Starting Your Company John Chory 781-966-2001 [email_address] Mick Bain 781-966-2027 [email_address]
Starting Your Company Protect your most important assets Raising Capital Form of Entity - Your IP Your Team
D –   Your Company’s Most Important Assets Intellectual Property <ul><ul><li>Question: Who owns IP created prior to    inc...
D –   Your Company’s Most Important Assets  Intellectual Property <ul><ul><li>Question: How do you ensure that the company...
D –    Your Company’s Most Important Assets  The Team <ul><ul><ul><li>Protect the team, not any single individual </li></u...
D –   Your Company’s Most Important Assets  The Team <ul><ul><li>The offer letter:  Use a well crafted one and don’t devia...
D –   Your Company’s Most Important Assets The Team <ul><ul><li>Equity Agreements – vesting of stock or options  </li></ul...
Formation <ul><ul><li>2 Questions:  </li></ul></ul><ul><ul><ul><li>What type of entity should you form? </li></ul></ul></u...
Formation What Type of Entity Should You Create? <ul><ul><li>Partnership </li></ul></ul><ul><ul><li>Limited Liability Comp...
Formation What Type of Entity Should You Create? <ul><ul><li>Partnership </li></ul></ul><ul><ul><ul><li>Not an investor-fa...
Formation What Type of Entity Should You Create? <ul><ul><li>Subchapter S Corporation </li></ul></ul><ul><ul><ul><li>Not a...
Formation What Type of Entity Should You Create? <ul><ul><li>Become a C-Corp if you want to: </li></ul></ul><ul><ul><ul><l...
Formation Where Should You Incorporate? <ul><ul><li>Delaware </li></ul></ul>
Raising Capital <ul><ul><li>Sources: </li></ul></ul><ul><ul><ul><li>Friends and family </li></ul></ul></ul><ul><ul><ul><li...
Raising Capital Goals in Seed Rounds <ul><ul><li>Seek sophisticated seed investors </li></ul></ul><ul><ul><ul><li>Who are ...
Raising Capital Types of Seed Funding <ul><ul><li>Cash loan </li></ul></ul><ul><ul><li>Common stock </li></ul></ul><ul><ul...
Raising Capital Cash Loan <ul><ul><li>Pros: </li></ul></ul><ul><ul><ul><li>Easy </li></ul></ul></ul><ul><ul><ul><li>Low tr...
Raising Capital Common Stock <ul><ul><li>Pros: </li></ul></ul><ul><ul><ul><li>Easy </li></ul></ul></ul><ul><ul><ul><li>Low...
Raising Capital Preferred Stock <ul><ul><li>Pros: </li></ul></ul><ul><ul><ul><li>Less dilution than common stock </li></ul...
Raising Capital Convertible Debt <ul><ul><li>Pros: </li></ul></ul><ul><ul><ul><li>Quick </li></ul></ul></ul><ul><ul><ul><l...
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Wilmer Hale At Highland Capital Partners 7 10 07

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Wilmer Hale At Highland Capital Partners 7 10 07

  1. 1. Starting Your Company John Chory 781-966-2001 [email_address] Mick Bain 781-966-2027 [email_address]
  2. 2. Starting Your Company Protect your most important assets Raising Capital Form of Entity - Your IP Your Team
  3. 3. D – Your Company’s Most Important Assets Intellectual Property <ul><ul><li>Question: Who owns IP created prior to incorporation? </li></ul></ul><ul><ul><ul><li>You? </li></ul></ul></ul><ul><ul><ul><li>People who collaborated with you? </li></ul></ul></ul><ul><ul><ul><li>Former employers? </li></ul></ul></ul><ul><ul><ul><li>The Public? </li></ul></ul></ul><ul><ul><li>Answer: Unclear. Potentially all of the above. </li></ul></ul><ul><ul><ul><li>One thing is clear: The Company does not own it. </li></ul></ul></ul><ul><ul><ul><li>…Yet </li></ul></ul></ul>
  4. 4. D – Your Company’s Most Important Assets Intellectual Property <ul><ul><li>Question: How do you ensure that the company’s intellectual property is owned by the company? </li></ul></ul><ul><ul><li>Answer: </li></ul></ul><ul><ul><ul><li>Assignment of inventions agreements </li></ul></ul></ul><ul><ul><ul><li>Non-disclosure agreements </li></ul></ul></ul><ul><ul><ul><li>Licenses from third parties (e.g., universities) </li></ul></ul></ul>All Founders By: All Collaborators All Future Employees
  5. 5. D – Your Company’s Most Important Assets The Team <ul><ul><ul><li>Protect the team, not any single individual </li></ul></ul></ul><ul><ul><ul><li>How? </li></ul></ul></ul><ul><ul><ul><li>Sign standardized agreements covering </li></ul></ul></ul><ul><ul><ul><ul><li>At-will employment offer letters </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Vesting of equity </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Ownership of inventions </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Non-disclosure </li></ul></ul></ul></ul>
  6. 6. D – Your Company’s Most Important Assets The Team <ul><ul><li>The offer letter: Use a well crafted one and don’t deviate </li></ul></ul><ul><ul><ul><li>Employment is “at will” </li></ul></ul></ul><ul><ul><ul><li>Describe equity information in shares, not percentages </li></ul></ul></ul><ul><ul><ul><li>NDAs, non-competes and assignment of inventions </li></ul></ul></ul><ul><ul><ul><li>No violation/conflicts with former employer agreements </li></ul></ul></ul><ul><ul><ul><li>Immigration laws </li></ul></ul></ul>
  7. 7. D – Your Company’s Most Important Assets The Team <ul><ul><li>Equity Agreements – vesting of stock or options </li></ul></ul><ul><ul><li>Carefully plan for your use of equity among: </li></ul></ul><ul><ul><ul><li>Founders </li></ul></ul></ul><ul><ul><ul><li>Employees </li></ul></ul></ul><ul><ul><ul><li>Investors </li></ul></ul></ul><ul><ul><ul><li>Plan for growth </li></ul></ul></ul><ul><ul><ul><li>Understand the dilutive impact of your uses of equity </li></ul></ul></ul>
  8. 8. Formation <ul><ul><li>2 Questions: </li></ul></ul><ul><ul><ul><li>What type of entity should you form? </li></ul></ul></ul><ul><ul><ul><li>Where should you form it? </li></ul></ul></ul>
  9. 9. Formation What Type of Entity Should You Create? <ul><ul><li>Partnership </li></ul></ul><ul><ul><li>Limited Liability Company </li></ul></ul><ul><ul><li>Subchapter S Corporation </li></ul></ul><ul><ul><li>Subchapter C Corporation </li></ul></ul>
  10. 10. Formation What Type of Entity Should You Create? <ul><ul><li>Partnership </li></ul></ul><ul><ul><ul><li>Not an investor-favored form </li></ul></ul></ul><ul><ul><ul><li>“Pass through” tax treatment </li></ul></ul></ul><ul><ul><ul><li>Not all owners have limited liability </li></ul></ul></ul><ul><ul><ul><li>No limit on number or types of owners </li></ul></ul></ul><ul><ul><li>Limited Liability Company </li></ul></ul><ul><ul><ul><li>Not an investor-favored form </li></ul></ul></ul><ul><ul><ul><li>“Pass through” tax treatment </li></ul></ul></ul><ul><ul><ul><li>All owners have limited liability </li></ul></ul></ul><ul><ul><ul><li>No limit on number or type of owners </li></ul></ul></ul>
  11. 11. Formation What Type of Entity Should You Create? <ul><ul><li>Subchapter S Corporation </li></ul></ul><ul><ul><ul><li>Not an investor-favored form </li></ul></ul></ul><ul><ul><ul><li>“Pass through” tax treatment </li></ul></ul></ul><ul><ul><ul><li>All owners have limited liability </li></ul></ul></ul><ul><ul><ul><li>Limit on number and types of owners </li></ul></ul></ul><ul><ul><ul><li>Limit on classes of equity </li></ul></ul></ul><ul><ul><li>Subchapter C Corporation </li></ul></ul><ul><ul><ul><li>Investor-favored form </li></ul></ul></ul><ul><ul><ul><li>No “pass through” tax treatment </li></ul></ul></ul><ul><ul><ul><li>All owners have limited liability </li></ul></ul></ul><ul><ul><ul><li>No limit on number and type of owners </li></ul></ul></ul>
  12. 12. Formation What Type of Entity Should You Create? <ul><ul><li>Become a C-Corp if you want to: </li></ul></ul><ul><ul><ul><li>Obtain VC funding </li></ul></ul></ul><ul><ul><ul><li>Go public </li></ul></ul></ul><ul><ul><ul><li>Do a “tax free” M&A deal </li></ul></ul></ul><ul><ul><ul><li>Use equity to compensate employees </li></ul></ul></ul>
  13. 13. Formation Where Should You Incorporate? <ul><ul><li>Delaware </li></ul></ul>
  14. 14. Raising Capital <ul><ul><li>Sources: </li></ul></ul><ul><ul><ul><li>Friends and family </li></ul></ul></ul><ul><ul><ul><li>Angels </li></ul></ul></ul><ul><ul><ul><li>Strategic investors </li></ul></ul></ul><ul><ul><ul><li>Government grants </li></ul></ul></ul><ul><ul><ul><li>Venture capitalists </li></ul></ul></ul>
  15. 15. Raising Capital Goals in Seed Rounds <ul><ul><li>Seek sophisticated seed investors </li></ul></ul><ul><ul><ul><li>Who are “accredited investors” </li></ul></ul></ul><ul><ul><ul><li>Who know angel investing and its risks </li></ul></ul></ul><ul><ul><ul><li>Who can distinguish Seed investing from Venture investing </li></ul></ul></ul><ul><ul><li>Seek standard (VC-friendly) terms and conditions </li></ul></ul><ul><ul><li>Speed </li></ul></ul><ul><ul><li>Minimize transaction costs </li></ul></ul><ul><ul><li>Minimize number of stockholders </li></ul></ul><ul><ul><li>Avoid future legal and other hurdles </li></ul></ul>
  16. 16. Raising Capital Types of Seed Funding <ul><ul><li>Cash loan </li></ul></ul><ul><ul><li>Common stock </li></ul></ul><ul><ul><li>Preferred stock </li></ul></ul><ul><ul><li>Convertible debt </li></ul></ul>
  17. 17. Raising Capital Cash Loan <ul><ul><li>Pros: </li></ul></ul><ul><ul><ul><li>Easy </li></ul></ul></ul><ul><ul><ul><li>Low transaction costs </li></ul></ul></ul><ul><ul><ul><li>No ownership dilution </li></ul></ul></ul><ul><ul><li>Cons: </li></ul></ul><ul><ul><ul><li>It becomes due, usually within 12-24 months </li></ul></ul></ul><ul><ul><ul><li>Not favored by other/future investors </li></ul></ul></ul>
  18. 18. Raising Capital Common Stock <ul><ul><li>Pros: </li></ul></ul><ul><ul><ul><li>Easy </li></ul></ul></ul><ul><ul><ul><li>Low transaction costs </li></ul></ul></ul><ul><ul><li>Cons: </li></ul></ul><ul><ul><ul><li>Valuation problems / Equity compensation problems </li></ul></ul></ul><ul><ul><ul><li>Dilution </li></ul></ul></ul><ul><ul><ul><li>Not an attractive investment </li></ul></ul></ul>
  19. 19. Raising Capital Preferred Stock <ul><ul><li>Pros: </li></ul></ul><ul><ul><ul><li>Less dilution than common stock </li></ul></ul></ul><ul><ul><li>Cons: </li></ul></ul><ul><ul><ul><li>Need to set a valuation </li></ul></ul></ul><ul><ul><ul><li>High transaction costs </li></ul></ul></ul><ul><ul><ul><li>Gives up too much control to a seed investor for too little money </li></ul></ul></ul>
  20. 20. Raising Capital Convertible Debt <ul><ul><li>Pros: </li></ul></ul><ul><ul><ul><li>Quick </li></ul></ul></ul><ul><ul><ul><li>Low transaction costs </li></ul></ul></ul><ul><ul><ul><li>No current valuation </li></ul></ul></ul><ul><ul><ul><li>Minimizes problems with VCs </li></ul></ul></ul><ul><ul><ul><li>Only minimum control constraints </li></ul></ul></ul><ul><ul><ul><li>Better than common stock for investors because it usually converts to preferred stock </li></ul></ul></ul><ul><ul><li>Cons: </li></ul></ul><ul><ul><ul><li>Ultimately issuing more “real” preferred </li></ul></ul></ul><ul><ul><ul><li>Often accompanied by an “equity kicker” </li></ul></ul></ul>
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