5 tia presentation 'legal issues for startups' 20130126

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Vivek Boray Attorney-at-Law De Franceschi & Shefayee, LLP (www.dfscounsel.com) Legal Issues WIRELESS: U/N: tia P/W: colgate THOUGHT INTO ACTION INSTITUTE January 2013

Transcript of 5 tia presentation 'legal issues for startups' 20130126

Page 1: 5 tia presentation 'legal issues for startups' 20130126

Vivek Boray

Attorney-at-Law

De Franceschi & Shefayee, LLP

(www.dfscounsel.com)

Legal Issues

WIRELESS:U/N: tia

P/W: colgate

THOUGHT INTO ACTION INSTITUTE

January 2013

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Agenda• Why Legal?

• Incorporation/Entities

• 3rd Parties

• Intellectual Property

• Equity Structure

• Founders’/Shareholders’ Agreement

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Agenda• How Much Does It Cost?

• How Much Does It Really Cost?

• How Do I Make Money/Sustain?

• What Do I Do Now?

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Why Legal?• Limit Liability

• Third Parties

• Structure

• Rule of Law

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Incorporation And Entities• Incorporation – Key Consideration for Type of Entity

o Liability for shareholders

o Tax considerations

o Investors

o Non-Financial/Public Purpose

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Incorporation and Entities• Types of Entities

o Limited Liability Corporation (LLC): limited liability for shareholders; favorable tax treatment; the expenses of formation are higher than for forming a corporation (Operating Agreement); good option for “lifestyle” businesses, or boutiques

o “S” Corporation: limited liability for shareholders; favorable tax treatment

o “C” Corporation: limited liability; double taxation; a requirement for any venture backed company

o “B” Corporation: limited liability; public benefit; fiduciary duty to think beyond finances

o Non-Profit Corporation: regulated by state and IRS; be sure you have good accountant

o Partnerships; Sole Proprietorship: unlimited liability; favorable tax treatment

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Incorporation and EntitiesCorporation• Limited Liability

o Importance

o “Piercing the corporate veil”

• Three pillars of a Corporation: o Owned by SHAREHOLDERS

o Directed by DIRECTORS

o Managed by OFFICERS

o Why these pillars?

• Number of Shareholders, Directors and Officers: o In Delaware, New York, New Jersey, Connecticut and

California, a corporation may have only one shareholder and one director.

o A president/CEO, chief financial officer/treasurer and secretary are the officer positions generally filled.

o In Delaware, all officer positions may be filled by one person.

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Incorporation And Entities• Jurisdiction: Delaware versus other jurisdictions

o Because Delaware has a well-developed body of corporate

law, incorporation in Delaware is a requirement by most venture

capital investors, avoiding the time and expense of

reincorporation at the time of going public

o Delaware corporations doing business within New York or

California are required qualify as a foreign corporation in the

state and are subject to state franchise taxes

o Certain foreign corporations are subject to California or New York laws

nonetheless if they are qualified to do business within those states

• Choosing a Company name: o Delaware requires corporations to include

“corporation”, “incorporated”, “limited” or the like or an

abbreviation thereof in the company name. California has no

such requirement.

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Incorporation Process (DE)• File Delaware Certificate of Incorporation – 1 day

• Appoint Director(s) and adopt Bylaws – 1 day

• Approve Organizational Minutes – 1 day

o Board of Directors appoints Officers: President/CEO, CFO and

Secretary

• Get Tax ID and open bank account – 1 day

• Issue Stock – 3 days

• If you set-up a presence in the US outside of

Delaware, you will have to qualify locally. 1-3 days

depending on the state.

• Could have a fully functioning company within 3-4 days.

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3rd Parties• Employment Issues

o Moonlighting

o IP Ownership

o Non-compete provisions

o Non-solicitation provisions

o Immigration

o These issues could apply to Founders as well

• Third Parties

o Employees

o Consultants & Advisors

o Board members

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Intellectual Property• Intellectual Property is a Business Asset.

• Have an IP strategy from the start.

• There are 5 main ways to protect it:o Patents: preliminary, utility, design

o Copyrights: automatic and registered

o Trademarks: marking, use, Lanham Act

o Trade Secrets: keep your secrets secret

• Invention Assignment: present and future

• Founders contribute all previous IP in exchange for

stock shortly after incorporation.

• Building a business vs. IP

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Equity StructureInitial Capital Structure• Total Authorized: 10MM shares of Common Stock

• Difference between Authorized and Issued and Outstanding Capital

• Founder Stock: 4-5MM o Issue stock early to avoid tax issues

o Vesting (look back period for vesting)

o Acceleration: Single Trigger versus Double Trigger

o 83(b) elections: file on time (within 30 days of purchase)!

o Class F Shares/Founders Preferred Stock

• Option Pool: 1-2MMo Vesting: Straight 4 year vesting, 1 year “cliff”, with monthly vesting

thereafter

o Acceleration: Could hamper acquisition

• Outside Investors: Preferred Stock

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Founders’/Shareholders’ AgreementWhy?

Typical provisions:

• Right of First Refusal

• Co-Sale

• Board Composition

• Drag-Along

• Protective Provision

• Typical parties: Founders, Holders of Options and Restricted Stock

• This agreement will usually by superseded by later agreements

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How Much Does It Cost?• Incorporation:

o To incorporate: $320 in Delaware (state and filing agent

costs)

o To organize the corporation: $0 ($2,500 fixed fee, assuming

no complications)

o Delaware yearly costs (fees and minimum tax): $450/yr

• Dissolution:

o Settle outstanding liabilities.

o Pay all your taxes.

o File Certificate of Dissolution-$100 fee, 24 hrs to process

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How Much Does It Really Cost?• To form and organize a start-up corporation: $2500 -

$5000, depending on complexity

• Visa: $2000 - $5000, depending on type

• Shared workspace at an incubator: $500/mo

• Apartment and utilities: $1000 - $1500/room/mo

• Food and entertainment: $200/week

• Car: $500/month

• 12 month reserve of cash and emotional capital

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How Do I Make Money?• Startup-Exit via an IPO or M&A (mostly M&A)

• Lifestyle Business-Developing & maintaining a

customer base

• Non-Profit-Mission & Funding

• But, to get there: listen, validate and adapt

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What Do I Do Now?• Discuss

• Organize

• Assign

• Document

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Vivek Boray

Attorney-at-Law

De Franceschi & Shefayee, LLP

(www.dfscounsel.com)

Q&A

Thank you!

• Vivek Boray

[email protected]

• http://www.linkedin.com/in/viveknboray

• Skype: Vivek Narahari Boray

• Twitter: @vibo78