This document summarizes key legal and business issues that two founders of a startup technology company should address, including forming the proper legal entity to house their intellectual property and business deal, hiring employees and contractors, obtaining financing, and protecting their intellectual property. It highlights that the founders need to determine who their legal client is, decide on an equitable equity split and vesting terms, and put all business agreements in writing from the start.

1. BOSTON // HARTFORD // NEW YORK // NEWARK // STAMFORD // PHILADELPHIA // WILMINGTON
Advising a Startup Company
Boston Bar Association
May 23, 2012
Rick Lucash and Ben Hron
McCarter & English, LLP
265 Franklin Street
Boston, MA 02110
617-449-6500
rlucash@mccarter.com bhron@mccarter.com
@ricklucash @hronesq

2. ♦ Some issues are universally applicable;
some not
♦ Tech start ups
♦ Low tech
♦ Grocery – Retail - Film studio –
Restaurants
♦ Today’s focus: Entrepreneurial Tech
Companies
1
What is a “Start Up”

3. The Situation
♦ Two founders
– Engineer with some developed technology
– Marketing Expert
♦ With no
– corporation or LLC,
– patents,
– registered trademarks,
– written agreements.
2

4. Ethical Considerations
♦ Who is/are the client(s):
– Principal founder?
– Both founders?
– The company?
– Both founders; then the company (alone) after
it’s formed?
♦ Engagement letter must spell out; contain
conflicts waivers
3

5. Entity Formation
♦ The entity embodies the business deal
between the founders
♦ IP in the entity means shared ownership
– A major step for some founders – can’t just
take it back and try again if things don’t work
out
4

6. Entity Formation
♦ Type of Entity
♦ Jurisdiction
♦ Capital Contributions
– Founders
– “Outside”
♦ IP Contributions
5

7. Entity Formation
♦ Relationship between the founders
♦ Equity Split
– 50-50 or not?
♦ Vesting – how and why
6

8. Entity Formation
♦ Equity Compensation
– For employees, consultants, vendors
♦ Stock Options
♦ Restricted Stock
– 83(b) Election
♦ Other
7

9. Issuing Equity
♦ Securities Law/Regulatory Compliance
♦ Issued to
– Founders Stock
– Friends and Family
– Angels and VCs
– Board of Advisors (Directors later)
– Employees and Other Service Providers
8

10. Founders Agreement
♦ Vesting
♦ Board Control
♦ Officers
♦ Restrictions on share transfer
– Co-sales and tags
– ROFR
♦ Drags
♦ Noncompetes/NDA/Invention
♦ Deadlock Provisions
9

11. IP Protection
♦ Corporate name clearance/reservation (State)
♦ Trademark/service mark
– Company name Brand/features
– Words and pictures/logos
♦ Patent take-aways:
– 12 months to file after first sale, disclosure –
use NDAs
– Disclosure before filing defeats European
coverage
♦ Copyright Registration
10

12. Hiring
♦ Employees vs. Independent Contractors
♦ Terms of the deal
– Wage/hour rules for employees
♦ Equity compensation
♦ Options or restricted stock
– Tiers for awards
♦ Invention Confidentiality and (maybe)
Noncompete Agreement
11

13. Financing
♦ Form of investment
– Common Stock
– Preferred Stock
– Convertible Debt
♦ Securities Law and Regulation
– 4(2) of Securities Act of 1933; Rule 506
– 110A M.G.L. 402(b)
LOE: 950 CMR 14.402(B)(9)
NSMIA: 950 CMR 14.402(B)(13)
12

14. Financing
♦ A word about Crowdfunding
– It’s not legal yet
Limits on non-accredited investors
General solicitation for accrediteds
♦ Note: KickStarter is not equity
– Looks good for product companies
13

15. Questions?
14
Rick Lucash Ben Hron
McCarter English, LLP
265 Franklin Street
Boston MA 02110
rlucash@mccarter.com
bhron@mccarter.com
@ricklucash @hronesq
www.mccarter.com
Representing Startups