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7/31/2019 SEFI Legal Aley 10.30.12
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Incorporation Issues for GrowthCompanies
The Founder Institute
Seattle, Winter 2012
Andy Aley
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About this Presentation
This presentation is provided for general informational purposes only, isnot made available for the purpose of providing legal advice and is notdelivered in the course of an attorney-client relationship. While thispresentation is intended to provided general information relevant to theintended audience, no warranty is made as to the informations accuracy.This presentation is not a substitute for competent legal advice from anattorney licensed to practice in your jurisdiction.
Circular 230 Disclosure: The income tax principles, rules, and outcomesdiscussed in this presentation are intended to be used solely for general
informational purposes. The information contained in this alert is notintended to be used, and cannot be used, for the purpose of avoidingfederal tax penalties.
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Whats this all about?
Building a solid foundation for growth. Avoiding time loss at a more critical moment.
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Why Incorporate?
Liability issues Multiple founders Intellectual property development Seeking investment Stock sales and tax issues Hiring employees / contractors Visa requirements
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Entity Choice
C Corp Basics Common choice for growth companies. No limitations on foreign or entity shareholders. Ability to issue multiple classes and series of stock. Earnings are subject to taxation once at the corporate level,
and once at the stockholder level.
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Entity Choice
S Corp basics Potentially beneficial to pre-funding companies or bootstrapped
companies.
Profits and losses pass through to shareholders. Ownership limitations prohibit non-U.S. shareholders and most
entity shareholders.
Multiple classes of stock are prohibited.
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Entity Choice
LLCs Profits and losses pass through to equity owners. No restriction on foreign or entity ownership. Costly to implement multiple classes of equity. Costly to implement equity incentive plans. Most professional investors avoid LLCs. Generally not recommended for growth companies.
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Jurisdiction
Delaware Familiar to investors nationwide. Well defined corporate law. Efficient secretary of states office. Greater formation and maintenance expense ~$500 to form /
potentially large annual franchise tax.
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Jurisdiction
Washington Limited corporate case law, courts tend to follow Delaware. Less expensive to form and maintain ~$250 to form / $60
annually.
Investor unfamiliarity could be a disadvantage, some investorsmay require re-incorporation in Delaware.
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Corporate Governance
Directors:
Elected By ShareholdersBroadly responsible forcorporate oversightOwe fiduciary duties tocompany and shareholders
Officers:
Appointed by and generallyreport to board of directorsResponsible for carrying onthe companys businessOwe fiduciary duties tocompany and shareholders
Corporation
andShareholdersFiduciary
Duties
all you (for now)
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Equity
Issued = stock that a stockholder actuallyowns.
Authorized = total number of shares that thecorporation may issue.
Reserved = authorized but unissued sharesthat have been reserved for a specific purpose(e.g. option plan, convertible security).
Fully Diluted = all issued and reserved shares
Approach carefully: mix ups can cost ownership %
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Classes of Stock
Common Stock
Basic economic and voting rights. Economic rights are equivalent to other common holders,
subordinate to preferred.
Possible to provide for varied control rights by creating classes ofcommon stock.
Preferred Stock
Superior rights compared to common holders (e.g. liquidationpreference, anti-dilution).
Founders and employees typically hold common stock, VCs andinstitutional investors typically hold preferred stock.
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Class F Stock
Specific to Founder Institute
10 Votes per Class F Share Right to appoint a Class F Director with two
votes
Protective provisions requiring specific approvalof Class F
Corporation would authorize Class A CommonStock and Class F Common Stock
A sufficient number of shares must be reservedfor conversion of Class F to Class A Class F is easily convertible to Class A
Not a requirement, and not one-size-fits-all
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Restricted Stock Agreement
Designed to ensure that equity stake is aligned withinput to the Company over time.
Founder stock subject to repurchase right/risk offorfeiture that lapses over time. Repurchase/forfeiture is triggered by defined events
(e.g., termination for cause, voluntary resignation)
Vesting may be fully or partially accelerated onchange of control
Potentially beneficial tax treatment
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FI Warrant Terms
Entitles the Institute to purchase 3.5% of the fully-dilutedshares of the company, measured after a QualifiedEquity Financing.
Exercise Price = QEF price Security = QEF securities (e.g. Series A) Term = 5 years from QEF, or 10 years if no QEF or IPO. Redeemable for $100,000 Founder Termination Payment
Payable by company to FI in the event of involuntarytermination
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Whats the process?
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GSB and FI Companies
Engagement Terms
$1,750 flat fee for incorporation. Covers out of pocket costs offiling.
Deferral of up to $5,000 for other legal needs (excludesimmigration).
First Steps
Complete incorporation questionnaire. Meet with one of us to discuss questions and particular needs. Be sure to let us know about immigration issues, third-party IP
contributions, obligations to current employer, etc.
Return engagement letter, complete any open items, deposit flatfee.
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Incorporation: Whats included
GSB prepares a set of incorporation documents based onquestionnaire and consultation
Certificate of Incorporation Bylaws Restricted Stock Agreements Invention Assignment / BPA Restricted Stock Purchase Agreement Director Indemnification Agreements IP Assignment Option Plan / Agreement Founder Institute Warrant Board and Shareholder Consents State Filings and Notices
We also provide a few useful documents for future use
Three forms of NDA selectable for different circumstances Form of Independent Contractor Agreement Trial access to GSB AdviceOnline HR Product
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Questions?
Peter Cancelmo Andy Aley
206-816-1332 206-816-1361
[email protected] [email protected]
Scott Warner Stephen McKay
206-816-1319 206-816-1524