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Jason Gordon, Putnam Gordon T. 10.9.14 Silicon Valley, California
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Ideas to IPO: Entity Formation & Selection
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JASON PUTNAM GORDON, ESQ. jpg@putnamgordon.com
Overview • Background • Entity Formation • Initial Ownership Structure • (Other Common Issues) • Intellectual Property
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JASON PUTNAM GORDON, ESQ. jpg@putnamgordon.com
Personal Background • Practicing law since 2005. • My firm focuses on handling the corporate needs of
emerging-growth companies. • Before I started my practice, I was a litigator at WSGR.
• Licensed in CA, DC, MA, NJ, & PA, but I only practice in CA.
• I have made almost 1,000 skydives.
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JASON PUTNAM GORDON, ESQ. jpg@putnamgordon.com
What is your Background? • In a startup? • Founder? • First startup? • Previous successful exit? • Who is interested in entity
formation? • Who is interested in IP? • What are some corporate issues
you are facing?
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JASON PUTNAM GORDON, ESQ. jpg@putnamgordon.com
Important Caveats
• Today’s Discussion is General Information – Not Legal Advice
• That means while we’ll be discussing rules and exceptions, those rules, exceptions, exceptions to the exceptions, may not be applicable to your situation.
• You need to get competent specific legal counsel to review all facts and circumstances. Our off-the-cuff answers to your questions are not legal advice.
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JASON PUTNAM GORDON, ESQ. jpg@putnamgordon.com
Entity Formation: Creating Value
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JASON PUTNAM GORDON, ESQ. jpg@putnamgordon.com
Company
Investors (Capital)
Idea(s) (Intangible Assets)
Technicians who have skills like: sales, marketing, business acumen (Services)
Entity Choice • No entity • No shield against personal liability • No ability to grant or transfer
equity interests • Accidental partnerships
• Limited Liability Company • No double taxation • Not as attractive to venture capital • Harder to use equity to acquire
other businesses • Difficult to reward employees with
equity
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JASON PUTNAM GORDON, ESQ. jpg@putnamgordon.com
Entity Choice Cont. • Corporation • Limited liability • Taxed as a separate entity • Developed Management
structure • Easiest to grant/use equity
• Jurisdiction • Usually Delaware • Beware of Section 2115
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JASON PUTNAM GORDON, ESQ. jpg@putnamgordon.com
Mechanics • Name selection and
reservation in jurisdictions • Different than trademark rights
• File certificate of incorporation
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JASON PUTNAM GORDON, ESQ. jpg@putnamgordon.com
Completion of Formation and Securities Laws
• Not done with filing with DE Secretary of State • Register with CA and local authorities • Incorporator actions • Director actions, e.g.,
• Bylaws • Stock Issuance • Approval of agreements
• Founders agreements • IP Assignment • Securities filings • 83(b) elections
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JASON PUTNAM GORDON, ESQ. jpg@putnamgordon.com
Initial Ownership Common Considerations
• Who gets what? • What happens if/when
someone leaves? • What protection is possible
against later investors?
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JASON PUTNAM GORDON, ESQ. jpg@putnamgordon.com
Who gets what? • Founders • There isn’t a market for this • Generally the person(s) running the show
should have the biggest stakes(s) • Do others have any stake already? • Nominal amount/IP • May not be possible if too far along
• Post-Founder, Initial Hires and/or advisors • Possibly restricted stock • Possibly stock options
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JASON PUTNAM GORDON, ESQ. jpg@putnamgordon.com
What happens if someone leaves? • Vesting
• Must get agreements in place • Term, typically four years with a one-year cliff • Acceleration • 83(b) elections!!! • May get renegotiated by later investors
• Shareholder Agreements • Rights of first refusal • Co-sale rights • Drag along rights
• Restrictions in bylaws
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JASON PUTNAM GORDON, ESQ. jpg@putnamgordon.com
Protections from later investors
• Is this possible? • What is your clout • Usually, not worth time/money because of
market power of invests • What are the options? • High-Vote founders shares • Founder protective provisions against a sale
without founder consent
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JASON PUTNAM GORDON, ESQ. jpg@putnamgordon.com
Other Issues: Seed Financing Options
• Common Stock • Frequently done by DIYers and attorneys who do not practice in this space. • Places a value on the common stock and makes it difficult to issue equity to later hires.
• Convertible Notes • Very common as large as 1.5 million. • Avoids valuing the company and a value on the common stock.
• Convertible Equity • Started to be in vogue ~2012 not heard that many people doing it.
• Series Seed • Essentially a slimmed down preferred round. • Can put later VC investors on top of the preferred to seed investors
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JASON PUTNAM GORDON, ESQ. jpg@putnamgordon.com
Other Issues: Hiring and Wage
• All full-time individuals (and maybe part-time) will be considered employees for purposes of federal and state wage laws. • Calling them consultants, does not fix that issue. • Entitled to minimum wage. • You are going to be responsible for withholding taxes.
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JASON PUTNAM GORDON, ESQ. jpg@putnamgordon.com
Protecting Your Intellectual Property
• Technology assignment agreements by founders • Proprietary Information and Assignment Agreements • Consulting agreements for other service providers (even if they are
out of the US) • Licenses from third parties
• Be mindful of other obligations of founders • Open source issues • Non-solicitation and non-competes among founders and employees
• Depending on the scenario scope of enforceability will vary • Trade Secrets – you must protect • Register your IP?
• Let’s hear from Mark Koo.
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JASON PUTNAM GORDON, ESQ. jpg@putnamgordon.com
Questions/Comments
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JASON PUTNAM GORDON, ESQ. jpg@putnamgordon.com
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