Startup Legal

How to Move Your Idea

From Concept to Reality:

The practical steps of incorporating

& financing an unfunded startup
 “Startup Legal”
Wayne Willis
How to Move Your Idea
From Concept to Reality

Entrepreneur / Co-Founder CEO of VC backed companies

•Hyatt Legal Services (legal) •Voice-Tel ($216m exit)
•Global Currency Advisors (finance) •Healthscribe ($90m exit)
•Vidtel (video conferencing) •Ditto.com ($23m exit)
•ExiTrak (strategic exit preparation) •Cyracom (5 years on Inc 5000)

Chairman or Board Director Other

•26 companies, mostly tech •Managing Partner – Nodal Partners
•Many different roles •Business & Law degrees from Yale

Investor
•≈50 companies
 www.NodalPartners.com/fi

Where/When Does Legal Fit?

Hypotheses Problem – Product – Scaling
Lean canvas Solution Fit Market Fit Up

Incorporation  Seed Funding  Service Providers  Options  Series A  Series B

1. Satisfice (Don’t Optimize) Legal Requirements

– Too much or too early is a waste of time or money
– Too little or too late is very expensive … and sometimes lethal
2. My recommendation
– Establish a FRAMEWORK for compliance and control - DIY
– Rely on lawyer for standard dox, financings and big deals only
– All other stuff done DIY, preferably in writing, using “liability
limiting language”
 www.NodalPartners.com/fi

Agenda

• Company Law 101 Overview

• Keeping Control - A Framework
• Standard Documents
• DIY Contracts With Liability Limiting Language
• Financings and Options
• Next Steps
• Q&A
 A Corporation Is A Legal “Person”
• It’s an independent entity – not you
• Multiple roles – shareholder, board director, officer or employee

A corporation is like the OSI model of networking – distinct layers doing different things

Executes Orders
Officers
Manages All Aspects
Board of Company

Elects Board; Approval

Shareholders of Big Changes

Bylaws
Articles Of Defines Entity and
its “Constitution”
Incorporation
State
Statutes
What Do These Have In Common?
 The Control Framework
Board, Stockholders

Stock Purchase; Board Resolutions,

etc.
Purchase Sales Orders;
Orders Terms of Service;
Suppliers Company Customers

Service Providers
License, Lease Employment ; Independent Contractors

Property: Independent
Patents, Employees
etc. Contractors
The Control Framework
 Sample Control Framework
• What You Need
– Filing Cabinet (fixed)
– To Do’s; Project Management;
– Whiteboard (dynamic)
– Policy/Procedure (versioned)
– Productivity Tools (email, cal,
chat, .doc, .xls, Github, etc.)

• Issues To Consider
– Paper vs. Electronic
– Draft vs. Final, Signed
– Primary vs. Derivative
– “Splitting vs. Clumping”
 Case Study: Acme Widgets
Date Event BoardMeeting Shareholder Other Possible Pothole
Meeting
1. 4/18/2008 Incorporation by "Incorporator" certified copy of filed articles; 10m S-corp election
shares "authorized"
2. 4/23/2008 Initial meetings of shareholders and Initial Meetings Initial Meetings incorporator out; board; bylaws; securities filings;
board; sale to founder at $.001/sh officers; Stock Purchase by founder Form D 15 days
for 1m shares at $.001/share;
securities filings
3. 6/28/2008 co-founders arrive; buy stock @ Restricted Stock Restricted Donna and Joe added to common 83(b) election; 30
$.001/sh Purchase Stock Purchase stock cap table; 83b election; 4 year days
monthly vesting
4. 6/30/2008 initial convertible notes issued - $300k Note-Warrant private placement securities filings
with warrant coverage @ 6% Purchase
5. 11/30/2008 Stock Option Plan created; initial grants Stock Option Stock Option form of master agreements also state securities
made Program & Program approved filing (Calif:
Grants 25102(o); Form D;
and every state
involved!
6. 12/31/2008 Joe resigns; company repurchases maybe / maybe timing on repurchase may be an timing; authority
unvested shares as treasury stock not issue; price may be an issue; may
require corporate action
7. 2/25/2009 Options Issuances Year End;
Options
8. 3/17/2009 second issuance of notes $485k -- with Note Purchase Annual Meeting private placement securities filings
20% discount on conversion, $4m cap;
no warrants
9. 4/19/2009 Options Issuances Office Lease;
Options
10. 7/30/2009 Options Issuances Options; Misc.
11. 9/9/2009 Optionee Beatrice Delay partially
exercises option
12. 9/17/2009 Options Issuances Options; Bank
LOC
13. 12/22/2009 Budget for following year Budget; CapEx
14. 2/15/2010 Options Issuances; Approval of founder Options; Misc. Annual Meeting
transfer to trust
15. 5/17/2010 Preferred Stock deal 3m on $8m Preferred Series Preferred
pre,($2.91/share) from two funds A; Options Series A
16. 7/23/2010 secondary closing for 250k more Preferred Series
A; Secondary
17. 8/20/2010 Options Issuances Miscellaneous;
Corporate Folder
• Delaware corporation, qualified to do busi-
ness as a “foreign corporation” in CA; C-
corp
• Forms Availability - DIY
• Hire a good lawyer and let him/her do
corporation and give you the “standard
documents” they prefer.
Capitalization Folder
• Each investment in the Company
will be a “Closing” or “Funding”
event.
• You and your attorney will handle
the term sheet
• The lawyer will handle
– the subscription agreement (aka the
“[SecuritesName] Purchase Agreement”
– the closing and
– the regulatory filings (federal and state)
People Folder
• This is where most startups have
their first contract issues
• Potholes:
– Misclassifying employees as IC’s
– Not securing IP rights (Inventions
Assignment; Work For Hire)
– Not repeating “at will” enough
– Promising stock; not delivering
– Discrimination
– Wage and hour violations
 Sample Control Framework
• What You Need
– Filing Cabinet (fixed)
– To Do’s; Project Management;
– Whiteboard (dynamic)
– Policy/Procedure (versioned)
– Productivity Tools (email, cal,
IM, .doc, .xls, Github, etc.)

• Issues To Consider
– Paper vs. Electronic
– Draft vs. Final, Signed
– Primary vs. Derivative
– “Splitting vs. Clumping”
 Agenda
www.NodalPartners.com/fi

• Company Law 101 Overview

• Keeping Control - A Framework
• Standard Documents
• DIY Contracting With Liability Limiting Language
• Financings and Options
• Next Steps
• Q&A
 Standard Documents
• Board • Options • Advisory
– Sample Minutes – Plan (and related) – Advisor Agreement
– Sample Unanimous – Standard Grant / (NDA, Inventions
Written Consent Options Agreements Assignment, Advisory
– Common resolutions Agreement )
• Options approval
• Employee – Standard Grant /
• Election of officer(s) – Offer Letter Options Agreements
• Approval of deal that is
not “usual/customary” or
– I-9, W-4, inventions • Contractors
assignments, non-
“in the ordinary course” – Consulting
disclosure, non-
• Shareholder solicitation, non-
Agreement

– Sample Minutes compete, etc. • Strategics

– (Restricted) Stock – Termination letter (or – Non-disclosure
Purchase Agreement memo to file) Agreement
 Agenda
www.NodalPartners.com/fico

• Company Law 101 Overview

• Keeping Control - A Framework
• Standard Documents
• DIY Contracting With Liability Limiting Language
• Financings and Options
• Next Steps
• Q&A
 Liability Limiting Language (1)
• Generic Contract – offer, acceptance, consideration
– Parties
– Deliverables by each, terms
• Who, what, when, where, how good and how much?
– Conditions, before and after
– Term and termination; renewal
– “Reps and warranties”
– Breach, Damages, Indemnification; limits of liability
– Boilerplate
• Agreement formed … and enforced – can be oral
– Partial performance
– Accepted by action
 Liability Limiting Language (2)
• Generic Contract – offer, acceptance, consideration – “Discussion Draft”; “Non-
binding term outline”; “not binding … definitive legal agreements”
– Parties – deal only with honorable people; observed/enforced; dogs and fleas
– Deliverables by each, terms
• Be super clear; don’t waffle. Better to say “no” than get sued.
• Limit your risks – small amounts at first; inspection/rejection; option; negotiate!
– Term and termination; renewal
• This is the most overlooked “gotcha” and best door out. Termination on X days, either way;
no auto-renewal for long periods.
– Breach, Damages, Indemnification; limits of liability
• Limit liability to the amount paid;
– Boilerplate
• Use a Rider “Notwithstanding anything in the main agreement to the contrary, the
parties agree that X, Y, Z….
• Agreement formed … and enforced – can be oral
– Partial performance – use email to confirm and be sure there’s a “meeting of the minds”
before proceeding.
– Accepted by action – make clear than only written documentation
 Agenda
www.NodalPartners.com/fico

• Company Law 101 Overview

• Keeping Control - A Framework
• Standard Documents
• DIY Contracting With Liability Limiting Language
• Financings and Options
• Next Steps
• Q&A
 Financing
Pitch and Term Sheets;
Closing
Fundraising Commitments

• Stock Purchase Agmt

• Executive Summary • Term Sheet (you)

• PowerPoint Deck • Term Sheet (them) • Convertible Note

• Private Placement Purchase Agmt
• Forecast & Budget Memorandum • $ Investment
• “Business Plan”
• The security issued
 Options
Board
“Plan” Created and
Grants Expiration or Exercise
Approved
Option

• Board & Shareholder • Board resolution • Expiration -- earlier of:

approval
• Agreement
• Reserves shares to be sold
when options exercised
• Board approves “grant”
• “Grant” is a contract
where option holder has
right but not obligation to
buy shares at X price
during Y period
• Vesting
• Acceleration
• 10 years
prepared and
• X days after term-
signed by holder
and company ination of service
• Exercise
• Sign the form and
submit a check
• X days after term-
ination of service
 Agenda
www.NodalPartners.com/fico

• Company Law 101 Overview

• Keeping Control - A Framework
• Standard Documents
• DIY Contracting With Liability Limiting Language
• Financings and Options
• Next Steps
• Q&A
 What Do You Do Next?
• Find a good lawyer; negotiate deferred fee arrangement
• Ask for a simple incorporation and “standard” agreements
– Restricted Stock Agreements (and 83(b) election) for co-founders
– Employee and IC agreements (NDAs, inventions assignments, work-for-hire, etc.)
– NDA (one way and mutual; individual and entity)
– Maybe customer or channel contracts
• Set Up YOUR Framework – Dropbox* and maybe [Gmail, GSites, GDox, GCal]
• Learn to use the standard agreements and drive them to final, signed documents,
filed inside the framework.
• Use Google to research other documents; avoid chit-chat with lawyer
• CYA with “liability limiting language”
• Buy your attorney lunch once a quarter (off the meter)
• Engage your attorney for funding and material ($$ or duration) matters.

* and make sure to back it up frequently!!

 Startup Legal
How to Move Your Idea
From Concept to Reality:

The practical steps of incorporating

& financing an unfunded startup