Post on 13-Jan-2016
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BU TECH COMMERCIALIZATIONBOOT CAMP
David D. Gammelldgammell@brownrudnick.com
617-856-8582
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Starting and Running a Business
Why form an Entity? What type of Entity to Form? How to form an Entity? – Focus on proper incentives How to finance an Entity? What about Intellectual Property? How do I make money?
Make sure you are diligence ready!
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Why Form an Entity
1. Reduce potential for personal liability
2. Concentrate intellectual property ownership
3. Structure equity ownership
4. Build brand
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What Type of Entity
1. Sole proprietorship – doesn’t satisfy four
factors
2. Partnership – may not satisfy four factors
3. Limited Liability Company
4. Corporation
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Considerations When Choosing an Entity
1. Timing
2. Financing trajectory
3. Tax considerations
Also, Consider VISA issues
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How to Form an EntityCorporate Governance and Ownership
Board Strategic direction Elected by Stockholder
Executives Tactical operations
Ownership (Stock vs. Options) – Aligning incentives Division of Voting Power Division of Proceeds of Liquidity
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How to Form an Entity (cont’d)Founder Equity – Align Incentives
Focus on the Founders first (all other issuances will dilute founders equally)
Divide 100% among Founders Based on expected contribution over vesting period (2-
5 years)
Set current vested portion based on contribution to date, remainder vests over selected period (2-5 years)
Acceleration of vesting Change of control Termination (for cause—not for cause)
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How to Form an Entity (cont’d) Incentives - Vesting
Require founders or managers to subject their original shares to vesting and require shares to be sold back to the Company at original cost or some other formula based on termination of relationship with the Company
Issues: Stock vs. Options How much initially vested? What happens to shares if terminated w/o cause or
voluntarily or because of death/disability? Vesting period: annual/quarterly/monthly? Buy-out price?
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How to Form an Entity (cont’d)Stockholder’s Agreement
Provides certain control of transfers of company securities and participation in such transfers.
Three types of protection:
Right of First Refusal: Right to purchase any securities proposed to be sold by certain stockholders (usually founders, sometimes other stockholders) on the proposed terms
Tag-along / Co-sale Right: Right to participate in proposed sale by certain stockholders
Drag-along / Take-along Right: Right for certain stockholders to take other security holders along in an exit transaction (typically majority of board and some group of stockholder)
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How to Finance an Entity
Sources Boot strap—self fund, customer funded Friends and Family Angel/Venture Capital Strategic Investor
Type of Investment Loan Convertible Loan Common Stock Preferred Stock
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How to Finance an Entity (cont’d)Principal Concerns in Financing Transactions
Concern Mechanism
Influence on CompanyComposition of Board of Directors Veto Rights over certain Corporate Actions, Negative and Affirmative Covenants
Control over exit eventsDrag-along Rights, Tag-along Rights, Rights of First Refusal, Registration Rights
Ownership/Dilution
Valuation/CapitalizationAntidilution Protection (economic and structural)Pre-emptive Rights (equity)
Incentives for Mgmt and Employees Vesting—Options, Restricted Stock
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How to Finance an Entity (cont’d)Capitalization and Valuation Terminology
Pre-Money Valuation: Value of the company prior to investment by the VC.
Post-Money Valuation: Value of the company after the investment by the VC, i.e., the sum of the pre-money valuation plus the investment.
Fully Diluted Shares: Generally defined as total issued and outstanding securities reported on an as converted to common stock basis. This number usually includes all issued and outstanding preferred stock, issued warrants, and options (often including unissued pool).
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Four Types of Intellectual Property
Patent
Trade Secret
Copyright
Trademark
Focus on Competitive Barriers
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Patent
Any machine, manufacture, composition of matter, and process (but cannot be law of nature, natural phenomena, or abstract idea)
Must obtain registration from federal government, and can only be registered if proven useful, novel, and unobvious
Provides right to exclude others from making, using, selling, offering to sell, or importing the patented invention
The right lasts from registration until 20 years after filing
Inventors own until they assign
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Trade Secret
Any information that derives economic value from being secret and for which reasonable efforts are used to keep it secret
No registration system – just need to use reasonable efforts to maintain secrecy
Secret will remain yours until it is revealed; Could last forever
Trade secret vs. Patent
Owner is the one that develops and maintains the secret
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Copyright
Original work of authorship fixed in a tangible medium of
expression
Registration is an option but is not required; copyright notice
also is not required
Bundle of rights – reproduce, prepare derivative works,
distribute, perform/display publicly, etc.
Rights last for the author/creator life plus 70 years after death
Owner is the creator until he/she assigns or unless it is a “work
made for hire”
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Trademark
Word, name, symbol, etc. that indicates the source of goods or services
Registration possible and enhances rights, but rights come from use and registration not possible without use
Owner can stop others from using same or confusingly similar mark, and the test is “likelihood of confusion”
Right could last forever, but registrations need to be renewed periodically
Owner is entity that uses mark
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Practical Tips Regarding IP
All officers/employees sign employment agreement: assign inventions and copyrightable works
agree not to disclose confidential information
All non-officer/employee contributors sign consulting agreement: assign inventions and copyrightable works
agree not to disclose confidential information
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Practical Tips Regarding IP
Follow best practices in product/service development: identify and respect obligations to prior employers know ramifications of including existing material (e.g.,
open source) Have an IP strategy
establish IP policies and procedures educate officers/employees document ideas and progress insert IP checkpoints into product/service development form and use an IP committee
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How Do I Make Money
Profit—Operate at a profit
IPO—sale of shares to public
Generally liquidity for insiders only begins 6
months after IPO
Sale—sale of stock or assets for cash or stock
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