Experience. REDEFINEDClient Turn-Key Package               Menu of Flat Fees               Basic M&A Issues and           ...
Turn-key Package Services and Flat                          Fees                           For a basic primer on each area...
Venture Stock Option Agreements                                           Page 10  •   Typical stock option package       ...
Venture Patents                                                Page 14  •   Typical Patent package                        ...
General Fee InformationNew clients are asked to pay a retainer before services will be rendered. The amount of the retaine...
A Primer on Venture Entity FormationShould I create a legal entity?Yes, you absolutely should create a legal entity for yo...
C-CorporationA corporation is made up of three groups of people – the shareholders, the board of directors and theofficers...
S-CorporationIn order to qualify for S-Corporation status a corporation must meet several conditions:    1. The business o...
A Primer on Employment AgreementsOnce an employment relationship exists, a company is required to adhere to applicable lab...
A Primer on Stock Option Agreements and Restricted Stock                                             AgreementsWhy have a ...
What is restricted stock?Instead of issuing stock options, some ventures issue “restricted stock.” Restricted stock refers...
A Primer on TrademarksTrademarks identify and distinguish a business, product, or service in the marketplace. Trademarks c...
Trademark RegistrationProvided that a trademark is used in interstate commerce, a trademark owner can protect nationwidesi...
A Primer on PatentsA patent is a legal document that defines a set of exclusive rights to a new technology, product or ser...
The ClaimsThe claims define the exclusive property right provided by a granted patent. Patents must include one ormore ind...
 Preparing non-infringement and invalidity opinions.     Developing design-around strategies.     Managing infringement...
A Primer on Initial Venture Capital Financing When you are ready to sell part of the venture to venture capital investors ...
Right of First Refusal and Co-Sale AgreementThe Right of First Refusal portion of this document obligates certain key stoc...
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AA-I & Co. | Menu of Flat Fees

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Aljucar, Anvil-Incus & Co. | http://www.anvil-incus.com/ is a Washington, DC -based firm providing advisory, private placement, and merger and acquisition services to –private- small & middle market federal contractor companies. We work on deals primarily between $5 million and $1 billion.

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AA-I & Co. | Menu of Flat Fees

  1. 1. Experience. REDEFINEDClient Turn-Key Package Menu of Flat Fees Basic M&A Issues and V e n t ure Start-up Needs to Consider Aljucar, Anvil-Incus & Co. www.anvil-incus.com
  2. 2. Turn-key Package Services and Flat Fees For a basic primer on each area of services, please view the appropriate section.Program | Venture Entity Formation Page 5 • Typical entity formation package $1,200 o Charter / Certificate of incorporation o Operating agreement / Bylaws o Board consents • Other agreements available (not included in fee above) o Advisory board agreement $600 each o Assignment of rights $600 each o Director indemnification $750 each o Promissory note $800 each o Foreign qualification in other states $350 each o Founder stock purchase agreement $750 eachVenture Employment Agreements Page 9 • Typical employment package $2,150 o Basic employment agreement o Nondisclosure agreement • Other agreements available (not included in fee above) o Non-competition agreement $425 o Offer letters $360 o Assignment of rights $600 o Trade secret policy (discounted pre-financing rate) $375/hr o Independent contractor / Consultant agreement $800 o Subcontractor agreement $800 o Policies and procedures $400 o Indemnification agreement $750 o Stockholder approval of indemnification agreement $325
  3. 3. Venture Stock Option Agreements Page 10 • Typical stock option package $3,275 o Stock option plan and agreement o Restricted stock purchase agreement o Option agreement o Spousal consent o Exercise notice o Board approval of stock plan o Stockholder approval of stock plan • Other agreements available (not included in fee above) o Common stock certificate $250 o Capitalization table $1,500 o Stock ledger $350 o 83(b) election form $475 o Board approval of option grant $900Venture Trademarks Page 12 • Trademark Search o Preliminary, knock-out search $350 o Full US search  Raw report by outside vendor $655 (vendor fee)  Analyze report and discuss result with client $625 • Draft opinion letter $425 • Trademark Prosecution o Draft and file application with USPTO (up to 3 classes) $500 o Each additional class $100 o USPTO filing fee (per class) $325 (gov’t fee) o Office actions  Analyze and report substantive office action to client with recommendations $250 • Report non-substantive office action to client $150 • Draft and file response with USPTO $350 per hour o Statement of use (only for Intent to Use Applications  Draft and file with USPTO (up to 3 classes) $300  Each additional class $50  USPTO filing fee (per class) $100 (gov’t fee) • Draft and file with USPTO (up to 3 classes) $200 • Each additional class $25 • USPTO filing fee (per class) $150 (gov’t fee) o Review, docket, and communicate misc. notices from USPTO, including Notice of Publication, Notice of Allowance, Notice of Acceptance of Extension of Time, and Notice of Registration $150 each 3
  4. 4. Venture Patents Page 14 • Typical Patent package $7,500 and up o Preliminary, knock out search o Patentability search & due diligence o Opinion o IP assignment for employees and consultants o Patent Licenses • Other agreements available (not included in fee above) o Various non-provisional application fees $1,800-4,000 o Patent preparation $6,000-15,000 o Patent application (discounted pre-financing rate) $375/hr o Government filing fees $300-500 o Patent maintenance $490-4,100Initial Venture Capital Round Page 17 • Typical fundraising package $25,000 o Term sheet o Standard Series A Preferred Stock purchase agreement o Board consent o Stockholder consent o Amended and restated certificate of incorporation o Investors’ rights agreement o Right of first refusal and co-sale agreement o Voting agreement o Management rights letter (if applicable) o Director indemnification agreement 4
  5. 5. General Fee InformationNew clients are asked to pay a retainer before services will be rendered. The amount of the retainerdepends upon the services to be provided. AA-I & Co. reserves the right to delay completion of servicesuntil your account is brought current.If you incur fees in excess of your retainer, or your retainer is exhausted and you incur significantconsultation or other costs in any single month, you may be asked to either replenish your retainer orsubmit an interim payment on account.After establishing relationships with our clients, AA-I & Co. is happy to extend certain credit terms toour clients.We value you as our client and do not want payment issues to interfere with your need for legal services.If you are unable to make a payment, please do not hesitate to call us immediately to discuss youroptions.All fees are subject to change based on complexity. The above fees presume little to no negotiation withother parties. If matters require more than minimal negotiation, an additional fee will be charged. Thefees quoted above include the amounts payable to AA-I & Co. only and do not include any applicable feesdue to government entities or third party service providers, each of which will be charged to clients inaddition to the fees set forth above.Disclaimer THE FOLLOWING IS ONLY A SIMPLE OUTLINE. WE STRONGLY RECOMMEND YOU SPEAK TO A LAWYER TO LEARN WHAT IS BEST FOR YOU. 5
  6. 6. A Primer on Venture Entity FormationShould I create a legal entity?Yes, you absolutely should create a legal entity for your Venture. The overriding reason is that most(not all) legal entities give you, the founding Venturer(s), limited liability. This means that barringspecific criminal acts, you and your assets cannot be held liable for the venture’s debts in a situationwhere the venture’s liabilities exceed its assets. You will only be liable for the amount that your firm hasinvested in the venture, and nothing more. You may lose the venture, but not your business.A limited liability entity also provides financial benefits: the ability to deduct more business expensesfrom annual revenue when calculating taxable income than would be possible without an entity. Thisrequires the limited liability entity to make sure that the company: 1. is adequately capitalized (it has the money necessary to cover the reasonably predictable legal and business responsibilities of the business); 2. keeps clean accounting books and has accounts that are separate from the personal accounts of its owners or employees; and 3. complies with corporate governance laws and properly maintains all legal documents.Forming a corporation or LLC structure also usually makes it easier for the venture to borrow moneyand to sell all or parts of the venture in the future. It is important to note that the longer a ventureoperates without a legal entity, the more complicated and expensive it becomes to transform it into aseparate, legal entity. For this reason it is very important to form a legal entity as soon as feasible.So what entities are available?Generally speaking, Venturer(s) are faced with three entity choices. They are: 1. C-Corporation 2. Limited Liability Company (LLC) 3. S-corporationThat’s it. Chances are that you’ll have absolutely no interest in (1) a limited liability partnership, (2) alimited partnership, or (3) a general partnership. Why not? Because they (1) are used specifically forprofessional entities like a law firm, (2) require one partner to have unlimited liability, or (3) arecompletely unlimited liability, respectively.Each entity has its own advantages and disadvantages which we will outline briefly here. 6
  7. 7. C-CorporationA corporation is made up of three groups of people – the shareholders, the board of directors and theofficers, although the same person can hold multiple positions. The board of directors is formally electedby the shareholders and represents their interests. It is the board of directors that hires the officers of thecompany, also known as management. Management’s job is to oversee the day-to-day operations of thecompany. Many decisions, however, require the approval of the shareholders and/or the board ofdirectors. A corporate structure is thus a highly organized and rigid structure of governance that can oftenbe quite burdensome. A corporation requires a slew of corporate governance documents that must befrequently updated. It also requires that annual meetings be held for shareholders and the board ofdirectors.Notably, C-corporations are subject to double taxation. They are taxed a corporate income tax at the endof the fiscal year in addition to the personal income taxes and dividend taxes that its owners andemployees pay. Federal corporate income tax is about 15% to 35% of profits, and most states also havecorporate income tax. This means after a C-Corporation has paid its expenses for the year, it will betaxed at least 15%-35% of whatever is left above the amount the company started with that year.Reasons to opt for a C-corporation: 1. Desiring a board of directors that is distinct from the officers and/or shareholders of the company 2. Institutional investors typically will invest only in C-corporations because of the corporate structure and governance.Limited Liability Company (LLC)Generally it provides the same legal protections from personal liability as a corporation, but is governedmore like a partnership than a corporation. Whereas a corporation’s owners are called shareholders, theowners of an LLC are known as members. An LLC does not require a board of directors or even officersand can simply be managed directly by its members, if so desired. It can also be structured more like acorporation, with managers that are distinct from its owners. LLCs allow for significantly moreflexibility than do corporations. For instance, the owners of an LLC can allocate distributions inwhichever way they see fit. Even if the ownership of an LLC is split 60/40, the owners can decide tosplit the profits 50/50 - something that is not possible in a corporation without a significantly morecomplicated structure.Reasons to opt for an LLC include: 1. If your business only has a few investors and you do not anticipate receiving outside financing in the near future. 2. Pass-through/flow-through taxation. The LLC’s income and expenses “pass through” the entity and are treated as the income and expenses of its owners. This means that there is no corporate tax, and the owners can even apply losses of the company against their personal income. 3. LLCs may qualify for the additional tax benefits an S-corporation confers. (see below) 7
  8. 8. S-CorporationIn order to qualify for S-Corporation status a corporation must meet several conditions: 1. The business owner files for an S-corporation election; 2. All shareholders must be residents of the United States; 3. The corporation may only have one class of shareholders and may not have more than 75 shareholders; 4. The company’s shareholders must be any of the following: individuals, estates, certain trusts, certain partnerships, tax-exempt charitable organizations, and other S corporations (but only if the other S corporation is the sole shareholder). This means S-Corporations may not be owned by other C-Corporations, LLCs, or foreign residents. If any of the requirements are not met at any time, the corporation automatically loses its S-Corporation status and will be treated as a C- Corporation.Why would one elect to form an S-corporation instead of the default C-corporation? 1. Flow-through/pass-through taxation, like the LLC. 2. The ability to reduce owners’ payroll taxes. Business owners can reduce their self-employment taxes. Any small business owner who has not made an S-Corp election and uses Schedule C for their personal tax return for 2010 is subject to both employer and employee FICA and Medicare payroll taxes at 15.3% up to $106,800, and 2.9% Medicare for Schedule C net income greater than $106,800. If the owner of an S-corporation pays himself/herself a “reasonable salary”, the rest of the net income is not subject to these payroll taxes.Can an LLC get the tax benefits of an S-Corp Election?Yes, if it makes an S-Corporation election as long as the entity meets the IRS criteria to be taxed as an S-Corp, files an S-Corp election, and gets approved by the IRS to be taxed as an S-Corporation. Without anS-Corporation election, single member LLCs default to be taxed as sole proprietors, and multi-memberLLCs defaults to be taxed as a partnership since they are considered “disregarded entities” unable to getthe tax benefits of an S-Corp election.However, if a single or multiple member LLC meets the IRS criteria to be classified as an S-Corp and theS-Corp election is filed and approved by the IRS, then for tax purposes (not legal purposes), the entity istreated like an S-Corporation.Where should I form my entity?This can be a very complex question. If you are looking to grow the company and get outside investment,then you should probably form an entity in Delaware. If your entity will have real estate holdings,Nevada might also be a good option. Otherwise, it might make the most sense to simply form the entityin the state where you will be conducting most of your business. 8
  9. 9. A Primer on Employment AgreementsOnce an employment relationship exists, a company is required to adhere to applicable labor laws,regardless of whether a newly formed venture has one employee or more. Three agreements are basic to acompany.1. Employment or Service AgreementsA new venture should determine which of its workers are employees and which are independentcontractors. The workers’ status will determine what benefits he or she is owed during employment andat its conclusion. A new venture is building its reputation not just for its product, but for its staff and forfairness as an employer as well. To this end, a venture should have a written agreement to clarify for itsworkers and itself a position’s expectations, benefits and responsibilities. A written contract delineatesscope and hours of work, how the relationship is to continue, and how it is to be terminated.2. Nondisclosure AgreementsYour venture’s ideas, methods, organization, and products are entitled to varying degrees of protection.With products and secrets more esoteric and virtual than ever before, it is essential that expectations andresponsibilities are set forth in black and white. A nondisclosure agreement serves a dual purpose: iteducates the employee or contractor and it protects the venture. A clearly written nondisclosure agreementwill tell your workers what his or her responsibilities are toward the venture and what the law considers tobe venture property.3. Non−competition AgreementsCan a part-time employee hold another job while working for you? Can he or she work for a directcompetitor a year after he involuntarily leaves his employment? Does this change if he owns part of yourbusiness? What if the competitor is anywhere in the world instead of in the same country? Differentstates have different laws regarding the restrictions that will be enforced once a worker leaves yourventure. It is important for your venture’s future and stability that you take full advantage of whateverprotections the applicable law affords. In some states, non-competition agreements are generally notenforceable except in connection with the sale of a business. 9
  10. 10. A Primer on Stock Option Agreements and Restricted Stock AgreementsWhy have a stock option plan?Ventures often prefer to compensate employees using stock options when possible because it does notrequire a cash outlay. In addition, employees may prefer the favorable tax treatment associated with stockoptions. Stock options also often give employees a stake in the long-term success of the venture thatsalaries or bonuses often do not.What is a stock option?A stock option is the right to acquire a certain number of shares of stock for a specific price (the “exerciseprice”). Usually, the employer does not permit an employee to exercise the right to purchase stockimmediately on the date the stock option is issued. Rather, the right to purchase stock typically “vests” oraccrues over a period of time or upon meeting certain company performance goals. This encouragesemployees to remain with the company for the rest of the vesting period and help the venture meet itsgoals.Tax consequences of Incentive Stock Options and Non-statutory Stock OptionsThere are two forms of stock options: 1. Incentive stock options (“ISO”) and 2. Non-statutory stock options (“NSO”).ISOs are different from NSOs in that ISOs typically receive more favorable federal tax treatment if theoption meets certain requirements of the Internal Revenue Code.When granted, both ISOs and NSOs should have an exercise price that is not less than 100 percent of thefair market value of the underlying stock. Neither ISOs nor NSOs are taxable upon grant to the employeeor when the option vests. The difference between them lies in the tax consequences when the option isexercised. When an NSO is exercised, the employee recognizes compensation (ordinary) income in anamount equal to the spread at exercise. An employee does not recognize taxable income on exercise of anISO. However, the spread at exercise is includible in the employee’s federal alternative minimum taxable(“AMT”) income and may give rise to AMT tax liability.If stock acquired upon exercise of an NSO is held for more than one year, any gain realized on thedisposition of the stock is taxed at favorable long-term capital gain rates. ISOs must be held for at leasttwo years from the date of grant and at least one year from the date of exercise to qualify for favorablecapital gain tax rates. Otherwise, the employee recognizes compensation income that is taxed at ordinaryincome tax rates.The other difference between ISOs and NSOs is in the benefit to the employer: for NSOs, the employercan take a deduction equal to the amount recognized by the employee upon exercise of the NSO. ForISOs, there is no deduction. The different aspects of ISOs and NSOs provide flexibility in tailoring anequity compensation plan to fit a venture’s needs. 10
  11. 11. What is restricted stock?Instead of issuing stock options, some ventures issue “restricted stock.” Restricted stock refers to stockthat is transferred to an employee as compensation for services, subject to a vesting schedule. Theemployee usually is not required to pay for the stock. If the employee does not remain with the employeruntil the end of the vesting period, the stock must be returned to the employer. If the employee has paidany amount for the restricted stock but then fails to become vested, the employer usually refunds thepurchase price to the employee. A discussion of the tax consequences of restricted stock is beyond thescope of this primer and requires a detailed conversation with a tax attorney.Given the complex legal, accounting and tax issues, a company should seek advice before implementingan equity compensation plan. 11
  12. 12. A Primer on TrademarksTrademarks identify and distinguish a business, product, or service in the marketplace. Trademarks canconsist of words, names, symbols, or devices or any combination thereof. Brands are trademarks.Trademarks often are a business’s most valuable asset. For example, the worlds most valuable brand,Coca Cola, was valued at more than $70+ million dollars in 2010.Clearing a name for registration with the Secretary of State’s office is not the same as conducting atrademark search. Corporate formation and domain name registration do not confer any trademark rights.The trademark search and registration (aka trademark prosecution) process can be long (typically 1.5 to 2years) and complicated.Trademark BasicsThere are five basic facts to keep in mind when dealing with trademarks: 1. U.S. trademark rights are governed by a system of “priority” or “superiority” -- the first person /entity to use a mark in interstate commerce can prevent all others from using an identical or similar mark for identical or similar services. 2. Common-law trademark rights (those not associated with a federal trademark registration) are geographic in scope and limited to the locations in which the mark has been used. Common law trademark rights are more difficult, and therefore more costly, to prove than rights associated with a state or federal trademark registration. 3. U.S. trademark rights also may be obtained by filing an Intent to Use (“ITU”) federal trademark registration application, though the mere filing of an ITU application does not convey any trademark rights; registration must be obtained for trademark rights to accrue. 4. Trademark infringement occurs when it is likely that consumers would be confused regarding the source or origin of a product or service. Infringement also exists when consumers would perceive an association between products, or a sponsorship between companies, that does not really exist. This is what trademark professionals refer to as a “likelihood of confusion.” 5. There are 19 variables that determine how much a trademark registration will cost.Trademark SearchingConducting a full trademark search before adopting a mark greatly reduces the chances of being involvedin a costly trademark infringement dispute and having to re-brand down the road. Trademarkinfringement matters often result in the infringer changing its mark, including on letterhead, businesscards, brochures, products, packaging, phone listings, signage, domain names and in all marketing,advertising, and promotional materials. The infringer generally is responsible for bearing the cost ofpurchasing all new materials to associate with its new mark. Federal court litigation poses the additionalrisks of treble damages (three times the trademark owner’s damages), as well as being liable for thetrademark owner’s attorneys’ fees and costs of bringing the suit, in addition to having to pay its ownattorneys’ fees and costs. Many insurance policies do not cover trademark infringement lawsuits, evenunder an “advertising injury rider.” 12
  13. 13. Trademark RegistrationProvided that a trademark is used in interstate commerce, a trademark owner can protect nationwidesimply by federally registering it. Federal trademark registration also evidences the mark’s validity andthe owner’s exclusive right to use the mark nationwide for the goods / services listed in the registration.A certificate of federal trademark registration serves as a “title” or “deed” to the trademark asset, which isespecially important if one plans to acquire funding or transfer ownership.International Classification System and Recitation of Goods & ServicesThe Nice Agreement is an international trademark treaty that sets forth 45 International Classifications ofgoods and services. All U.S. applicants must use this classification system when applying for trademarkregistration. The Patent & Trademark Office (PTO) charges a $325 filing fee per InternationalClassification. It is important to determine in which International Classes the mark is / will be used beforeconducting the trademark search, as you want the search to be as accurate as possible.There is a PTO Manual of Acceptable Identifications of Goods and Services on the PTO’s website, withwhich the applicants must comply whenever possible. Once an application is filed, the applicant may onlynarrow or clarify its recitation of goods / services, no additions or material alterations are allowed.ConclusionTrademarks often are a business’s most valuable assets, as they embody the relationship a business haswith its consumers. Trademarks are the tools that consumers use to identify what they want anddistinguish it from what they don’t (i.e., competitors’ products / services). While the search andregistration process can be costly, especially for a start-up venture, it is always more cost effective to actdiligently and pro-actively in the beginning, rather than scrambling to do damage control down the road.Dispute resolution ALWAYS costs more than trademark prosecution; thus, it pays to search, clearand register marks up front. 13
  14. 14. A Primer on PatentsA patent is a legal document that defines a set of exclusive rights to a new technology, product or service.The exclusive rights are granted to the patent owner for a limited amount of time and can be leveraged ina variety of ways to support a business strategy and add value to a business.Patents have many strategic uses. Patents can be used to create a legal barrier to competition, to establisha portfolio of assets that can be used to generate revenues through licensing or IP transfers or to augmentthe value of a business for purposes of raising seed or venture funding.Patent Basics - What types of innovations are patentable?Under U.S. patent law, any person who "invents or discovers any new and useful process, machine,manufacture, or composition of matter, or any new and useful improvement thereof, may obtain a patent."Virtually “anything made by man under the sun” can be patentable.Utility patents can protect inventions that are novel (new), nonobvious, and useful including the followingtypes of subject matter: 1. Process or method (e.g., method of making or using a product or computer-based processes) 2. Machine ( something with moving parts or circuitry) 3. Article of manufacture (such as a tool or another object that accomplishes a result with no moving parts, such as a new hammer) 4. Composition of matter (such as a new pharmaceutical, food, or toothpaste) 5. Or an improvement of any of the above items. Most patents are for incremental improvements made to known or pre-existing technology - thus typically evolution rather than revolution.Even if the invention falls into one of the above categories, there are certain subject matters that cannot bepatented including mathematical formulas, naturally occurring substances, abstract ideas, or laws ofnature.What does a Patent contain?Patents typically contain: > Background of the Invention > Summary of the invention > Detailed Description of the Invention > Example(s) (Actual or Prophetic) (Optional) > Must include at least one claim. 14
  15. 15. The ClaimsThe claims define the exclusive property right provided by a granted patent. Patents must include one ormore independent claims and may include one or more dependent claims that further narrow theindependent claims. Dependent claims are helpful in the event the broader independent claims are laterfound to be invalid.Provisional Patent ApplicationAA-I & Co. recommends first filing provisional applications since they are less expensive to file comparedto non-provisional applications and can be updated less expensively throughout the following year.However, the provisional application should be as complete as possible so that it can ultimately supportany patent claims issuing based on that initial filing. That is, the provisional application should not beconsidered a shortcut but is instead an opportunity to secure an initial filing date at a reduced cost.Accordingly, we strongly recommend drafting the provisional application as if it were a regular non-provisional application (including claims and drawings), but filing provisionally.Design PatentsIn general terms, a “utility patent” protects the way an article is used and works, while a “design patent”protects the way an article looks. Both design and utility patents may be obtained on an article ifinvention resides both in its utility and ornamental appearance.Design patents may be granted for any new, original and ornamental design for an article of manufactureand protects only the appearance of the article and not its structural or utilitarian features.Patent ProsecutionAfter the patent application is prepared and filed, there is usually at least one office action issued by thepatent office that requires a written response and other formalities to comply with (e.g., the filing ofinformation disclosure statements). Patent prosecution costs can range from $2,000 to $5,000+depending on the complexity and the office actions involved. Currently, prosecution within the USPatent Office typically does not start until at least 12 months after the filing of the non-provisionalapplication.AA-I & Co. Patent ServicesAA-I & Co.’s IP attorneys provide value-added services to clients by combining creativity withextensive experience and expertise in key areas. We help our clients secure valuable patent assets,monetize those assets through licensing or business transactions and develop strategies to enforce patentrights through litigation.Our patent services include:  Advising on the patentability of inventions.  Preparing and prosecuting patent applications to issuance.  Managing and developing strategies for patent portfolios.  Training personnel to help identify and protect patentable inventions.  Performing patent audits to confirm patent assets are optimized for a client’s business strategy in a cost-effective manner.  Generating patent landscapes for product lines and development roadmaps. 15
  16. 16.  Preparing non-infringement and invalidity opinions.  Developing design-around strategies.  Managing infringement matters or other disputes.  Reviewing, negotiating and drafting complex intellectual property, corporate and commercial agreements or other transactions.  Advising on merger and acquisition transactions and conducting due diligence relating to intellectual property issues.Our clients include multi-national corporations, small businesses, early-stage startups and individualinventors. Our IP attorneys also provide “do it yourself” training for cost-conscious clients who wish toprotect their patent assets at reduced cost. 16
  17. 17. A Primer on Initial Venture Capital Financing When you are ready to sell part of the venture to venture capital investors in exchange for cash for the business, it is important to find a good business partner and not just take the first money that comes along. If you have a good idea and business plan, generally multiple investors will be interested. That being said, fewer than 10% of proposals received by venture capital funds typically result in investments. You need to be prepared to be valiant in the face of repeated rejection and confident in your idea and business plan. However, if you receive feedback from venture capitalists please do take it to heart and consider revising your idea and/or business plan. Early stage ventures that are flexible, willing and able to change tend to be more successful. Once you have identified the venture capital (VC) fund you will be working with, you will typically enter into a term sheet outlining the key terms of the investment. The term sheet will include things like how much money the VC will invest, how many shares of stock it will get in exchange for its investment and what other rights, preferences and privileges it will have. You should be aware that in addition to paying for your legal fees, it is typical for the venture to pay the VC’s legal fees (up to an agreed upon amount) from the proceeds of the investment. VCs typically receive Preferred Stock in exchange for their cash, which gives them the right to get paid first, before the Common Stock (which is what you and your employees will own) upon an IPO or acquisition. Both before and after the term sheet is signed, the VC fund will engage in due diligence, where it tries to learn as much as it can about the Venturer(s) and the venture. It is a good idea to have all of your documentation listed, organized and readily available in digital form to share with the VCs. You may want to limit how much you share with the VC prior to receiving a signed term sheet. Keep in mind that just because the term sheet is signed, does not mean the investment is a done deal. If the VCs find something during their due diligence that they don’t like, they may try to renegotiate the terms of the investment or may walk away completely.Once the due diligence is completed, your venture will enter into several agreements with the VC fund, including the following: Amended and Restated Charter This document will be revised to create the Preferred Stock that the VCs will own, as well as to set forth the rights, preferences and privileges of this stock. Stock Purchase Agreement This document will contain the basic terms of the investment, including representations and warranties that you need to make about the company, the number of shares of stock being purchased and the price per share. Investors’ Rights Agreement This document will contain certain rights of the investors such as registration rights (the right of the investor to force the venture to sell its shares in an IPO or in a follow-on offering), information rights (the obligation of the venture to provide the investors with certain information on a regular basis), pre- emptive rights (the right of the investors to maintain the ownership percentage in the venture if the company decides to issue more stock) and additional covenants of the venture (such as an obligation to maintain a minimum amount of insurance and to have all employees sign certain agreements). 17
  18. 18. Right of First Refusal and Co-Sale AgreementThe Right of First Refusal portion of this document obligates certain key stockholders to offer their stockto the VC if that stockholder wants to sell its stock. The VC would have the right for a specified period oftime to purchase the stock from the other stockholder on the same terms and conditions as the 3rd party.The Co-Sale portion of this document allows the VC to sell a portion of its stock to a 3rd party it one ofthe key stockholders tries to sell any of its stock, resulting in the 3rd party buying the same amount ofstock at the same price, but some of the stock would come from the key stockholder and some of it wouldcome from the VC.Voting AgreementThis document accomplishes two things. First it is an agreement amongst the VC, the venture and certainkey stockholders to all vote their stock to elect directors nominated by the VC and certain groups ofstockholders. Second it typically contains a drag-along provision, which obligates most, if not all,stockholders to sell their stock on the same terms and conditions as everyone else, if a certain percentageof stockholders (always more than a majority) agree to sell their stock.In addition to the agreements noted above, there are a few other ancillary agreements that are typicallyentered into in connection with an initial venture financing round. Many “angel” investments also fallinto this category, and follow the same procedures. We are happy to discuss the nature of those ancillarydocuments with you, but they are not generally as heavily negotiated as the 5 documents mentionedabove. 18

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