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SVFI May 7, 2013 Startup Legal & IP- Yoichiro ("Yokum") Taku

SVFI May 7, 2013 Startup Legal & IP- Yoichiro ("Yokum") Taku

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Published by: Founder Institute on May 09, 2013
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11/27/2013

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Incorporation and other early-stage legal issues

May 7, 2013

Yoichiro (“Yokum”) Taku Direct: (650) 354-4251 ytaku@wsgr.com www.startupcompanylawyer.com

When do I need to incorporate a company?

• Graduate from the Founder Institute • More than one founder working on project • IP creation • Hiring employees or third party contractors • Option grants • Launching product/service • Corporate liabilities (i.e. office lease) • Start long-term capital gain • Visa issues
DOC# 2

What situations might require special consideration?

• Founder is an employee of another company • Founder is not a U.S. citizen/permanent resident • Founder already has incorporated an entity
– LLCs, S corps, non-DE corps

• Most of the business is non-U.S. • Pre-incorporation agreements

DOC#

3

What documents should I review if I still am employed?

• Offer letter • Proprietary Information and Invention Assignment
Agreement

• Conflict of interest policy • Other employee documents

DOC#

4

What if I already incorporated a company?
• • •
If non-DE corporation, then create a DE parent holding company using Founder Institute form documents – Eventually dissolve existing corporation before end of year If DE corporation, then amend and restate Certificate of Incorporation using Founder Institute form documents If investors or non-founder equity holders, then probably leave things alone unless something is broken

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Why shouldn’t I incorporate an LLC?
• • • • •
Venture capital investors do not want Unrelated Business Taxable Income and cannot invest in LLCs Stock options difficult to grant Complicated to mimic typical preferred stock rights in an LLC operating agreement Attorney fees are higher S corporations are okay until they have entity shareholders

DOC#

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What happens during the incorporation process?

• Founder needs to sign WSGR engagement letter • Founder needs to create and sign documents using
Clerky
– Only for companies that will be newly incorporated

DOC#

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What are WSGR’s engagement terms for Founder Institute companies?

• $5K fee deferral for corporate matters only • Out of pocket fees need to be paid ahead of time
– If we incorporate you, then we need a check for $1K – If you use Clerky (document automation system), then you need to pay Clerky fees and third party costs (total of $876)

• Fees payable upon $250K financing, reevaluate in 1
year

• Fees written off if company does not go forward • If company needs more legal work, need to pay or
discuss equity issuance for fee deferral

DOC# 8

Clerky Process

• After signing WSGR engagement letter, send
support@clerky.com an email. Let them know you’re a Founder Institute company to get access to the Class F documents.

• Clerky will create your account and send you instructions
on how to start the incorporation process.

• Once you have a copy of your filed certificate of
incorporation, you must complete your postincorporation setup. There are 2 steps to this – you have to do them in order. You may add a designated WSGR associate as a reviewer of documents.
DOC# 9

Clerky is an online document creation platform

DOC#

10

Clerky Fees

• Certificate of Incorporation - $99, plus:
– $99 first-year registered agent fee (renews annually) – $35 filing agent fee – $220 Delaware fee

• Post-Incorporation Setup, Step 1 - $299 • Post-Incorporation Setup, Step 2 - $99, plus:
– $25 California fee for 25102(f) filing

• Total:

$876

DOC#

11

Why do you still need an attorney/law firm?

• Implement stock option plan • Stock option agreement • Securities law filings for the option plan • Qualification to do business in California (could do
yourself)

• Miscellaneous corporate housekeeping

DOC#

12

What happens during the incorporation process?
• • • • • • •
Founder signs certificate of incorporation Founder obtains employer identification number (IRS) Open bank account Other documents signed Deposit checks for founders stock 83(b) filing – founder responsible Securities law filings

DOC#

13

What should the company’s capitalization table look like?

• Authorized
– Class A common – 15,000,000 – Class F common – 9,000,000

• Fully-diluted capitalization at initial formation
– Class A common – none – Class F common – 9,000,000 – Option pool (Class A common) – 1,000,000

• Please note that there is an extra 5,000,000 shares
of Class A common authorized for future issuances

DOC#

14

What is par value and what is the purchase price per share?

• Par value is the minimum price per share that stock
must be issued for

• Typically, founders purchase their shares for
$0.001, $0.0001 or $0.00001 per share
– 9,000,000 shares for $9,000, $900 or $90

• If a company needs additional funds, founders can
lend the company money documented with a one page promissory note with nominal interest

DOC#

15

What happens if I have additional founders or need to sell stock to investors?

• Newly issued shares are sold by the company
– Founders do not sell their existing shares

• May require amending the Certificate of
Incorporation if there aren’t enough authorized shares

• Need to amend and restate the Certificate of
Incorporation to create preferred stock at the time of a financing

DOC#

16

What is Class F common stock?

• Super-voting (10 votes per share) • Election of Class F director (with 2 votes per
director)

• Protective provisions • Convertible into Class A common stock

DOC#

17

What happens to Class F when investors invest?
• • • •
Companies like Google, Broadcom, Zynga, Facebook and LinkedIn have super-voting common stock Company potentially has additional leverage when negotiating with VCs (more chips to trade) All of these “founder favorable” provisions can be eliminated upon a financing, but it is simply a negotiation The best way to preserve some of these provisions is to outperform competitors because only elite companies will have real leverage

DOC#

18

How should founders stock vest?

• Stock is issued and voting, but subject to
repurchase by the company if the founder is terminated for any reason

• Vesting commencement date
– Credit for pre-incorporation time

• Founder Institute recommendation
– 1/48th per month with no cliff – Acceleration – single trigger upon a change of control or double trigger – Please note that a single trigger is extremely founder favorable
DOC# 19

Questions

• Please read www.startupcompanylawyer.com first

DOC#

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