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

2. CHOICE OF ENTITY

3. 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).

4. 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

5. EQUITY ALLOCATION

6. WHO RECEIVES EQUITY?
Founders
Employees
Investors
Advisors

7. 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.

8. 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