©  Ashitha  Bhagwan    

TOP LEGAL MISTAKES STARTUPS ENTERING THE US MARKET

SHOULD AVOID

SEPTEMBER 25, 2013

IRS  Circular  230  Disclosure:  To  ensure  compliance  with  the  requirements  imposed  by  the  IRS,  we  inform  you  that  any  tax  advice  contained  in  this  communicaCon,  including  any  aEachment  to  this  communicaCon,  is  not  intended  or  wriEen  to  be  used,  and  cannot  be  used,  by  any  taxpayer  for  the  purpose  of  (1)  avoiding  penalCes  under  the  Internal  Revenue  Code  or  (2)  promoCng,  markeCng  or  recommending  to  any  other  person  any  transacCon  or  maEer  addressed  herein.  

Ashitha  Bhagwan  abhagwan@rroyselaw.com Linkedin:  h-p://www.linkedin.com/in/ashithabhagwan  TwiEer:  @ashithabhagwan  

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10.  Failing  to  iden/fy  the  right    market-­‐entry  strategy  

   

Market  Entry  Op@ons  

Third  Party  Presence  

Sales  Rep   Distributor   OEM/VAR   Franchise  

Direct  Presence  

Branch  Office     Subsidiary  

©  Ashitha  Bhagwan    

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9.  Choosing  the  wrong  en/ty  structure  

EnCty  Form   Liability   Flexibility   TaxaCon  

S  Corpora@on   Limited  Liability    

Formal  but  flexible  capital  structure  

Pass  through  

C  Corpora@on   Limited  Liability    

Formal  but  flexible  capital  structure  

Double  taxa@on  

LLC   Limited  Liability   Very  flexible   Pass  through  

Partnerships   General  Partners  –  unlimited  liability  

Can  be  flexible   One  level  of  tax  

Liability  shield  

Delaware  is  not  right  

for  everyone  

Credibility  

©  Ashitha  Bhagwan    

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8.  Failure  to  establish  intellectual  property  strategy  

   

Trademarks  Copyrights  Patents  

Trade  Secrets  

Jurisdic@on  specific  

Privacy  Policy  and  Terms  of  

Use  

Inven@on  assignments  

Prior  Employer’s  IP  ownership  

©  Ashitha  Bhagwan    

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7.  Viola/ng  Employment/Labor  Laws  

   

Minimum  Wage  Laws  apply  to  

startups   Employee    v.  Independent  Contractor  classifica@on  

Post-­‐termina@on  restric@ve  covenants  

©  Ashitha  Bhagwan    

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6.  Not  complying  with  Securi/es  Law  

   

Sale  of  Securi@es  

Accredited  Investors?  

State  and  Federal  Securi@es  filings  

Broker  Dealer  

Registra@on/  Exemp@on  available?  

©  Ashitha  Bhagwan    

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6.  Not  complying  with  Securi/es  Law  

   

Failure  to  comply  with  securi@es  

laws  

Injunc@ve  relief  

Rescission  of  securi@es  

Criminal  prosecu@on  

Fines  

©  Ashitha  Bhagwan    

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5.  Lack  of  tax  planning  

   

409A    

83(b)  

Deferred  CompensaCon  

Plan  

©  Ashitha  Bhagwan    

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4.  Lack  of  adequate  corporate  structure    resul/ng  in  entrenched  management  

   

Tag  along  rights  

Drag  along  rights  

Lack  of  vesCng  schedule  

Buy  sell  agreements  

Using  %  while  

spliWng  up  equity  

Right  of  First  

Refusal    

Using  stock  as  currency  

Veto  rights  

©  Ashitha  Bhagwan    

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3.  Not  using  the  right    equity  compensa/on  structure  

   

75  -­‐85%  Founders/  Common  Stock  

15  -­‐25%  Op@on  Plan  

Typical  Equity  Structure  

Issue  opCons  when  valuaCon  is  low  to  realize  a  return  on  investment  

Establish  vesCng  schedules  for  opCon  grants  

OpCons  are  securiCes,  and  have  to  comply  with  securiCes  laws  409A  compliance  -­‐  mandatory  for  opCon  plans  

©  Ashitha  Bhagwan    

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2.  Failure  to  ensure  compliance  with  FCPA  and  immigra/on  laws  

   

Check  the  immigraCon  status  of  all  founders:  if  sponsorship  is  required  by  the  startup,  you  need  good  immigraCon  counsel.    

AnC-­‐bribery  laws  apply    to  all  U.S.  persons  and  certain  foreign  issuers  of  securiCes      Also  applies  to  foreign  firms  and  persons  who  cause  a  corrupt  payment  to  take  place  within  the  United  States.  

©  Ashitha  Bhagwan    

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1.  Subs/tu/ng  legal  counsel  with    online  incorpora/on  services  

   

Check  State  law  

enforcement  

Templates  could  =  missing  

provisions  

Obtain  ownership  documents  

Get  legal  counsel  in  the  beginning  

Hire  a  lawyer  but  do  your  

homework!  

Business  permits,  State  

qualificaCons  and  county  permits  

©  Ashitha  Bhagwan    

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Ashitha  Bhagwan  abhagwan@rroyselaw.com  Ph:  650-­‐521-­‐5740  

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