Mel Baiada

• Founder of BaseCamp Ventures,

BaseCamp Business, and Bluestone, Inc.

• Founding Donor of The Baiada Institute

for Entrepreneurship

• Trustee of Drexel University

Our objective is to tell a formation story

• Introduce the Problems

• Present A Number of Solutions

• Solicit Expert Feedback

You determine the ending…

• NetConnectionZ.com

–Technology start-up

–Mission: to connect

computers online

–Objective: to grow rapidly

and make a lot of money

• NetConnectionZ.com

–Three Core Founders

• Bobby – Biz Dev

• Brett – Tech

• Taylor – Design

–Former classmates

–Began at StartUp Weekend

Characteristics of Our Founders:

• Committed to long term success

• Invested more sweat equity than cash

• Awarded equity for services rendered

• Able to defer cash payment until necessary

Characteristics of Consultants:

• Provide services on a limited basis

• No ongoing management responsibilities

• Would prefer cash, but may accept deferred

compensation, e.g., a convertible note, equity,

warrants, or other means

Characteristics of Employees

• Hired to perform a service

• Require cash compensation (with limited

deferment), but may accept equity incentives

• May, or may not, be committed to the long-

term success of the company

At this moment, our

Founders are planning

for a flawless

launch

of...

They don’t have time

for legal, but that’s ok

because they have gotten

to know each other

pretty well.

Change happens…

Change happens…

“The Forgotten Founder”

• Problem: company does not own its IP

• Solution: IP assignment

– Prevents ownership claims from long-lost founders

• Absent a written agreement, the author, creator or

inventor is the owner of the IP

• Even if you pay for the creation of IP!!!

– Ensures that the Company can build asset value

“The Backstabber”

• Problem: arming the competition

• Solution: IP assignment, non-compete &

non-disclosure

– Ensures all IP belongs to the company

– Prevents a former team member from using your

IP to start a competing venture

– Creates leverage, especially if bad blood

“The Underachiever”

• Problem: lack of motivation

• Solution: compensation plans

– Create short-term reward system

– Provide team members with an opportunity to

share in the profits or earn additional equity

– Clarify manner in which the team will be

compensated (cash/equity) to avoid confusion

“The Beacher”

• Problem: dead weight

• Solution: vesting provisions

– Founders must earn equity over time

– Flexible vesting schedule based on value of input

– Permits company to reclaim unearned equity by• Terminating the Beacher

• Recapturing vested and vested equity

– Ensures that the team thinks long-term

“The Fighter”

• Problem: internal friction

• Solution: decision making provisions

– Deadlock resolution

– Structure for fairly and efficiently making tough

decisions

– Ability to align decision making power with

relative contributions of equity or talent

“The Quitter”

• Problem: grinding to a halt

• Solution: break-up provisions, transfer

restrictions & vesting

– Reclaim vested and unvested equity

– Pre-negotiated buy-out process

– Block unwanted transfers

So how to plan

for change?

Make the time to draft

and negotiate a

Founders Agreement

What would happen to

NetConnectionZ if our

Founders skipped

that step?

• Lack of certainty amongst Founders

– Increased risk of in-fighting and/or failure

–Delays in product development

• Future liability

–From forgotten founders, backstabbers,

investors, or other unknowns

• Harder to raise investment capital

–Why invest in a product you don’t own?

–Demonstrated lack of sophistication

• Lower valuations

–Cost of resolving internal squabbles

–Stability equals value

BOTTOM LINE: your

legal bills are not part of

the problem.

“The peace of

mind that comes

from knowing that

your business can

handle change.”

“The opportunity to

spend more time

developing your

business and less

time fighting with

your co-founders.”

The Who, Why, When,

What and How of

Founders Agreements

Who should be signing a Founders

Agreement?

• All founding members who are committed to

the long-term success of the Company, but not

most consultants or employees.

Why is a Founders Agreement necessary?

• Timing Issues

– What if we haven’t talked yet?

– What if there’s too much up in the air?

– What if we change?

• The initial Founders Agreement need not be

final or comprehensive!

• What should you consider including in a

Founders Agreement agreement?

– IP Assignment

– Vesting

– Deadlock

– Decision-making

– Break-Up Provisions

– Transfer Restrictions

– Non-compete

– Confidentiality

How should the process work?

• Identify the concerns you want to address

• Review the agreement as a whole to ensure it makes sense.

Who else should be involved?

• Other entrepreneurs who have gone through it?

• Outside mediators?

Let’s Hear From the

Experts…

• Chris McDemus

– Partner, Baer Crossey

– Corporate, transactional

& securities law

• Chris Miller

– Partner, Pepper Hamilton

– Corporate and Securities

Group

• Jeffrey Bodle

– Partner, Morgan Lewis

– Emerging Business and

Technology Practice

• Recently saw an excellent presentation on

Founders Agreements at Philly Tech Week

• Have decided that vesting is important

• But have conflicting ideas about the “best” way

• Actively preparing to meet with their legal

counsel to discuss the best approach

• Form of Dynamic Vesting

– Focus on milestones/events/triggers, rather than

time or hours

• Setting Milestones

– Consider important moments that move company

toward greater viability

• Business Side: Sales, Revenues, Fundraising, customers

• Technology Side: Development of Product

Sample Vesting Schedule

Founder Milestone 1 Milestone 2 Milestone 3 Total

Bobby Revenue >

$5k

33 1/3%

Revenue >

$20k

33 1/3%

Revenue >

$50k

33 1/3%

100%

Brett Prototype

33 1/3%

Beta Testing

33 1/3%

Full Initial

Version

33 1/3%

100%

Taylor Initial

Design

33 1/3%

Layout and

Upgraded

UI

33 1/3%

Final

Design

Features

33 1/3%

100%

• Straight-line vesting over four years

• Four year vesting with a one year cliff

• Right to repurchase all shares

– Both vested and unvested

• Relative Value

– Instead of pre-determining the equity “pie,”

determine the relative value of each contributor’s

slice based on pre-determined “ingredients”

• Ingredients:

– 1. Time (grunt/consultant/cash employee)

– 2. Money (cash contribution/credit/loan to

company)

– 3. Supplies/facilities

– 4. Intellectual property/ideas

– 5. Professional relationships

• Relative value (% of pie) = individual

contribution / total contribution

• Avoid having to assign equity before we know

the value of each Founder’s contribution

•Equity Split

based on variety of

factors

•Create Milestones

•Based on the

Company’s goals

•Founder Vesting

upon the meeting

of those goals

•Vesting based on

time served

•No problem if

company changes

direction,

•Departing

founders can’t

control without

contributing

•Relative Value

based on

contribution

•Attributes

understood value

to each ingredient

•Allows for

flexibility and for

fair compensation

Live Q&A: Text us @ 22333, include “30273” in your question

Submit 30273 and your question to http://PollEv.com

Tweet us with hashtag #trepprenup

Live Results

Please complete a survey on our program at:

ph.ly/prenupsurvey

Also complete a survey on Philly Tech Week at:

ph.ly/ptw2013survey

For additional information about how the

ELC can help your business, contact:

Steven Rosard, Director

srosard@drexel.eduwww.earlemacklaw.drexel.edu/ELC