Explores exit events, common mistakes with capitalization, IP, HR, equity compensation, financing, contracts, housekeeping and advisor selection.

1. Legal Issues for Start-ups
Mick Bain
Attorney Advertising

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The Exit Event
If you’re building an angel-backed or venture-backed
company, an exit is in your future
 Exit will be an IPO or a sale
– Either way, the underwriters/buyer will perform extensive
diligence
– Be ready with answers to their questions
– If an IPO, the SEC will review your disclosure and you will be
exposed to increased risk of liability for issues and increased
scrutiny in the public markets
– If a Sale, you will be required to indemnify the Buyer for certain
problems (known and unknown)

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Plan Now – It is NEVER too early
Build the company to avoid exit roadblocks
Avoid common mistakes
Get good advisors
Establish sound processes
Document everything

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Capitalization Mistakes
Making oral promises
Misunderstandings over percentages
Misallocating founder equity and being too aggressive
with vesting
Do what it takes to avoid the “woodwork”

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IP Mistakes
Failing to get IP assignments from co-
founders/collaborators, employees, consultants
 Honestly assess risks of claims by former employers
 Not establishing policies to protect trade secrets; failing to
properly use good NDAs

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IP Mistakes
Improper use, documentation nor compliance with
open source
 Failing to keep track of filing deadlines
 Failing to strategize over, and to make proper foreign filings
 Failing to TM your company name

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HR Mistakes
Background checks
 Employees v. Independent contractors (IRS compliance and
personal liability)
 Not using at-will offer letters
 Assignment of inventions, non-disclosure and non-competition
agreements

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HR Mistakes
Are they subject to non-compete and/or non-
disclosure agreements with other employers?
 Immigration compliance
 Discrimination and sexual harassment claims/policies

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Tax Mistakes
Select the proper entity type
 280G problems
 409A problems
 Improper withholding (contractors v.employees)
 Issuing stock for services

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Equity Compensation Mistakes
Need compliant equity plans
 Options not properly authorized (tax, accounting and
corporate issues/liabilities)
 Cheap stock and 409A compliance
 State and foreign law compliance for equity plans (Rule 701,
California, UK, etc.)

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Equity Compensation Mistakes
Make and document 83(b) elections
 Aggressive use of acceleration
 Milestone-based vesting
 Failing to follow RSA buy-back procedures

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Financing Mistakes
Using finders and unregistered capital raisers; bad
agreements
 Non-accredited investors
 Federal and State securities law compliance
 Failing to provide for rights terminate

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Financing Mistakes
Voting percentages and veto rights
 Ambiguous language in equity contracts (e.g., warrants)
 Failing to get proper waivers (e.g., preemptive rights)

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Contract Mistakes
Source code escrow provisions
 Third party consents required for change in control
 Affiliate language in non-competes and licenses
 Exclusivity and MFN Provisions
 Non-competes
 Be aware of Confidential Treatment requests at time of IPO

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Housekeeping Mistakes
Poor or no records
 Failure to follow corporate formalities
– Hold regular board meetings
– Keep minutes (good ones)
 No proper authorization for stock, options and other equity

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Advisor Selection Mistakes
Experience level with the SEC and in M&A
transactions (including in the early-stage planning
process)
 Knowledge of what is customary
 Good form files
 Accountants not PAOCB certified
 Independence issues with accountants – can they help you
avoid problems (e.g., revenue recognition)?

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© 2014 Wilmer Cutler Pickering Hale and Dorr LLP
The Exit Event
Goal is to focus on the economics of the event
 Avoid having to negotiate from a position of weakness
 Be prepared
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keep recipients advised of all legal developments. Prior results do not guarantee a similar outcome. © 2014 Wilmer Cutler Pickering Hale and Dorr LLP