Getting Started - Corporate Formation, Founder and Funding Considerations By: Gordon Empey, Special Counsel Cooley Godward Kronish LLP From Invention to.

Slides:



Advertisements
Similar presentations
Business Organizations Sole Proprietorship Partnerships Corporations.
Advertisements

STRUCTURING YOUR COMPANY DAY ZERO Gregory H. Teufel, Esq. Member, Eckert Seamans Cherin & Mellott, LLC Pittsburgh.
HARTFORD | STAMFORD | WASHINGTON, DC | GREENWICH | LAKEVILLE Incorporation 101 January 30, 2015 James C. Schulwolf Matthew J. Monteith.
First Steps to Create and Protect Value for the Emerging Technology Company.
Laurel Durham - Partner, Holme Roberts & Owen LLP Mark Weakley – Partner, Holme Roberts & Owen LLP 1 Entrepreneurial Finance: Cap Table Management and.
Top Ten Legal Issues for Startups Harvard Business School November 13, 2003 John H. Chory Michael D. Bain.
Choosing the Best Business Structure. Choosing the Legal Structure of Your Business Sole Proprietorship Partnership Limited Liability Company Corporation.
FORMS OF BUSINESS ORGANIZATION. Introduction and Understanding of  Three Principal Forms of Business Organization  Essential Attributes and Characteristics.
Wilson Sonsini Goodrich & Rosati PROFESSIONAL CORPORATION The Legal Side of Things Corporate Start-up Fundamentals Craig Sherman Wilson Sonsini Goodrich.
{ Legal Basics for Business Danielle A. Higgins, Esq. Day Ketterer, Ltd.
Start-Up Law Talk 0 Corporate Law Carter Mackley Mackley & Mackley, PLLC (206)
Legal Issues and Valley Trends Financing Issues – Getting Your Money Capital Issues – Spending Your Money Formation Issues – Saving Your Money.
Understand the nature of business.
ANGEL VENTURE FORUM – GEORGETOWN SELECTION DAY YOU ARE OFFERED A TERM SHEET, NOW WHAT?
PARTNERSHIPS, CORPORATIONS AND THE VARIANTS PROF. BRUCE MCCANN LECTURE 8 PP Business Organizations Lectures.
Hugh Tucker September 29, 2005 OWNERSHIP ARRANGEMENTS FOR INTERNATIONAL PROJECTS.
Legal Document Preparation Class 4Slide 1 Initial Concerns in Forming a Corporation Type of entity to be formed. –S-corp or C-corp; in addition other forms,
Chapter 7 Forms of Business Organization and Personal Liability Accounting and Finance for Entrepreneurs EBD-301 Dr. David P Echevarria All Rights Reserved.
Electronic Flashcards  Why might a person want to own their own business?
Business, Law, and Innovation Entrepreneurial Finance Lecture 5 Spring 2014 Professor Adam Dell The University of Texas School of Law.
LEGAL ISSUES FOR STARTUPS
Accounting and Tax for the Small Business NOVEMBER 8, 2012.
NOTHING VENTURED NOTHING GAINED © Venture Capital Term Sheets by Barry Burgdorf Vice Chancellor and General Counsel July 25, 2007.
OVERVIEW OF BUSINESS ORGANIZATIONS. Introduction Sole Proprietorship Partnerships –General Partnership –Limited Partnership –Limited Liability Partnership.
©2010 SMITH, ANDERSON, BLOUNT, DORSETT, MITCHELL & JERNIGAN, L.L.P. Legal Issues for Start-Ups Merrill M. Mason December 2, 2010.
Venture Capital Deal Structure Prof. Dell, Spring 2009.
Ch © 2006 Prentice Hall THE LEGAL ENVIRONMENT OF BUSINESS A Critical Thinking Approach Fourth Edition Nancy K. Kubasek Bartley A. Brennan M. Neil.
LEGAL ISSUES FOR START-UPS November 11, 2011 Adam Hull Travis Wilson.
1 Overview of Legal Issues in Early Stage Financings (Energy Efficiency and Renewables) August 11, 2006 Michael Jay Brown Dorsey & Whitney LLP (206)
Ch. 5-2 Forms of Ownership.
© 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 5 SLIDE Forms of Business Ownership 5 C H A P T E R Economic.
© 2005 West Legal Studies in Business, a division of Thompson Learning. All Rights Reserved.1 PowerPoint Slides to Accompany The Legal, Ethical, and International.
© 2010 Pearson Education, Inc., publishing as Prentice-Hall 1 LIMITED LIABILITY COMPANIES AND LIMITED LIABILITY PARTNERSHIPS © 2010 Pearson Education,
LIMITED PARTNERSHIPS (LP) 1 1.
© 2012 Foley Hoag LLP. All Rights Reserved. Legal Issues for Start-ups: Seed Financing Presentation to Boston ENET December 4, 2012 Matt Eckert
Business Forms-. Legal Ramifications of Selecting a Business Form Creation Control Liability Termination.
Term Sheets and Convertible Notes: Structuring the Deal
The Legal Checklist for a Successful Business Launch Matthew Donahue Eno Martin Donahue, LLP
Corporate Venture Capital Essentials Insights on venture capital (VC) investing by corporations October 20, 2015.
Chapter 39 Corporations: Directors, Officers, and Shareholders Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution.
Essential Standard 2.00 Understand the nature of business. 1.
MY BORROWER IS A ____________________* WHAT DO I NEED TO KNOW? AND WHO HAS THE AUTHORITY TO SIGN? *CORPORATION, PARTNERSHIP, LLC…OTHER COLORFUL ADJECTIVES.
Essential Standard 2.00 Understand the nature of business. 1.
Essential Standard 2.00 UNDERSTAND THE NATURE OF BUSINESS. 1.
© 2012 Cengage Learning. All Rights Reserved. Principles of Business, 8e C H A P T E R 5 SLIDE 1 ESSENTIAL QUESTION(S): 1.What are the main types of business.
©2009 Cooley Godward Kronish LLP. All rights reserved. STARTUP 2009 LEGAL SERIES Topic #2 Forming an Entity.
Essential Standard 2.00 UNDERSTAND THE NATURE OF BUSINESS. 1.
UNDERSTAND THE NATURE OF BUSINESS. 1 Essential Standard 2.00.
Forms of Business Ownership 5-2. Goals Understand the three major forms of business ownership. Determine when each form of business ownership is most.
1 3. Business Legal Structure 3.1 Why Be Concerned About Legal Structure? 3.2 Forms of Legal Organization 3.3 VC Investor and Entrepreneur Information.
LEGAL ISSUES FOR START UPS A NIL A DVANI M ANAGING P ARTNER PRESENTS:
Understand the Types of Business Ownership
Mark P. Walters Intellectual Property Attorneys & Members
Choice of Business Entity: Governance
Funding Early Stage Companies
Understand the nature of business.
10,000 FT View Last class, we learned how to value a start-up company and then translate it into an ownership percentage. Today, we are going to discuss.
Stockholders’ Equity: Paid-In Capital
Be The Entrepreneur Bootcamp
Venture Capital Deal Structure
Understand marketing and business management
Forms of Business Ownership
Stockholders’ Equity: Paid-In Capital
Understand the nature of business.
Igniters Tech Consulting
Read Focus on Real Life on Page 108 in textbook.
CHAPTER 9 THE CORPORATE ORGANIZATION © 2013 Delmar Cengage Learning.
© 2013 Delmar Cengage Learning
STARTUP ESSENTIALS: Part 1 of 4 Starting Up Your Startup.
STARTUP ESSENTIALS: Part 1 of 4 Starting Up Your Startup
Presentation transcript:

Getting Started - Corporate Formation, Founder and Funding Considerations By: Gordon Empey, Special Counsel Cooley Godward Kronish LLP From Invention to Start-Up :

Legal Entity Considerations are: Considerations are: Taxation Taxation Stockholder liability Stockholder liability Raising investment funds Raising investment funds C Corporation: C Corporation: Subject to double-taxation Subject to double-taxation Can usually only pierce the corporate veil in case of bad faith Can usually only pierce the corporate veil in case of bad faith Most common structure for venture capital (VC) investors Most common structure for venture capital (VC) investors Limited Liability Company (LLC), S Corporation, and Partnerships: Limited Liability Company (LLC), S Corporation, and Partnerships: LLCs – avoid double taxation, complex operating agreements, higher maintenance costs (accounting, tax, etc.), members hold units LLCs – avoid double taxation, complex operating agreements, higher maintenance costs (accounting, tax, etc.), members hold units S Corp – file as a C Corp, but make election within 3.5 months, Same tax pass- through as an LLC, High restrictions – 75 shareholders, only individuals, one class of stock, but easy to convert to C Corp S Corp – file as a C Corp, but make election within 3.5 months, Same tax pass- through as an LLC, High restrictions – 75 shareholders, only individuals, one class of stock, but easy to convert to C Corp

State of Incorporation Delaware Delaware Well-developed body of law – historically favorable to company, directors and management team Well-developed body of law – historically favorable to company, directors and management team More expensive franchise fees More expensive franchise fees Favored by many investors Favored by many investors Washington Washington Less clarity on certain corporate issues because less developed body of law Less clarity on certain corporate issues because less developed body of law Some arcane features – originals for filings, appraisal rights Some arcane features – originals for filings, appraisal rights Less expensive Less expensive

Roles in the Company Board of Directors Board of Directors Ultimate power and duty to manage this business of the company Ultimate power and duty to manage this business of the company Fiduciary duties (care and loyalty) Fiduciary duties (care and loyalty) Committees (Audit, Compensation, Special) Committees (Audit, Compensation, Special) Tasks and functions delegated by Board of Directors Tasks and functions delegated by Board of Directors Management Management Day-to-day responsibility for running the Company Day-to-day responsibility for running the Company Ultimately responsible to the Board of Directors Ultimately responsible to the Board of Directors Stockholders Stockholders Responsible for final decision of key corporate events Responsible for final decision of key corporate events Advisory Board Advisory Board For benefit of management For benefit of management

Typical Organizational Documents Appointment of Directors and Officers Appointment of Directors and Officers Bylaws Bylaws Powers & responsibilities of officers and directors Powers & responsibilities of officers and directors Meeting procedures Meeting procedures Indemnification obligations of the Company Indemnification obligations of the Company Certificate of Incorporation Certificate of Incorporation Number and class of stock authorized Number and class of stock authorized Stock Plan Stock Plan Proprietary Information and Invention Assignment Agreement (PIIA) Proprietary Information and Invention Assignment Agreement (PIIA)

Licensing in the Technology Option to license prior to Series A funding. Option to license prior to Series A funding. Key terms of Option: Key terms of Option: Option Fee Option Fee Term of Option Term of Option Exclusivity Exclusivity Territory Territory Fields of Use Fields of Use Up-Front Consideration Up-Front Consideration Annual Maintenance Fee Annual Maintenance Fee Equity Equity Royalty (both for products and services) Royalty (both for products and services) Minimum Annual Royalty $$ Amount Minimum Annual Royalty $$ Amount Sublicensing Consideration Sublicensing Consideration Performance Milestones Performance Milestones Financial Milestones (filing IND, first dosing in Phase II, NDA, FDA approval, Other county approval) Financial Milestones (filing IND, first dosing in Phase II, NDA, FDA approval, Other county approval) Patent Prosecution reimbursement Patent Prosecution reimbursement

Founders Stock Issuances Common Stock Purchase Agreement Common Stock Purchase Agreement Stock subject to vesting – 4 years typical Stock subject to vesting – 4 years typical Restrictions on Transfer Restrictions on Transfer Drag-Along Rights Drag-Along Rights

Employment Agreement Terms Usually entered in connection with funding Usually entered in connection with funding Salary Salary Stock Subject to Vesting Stock Subject to Vesting At-Will At-Will Protect Equity – Termination or Change of Control Protect Equity – Termination or Change of Control Severance Severance Venture Capital Mentality Venture Capital Mentality

Issuing Stock or Debt Should be approved by the Board of Directors – written record Should be approved by the Board of Directors – written record Fully-executed document Fully-executed document Securities laws compliance – need exemption from registration Securities laws compliance – need exemption from registration Accredited investors Accredited investors Finders/Brokers Finders/Brokers Issuing options to employees – written valuations (409A) Issuing options to employees – written valuations (409A) Don’t promise equity to anyone Don’t promise equity to anyone

Sample Capitalization Table Pre-Series A Founder A 4,000,000 Common Shares Issued 4,000,000 Common Shares Issued(40%) Founder B 4,000,000 Common Shares Issued 4,000,000 Common Shares Issued(40%) University 500,000 Common Shares Issued 500,000 Common Shares Issued Option Plan 1,500,000 Common Reserved 1,500,000 Common Reserved Fully-Diluted10,000,000

Bridge Financings Convertible Notes Convertible Notes Convert in Next Equity Financing Convert in Next Equity Financing Interest Interest Warrants Warrants Percentage Coverage, Exercise Price Percentage Coverage, Exercise Price Avoids Valuation, Gets Seed Money Avoids Valuation, Gets Seed Money

Valuation for Financings Pre vs. Post-Money Pre vs. Post-Money Sample Cap Table - $7M Pre-money = $0.70 per share Sample Cap Table - $7M Pre-money = $0.70 per share Milestones/Tranches for Large Investments Milestones/Tranches for Large Investments

Sample Capitalization Table Post-Series A: $7M Pre-Money, Raise $5M Series A Investors 7,142,857 Series A Issued 7,142,857 Series A Issued (42%) Founder A 4,000,000 Common Issued 4,000,000 Common Issued(23%) Founder B 4,000,000 Common Issued 4,000,000 Common Issued(23%) University 500,000 Common Issued 500,000 Common Issued Option Plan 1,500,000 Common Reserved 1,500,000 Common Reserved Fully-Diluted17,142,857

Terms of Series A Preferred Stock Liquidation Preference Liquidation Preference Money off the top Money off the top Participation Participation Cap on participation Cap on participation Anti-Dilution Anti-Dilution Redemption Redemption Protective Voting Provisions Protective Voting Provisions Board Seats Board Seats Pro Rata Rights Pro Rata Rights Information Rights Information Rights Registration Rights Registration Rights

Series A Process 4-6 weeks from signed term sheet 4-6 weeks from signed term sheet Draft and negotiate key agreements Draft and negotiate key agreements Series A Purchase Agreement Series A Purchase Agreement Amend and Restate the Certificate of Incorporation Amend and Restate the Certificate of Incorporation Investor Rights Agreement Investor Rights Agreement Voting Agreement Voting Agreement Registration Rights Agreement Registration Rights Agreement Due Diligence (IP, capitalization, materials agreements, founder deals, corporate formalities) Due Diligence (IP, capitalization, materials agreements, founder deals, corporate formalities) Obtain board and shareholder approvals Obtain board and shareholder approvals Third Party consents Third Party consents

Summary The Three F’s: The Three F’s: Formation Formation Founders Founders Funding Funding