to revise documents • Avoid custom drafting – Custom acceleration on termination without cause or resignation for good reason • Keep good records DOC# 20
  21. 21. Why should I avoid online incorporation services? • Documents generally need to be redone anyway • Most people ignore the package of paper they receive after initial incorporation • No restricted stock purchase agreement to impose founder vesting, right of first refusal on stock transfers, IPO lockup • IP assignment clauses typically do not exist or are inadequate DOC# 21
  22. 22. Questions • Please read www.startupcompanylawyer.com first DOC# 22

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