Startup Legal

1. Be A Competent Client – Use A Framework2. Get A Good Lawyer (Firm)3. Get Incorporated; Observe Formalities4. Use “Standard” Contracts Where Possible5. Use Lawyer for Big Deals (and Financings)6. Use “Liability Limiting Language” Otherwise.

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Where Does Legal Fit?

1. Getting to Product-Market fit is core. Focus there.2. Satisfice (Don’t Optimize) Legal. What does that mean?3. Cost question is not only “how much” but “when”

– Too early is a waste– Too late is very expensive … and sometimes lethal

4. My recommendation– Establish a FRAMEWORK for compliance and control– Rely on lawyer for standard dox, financings and big deals only– Do DIY things in writing and use liability limiting language

Incorporation Seed Funding Service Providers Options; Series A

Hypothesis Problem – Solution Fit

Problem – Market FitLean canvas

Elects Board; Approval of Big Changes

Manages All Aspects of Company

Executes Orders

A Corporation Is A Legal “Person”• You are merely its agent (fiduciary) (So is “your” attorney.)• You have multiple relationships – shareholder, board director, officer or employee• Power and ownership will be SHARED.

State Statutes

Articles Of Incorporation

Bylaws

Shareholders

Board

Officers

Defines Entity and its “Constitution”

A corporation is like the OSI model of networking – distinct layers doing different things

What Do These Have In Common?

The Control Framework

CompanySuppliers Customers

EmployeesIndependent

Contractors

Service Providers

Board, Stockholders, Co-founders

Property: Patents,

etc.

Purchase Orders

Sales Orders; Terms of Service; Privacy Policies

Stock Purchase; Board Resolutions, etc.

Employment ; Independent ContractorsPatent, Lease

The Control Framework

Sample Framework

• What You Need– Filing Cabinet (fixed)– Policy/Procedure (versioned)– Projects (draft; final)– Whiteboard (dynamic)

• “Splitting vs. Clumping”• Draft vs. Final, Signed• Primary vs. Derivative• Paper vs. Electronic

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Case Study: Acme WidgetsDate Event BoardMeeting Shareholder

Meeting Other Possible Pothole

1. 4/18/2008 Incorporation by "Incorporator" certified copy of filed articles; 10m shares "authorized"

S-corp election

2. 4/23/2008 Initial meetings of shareholders and board; sale to founder at $.001/sh

Initial Meetings Initial Meetings incorporator out; board; bylaws; officers; Stock Purchase by founder for 1m shares at $.001/share; securities filings

securities filings; Form D 15 days

3. 6/28/2008 co-founders arrive; buy stock @ $.001/sh

Restricted Stock Purchase

Restricted Stock Purchase

Donna and Joe added to common stock cap table; 83b election; 4 year monthly vesting

83(b) election; 30 days

4. 6/30/2008 initial convertible notes issued - $300k with warrant coverage @ 6%

Note-Warrant Purchase

private placement securities filings

5. 11/30/2008 Stock Option Plan created; initial grants made

Stock Option Program & Grants

Stock Option Program

form of master agreements also approved

state securities filing (Calif: 25102(o); Form D; and every state involved!

6. 12/31/2008 Joe resigns; company repurchases unvested shares as treasury stock

maybe / maybe not

timing on repurchase may be an issue; price may be an issue; may require corporate action

timing; authority

7. 2/25/2009 Options Issuances Year End; Options

8. 3/17/2009 second issuance of notes $485k -- with 20% discount on conversion, $4m cap; no warrants

Note Purchase Annual Meeting private placement securities filings

9. 4/19/2009 Options Issuances Office Lease; Options

10. 7/30/2009 Options Issuances Options; Misc. 11. 9/9/2009 Optionee Beatrice Delay partially

exercises option

12. 9/17/2009 Options Issuances Options; Bank LOC

13. 12/22/2009 Budget for following year Budget; CapEx 14. 2/15/2010 Options Issuances; Approval of founder

transfer to trust Options; Misc. Annual Meeting

15. 5/17/2010 Preferred Stock deal 3m on $8m pre,($2.91/share) from two funds

Preferred Series A; Options

Preferred Series A

16. 7/23/2010 secondary closing for 250k more Preferred Series A; Secondary

17. 8/20/2010 Options Issuances Miscellaneous; Options

18. 10/27/2010 Options Issuances Miscellaneous; Options

19. 1/19/2011 Options Issuances Year End; Options

Annual Meeting

Corporate Folder

• Delaware corporation, qualified to do busi-ness as a “foreign corporation” in CA; C-corp

• Forms Availability - DIY– Goodwin- Proctor

– Series Seed

– Links at Startup Co. Lawyer

– State of Delaware, Secretary of State

– MyCorporation.com, Nolo Press, Legal Zoom

• Hire a good lawyer and let him/her do corporation and give you the “standard documents” they prefer.

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Capitalization Folder

• Each investment in the Company will be a “Closing” or “Funding” event.

• You will handle the term sheet

• The lawyer will handle the subscription agreement, the closing and the regulatory filings (federal and state)

People Folder• This is where most startups have

their first contract issues

• Potholes:– Misclassifying employees as IC’s

– Not securing IP rights (Inventions Assignment; Work For Hire)

– Not repeating “at will” enough

– Promising stock; not delivering

– Discrimination

What Do You Do Next?• Find a good lawyer; negotiate deferred fee arrangement• Ask for a simple incorporation and “standard” agreements

– Restricted Stock Agreements (and 83(b) election) for co-founders– Employee and IC agreements (NDAs, inventions assignments, work-for-hire, etc.)– NDA– Maybe customer or channel contracts

• Set Up YOUR Framework – Dropbox,* [Gmail, GSites, GDox, GCal]• Learn to use the standard agreements and drive them to final, signed documents,

filed inside the framework.• Use Google to research things; avoid chit-chat with lawyer• CYA with “liability limiting language” (next)• Buy your attorney lunch once a quarter (off the meter)• Engage them for funding and thereafter.

* make sure to back it up!!

Liability Limiting Language (1)• Generic Contract – offer, acceptance, consideration

– Parties– Deliverables by each, terms

• Who, what, when, where, how good and how much?

– Conditions, before and after– Term and termination; renewal– “Reps and warranties”– Breach, Damages, Indemnification; limits of liability– Boilerplate

• Agreement formed … and enforced – can be oral– Partial performance– Accepted by action

Liability Limiting Language (1)• Generic Contract – offer, acceptance, consideration – “Discussion Draft”; “Non-

binding term outline”; “not binding … definitive legal agreements”– Parties – deal only with honorable people; observed/enforced; dogs and fleas– Deliverables by each, terms

• Be super clear; don’t waffle. Better to say “no” than get sued.• Limit your risks – small amounts at first; inspection/rejection; option; negotiate!

– Term and termination; renewal• This is the most overlooked “gotcha” and best door out. Termination on X days, either way;

no auto-renewal for long periods.– Breach, Damages, Indemnification; limits of liability

• Limit liability to the amount paid;– Boilerplate

• Use a Rider “Notwithstanding anything in the main agreement to the contrary, the parties agree that X, Y, Z….

• Agreement formed … and enforced – can be oral– Partial performance – use email to confirm and be sure there’s a “meeting of the minds”

before proceeding. – Accepted by action – make clear than only written documentation

The Lawyer’s Role … and Yours

• The lawyer represents the Company, not you.• You, as CEO, are the boss; they are the

“professional” (but, like a doctor). • They advise, recommend and represent.• You decide.• You are wise to defer to them for “legal

points” … but you don’t have to. • Don’t be afraid to talk fees and money.