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10 Questions Founders should ask their law firm.!

And possible answers.! Alan Colmenares Medellin 2013

“…the best time to start meeting and getting to know lawyers is long before you ever start your company.”
Mark Suster, Both Sides of the Table

Since we’re mentioning Mark Suster here in Medellin…

He grew up in Colombia…! In Medellin, actually… I grew up with Platanos and Arepas as well as tongue and brisket.!
Mark Suster, writing about his father (2013).

First, general thoughts
•  Best to choose a firm that is known as a leader in working with startups. •  Do it right the first time (SuperTrendi example). •  Firm knowledge is important, but chemistry is also important. •  Mistakes can be costly.

Launching the company

1. Where should I incorporate?

Possible responses
•  •  •  •  Colombia Panama Offshore US

2. What rights should stock holders have?

Possible responses

Common Stock

Preferred Stock

Other options?

Class F!

Class F Stock
•  2:1 Board votes per Founder versus normal Board Members. •  10:1 share votes as compared to normal common. •  Participating Class F shares vest monthly without a cliff to act as compensation for founding teams, and "single trigger acceleration" allows one Founder to leave without hurting co-Founders.
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3. What other documents do I need?

Possible responses
•  •  •  •  •  •  •  Incorporation agreeement Employment contract Employee Stock Option Plan (ESOP) Terms and Conditions/Privacy Policy Trademark filing IP Rights Assignment / Vendor Agreement Mutual Non-Disclosure Agreement (NDA)

4. Should I have advisors sign an agreement?

5. What tax considerations should I be aware of?

Example – 83(b) Election

Make sure those initial 5 questions are answered and taken care of first.

Now, a small taste of possible Term Sheet questions

6. What is a liquidation preference?

7. What are antidilution Provisions?

Full ratchet

Weighted average

Conversion Price Pro rata

8. What is Right of First Refusal?

Tips on Right of First Refusal
•  Pay attention to definition of “Major Investor” who gets this right. •  Try to keep mulitple on the purchase rights to 1X times their pro rata portion.

9. What are Drag-Along rights?

Majority of common stock or preferred stock?

10. What is a convertible note?

Cap

Discount Beware hidden liquidation preferences and other things….

Resources
•  http://www.startupcompanylawyer.com •  http://venturehacks.com/ •  http://www.bothsidesofthetable.com/ 2010/01/21/how-to-work-with-lawyers-ata-startup/ •  http://www.wsgr.com/WSGR/Display.aspx? SectionName=practice/termsheet.htm •  http://www.docstoc.com/docs/10303638/ FFI-Plain-Preferred-Term-Sheet