Choice of Entity & Equity Allocation Jennifer Fan April 28, 2018 Assistant Professor of Law Director, Entrepreneurial Law Clinic University of Washington School of Law

CHOICE OF ENTITY

COMMON MISCONCEPTIONS WHEN FORMING AN ENTITY The client believes that: they have formed an entity when they have not; they have not formed an entity because they have not filed any paperwork; all entity types are the same; it’s okay to hold IP in the name of an individual even when you have an entity; and modeling their corporate structure after famous companies is a good idea (e.g., Alphabet).

WHAT CLIENTS DON’T KNOW Tax implications of choice of entity Importance of limited liability Sole proprietorship as an option Dangers of forming a partnership Relevance of the state of incorporation Importance of good corporate governance

EQUITY ALLOCATION

WHO RECEIVES EQUITY? Founders Employees Investors Advisors

COMMON MISCONCEPTIONS Entrepreneur believes: she can wait to give herself equity after she gets an investor; she can promise equity to an investor before even forming the company; everyone who is there at the beginning of the company is a founder; equity should be divided equally; differences between board observers, board members, and advisors; and talking about equity allocation in terms of percentages is a good idea.

WHAT CLIENTS DON’T KNOW Differences between equity types When legal paperwork is/isn’t necessary Role of vesting schedules Importance of discussing equity allocation early Dilution of equity over time Relationship between equity allocation and decision making power Required Securities filings