YS WorkShop- Inventus Law on legal issues for startups


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Anil Advani of Inventus Law presented at a YourStory.in workshop to startups who're looking to setup office in the US.

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YS WorkShop- Inventus Law on legal issues for startups

  1. 1. LEGAL ISSUES FOR STARTUPSAnil AdvaniManaging Partneranil@inventuslaw.comPRESENTS
  2. 2. 2AgendaPART I: STRUCTURING U.S. OPERATIONS• Reincorporate Indian Company as a U.S. Parent Company• Incorporate a U.S. Subsidiary• Incorporate an entirely independent CompanyPART II: LEGAL ISSUES RELATING TO A STARTUP COMPANYIncorporation ProcessEmployment Issues; IP Ownership IssuesEquity StructureFinancing OptionsStrategic Transactions
  3. 3. 3PART I: STRUCTURING U.S. OPERATIONS• Option 1: Reincorporate Indian Company as a U.S. Parent Company• Option 2: Incorporate a U.S. Subsidiary• Option 3: Incorporate an Independent U.S. CompanyINVESTORS U.S. ParentIndian SubInvestment100%INVESTORS Indian ParentU.S. CompanyFounder StockInvestment100%Founder StockOption PlanOption PlanU.S.CompanyOwnership, InvestmentandManagementwill beunclear
  4. 4. 4Reincorporate Indian Company as a U.S. Parent company:• Only viable option where the investors and/or potential exit and/or most strategic customersand/or partners located in the U.S.• Tax issues need to be handled carefully; valuation of Indian company shares needed• All IP, founder stock, Option Pool, Investors, Customers and Revenues will be held in theU.S. Company• Need to carefully structure management, Board and Shareholding• IP can be licensed to Indian company for sale in India, or directly to Indian customersthrough website• Transfer Pricing Issues; Immigration related issuesIncorporate a U.S. Subsidiary Company:• Good option where the purpose of U.S. company is limited. For example, for collectionsfrom, or marketing and managing, U.S. customers of the Indian company• Easy to set up and operateIncorporation a completely independent company:• Easy to set up and operate• Not a good option if need to restructure for U.S. financing, licensingand/or potential exitSETTING UP U.S. OPERATIONS (CONTD.)
  5. 5. Part II: Life Cycle of a StartupEXIT:ACQUISITIONBRIDGEROUNDINITIALPUBLICOFFERINGSERIES CSERIES BSERIES ABIGCUSTOMERSMALLCUSTOMERANGEL ROUNDSERIES DIncorporationFounders StockStock Incentive Plans Selecting and Negotiating with VCsDebt vs. EquityEmployee MattersIP ProtectionLicensing and other IP MattersStrategic PartnershipsThe bigquestion: whenand how toexit????
  6. 6. 6Equity StructureInitial Capital Structure• Total Authorized: 10MM shares of Common Stock• Difference between Authorized, Issued, and Outstanding Capital• Founder Stock: 7-8MM• Issue stock early to avoid tax issues• Vesting (look back period for vesting)• Acceleration: Single Trigger versus Double Trigger• 83(b) elections: file on time (within 30 days of purchase)!• Option Pool: 2-3MM• Vesting: Straight 4 year vesting, 1 year “cliff”, with monthly vesting thereafter• Acceleration: Could hamper acquisition• Outside Investors: Preferred Stock
  7. 7. 7Seed Financings:• Founders, Friends, Family, Angels, Early Stage VCs• Incubators: YC, Idea labs, Citrix Accelerator, 500 Startups, Tandem, and Alchemist• Convertible Notes with a “kicker”, either a discount or warrant coverage• Typically between $250k to $1MM• Debt that converts into preferred equity in the “next qualified financing”• Avoid any additional rights to seed investors, although institutional investors may require rightto lead the next round, management rights, board seat and protective provisions• Look out for any issues that may affect future financings.Venture Capital Financings:• Valuations• Preferred StockStrategic Transactions:• Licensing Arrangements• Revenue Share; Affiliation Agreements; Reseller Agreements• Mergers and AcquisitionsFinancing Options
  8. 8. 8Venture Financing - Term SheetThree Main Purposes of Term Sheet• Pricing/Valuation• Percentage of the Company to be sold (Pre and Post Money)• Liquidation Preferences• Dividends• Anti-Dilution Protections• Management/Controls• Board Rights• Protective Provisions• Covenants• Liquidity Rights• Co-Sale/Right of First Refusal• Registration Rights• Drag-Along Rights• Redemption Rights
  9. 9. Venture Financing (cont’d.)Valuation• Methodology for valuation:• Discounted Cash Flow• Multiple of Revenues/Sales, Multiple of Earnings• Customers, Revenues, Management Team, Patent Strategy, Competition, Size of the market,other precedents• Getting multiple term sheets always helps, but be careful how you play your horses!• Watch out for milestone based investments• Not the only issue to think aboutTime, Process, and Expense• Time: 2-3 months from start to finish• Process: IP diligence, Legal diligence, Schedule of Exceptions, Financing Documents• Expenses: Legal fees (both sides), Investor expenses
  10. 10. 10Privileges of Preferred Stock• Voting (Board) rights• Protective Provisions• Dividends: Cumulative versus non-cumulative; should be non-cumulative and discretionary, i.e.,“when, as and if declared by the Board”• Conversion Rights: Right to convert into Common Stock; Upon requisite preferred holders‟consent or upon a “qualified” IPO• Anti-dilution Protection: Full Ratchet is bad; Broad-based weighted average is good and standard• Redemption: Watch out, not a good sign; right should be at least 5 years out and spread over aperiod of time• Registration rights: standard registration rights OK, nothing to fight over• Information Rights: standard information rights OK, nothing to fight over; limit to “Major Investors”• Right of First Offer: maintain their pro rata ownership; right to “gobble up”; limit to “MajorInvestors”• Right of First Refusal and Co-Sale Agreement: OK, but understand how it works• Board Observer Rights: OK, but need to be careful as VCs don‟t likethe distraction of too many observersVenture Financing (cont’d.)
  11. 11. 11Strategic TransactionsLicensing Arrangements• License Terms:• Exclusive versus Non-Exclusive• Geographical Limitations• Ownership of IP and “Work Product”• Other Material Provisions: Fee Structure, Term, Termination, Assignment, and Indemnification.Partnerships• Affiliate Agreements• Reseller AgreementsMergers and Acquisitions• Set up right legal structure• Ownership of IP is critical• Contract terms play a big role in valuation
  12. 12. 12Terms of Use and Privacy PolicyWhy are these policies important?• Contract with Users• Subject Users to terms and conditions• Key Terms: Registration requirements (Restrict use of site or app to users of a certain age),IP Ownership, Define fee structure, Limit Company‟s liability, Define publicity rights,Indemnification, Assignment, Jurisdiction, Customer Support and Questions• Content License:• Limited license for use of your site and content to users• Users assign their content ownership rights to the company• Compliance with Digital Millennium Copyright Act• Restrict User Activity• Don‟t post hate speech• No spam• No harassment of other users• Data Security• Ensure compliance with the terms you‟ve set• Inform users of the data the Company collects: Personally Identifiable Information (PII)versus Non-PII• Inform users of the Company‟s use of their data• Provide users with the opportunity to Opt-Out of use of Cookies
  13. 13. Terms of Use and Privacy PolicyRisks if you don’t have these policies in place?• Unchecked liability• Collecting User Data without consent• No restrictions on User activity• Lost value• Unclear ownership of content/contributions• Copyright, patent, and trademark implicationsChallenges with these policies?• Acceptance of the policies by users• Should „Manifest Consent‟• Evolving Rules• EU new standards on cookies differ from other countries• Global Enforcement issues
  14. 14. 14Q&AThank you!