legal issues for start-ups november 11, 2011 adam hull travis wilson

LEGAL ISSUESFOR START-UPS

November 11, 2011Adam Hull

Travis Wilson

Start-Up Right So You Don’t Have to Shut Down

Protecting Your Personal Ass

Choosing Which Entity to Form

Choosing Where to Form it

Negotiating and Drafting Organizational Documents

Getting the Company Up and Running

Maintaining the Liability Shield

Taking on Investors & Exit Strategies

Start-Up Right So You Don’t Have to Shut Down

Protecting Your Personal Assets

Choosing Which Entity to Form

Choosing Where to Form it

Negotiating and Drafting Organizational Documents

Getting the Company Up and Running

Maintaining the Liability Shield

Taking on Investors and Exit Strategies

Choosing Which Entity to Form

No Entity or D/B/A Only

Partnership

Limited Partnership

LLC

Corporation

L3C

Taxation of CorporationsDouble Taxation

The Company

Shareholder #1

Shareholder #2

Income

IRS

Tax on Ordinary Income

Dividend

Dividend

Tax on Dividend

Taxation of LLCs Pass Through Tax Treatment

The Company

Member #1

Member #2

Income

IRS

Distribution

Distribution

Tax on Ordinary Income

Taxation of S-Corps Pass Through Tax Treatment Plus Dividends

The Company

Shareholder (as an owner)

Shareholder (as an employee)

Income

IRS

Dividend

Tax on Ordinary Income

Salary

Tax on Dividend

C-Corp vs. LLC

Tax Treatment

Liability Shield

Limitations on Ownership

Types of Equity Interests Common & Preferred Interests Options & Warrants (No ISOs for LLC)

Authorized Stock vs. Units

Flexibility

S-Corp vs. LLC

Tax Treatment

Liability Shield

Limitations on Ownership

Flexibility

LLCs as S-Corps

Tax Issues for LLC Members

Phantom Income

Mandatory & Elective Distributions

Start-Up Right So You Don’t Have to Shut Down

Protecting Your Personal Assets

Choosing Which Entity to Form

Choosing Where to Form it

Negotiating and Drafting Organizational Documents

Getting the Company Up and Running

Maintaining the Liability Shield

Taking on Investors & Exit Strategies

Choosing Where to Form

Local vs. Foreign Jurisdictions Authority Local Filing Requirements Foreign Filing Requirements Registered Agent

Jurisdictions to Consider Delaware Nevada & Wyoming Utah

Jurisdictions to Avoid - California

Start-Up Right So You Don’t Have to Shut Down

Protecting Your Personal Assets

Choosing Which Entity to Form

Choosing Where to Form it

Negotiating and Organizational Documents

Getting the Company Up and Running

Maintaining the Liability Shield

Taking on Investors & Exit Strategies

Specific Provision to Consider (Preparing the Pre-Nup)

These Concepts Apply Universally – Sort of… Management Structure (Members, Managers & Officers) Types of Ownership

Rights & Obligations of Each Series Distributions Capital Call Obligations

Restrictions on Transfer (ROFR, Drag Rights, Tag Rights & Rights of Assignee)

Buy/Sell Provisions Indemnification & Advancement of Costs for Managers &

Officers

Specific Provision to Consider (Preparing the Pre-Nup) – Cont…

These Concepts Apply Universally – Sort of… Advanced Concepts for Specialty/Tech Companies

Equity Vesting Invention Assignment IP Ownership/Assignment

Start-Up Right So You Don’t Have to Shut Down

Protecting Your Personal Assets

Choosing Which Entity to Form

Choosing Where to Form it

Negotiating and Drafting Organizational Documents

Getting the Company Up and Running

Maintaining the Liability Shield

Taking on Investors & Exit Strategies

Getting the Company Upand Running

Federal Employer Identification Number

Sales & Use Tax License

Bank Accounts

Business Licenses

Insurance

Trademarks & Other Intellectual Property Considerations

Employee/Independent Contractor Agreements

Formation Due Diligence – Founder Concerns

Knowing Which Hat You are Wearing

• Fiduciary Duties• Compensation

Shareholder/Member

• Fiduciary Duties• Compensation

Director/Manager

• Fiduciary Duties• Compensation

Officer/Employee

Start-Up Right So You Don’t Have to Shut Down

Protecting Your Personal Assets

Choosing Which Entity to Form

Choosing Where to Form it

Negotiating and Drafting Organizational Documents

Getting the Company Up and Running

Maintaining the Liability Shield

Taking on Investors & Exit Strategies

Maintaining the Liability Shield

Basic Principle – Owners Not Liable

Piercing the Veil

Preventing Veil Piercing Arguments Money Management Using Formalities Remembering Which Hat You Are Wearing

Take a Mulligan (Ratifying Past Acts)

Sign in Your Official Capacity

Become a Tree Hugger

Become a Tree Hugger(Utilizing Subsidiaries)

The Company

IPProfit

Stream #1

Profit Stream

#2Property

1. Separating Assets2. Limiting the Contracting Parties3. Intercompany Agreements

Start-Up Right So You Don’t Have to Shut Down

Protecting Your Personal Assets

Choosing Which Entity to Form

Choosing Where to Form it

Negotiating and Drafting Organizational Documents

Getting the Company Up and Running

Maintaining the Liability Shield

Taking on Investors & Exit Strategies

Taking on Investors

Private Offerings (33 & 34 Acts) Registration Requirement Unregistered Offerings

Accredited Investors Anti-Fraud Requirements

Promoting 3Ps Private Offering (New Laws)

Dealing With Angels, VCs & Private Equity Funds

To I-Bank or Not to I-Bank

Early Stage VC Investment Trends

Exit Strategies

No Exit Profitable Existence Joint Ventures

Sale of Assets (Tax Consideration for Corps)

Merger or Sale of Company

IPOs

Final Thoughts—Preventing Implosion

Get Help – Do it Right the First Time

Don’t Assume that Fair = Legal

Abide by the Terms of Your Organizational Documents

Get Insurance

Hire a CPA (a good one)

Consider a Part-Time CFO

Be Nice

LEGAL ISSUESFOR START-UPS

Adam Hull, Attorney at Lawahull@joneswaldo.com

Travis Wilson, Attorney at Lawtwilson@joneswaldo.com