1. 1 Cleantech Open Confidential Information – All Rights Reserved
Webinar Q & A Session – Legal Environment, Issues and
Risks- Worksheet 6
Tuesday, August 13, 2013

2. 2 Cleantech Open Confidential Information – All Rights Reserved
Q & A Session 1- Legal Environment, Issues and Risks
• Q 1. What are the some of the foundations that offer grants in the cleantech space?
– Several examples are listed in the Webinar slides so I would recommend people checking them up
in Wiki.
– To add, there are numerous foundations on the private side, like Gates Foundations, W. Buffet
Foundation etc. Private foundations focus particularly on products that can be used in the
developing world.
• Q 2. Can you address restrictive covenants, terms & conditions that would make a superficially looking
good deal potentially poor for the start-up? When is it reasonable to agree to "preferred" terms, anti-
dilution clauses? How to find good comps for valuation?
– You can find restrictive covenants in any sort of investment deal. Common ones are the ones that
allow the investor a certain amount of control of the company, but don’t grant investors with too
much control because the founder remains to in order to crate his product. Those type of restrictive
covenants that allow the investor to take over the company and control the company too much on
the daily bases, are going to result in a very poor deal, even if the amount of investment looks very
good. If the founders are not in control of the company, the company is much less likely to succeed.
– In majority of situations, you have to agree with preferred terms.
– Good comps for valuation can be a difficult to do, each comp is different. If you have similar
products with the competitor, you can follow their valuation, however investors may apply
different criteria on you (e.g. particular sector, particular product, geo region).

3. 3 Cleantech Open Confidential Information – All Rights Reserved
Q & A Session 1- Legal Environment, Issues and Risks
• Q 3. How common do angels prefer an exit at a Series A round if (for example) their "six digit" money
will be eclipsed by 7-8 digit money within 12-18 months? What type of a return would an angel expect
in 12 months versus the 10X at year 5 a VC might see?
– Angel investment fund may look at recouping 1.5 -2x in a 12 month period, but generally longer and
quite often they want to stay at least through B round until they come out.
• Q 4. What is the standard time to exit for early stage VC's?
– Early stage VC exit is usually 5 years or 3 years.
– Angel exit is around 24 month.
• Q 5. You stated that LLCs are governed by an operating agreement as opposed to a corporation -
governed by statute. What is the benefit?
– Operating agreement is an agreement among the members and it determines how the corporation
will be operated. It allows some flexibility of how the company will be run. Corporations, their laws
are dictated by statute, the shareholders have only some flexibility in deciding the size of their
board and number of officers, number of meetings. That makes it more structured but also less
flexible.
• Q 6. Is there a potential liability if the valuation is wrong?
– There is no liability if the valuation is wrong for the start-up company. If the company has
misinterpreted its value to the seller then it is. Investors will have to take time to value the
company as they are going to have a large role in the valuation. And if the investor is wrong, that is
a problem to the investor

4. 4 Cleantech Open Confidential Information – All Rights Reserved
Q & A Session 1- Legal Environment, Issues and Risks
• Q 4. If your business is software based, how do you estimate costs?
– There are different types of costs. For example in e case of a mobile app, customer acquisition costs are
very high. These include getting out there, getting subscribers to subscribe and this is expensive in staffing
and in marketing materials. They have to deploy it in order to achieve the sales growth.
• Q 5. How does one do this analysis when there are no product sales during technology development and
scale-up for all three years?
– You will have to do this analysis without revenue piece, but include costs like general administration,
personnel, salary etc. So you need to budget these costs out. Then you can see the revenues needed.
• Q 6. How do you estimate revenues from lead generation?
– This depends really on the product and end customers. In order to estimate revenues, take into account
the feedback what you have collected from potential customers, look at the value proposition, look at
what competitors are doing. You need to use the information found from the customer discovery process.
This is the information you need to use. For example, do a paper exercise asking customers, what is the
volume and price they would pay for your product. This is a good way of forecasting. That gives you
credibility.
• Q 7. How do you feel about using outside financial advisors to help raise capital for pre-revenue
companies? What sorts of terms should you expect (retainer, commission, etc.)?
– Be really careful to get the right person, make sure that person or organization is not simply a broker but
an investment banker. He has to put together a strategy, materials, pitch documents, terms, retainer etc.

5. 5 Cleantech Open Confidential Information – All Rights Reserved
Q & A Session 1- Legal Environment, Issues and Risks
• Q 7. How do you value sweat equity of the founders?
– It is the point of negotiation. In almost every instance, the founders believe that the value of the sweat
equity is higher than the investor believe. Generally, money talks. Usually, the founders need to scale back
their expectations, of the value of their seat equity. It is keenly negotiated topic.
• Q 8. I am going to have exclusive license from a university. The patent is provisional currently. What if the
university does not want to go for a full patent? Can I apply for a full patent later? And if so when can I apply.
– The speaker is not an IP lawyer.
– It is important to talk to a relevant lawyer (case by case basis) who is knowledgeable in patents.
• Q 9. Is it necessary to get a 3rd party opinion on IP "defensibility"...how to best back up the founders' opinion
on this question in the CTO worksheets? If Patent/Trademark Office hasn't acted yet on utility patent
application, defensibility seems subjective.
– Defensibility is subjective until patent office acts on the utility patent application. There are consulting
firms that provide opinion on the defensibility of the patent and probably on the value of the patent as
well. So this is again an issue that is going to be negotiated, because some investors insist on that.

6. 6 Cleantech Open Confidential Information – All Rights Reserved
Q & A Session 1- Legal Environment, Issues and Risks
• Q 10. For start-up companies with not much financial resources how do they hire such services of a lawyer? Is
there a budget plan based on success and advancement etc.?
– Lawyers like to talk, so it might be fairly easy to meet lawyers in the context like Cleantech Open and chat
with them. So get a sense of what it might cost to be represented by them. Many firms are willing to take
risks on some portion of fees and offer some kind of alternative fee arrangement if they feel like the
technology is very promising or the team is very well managed or whatever reason the law firm thinks that
that start-up will be successful. Not every firm does that, it really depends on the risk appetite of the firm.
Most law firms are going to look to principles to provide the guarantees for pavement, because they want
to make sure that the start-up will pay all of the fees. Generally engaging the lawyer in earlier stages will
help a company to avoid a lot of problems it might get into.
• Q 11. Question regarding employment contracts: Is it true generally that employment agreements are getting
simpler and with more "plain English"? Our lawyer drew up a long employment agreement, and a prospective
employee pushed back, saying it was overly difficult to read/understand. Please comment in general.
– You need lawyers and advisors to look it though.

7. 7 Cleantech Open Confidential Information – All Rights Reserved
Q & A Cap Tables
• Q 1. Is it rare to have NOT issued shares beyond a sole founder even though there are part-time team
members engaged waiting for first outside (e.g. angel) funding. Does this confuse investors relative to team
status or commonly rectified at closing?
– It is actually very typical to have not issued shares. It is the options that are not issued. It is often the case
that you have a lot authorized shares and you will have options available to issue. When investors come in,
they will want you to show available shares. So make sure when you look at the capitalization, the dilution
that will happen is already included when they are buying. So they are not diluted by present plans. You
can have no shares, you can be a corporation without shareholders, but it is unusual. Frankly, it is not a
good idea. From the tax prospective, you want to start your holding period ASAP, you can issue shares at a
lower amount, but later, it goes up. The investor would not be confused, but they would like to invest in
shares.
• Q 2. LLC structure has not defined share numbers, etc.
– If you have an LLC, then you have units and economic interests, so the question is what are people’s
economic interests. But as the time passes you will be converted into s-corp in the end. So why start as
LLC.
• Q 3. For an S-Corp, are distribution percentages tied to issue or outstanding shares?
– There are the shares that are outstanding. Those are the present economic interests to people.
– You should contact a tax attorney.
• Q 4. Is 20% a common discount for convertible debt holders?
– Yes it’s a common discount. (The convertible note can include a pre-money valuation cap).

8. 8 Cleantech Open Confidential Information – All Rights Reserved
Q & A Cap Tables
• Q 5. No reference is made to Authorized Shares in the spreadsheets. OK, so is there any significance to
Authorized Share numbers?
– There is a significant number of authorized shares only to the extent the company by a simple vote of the
board can issue the shares up to the authorized shares. In order to issue more shares, you have to amend
the certificate that requires the shareholder vote. When you do a Series A, the investors will insist that
there will not be more preferred shares that would be absolutely necessary. That’s the significance to it.
• Q 6. Is it common to layout multiple rounds on the cap table as a pro-forma scenario if funding is achieved
according to a multi-year plan?
– No, for a multi-year plan probably not. But it is often a case that you would show multiple steps if there is
something complicated (e.g. 7 different steps).
• Q 7. Can you talk about the 83b and how founders set up the company to avoid tax liability if some founders
come in later after initial founders have invested in the company?
– 83B election:
– You should always consult your own tax advisor.
– This election allows you to pay taxes now. You don’t have to pay taxes if you forfeit it later. But you can
choose to do so. It is positive because the value of sharer should go up. But when your vesting lapses, 3
year later, you have to pay taxes on the value of the stock at that moment, so you don’t want to pay the
tax. You can make 83B election within 30 days and pay tax e.g. 1% per share.
– How to protect investors in the future – in order to make the contribution, it depends on the tax situation,
you should plan it properly, as it is a highly individualized question.

9. 9 Cleantech Open Confidential Information – All Rights Reserved
Q & A Cap Tables
• Q 8. For unfunded startups, where does money for VC legal fees come from?
– Out of the money you are getting. It ranges, from the West coast $ 25 000 to the East coast $75 000. But it
also depends if you have a lot of IP, then IP due diligence is necessary.
• Q 9. Who offers a cap table in a transaction typically?
– It is the company that offers the cap table. For VCs – the pitch is important with a very big product focus.
After that, people might want to see, what is your cap table.