This session was presented by Mark Graffagnini, Managing Member of Graffagnini & Associates. Find out more at http://graffagninilaw.com.

1. RAISING ANGEL & VENTURE CAPITAL:
GETTING YOUR LEGAL DUCKS IN A ROW
Mark J. Graffagnini
Managing Member
Graffagnini + Associates, LLC
New Orleans, LA
mg@graffagninilaw.com @GraffagniniLaw graffagninilaw.com

2. BACKGROUND
 Graffagnini + Associates was founded in 2010
 Focus on start-up company, venture capital investor,
securities reporting and M&A issues over last 10 years
 We represent companies around world in financing,
M&A and formation transactions
 Founding Board of Directors, NO/LA Angel Network, Inc.
 Entrepreneur & Investor
 Aestus Power
 Collector App
 CaliBurger
 Cleantech Systems
 Data company in stealth mode
 www.nanolabweb.com

3. OVERVIEW
 Early Stage Legal Issues
Entity
Choice
Founders
Issues
Employee
Incentives
Seed Capital
Venture &
Angel
Capital
Managing
Legal
Costs

4. 1. FORMATION & CHOICE OF ENTITY
Factor LLC C-Corp
Taxation Pass-through
•Profits/Losses flow
through to owners
Double-taxation:
•Corp. pays tax on profits
•Stockholders pay on
dividends
Type of Investor Not generally preferred for
VCs, but some PE groups
prefer:
•Exit Issues
•Distribution of income
Generally preferred for VCs
•Limited partners
•Certainty
Management/
Governance
Flexible
•Single manager
•Board of Managers
•Member-managed
Less Flexible:
•Board of Directors
•Officers
•Stockholders
Employee Incentive Plans More difficult
profits interests & less
favorable tax treatment
Incentive Stock Options

5. ADDITIONAL CONSIDERATIONS IN ENTITY CHOICE
 Of Louisiana-based companies receiving venture funding,
slightly less than half were corporations
 DE is the most common jurisdiction used, regardless of entity
type from 2011-2013.
 LA was a close 2nd.
 NOTE: If your investors are out-of-state investors, you will almost
certainly be required to use a DE company.
 S-corp tax status is likely the wrong choice unless you are
purely a service company that will not raise angel or venture
capital
 Limitation on number of shareholders (means no IPO)
 Taxation issues of the LLC form
 Conversion later introduces additional complexity
 Switch from LLC to C-Corporation later
 May be your preferred strategy

6. 2. NOW YOU’VE CHOSEN THE RIGHT ENTITY FOR YOU—
FOUNDERS ISSUES
Membership
Interest
Purchase
Agreement
A/K/A
Subscription
Agreement
A/K/A
Contribution
Agreement
LLC
[Restricted]
Stock Purchase
Agreement
A/K/A
Subscription
Agreement
A/K/A
Buy-Sell
Agreement
C-Corp

7. 4 KEY ELEMENTS OF FOUNDERS/EMPLOYEE EQUITY
AGREEMENTS
Vesting of Shares or LLC
Interests
Company Re-purchase Option
(“ROFR”); Right of other
Equityholders to purchase
Acceleration Provisions
Lock-ups,
Other Reps & Warranties
Key Features of
Founders
Agreements

8. FOUNDERS/EMPLOYEE ISSUES (CONT’D)
 Clean IP Assignments
 Confidential Information & Invention Assignment Agreement (w/
non-competition)
 Applies to ALL employees, contractors, etc. and in various
agreements
 Full coverage is beyond scope of this presentation
 Pay for your stock/interests!!
 Should be able to document payment and issuance
 “Fully paid and non-assessable”
 Mistakes:
 Case of mistaken identity
 “Woodwork” or “Social Network” issues
 Poor documentation can lead to disputes
 Not keeping “cap table” clean

9. WHAT’S A “CAP TABLE”
XYZ Company
XYZ % Units Type Capital Price
Founder A 15% - Common 25,000$ 0.01$
Founder B 15% - Common 25,000$ 0.01$
Founder C 50% 500,000 Working
Founder D 12% - Common 250,000$ 0.01$
Reserve 8% - Working
Total 1,000,000

10. Common
Series A
and A-1
(7/10/01
& 7/8/02)
Series B and
B-1
3/31/03
Series C and
C-1
7/27/04
Series D and
D-1
5/24/07
As-Converted
to Common
Shares
% of Total
Out-
standing
% of Total
Fully
Diluted
VC 1A 92,310 886,735 467,704 900,478 2,347,227 #DIV/0! #DIV/0!
VC 1B 12,270 117,866 62,168 114,898 307,202 #DIV/0! #DIV/0!
VC 1C 236,400 2,270,872 1,197,760 2,361,763 6,066,795 #DIV/0! #DIV/0!
VC 1D 2,639,250 25,352,795 13,372,200 26,315,379 67,679,624 #DIV/0! #DIV/0!
VC 2A 19,770 189,911 100,168 197,513 507,362 #DIV/0! #DIV/0!
VC 2B 138,812 556,873 357,546 669,553 1,722,784 #DIV/0! #DIV/0!
One Portion of a Complex Cap Table

11. 3. EMPLOYEE INCENTIVE PLANS
Best Practices (LLC or C-Corp)
• Written Plan
• Consistent administration
• Board/Manager Consent + Agreement
• Clear Documentation
• Update records after each grant
• Keep attorney in the loop!!
• File IRS paperwork if vesting
• Securities filings (some states)

12. EMPLOYEE INCENTIVE PLANS (CONT’D)
Worst Practices:
• Informal “hand-shake” deals
• Switching equity to and from individuals without paper trails
• Failing to update records and cap table regularly
• Ignoring internal requirements
• Deliberating “forever”
Risks:
• VCs/Angels will notice
• Employee confusion
• Tax treatment

13. 4. RAISING SEED CAPITAL:
THE “FAMILY & FRIENDS” ROUND
• Issue stock or LLC interests according to your
documents
• Comply with securities laws
• “Accredited investors”
• Private placement memo (“PPM”) (a/k/a
“private offering memo”)
• Issue certificates if certificated shares
• Present documents professionally
Do’s
• “Handshake” deals
• General solicitations in media/events unless you
are prepared to comply with Rule 506(c)
• Fail to update records and tables
• Fail to consider departure from company
operations
Don’ts

14. 5. ANGEL & VENTURE CAPITAL—DEAL DOCUMENTS &
ISSUES
Term sheet
• Non-binding
• Outlines basic terms of deal
• Actual Terms Beyond scope
Deal
Documents:
• Certificate of incorporation/Operating Agreement
• Stock Purchase/Subscription Agreement
• Investors Rights Agreement
• Right of First Refusal/Co-Sale Agreement
• Voting Agreement
Due
Diligence:
• Dirty IP Assignments
• Poor Cap Table Maintenance
• General sloppiness—Due Diligence Nightmares!!
Closing
• Initial Closing and subsequent closing
• Issue equity, obtain funds and signatures
• Make securities filings

15.  Early Stage Legal Issues
Entity
Choice
Founders
Issues
Employee
Incentives
Seed Capital
Venture &
Angel
Capital
Managing
Legal
Costs

16. 6. SERIOUSLY?! WHAT’S THIS GONNA COST ME?!
 Attorney’s fees vary widely
 Formation and Initial Financing Packages available:
 Use resources to understand options before you begin
 Take advantage of pro bono services (but be careful to understand
when fees kick in)
 Alternative fee arrangements, equity
 Value Billing/Start-up packages
 Beware of the “add-on” model
 Hourly rates and lawyers on your file
 Investor’s counsel fees & caps

17. SERIOUSLY?! WHY BOTHER?!
 Correcting mistakes is far more costly
 Happy employees
 Happy investors
 Roadmaps
 Credibility!!!
 Quicker Fundraising  Better results

18. ADDITIONAL RESOURCES
 Graffagninilaw.com/blog
 Google/Silicon Bayou News
 “Entity choice entrepreneurs”
 “Equity Incentives LLCs”
 Startupcompanylawyer.com (detailed preferred financing
issues and startup FAQs)
 Many large firms with focus on financing transactions have
sample legal documents (e.g., WSGR.com; Orrick.com)
 Many incubator programs have them:
 Series AA Preferred Financing Docs
 National Venture Capital Association Model Templates
 Series Seed
 “Founders Fund”
 SAFE

19. CONCLUSION
 Entrepreneurship is a difficult road, and you have enough to
worry about
 Good documents and corporate practices give you peace of
mind. Think of it as “code for corporate governance and
capitalization”
 View them as a roadmap for administration and successful
business
 Questions?
 mg@graffagninilaw @GraffagniniLaw
 504-265-9955
 Graffagninilaw.com