Intellectual Property Primer - Entity Formation and Selection

Ideas to IPO:
Entity Formation & Selection
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JASON PUTNAM GORDON, ESQ.
jpg@putnamgordon.com

Overview
• Background
• Entity Formation
• Initial Ownership Structure
• (Other Common Issues)
• Intellectual Property
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Personal Background
• Practicing law since 2005.
• My firm focuses on handling the corporate needs of
emerging-growth companies.
• Before I started my practice, I was a litigator at WSGR.
• Licensed in CA, DC, MA, NJ, & PA, but I only practice in
CA.
• I have made almost 1,000 skydives.
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What is your Background?
• In a startup?
• Founder?
• First startup?
• Previous successful exit?
• Who is interested in entity
formation?
• Who is interested in IP?
• What are some corporate issues
you are facing?
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Important Caveats
• Today’s Discussion is General Information – Not
Legal Advice
• That means while we’ll be discussing rules and
exceptions, those rules, exceptions, exceptions to the
exceptions, may not be applicable to your situation.
• You need to get competent specific legal counsel to
review all facts and circumstances. Our off-the-cuff
answers to your questions are not legal advice.
5

Entity Formation:
Creating Value
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Company
Investors
(Capital)
Idea(s)
(Intangible Assets)
Technicians
who have skills
like: sales,
marketing,
business acumen
(Services)

Entity Choice
• No entity
• No shield against personal liability
• No ability to grant or transfer
equity interests
• Accidental partnerships
• Limited Liability Company
• No double taxation
• Not as attractive to venture capital
• Harder to use equity to acquire
other businesses
• Difficult to reward employees with
equity
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Entity Choice Cont.
• Corporation
• Limited liability
• Taxed as a separate entity
• Developed Management
structure
• Easiest to grant/use equity
• Jurisdiction
• Usually Delaware
• Beware of Section 2115
8

Mechanics
• Name selection and
reservation in jurisdictions
• Different than trademark rights
• File certificate of
incorporation
9

Completion of Formation
and Securities Laws
• Not done with filing with DE Secretary of State
• Register with CA and local authorities
• Incorporator actions
• Director actions, e.g.,
• Bylaws
• Stock Issuance
• Approval of agreements
• Founders agreements
• IP Assignment
• Securities filings
• 83(b) elections
10

Initial Ownership
Common Considerations
• Who gets what?
• What happens if/when
someone leaves?
• What protection is possible
against later investors?
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Who gets what?
• Founders
• There isn’t a market for this
• Generally the person(s) running the show
should have the biggest stakes(s)
• Do others have any stake already?
• Nominal amount/IP
• May not be possible if too far along
• Post-Founder, Initial Hires and/or
advisors
• Possibly restricted stock
• Possibly stock options
12

What happens if someone leaves?
• Vesting
• Must get agreements in place
• Term, typically four years with a one-year cliff
• Acceleration
• 83(b) elections!!!
• May get renegotiated by later investors
• Shareholder Agreements
• Rights of first refusal
• Co-sale rights
• Drag along rights
• Restrictions in bylaws
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Protections from later
investors
• Is this possible?
• What is your clout
• Usually, not worth time/money because of
market power of invests
• What are the options?
• High-Vote founders shares
• Founder protective provisions against a sale
without founder consent
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Other Issues:
Seed Financing Options
• Common Stock
• Frequently done by DIYers and attorneys who do not practice in this space.
• Places a value on the common stock and makes it difficult to issue equity to later hires.
• Convertible Notes
• Very common as large as 1.5 million.
• Avoids valuing the company and a value on the common stock.
• Convertible Equity
• Started to be in vogue ~2012 not heard that many people doing it.
• Series Seed
• Essentially a slimmed down preferred round.
• Can put later VC investors on top of the preferred to seed investors
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Other Issues:
Hiring and Wage
• All full-time individuals (and maybe part-time)
will be considered employees for purposes of
federal and state wage laws.
• Calling them consultants, does not fix that issue.
• Entitled to minimum wage.
• You are going to be responsible for withholding taxes.
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Protecting Your Intellectual
Property
• Technology assignment agreements by founders
• Proprietary Information and Assignment Agreements
• Consulting agreements for other service providers (even if they are
out of the US)
• Licenses from third parties
• Be mindful of other obligations of founders
• Open source issues
• Non-solicitation and non-competes among founders and employees
• Depending on the scenario scope of enforceability will vary
• Trade Secrets – you must protect
• Register your IP?
• Let’s hear from Mark Koo.
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Questions/
Comments
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Intellectual Property Primer - Entity Formation and Selection

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