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2012 Paul Sweeney
- 1. Legal Pitfalls to Avoid
When Starting Up
RamenCamp
Paul Sweeney
May 12, 2012
© 2012 Foley Hoag LLP. All Rights Reserved.
- 2. These materials have been prepared solely for general information and
educational purposes. The information protected does not constitute legal
advice, nor does it establish any form of attorney-client relationship with the
author or Foley Hoag LLP. Specific legal issues should be addressed through
consultation with your own counsel, not by reliance on this presentation or
these materials. Attorney Advertising. Prior results do not guarantee a similar
outcome. © Foley Hoag LLP 2012.
United States Treasury Regulations require us to disclose the following: Any
tax advice included in this document and its attachments was not intended or
written to be used, and it cannot be used by the taxpayer, for the purpose of
(i) avoiding penalties under the Internal Revenue Code or (ii) promoting,
marketing or recommending to another party any transaction or matter
addressed herein.
© 2007 Foley Hoag LLP. All Rights Reserved.
2012 Presentation Title | 2
- 3. INTRODUCTIONS
Corporate lawyer at Foley Hoag LLP
Named one of the “Top 20 Startup Lawyers in Boston”
Named one of “Ten Most Innovative Lawyers in US” by
the ABA Journal
Over 100 venture debt and equity financings since
1998
– Examples:
• SCVNGR (Highland, Google Ventures, Balderton - $15M)
• Kyruus (Highland, Venrock - $5.5 M)
• Vanu (Charles River Ventures, Norwest - $32 M)
MIT 100K Bus Plan Comp / HBS Business Plan Comp
© 2007 Foley Hoag LLP. All Rights Reserved.
2012 Presentation Title | 3
3
- 4. Overview
Legal Pitfalls For Startups
Emphasis on practical advice
Questions
© 2007 Foley Hoag LLP. All Rights Reserved.
2012 Presentation Title | 4
- 6. #1 – Waiting Too Long To Form Entity
Protect yourself and your assets from personal
liability
Establish clear ownership rights in corporation’s
assets (e.g. IP)
Issue equity (“Founder Stock”) to founders
early to avoid tax nightmare
© 2007 Foley Hoag LLP. All Rights Reserved.
2012 Presentation Title | 6
- 7. #2 – Failing to Establish Clear
Relationships Among Co-Founders
Control: How will decisions be made, and who
will make them? President & CEO
Equity: How will we divide the equity among
ourselves?
Contributions: Will any of us be investing cash /
IP in the company? How will this be treated?
Succession: What happens when one of us
leaves?
Forced Departure: Can one of us be fired? By
whom, and for what reasons?
© 2007 Foley Hoag LLP. All Rights Reserved.
2012 Presentation Title | 7
- 8. #3 – Casual Distribution of Equity
Warning Signs:
“We promised her 3% of the company and agreed that
she wouldn’t get diluted.”
“We’ll re-adjust the equity distribution as we go along.”
“I can’t remember what I said he was getting, but I
probably have it somewhere in an email.”
“We all thought that it was best to focus on building a
great company, not wasting time on paperwork!”
© 2007 Foley Hoag LLP. All Rights Reserved.
2012 Presentation Title | 8
- 9. Taking Stock
Don’t promise percentages; always speak in terms of #
of shares and what they currently represent
Avoid giving anti-dilution protection to founders or
employees
Understand the need for future option pool
Keep accurate cap table and stock ledger – they really
do matter!
© 2007 Foley Hoag LLP. All Rights Reserved.
2012 Presentation Title | 9
- 10. #4 – No Reverse Vesting
100% of founders shares are issued day one, but
company has right to repurchase at the price paid by
the founder (usually nominal) if founder leaves.
Shares vest over time (usually 4 years)
Full or partial acceleration if change of control or
termination without cause
Keep vesting simple and linear
Consider past activities
Angel / Venture investors require it anyway
Critical tax consideration – 83(b) Election
© 2007 Foley Hoag LLP. All Rights Reserved.
2012 Presentation Title | 10
- 11. #5 – Casual protection of IP
Everyone who creates IP on behalf of company should
be bound by NDA/Assignment of Inventions Agreement
Everyone with whom you share proprietary information
should be bound by NDA – always disclose cautiously
and gradually
Disclosure of inventions may preclude patentability or
spoil trade secret protection
Be aggressive with protecting your IP!
© 2007 Foley Hoag LLP. All Rights Reserved.
2012 Presentation Title | 11
- 12. #6 – Violating Agreements with
Former Employers
2 common issues – non-compete/solicit, and IP
Solution: Review and understand the terms of
agreements that you’ve signed
Solution: Be careful of hiring from former employer
Solution: Require all employees to disclose contractual
obligations or represent there are none
Solution: Beware of landmines – e.g. customer lists,
marketing materials, employee data
Solution: Don’t use employer’s computers, phones, etc.
to conduct your own business
© 2007 Foley Hoag LLP. All Rights Reserved.
2012 Presentation Title | 12
- 15. Questions?
Paul Sweeney
Partner
(617) 832-1296
psweeney@foleyhoag.com
© 2007 Foley Hoag LLP. All Rights Reserved.
2012 Presentation Title | 15