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Legal Landmines Presentation (092915)
- 1. Legal Landmines What to Know When Starting Your Start-Up Jon O’Connell October 6, 2015 Silicon Valley Startup: Idea to IPO
- 2. WilmerHale 2 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
- 3. WilmerHale 3 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
- 4. WilmerHale 4 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 • Failing to adequately protect trade secrets • Hiring someone who worked for a competitor without addressing IP issues head on
- 5. WilmerHale 5 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
- 6. WilmerHale 6 Capital Raising • Having a poorly articulated or no go to market • The importance of an executive summary, elevator pitch • Highlighting the market, product, 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
- 7. WilmerHale 7 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)
- 8. WilmerHale 8 Choice of Legal Entity • Failing to appropriately limit personal liability • Selecting a legal entity form that addresses short term (but not long term) goals • Incorporating in a jurisdiction other than Delaware • Understanding the difference • Down the road pitfalls • Failing to maintain adequate corporate records
- 9. WilmerHale 9 Working With (Managing) Legal Counsel • Hiring a lawyer who has no start-up experience • Hiring a lawyer who has some start-up 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
- 10. WilmerHale 10 Questions? Contact: Jon O’Connell | WilmerHale 950 Page Mill Road Palo Alto, CA 94304 USA +1 650 858 6144 (t) Jonathan.OConnell@wilmerhale.com