Starting Your Company

John Chory 781-966-2001john.chory@wilmerhale.com

Mick Bain 781-966-2027michael.bain@wilmerhale.com

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Starting Your Company

- Protect your most important assets

Your IP

Your Team

Raising Capital

Form of Entity

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D – Your Company’s Most Important AssetsIntellectual Property Question: Who owns IP created prior to

incorporation?

You?

People who collaborated with you?

Former employers?

The Public?

Answer: Unclear. Potentially all of the above.

One thing is clear: The Company does not own it.

…Yet

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D – Your Company’s Most Important Assets Intellectual Property Question: How do you ensure that the company’s intellectual

property is owned by the company?

Answer:

– Assignment of inventions agreements

– Non-disclosure agreements

– Licenses from third parties (e.g., universities)

All FoundersBy: All Collaborators

All Future Employees

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D – Your Company’s Most Important Assets The Team

– Protect the team, not any single individual

– How?

– Sign standardized agreements covering At-will employment offer letters Vesting of equity Ownership of inventions Non-disclosure

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D – Your Company’s Most Important Assets The Team The offer letter: Use a well crafted one and don’t deviate

– Employment is “at will”

– Describe equity information in shares, not percentages

– NDAs, non-competes and assignment of inventions

– No violation/conflicts with former employer agreements

– Immigration laws

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D – Your Company’s Most Important AssetsThe Team Equity Agreements – vesting of stock or options

Carefully plan for your use of equity among:

– Founders

– Employees

– Investors

– Plan for growth

– Understand the dilutive impact of your uses of equity

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Formation

2 Questions:

– What type of entity should you form?

– Where should you form it?

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FormationWhat Type of Entity Should You Create?

Partnership

Limited Liability Company

Subchapter S Corporation

Subchapter C Corporation

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FormationWhat Type of Entity Should You Create?

Partnership

– Not an investor-favored form

– “Pass through” tax treatment

– Not all owners have limited liability

– No limit on number or types of owners

Limited Liability Company

– Not an investor-favored form

– “Pass through” tax treatment

– All owners have limited liability

– No limit on number or type of owners

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FormationWhat Type of Entity Should You Create?

Subchapter S Corporation

– Not an investor-favored form

– “Pass through” tax treatment

– All owners have limited liability

– Limit on number and types of owners

– Limit on classes of equity

Subchapter C Corporation

– Investor-favored form

– No “pass through” tax treatment

– All owners have limited liability

– No limit on number and type of owners

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FormationWhat Type of Entity Should You Create?

Become a C-Corp if you want to:

– Obtain VC funding

– Go public

– Do a “tax free” M&A deal

– Use equity to compensate employees

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FormationWhere Should You Incorporate?

Delaware

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Raising Capital

Sources:

– Friends and family

– Angels

– Strategic investors

– Government grants

– Venture capitalists

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Raising CapitalGoals in Seed Rounds

Seek sophisticated seed investors

– Who are “accredited investors”

– Who know angel investing and its risks

– Who can distinguish Seed investing from Venture investing

Seek standard (VC-friendly) terms and conditions

Speed

Minimize transaction costs

Minimize number of stockholders

Avoid future legal and other hurdles

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Raising CapitalTypes of Seed Funding

Cash loan

Common stock

Preferred stock

Convertible debt

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Raising CapitalCash Loan

Pros:

– Easy

– Low transaction costs

– No ownership dilution

Cons:

– It becomes due, usually within 12-24 months

– Not favored by other/future investors

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Raising CapitalCommon Stock

Pros:

– Easy

– Low transaction costs

Cons:

– Valuation problems / Equity compensation problems

– Dilution

– Not an attractive investment

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Raising CapitalPreferred Stock

Pros:

– Less dilution than common stock

Cons:

– Need to set a valuation

– High transaction costs

– Gives up too much control to a seed investor for too little money

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Raising CapitalConvertible Debt

Pros:

– Quick

– Low transaction costs

– No current valuation

– Minimizes problems with VCs

– Only minimum control constraints

– Better than common stock for investors because it usually

converts to preferred stock

Cons:

– Ultimately issuing more “real” preferred

– Often accompanied by an “equity kicker”