Legal Land Mines: What to Know When Starting Your Startup


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Learn how to open a business the legal way. Legal advice for startups from WilmerHale's Mick Bain and Janene Asgeirsson. This deck includes common legal mistakes, founders equity, protecting intellectual property, employee compensation, raising capital, hiring independent contractors and interns, and working with legal counsel.

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Legal Land Mines: What to Know When Starting Your Startup

  1. 1. WilmerHale 1
  2. 2. Legal Landmines What to Know When Starting Your Startup Mick Bain Janene Asgeirsson March 11, 2014 Wifi: cs-guest | Password: bgfwh03e2 @MickBain | @Jasgeirsson | @WilmerHaleTech | @Intelligent_ly
  3. 3. WilmerHale 3 Categories of Most Common (and costly) Mistakes • Founders’ Equity • Protecting Intellectual Property (IP) • Employee Compensation • Capital Raising • Independent Contractors and Interns • Choice of Legal Entity • Working With (Managing) Legal Counsel
  4. 4. WilmerHale 4 Founders’ Equity • Automatically splitting the “pie” into equal shares • Promising a set ownership percentage • Over complicating the capitalization table • Failing to subject shares to vesting and/or seeking full acceleration upon termination/change of control • Missing the filing deadline for 83(b) elections • Failing to comply with securities laws • Waiting too long to issue equity to founders
  5. 5. WilmerHale 5 Protecting Intellectual Property • Assuming that former employers have no rights in IP created by a founder during his/her employment • Failing to have founders (or others) assign ownership rights in IP to the company • Pre-inception v. on-the-job inventions • Using third party IP without a license • Misunderstanding the implications of open source software • Failing to adequately protect trade secrets • Hiring someone who worked for a competitor without addressing IP issues head on
  6. 6. WilmerHale 6 Employee Compensation • Failing to adopt an appropriate equity incentive plan • Tax benefits • ISO requirements • Creating stock valuation problems (409A) • Impact of recent developments on stock price • (Over)-estimating the discount of CS from PS • Backdating options (and premature option grants) • Internal v. third party valuations • Vesting and acceleration, revisited • Post-termination acceleration
  7. 7. WilmerHale 7 Capital Raising • Having a poorly articulated or no business plan • The importance of an executive summary • Highlighting the market, competitive advantage and team • Misunderstanding financing structures and/or terms • Taking money from anyone who offers or from unaccredited investors • Utilizing a “finder” to secure investments • Failing to comply with securities regulations • Rescission liability • Broker-dealer issues
  8. 8. WilmerHale 8 Independent Contractors and Interns • Misclassifying employees as independent contractors • Income tax obligations (W2 v. 1099) • 20 factor test (control v. independence) • Back taxes, penalties and interest • Classifying anyone you can’t afford to pay as an “intern” • School credit • Back taxes, penalties and interest (yes, it applies here too)
  9. 9. WilmerHale 9 Choice of Legal Entity • Failing to appropriately limit personal liability • Selecting a legal entity form that addresses short term (but not long term) goals • Misunderstanding or over-emphasizing taxation issues (single v. double level taxation for startups) • Incorporating in a jurisdiction other than Delaware • Understanding the difference • Down the road pitfalls • Failing to maintain adequate corporate records
  10. 10. WilmerHale 10 Working With (Managing) Legal Counsel • Hiring a lawyer who has no startup experience • Hiring a lawyer who has some startup experience • Allowing too many (legal) cooks in the kitchen (“over-lawyering”) • Over-complicating the incorporation process • Failing (or being afraid) to seek advice • Managing (or mismanaging) expectations and costs
  11. 11. WilmerHale 11 Questions? Contact: Mick Bain – 781-966-2027; Janene Ásgeirsson – 617-526-6645;