First Steps to Create and Protect Value for the Emerging Technology Company

First Steps: Decide on form of entity Issue equity for: Cash Debt IP Other assets Service Determine equity split among founders Protect IP: Get assignments for IP transferred for stock or cash Get assignments for IP to be developed for services Get confidentiality from service providers

Form of entity: LLC or Corporation? LLC avoids double-taxation Only C Corps file for IPOs If expect to need institutional venture capital, C Corp is preferred entity VCs prefer C Corps Angel or seed investors less biased, so LLC’s should be okay If don’t expect to need VCs, go with LLC Choose appropriate form of entity now to avoid complications later

Allocate and Issue Equity: First determine relative values of current contributions: The business idea Cash invested Transfer of property (IP, equipment, etc.) The sum of these values is the pre-money enterprise valuation Example: Assume total value is $250,000 and issue 250,000 shares Pre-money valuation is $1.00 per share 100,000 for IP or business idea 50,000 for $50,000 cash 100,000 for future services Require equity for future services to vest over time 3 or 4 years; some can vest immediately (say 10-25%) Document the issuances with subscription agreements

Protect IP: IP protection is essential for future sale of company Not just patents, but also trade secrets/confidentiality Investors/buyers want assurance that trade secrets are protected IP due diligence to determine that all employees/third parties are under confidentiality have assigned inventions to company

Methods of Protection CDAs/NDAs Employee/Consultant Agreements Material Transfer Agreements Sensitive Information Programs Label Everything!

Use of Employee Agreements Essential features: Assignment of all inventions to company Confidentiality obligation List of prior inventions to be excluded Other terms: Noncompete Nonsolicitation of employees or customers Get signed at start date Later could jeopardize enforceability

Agreements with Third Parties Confidential Disclosure Agreements/Nondisclosure Agreements Essential for every contact where confidential information to be shared

Noncompetition Agreements Unconstitutional in OK in context of employment Use of other forms of restrictions: non-solicitation of customers, employees