svfi may 7, 2013 startup legal & ip- yoichiro ("yokum") taku

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Incorporation

and other early-stage legal issues

May 7, 2013

Yoichiro (“Yokum”) Taku

Direct: (650) 354-4251

[email protected]

www.startupcompanylawyer.com



DOC# 2

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# 3

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# 4

What documents should I review if I stil l amemployed?

•Offer letter

•Proprietary Information and Invention Assignment

Agreement

•Conflict of interest policy

•Other employee documents



DOC# 5

What if I already incorporated a company?

• If non-DE corporation, then create a DE parent holdingcompany 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



DOC# 6

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# 7

What happens during the incorporationprocess?

•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# 8

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# 9

Clerky Process

•After signing WSGR engagement letter, [email protected] email. Let them know you’re a

Founder Institute company to get access to the Class F

documents.

•Clerkywill 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 post-incorporation 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# 10

Clerky is an online document creationplatform



DOC# 11

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# 12

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# 13

What happens during the incorporationprocess?

• 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# 14

What should the company’s capitalizationtable 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 sharesof Class A common authorized for future issuances



DOC# 15

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

•Par value is the minimum price per share that stockmust 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# 16

What happens if I have additional founders or need tosell 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 authorizedshares

•Need to amend and restate the Certificate of

Incorporation to create preferred stock at the time of

a financing



DOC# 17

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# 18

What happens to Class F when investorsinvest?

• Companies like Google, Broadcom, Zynga, Facebook andLinkedIn 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# 19

How should founders stock vest?

•Stock is issued and voting, but subject torepurchase 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# 20

Questions

•Please read www.startupcompanylawyer.com first

svfi may 7, 2013 startup legal & ip- yoichiro ("yokum") taku

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