CHINESE INFORMATION AND NETWORKING ASSOCIATION (CINA) FOUNDERS AND STARTUP WORKSHOP May 15, 2004...
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Transcript of CHINESE INFORMATION AND NETWORKING ASSOCIATION (CINA) FOUNDERS AND STARTUP WORKSHOP May 15, 2004...
CHINESE INFORMATION AND NETWORKING ASSOCIATION
(CINA)FOUNDERS AND STARTUP
WORKSHOP
May 15, 2004
Fred [email protected](650) 335-7241
Andrew [email protected](650) 335-7964
2
FORMATION MATTERS
Choice of entity LLC Delaware or California corporation Offshore corporation
Appoint Board of Directors and Officers Observe corporate formalities
Organizational board minutes Properly sell and issue shares
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CONVENTIONAL CAPITAL STRUCTURE
Keep it simple “1X” pattern Fully diluted concept: outstanding shares +
outstanding options + option reserve
Authorized Outstanding
Founding Common Stock
10M 3-5M Founders
1-2M Equity Incentive Plan
4
FOUNDERS SHARES ALLOCATION
3-5M shares of Common Stock Number depends on number of founders Common Stock at a nominal price
Timing Tax issues
Payment is by cash, assignment of technology or other property
Vesting Right of first refusal until IPO Federal and state securities laws
5
FOUNDERS VESTING ISSUES
What is stock vesting? Right to repurchase shares, at original purchase price, on
termination, that lapses over time Right is exercisable if founder stops providing services to
the company
83(b) filing/consequences
Why impose vesting pre-financing? Provides incentive for founder to continue to provide
services to the company
Avoids “free-rider” problem if a founder leaves
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FOUNDERS VESTING ISSUES (continued)
How much vesting up front for founders?
Work done in past Value of IP/other contributions Stickiness
Time vesting 3 or 4 years Cliff, no cliff Monthly after the cliff
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FOUNDERS VESTING ISSUES (continued)
Vesting acceleration – when addressed?
Trigger events Acquisition of the company with “double
trigger” on acquisition - stickiness Upon termination without “cause” or for
“good reason” (outside of an acquisition)
What is a “double trigger”? Trigger One - Company acquired Trigger Two – Termination within 12
months (or other period)
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EQUITY INCENTIVE PLAN
Adopt at incorporation to have available under securities laws – 25102(o) filing in California
Single plan can enable options (ISOs and NQs) and share sales
Number of shares – 20-30%
Eligibility requirements – employee or service provider
Acquisition consequences No acceleration on acquisition unless
acquiror doesn’t assume – valuation requires stickiness
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EQUITY INCENTIVE PLANSTOCK OPTIONS
Key differences between ISOs and NQs
Non-qualified stock options Available to employees and other service
providers Ordinary income on spread at time of
exercise Taxed again at time of sale on spread
between sale price and tax basis (short or long term gain)
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EQUITY INCENTIVE PLANINCENTIVE STOCK OPTIONS
Available to employees only (numerous other requirements)
No ordinary income at time of exercise – taxed on sale of stock on spread between exercise price and sale price (short or long term gain)
Disqualifying disposition – sale of stock less than one year from the date of exercise and two years from the date of grant
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First visible aspects of your business and first legal exposure
Coordinate all types of protection Secretary of State – both California and
Delaware Domain Name – need for business Trademark Scan –strongest form of
protection
Better to switch than fight at startup time
COMPANY TRADE NAME, TRADEMARK AND DOMAIN NAME
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California Labor Code 2870
“Any provision in an employment agreement
which provides that an employee shall assign, or
offer to assign, any of his or her rights in an
invention to his or her employer shall NOT apply
to an invention that the employee developed
entirely on his or her own time without using the
employer’s equipment, supplies, facilities, or
trade secret information EXCEPT for those
inventions that either:
CLEAN BREAK FROM A PRIOR EMPLOYER
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California Labor Code 2870 (continued)
1. Relate at the time of conception or reduction to practice of the invention to the employer’s business, or actual or demonstrably anticipated research or development of the employer; or
2. Result from any work performed by the employee for the employer.”
CLEAN BREAK FROM A PRIOR EMPLOYER (continued)
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Working completely outside an employer’s premises and not using and employer’s resources may not be enough
“Moonlighting” by founder or others Duties to previous employer Solicitation, hiring of employees
CLEAN BREAK FROM A PRIOR EMPLOYER (continued)
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ADVANCES/SALARY DEFERRALSDURING STARTUP
1432519
Loans to company Salary deferrals Document Reflect in financial statements