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

2. 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

3. 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

4. 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

5. 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)

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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

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