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Legal Issues for Startups

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Presentation given to the participants of the Launchpad program run by NDRC in Dublin's Digital Hub, including updated links to NVCA term sheet and guidance on retaining professional advisers

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Legal Issues for Startups

  1. 1. National Digital Research Centre Launchpad Peppe Santoro @VentureLawIE Venture Legal Services Monday 20 February 201220 February 2012 1
  2. 2. Company Incorporation • Get it done sooner rather than later • Ireland is one of the world’s easiest places to incorporate • Pointless to incorporate if you don’t fully use structure • Minor ongoing compliance burden • Subsidiaries / foreign companies • If all comes to all, redomiciliation is possible 20 February 2012 2
  3. 3. Classes of shares • Authorised v Issued Share Capital • Nominal (aka “par”) v Market value • Ordinary • Preference • Redeemable • Coupon / Cumulative 20 February 2012 3
  4. 4. Brand protection• Domain and company names are obvious first step• Chinese (& Arabic?) character domains less so• Registered business names? Purpose is compliance, not brand protection• Trade marks – useful if infringement or other issues arise (McCambridges v Brennans – traditional but good)• When? Phase 2 / 3 of growth 20 February 2012 4
  5. 5. Share issuance & registration • This is a fundamental issue – get it wrong and you’ll spend a long time putting it right • Whether in an exit or a fundraising, shares are your currency • Matters less what you’ve agreed in principle – share ownership stems from what’s on the share register (register of members) • Legal v Beneficial interests • Options 20 February 2012 5
  6. 6. Accounting & company secretarial services • Bookkeeping services (monthly/hourly) (to keep a handle on routine financial transactions) • CFO Services (monthly amount) (to provide an outsourced CFO function or to support the CFO role) • Company secretarial (flat annual fee – includes most customary transactions and filings) 20 February 2012 6
  7. 7. Founders’ equity split • The default is often equal but often that’s not appropriate • Consider founder vesting from day one to make sure a member of the original team doesn’t leave with a substantial equity early on • Share vesting in Ireland is usually best done on a reverse vesting basis (for tax reasons) • Prepare for dilution and to be able to follow your founder equity if at all possible • Don’t let it become a divisive issue 20 February 2012 7
  8. 8. Employee shares • Employee share allocations will almost always involve an option scheme • Make sure your option scheme fits within your overall share structure • Plan to allocate some shares to an option pool from the start (15% is common but higher or lower can be appropriate) • Again, make sure that these are subject to vesting and do your best to mitigate adverse employment law implications 20 February 2012 8
  9. 9. Intellectual property • Distinct from brand identity – talking here about functional / value based IP. It should (nearly always) vest in the company • Usually includes copyright but may include patents, secret know-how or other factors. • Make sure you understand and defend what makes your company special • Some things you can defer but others you can’t: eg public disclosures will make inventions non-patentable in many jurisdictions 20 February 2012 9
  10. 10. Shareholders’ agreements • Disputes among shareholders can be the death knell of an early stage startup • More important than the form and legal content of the agreement is the thought process, collaboration and values that underpin what you agree in principle. • Some key issues to address: board representation, information rights, drag rights, tag rights, preferences, anti-dilution, pre-emption rights • Interacts with articles of association 20 February 2012 10
  11. 11. Employment agreements • Sometimes glossed over in the startup process (‘poor relation’ to shareholders’ agreement etc.): budget time & money to get right • If you wind up in a dispute you’ll spend more time looking at these agreements than you ever anticipated – “a stitch in time…” • The incidence of employment disputes in startups is much higher than published cases would indicate • Be mindful of how processes and procedures can impact on form of agreements: always take advice before taking disciplinary action 20 February 2012 11
  12. 12. Standard terms & privacy policies • Can be pretty turgid stuff but get it done and out of the way early and get it checked by a lawyer. • Make use publicly available guidance such as that offered by the Data Protection Commissioner • Most companies look to their competitors when designing the shape of their T&Cs and identifying the issues they really want to cover (but please don’t just do a direct cut & paste) 20 February 2012 12
  13. 13. Basic legal agreements • B2C businesses will have lesser need for customer agreements but may have material supplier, consultancy, infrastructure or other agreements • If your business is going to be B2B you’ll need bespoke agreement and you’ll have to be flexible but you might still get to propose terms (particularly if your business is novel) • Getting to propose the first draft can be powerful • Get legal help and try to standardise your approach as much as possible. 20 February 2012 13
  14. 14. Mind the exit • Once you’re up and running, everything you do should be with one eye on the implications for your exit • Items that can affect terms, availability or value of an exit include: change of control clauses, uncapped indemnities, equity held by industry, exclusive distribution arrangements, key licensing/supply deals • Honesty is the best policy – “sorry, that could really hurt our exit” can be a really powerful negotiating stance 20 February 2012 14
  15. 15. Regulatory approvals • If business requires regulatory approval, your costs will be higher, your time to market will be slower and your capital needs will be greater • Some common regulatory hurdles: • data protection (registration and transfer outside EEA) • pharmaceuticals or medical devices • E-Money/Payment services • Regulated professions (law, medicine, etc.) 20 February 2012 15
  16. 16. Forward planning • Online resources to understand term sheets and related investment issues and structures. In particular see Brad Feld’s Term Sheet Series and Mark Suster’s Blog. The US NVCA has a detailed model term sheet and other documents and the ABA has also published detailed guidance. Get as much of this know-how as possible before you need it. • Beware of timescales involved in raising investment • Due diligence processes are relatively standard: it’s possible to prepare properly far in advance • Build professional relationships early and on the basis of a long-term value proposition 20 February 2012 16
  17. 17. What to look for in professional advisers? • Track record: all good advisers should be comfortable for you to talk to a couple of existing or former clients and be able to talk • Experience: it’s likely that there are professionals who will understand your business and worth seeking them out • Work plan: skilled practitioners will know the issues you are likely to encounter and should be able to guide you accordingly • Fee structure: expertise worth having usually isn’t cheap but a qualified professional should be able to offer certainty of fees (within reason) or at least absolute clarity 20 February 2012 17
  18. 18. Questions 20 February 2012 18
  19. 19. National Digital Research Centre Launchpad Peppe Santoro Venture Legal Services Monday 20 February 2012 www.venturelaw.ie20 February 2012 19

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