This document summarizes key considerations for startups presented by attorneys from Fredrikson & Byron law firm. It discusses: 1) Choosing an entity, founder vesting, assigning intellectual property, and allocating equity fairly between founders. 2) Raising money legally, avoiding misrepresentations to investors, understanding different securities, and balancing investor rights. 3) Properly classifying employees vs. contractors, obtaining intellectual property assignments, using equity grants and severance appropriately. 4) Repeatedly obtaining intellectual property assignments, using open source software carefully, deciding on patent strategy, and using confidentiality agreements. 5) Preparing for an exit from the start by considering how founders and investors will realize

1. STARTUP WEEK EVENT
5 THINGS ABOUT 5 THINGS THAT
EVERY STARTUP SHOULD KNOW
Presented by:

2. Discussion Leaders
 Kevin Spreng, Shareholder, Fredrikson
& Byron
 David Winkler, Senior Associate,
Fredrikson & Byron
© 2015 Fredrikson & Byron, P.A.

3. 1. Getting Started
1. Entity choice matters, sort of.
– Operating your business through some sort of
entity is far more important than which entity
• Liability protection for personal assets
• Gets the rights parts in the right bucket from
the beginning
– Any entity will accomplish the above and we
can easily change between corporations and
LLCs in the early stages
© 2015 Fredrikson & Byron, P.A.

4. 1. Getting Started
2. Founder vesting is a must.
- Founder vesting must be considered to avoid “free-riding.”
- Free riding occurs when a founder receives shares that are
not subject to vesting and leaves. He or she continues to
have benefit of ownership while others do all the work.
- Founder vesting is usually in the form of a lapsing
repurchase right that allows the company to repurchase the
shares at the original issue price.
- Repurchase right usually lapses in 3 or 4 years but is
sometimes based on performance milestones.
- Investors often insist upon founder vesting. This can be hotly
negotiated.
© 2015 Fredrikson & Byron, P.A.

5. 1. Getting Started
3. Don’t forget assignment of IP.
– Founders (and other service providers) should assign
to the company all code, patents, business ideas and
other intellectual property related to the company’s
business.
– This is usually a simple uncontroversial document for
founders and employees but if it is not done at formation
or prior to employment it can cause significant issues at
financing or acquisition.
– Consultants may request carve-outs and/or right to use
developed IP.
– Investors and acquirers want “clear title” to all IP.
© 2015 Fredrikson & Byron, P.A.

6. 1. Getting Started
4. Each founder should get what’s fair.
– Consider the current economic contribution to
the business, not relationship or friendship.
• Cash, IP, Property can be valued at the
beginning
• A promise to work cannot be valued until it is
actually delivered upon and results in value
to the business
– Always consider what will happen when the
founders hate each other
© 2015 Fredrikson & Byron, P.A.

7. 1. Getting Started
5. Do it right and in writing and don’t make
promises you might not want to keep.
– Often in the early stages of a company/idea people
come and go, ideas are shared, collaborations
occur and through this promises are made. Be sure
any such promises are made deliberately, are tied
to performance and are in writing, ideally prepared
by a lawyer.
– “Back of the napkin” deals (e.g. “you’ll get 10% of
the company if you …”) often come back just before
a financing or acquisition.
© 2015 Fredrikson & Byron, P.A.

8. 2. Raising Money
1. It’s illegal to sell stock, units or notes,
except when it’s not.
– The sale of equity interest in an enterprise is
generally covered by state and federal
securities laws, there are many exceptions to
these laws
– The identity of the buyer(s) (or potential
buyer(s)) drives this issue not the type of
security offered or sold
© 2015 Fredrikson & Byron, P.A.

9. 2. Raising Money
2. No fibs or lies or cover-ups!
– Some sales of equity are “exempt” from registration (i.e.,
don’t have to be registered with the SEC) but they are
NOT exempt for the anti-fraud provision of securities laws.
– The company and control persons can be held liable for
providing information that includes an untrue statement of
a material fact or omits a material fact required to make
other statements not misleading.
– Some exempt offerings have no specific disclosure
requirements but what is provided must be true and not
misleading.
– Purchasers can seek damages or rescission.
© 2015 Fredrikson & Byron, P.A.

10. 2. Raising Money
3. There are big differences among
convertible notes, SAFE, common stock,
and preferred stock but in the end the
investors almost always get their money
back first with subtle or significant
variations.
– Expect investors to get their money back before
founders share in proceeds.
– Occasionally investors will purchase common stock.
– Be sure to understand and model liquidation
preference.
© 2015 Fredrikson & Byron, P.A.

11. 2. Raising Money
4. You need to understand how shares
(and your business) are valued.
Take the time to discuss with lawyer
or read up.
– Investor Values the business, not you:
• Pre-Money = the value of your company now
• Post-Money = the value of your company
after the investor puts the money in
– Valuation methods -- vary
© 2015 Fredrikson & Byron, P.A.

12. 2. Raising Money
5. Most investor’s rights are fairly benign and
standard (although wordy) but be cautious
with board seat, protective provisions and
liquidation preferences.
– Convertible notes - try to avoid repayment at maturity or maturity at all.
– Preferred stock - push for simple liquidation preference – investors get money back or
convert to common and participate in up side but not both. Avoid participating preferred
and liquidation multiples if possible.
– Try to maintain control of the board of directors, if possible. The board controls hiring and
firing of CEO and key corporate decisions including financing and sale of company.
– Limit protective provision – protective provisions are essentially a list of actions that the
company can not take without the investors consent. These provisions shift control of
the included items from the board to the investors.
– Information, registration, pre-emptive, co-sale and first refusal rights are fairly standard.
© 2015 Fredrikson & Byron, P.A.

13. 3. Building the Team
1. You can’t just decide who will be an
employee or contractor, and it makes
a difference.
– Various state agencies make determination, not
the worker or the buyer of services
– Agreement does not change status
– Consequences of wrong choice are bad and the
authorities are cracking down
© 2015 Fredrikson & Byron, P.A.

14. 3. Building the Team
2. Don’t forget to get IP assignments!
– All workers (employees or independent
contractors and working owners) need to
sign an IP assignment agreement at
commencement of engagement
– Get a confidentiality agreement and non-
compete as well if you can
– Don’t just rely on common law
© 2015 Fredrikson & Byron, P.A.

15. 3. Building the Team
3. Equity grants should be subject to
vesting and no acceleration when
possible.
– Equity (options and stock) is typically granted to service providers
(i.e., founders, employees) in exchange for service to be provided
in the future, and should not be vested until such service has been
provided. Vesting is usually time based but can be tied to
performance milestones.
– Investors generally object to accelerated vesting in connection with
a sale of the company because it transfers value from stockholders
to service providers before it has been earned.
– Founders and key executives can often negotiate accelerated
vesting.
© 2015 Fredrikson & Byron, P.A.

16. 3. Building the Team
4. Avoid severance, except when you
can’t.
– Severance should not be offered, it should be
requested
– Only provide severance to valuable contracted
team members; tie severance to noncompete
– Don’t put severance in your employee
handbook either
© 2015 Fredrikson & Byron, P.A.

17. 3. Building the Team
5. On termination always get a release,
if you can.
– Release of claims by the terminated employee
– Typically mutual
– There are timing and rescission rules to take
into account
– Good area to engage a competent lawyer.
© 2015 Fredrikson & Byron, P.A.

18. 4. Protecting your ideas.
1. Did I forget to mention, get an IP
assignment from everyone?
– Get an assignment from all employees,
contractors, and collaborators.
– Investors and acquirers will want to see
them.
© 2015 Fredrikson & Byron, P.A.

19. 4. Protecting your ideas.
2. Use your open source deliberately.
– Using open source software can speed development but
comes with obligations under the applicable license
agreement.
– Understand the obligations before you use the software.
– Some open source licenses require free distribution of
your software if you use the open source code. This can
be a significant business model problem and issue for
investors and/or acquirers.
– Keep track of where the open source is used, the
applicable license and don’t incorporate into key software
without consulting a lawyer.
© 2015 Fredrikson & Byron, P.A.

20. 4. Protecting your ideas.
3. Patent when possible. Yes, you need a
good patent lawyer.
– The importance of patents depends on industry – patenting is
more common in medical device, semiconductor and
hardware industries and may help in securing funding.
– In software and ecommerce patenting is less common and
less likely to help with financing.
– Hire a good patent lawyer to help decide whether to pursue a
patent strategy
© 2015 Fredrikson & Byron, P.A.

21. 4. Protecting your ideas.
4. Use a confidentiality agreement.
– ALWAYS!!!
– Develop your own form agreement and require any
party who might have access to your idea(s) to
execute it before sharing any information with them
– Savvy players will expect to sign an confidentiality
agreement so if someone is shocked you asked,
reconsider
© 2015 Fredrikson & Byron, P.A.

22. 4. Protecting your ideas.
5. Registration of copyright and trademark
are secondary concerns, except when
they’re not – ask your lawyer.
– Sector and market specific
– Branding can be very valuable
– Not all ideas are patentable or justify the cost
of a patent
© 2015 Fredrikson & Byron, P.A.

23. 5. Finding the Exit
1. Preparing for sale starts at the beginning.
– So how are you and your investors going to get your
money (or value) out of the enterprise
– Exit is more than 100% sale:
• Liquidity event
• Strategic buyer
– Entity choice matters (a little) when considering exit
© 2015 Fredrikson & Byron, P.A.

24. 5. Finding the Exit
2. Do everything right and in writing and
don’t make promises you might not want
to keep.
– The night before selling the company is when skeletons creep out of the
closet.
– Remember the woman that sat next to you at CoCo for a few weeks
while you were hatching the idea for your company. You told her that
you would give her 5% of the company if she created a key feature of
your software. She started but flaked out and you never used any of her
code. She is going to want her 5%.
– And it could be worse if you did use her code but didn’t get an IP
assignment.
– Do it right and do it in writing.
© 2015 Fredrikson & Byron, P.A.

25. 5. Finding the Exit
3. You must keep track of ownership, every
share, unit, option, and every promise on
a napkin.
– Clean it up if you have not been good to date
– Going forward write everything down
– Even one undocumented claim on equity can
kill a deal – buyers hate the unknown
© 2015 Fredrikson & Byron, P.A.

26. 5. Finding the Exit
4. One last time, always get assignment of
IP ownership.
– See Item 2
© 2015 Fredrikson & Byron, P.A.

27. 5. Finding the Exit
5. Engage with strategic investors carefully.
– Consider long term exit before you take their
money
– Strategic investors have their best interest
mind and not yours when they invest.
– Document the relationship and goals carefully
and watch out for control grabs
© 2015 Fredrikson & Byron, P.A.

28. Contact Information
Kevin Spreng
Fredrikson & Byron, PA
kspreng@fredlaw.com
612-492-7395
David Winkler
Fredrikson & Byron, PA
dwinkler@fredlaw.com
612-492-7233