Legal Issues for Start-ups Mick Bain

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The Exit Event

If you’re building an angel-backed or venture-backed company, an exit is in your future

Exit will be an IPO or a sale – Either way, the underwriters/buyer will perform extensive

diligence

– Be ready with answers to their questions

– If an IPO, the SEC will review your disclosure and you will be exposed to increased risk of liability for issues and increased scrutiny in the public markets

– If a Sale, you will be required to indemnify the Buyer for certain problems (known and unknown)

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Plan Now – It is NEVER too early

Build the company to avoid exit roadblocks

Avoid common mistakes

Get good advisors

Establish sound processes

Document everything

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Capitalization Mistakes

Making oral promises

Misunderstandings over percentages

Misallocating founder equity and being too aggressive with vesting

Do what it takes to avoid the “woodwork”

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IP Mistakes

Failing to get IP assignments from co-founders/collaborators, employees, consultants

Honestly assess risks of claims by former employers

Not establishing policies to protect trade secrets; failing to properly use good NDAs

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IP Mistakes

Improper use, documentation nor compliance with open source

Failing to keep track of filing deadlines

Failing to strategize over, and to make proper foreign filings

Failing to TM your company name

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HR Mistakes

Background checks Employees v. Independent contractors (IRS compliance and

personal liability)

Not using at-will offer letters

Assignment of inventions, non-disclosure and non-competition agreements

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HR Mistakes

Are they subject to non-compete and/or non-disclosure agreements with other employers?

Immigration compliance

Discrimination and sexual harassment claims/policies

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Tax Mistakes

Select the proper entity type 280G problems

409A problems

Improper withholding (contractors v.employees)

Issuing stock for services

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Equity Compensation Mistakes

Need compliant equity plans Options not properly authorized (tax, accounting and

corporate issues/liabilities)

Cheap stock and 409A compliance

State and foreign law compliance for equity plans (Rule 701, California, UK, etc.)

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Equity Compensation Mistakes

Make and document 83(b) elections Aggressive use of acceleration

Milestone-based vesting

Failing to follow RSA buy-back procedures

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Financing Mistakes

Using finders and unregistered capital raisers; bad agreements

Non-accredited investors

Federal and State securities law compliance

Failing to provide for rights terminate

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Financing Mistakes

Voting percentages and veto rights Ambiguous language in equity contracts (e.g., warrants)

Failing to get proper waivers (e.g., preemptive rights)

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Contract Mistakes

Source code escrow provisions Third party consents required for change in control

Affiliate language in non-competes and licenses

Exclusivity and MFN Provisions

Non-competes

Be aware of Confidential Treatment requests at time of IPO

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Housekeeping Mistakes

Poor or no records Failure to follow corporate formalities

– Hold regular board meetings

– Keep minutes (good ones)

No proper authorization for stock, options and other equity

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Advisor Selection Mistakes

Experience level with the SEC and in M&A transactions (including in the early-stage planning process)

Knowledge of what is customary

Good form files

Accountants not PAOCB certified

Independence issues with accountants – can they help you avoid problems (e.g., revenue recognition)?

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The Exit Event

Goal is to focus on the economics of the event Avoid having to negotiate from a position of weakness

Be prepared

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