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Be The Entrepreneur Bootcamp
June 15, 2015 Presented by: Brian C. Larsen Stoel Rives LLP
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Overview Formation Issues Capitalization Concepts Securities Laws Intellectual Property Considerations
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Ten Important Topics Identifying the Idea
Owning and Protecting the Secret Sauce Brand Developing a Business Plan and Pitch Building your Team Paying with Equity Entity Choice Organization Valuation Funding
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First Steps – Understanding the Business Deal
Who are the parties (inside/outside)? What is the business plan/model (now/future) What are the economic sharing arrangements? What are the capital requirements? Who contributes capital, and when? How are profits shared? What is the exit strategy or long-term plan? How might things change going forward?
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Formation Choice of Entity Considerations: Personal Liability
Tax Implications Complexity of Formation and Management Effect on Ability to Raise Capital
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Formation Common Business Entities: Sole Proprietorship Partnership
S Corporation C Corporation Limited Liability Company
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S Corporation Limited liability for shareholders
Pass through tax treatment Limitations Limited to 100 shareholders Only one class of stock Partnerships and corporate entities cannot be shareholders Easy to convert to C Corporation
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C Corporation Limited liability for shareholders
Double taxation – taxed at both corporate and shareholder level No limits on type of shareholder May have different classes of stock Typically required for businesses that are funded by VCs
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Limited Liability Company
Limited liability for members Pass through tax treatment Can be managed by members or managers Advantages: No limit on number of members No limit on who may invest Different classes of ownership available
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Common Formation Mistakes
Failing to consider founders’ obligations to former employers Failing to create a vesting schedule for founder stock Failing to make appropriate 83(b) elections
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Capitalization Concepts
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Capitalization Concepts
Common Stock: Equal voting, liquidation and distribution rights Issued to founders, friends and family, seed investors and key employees Reasonable valuation
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Capitalization Concepts
Preferred stock: Establish preferential rights over the common shares Dividends Redemption Liquidation Voting Conversion Protective Provisions Anti-dilution Issued to VCs, angels and other institutional or later-stage investors May have multiple series of preferred stock
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Capitalization Concepts
Preferred Stock Agreements: Stock Purchase Agreement Amended and Restated Articles/Certificate Voting Agreement Investor Rights Agreement Co-Sale Agreement Check out
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Capitalization Concepts
Convertible Debt: Note that is convertible into preferred stock Rights are determined by contract (debt instrument) Payment Terms Maturity Conversion rights Particularly useful for early-stage investment Conversion is tied to future valuation
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Capitalization Concepts
Common mistakes: Choosing the wrong investor or VC Considering only the valuation when negotiating an investment Paying a commission to an unlicensed broker/dealer (finder) Failure to obtain board or shareholder approval when necessary Failure to properly document transactions
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Financing - Options Self-Financing Friends and Family Bank Lending
SBA Traditional Venture Capital Strategic or Financial Partners
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Financing – Issues to Consider
Timing – How urgent? Need – Do you need more capital or can you manage cash flow more effectively? Business Plan – How does the financing fit in? Management Team Growth/Development Stage What is the Specific Purpose for the Cash? Debt-to-Equity Ratio
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Financing – What will you need?
Business Profile/Business Plan Loan Request – With description of specific purpose of the capital Collateral – Description of the collateral to be secured Financial Statements and Records Business Personal Corporate Records and Documents Contracts
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Securities Laws What is a security?
Expectation of profit from efforts of another Examples include stock, notes, bonds, debentures, profit-sharing interests, investment contracts, LLC interests, partnership interests, and options or rights to acquire any of the foregoing Registration or exemption required Common exemptions Private transaction – not involving a public offering Regulation D – safe harbor Concept of accredited investor
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Intellectual Property Considerations
Use non-disclosure agreements Employment agreements and invention assignments Intellectual property protection Patents Copyrights Trade Secrets Trademarks
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Intellectual Property Considerations
Common Mistakes: Failing to secure rights from founders to all necessary intellectual property Failing to register trademarks and copyrights Failing to timely file patent applications Failing to use non-disclosure agreements Overinvesting in unprotected brands
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Employment Issues Contract vs. At-Will Employee Handbook
Performance Evaluations and Records Non-Disclosure/Non-Compete Agreements Payroll/Benefits/Stock Options
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Exit/Growth Strategies
Sale Strategic Merger or Acquisition Expansion Management Issues Legacy
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Inadequate Legal Advice and Documentation
Selling securities Considerations: Deal terms Securities laws Contract Expertise and judgment Value and risk mitigation Costs Involve early Startup Fundraising Financing
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Common Mistakes Federal Regulations State Regulations Financial Performance Representations (FPRs)
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Questions? Brian C. Larsen Stoel Rives LLP Phone: 208-387-4240
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