This document provides advice to entrepreneurs on positioning their start-up for success. It discusses choosing the appropriate business entity based on factors like tax treatment, liability, ownership structure, and funding plans. Common options include partnerships, LLCs, S-corps, and C-corps. The document also covers protecting intellectual property, establishing employment agreements, issuing equity to founders and employees, and vesting schedules. The overall advice is to take care of legal and organizational matters upfront to set the company up for future success and prepare for fundraising.

1. Positioning Your Start-Up For Success:
Advice to Entrepreneurs Forming a
Company
Joshua D. Fox, Esq.
Attorney Advertising

2. Corporate Formation
Which type of entity should we choose?
 Possibilities:
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Partnership
Limited Liability Company
Subchapter S Corporation
Subchapter C Corporation
 Considerations:
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Tax
Liability
Number and Types of Owners
Funding Plans
Under which jurisdiction’s law should we organize?
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3. Corporate Formation
What Type of Entity Should We Choose?
Partnership
– “Pass through” tax treatment
– No limit on number or types of owners
– All owners do not necessarily have limited liability
– Not an investor-favored form
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4. Corporate Formation
What Type of Entity Should We Choose?
Limited Liability Company
– “Pass through” tax treatment
– No limit on number or types of owners
– All owners have limited liability
– Not an investor-favored form
– Cost and time to administer
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5. Corporate Formation
What Type of Entity Should We Choose?
Subchapter S Corporation
– “Pass through” tax treatment
– All owners have limited liability
– Limit on number and types of owners
– Limit on classes of equity
– Not an investor-favored form
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6. Corporate Formation
What Type of Entity Should We Choose?
Subchapter C Corporation
– All owners have limited liability
– No limit on number and types of owners
– No “Pass through” tax treatment
– Investor-favored form
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7. Corporate Formation
What Type of Entity Should We Choose?
 Become a C-Corp if you want to:
– Obtain VC funding
– Go public
– Use equity to compensate employees
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8. Corporate Formation
Where Should We Incorporate?
Delaware
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9. Protecting Your Intellectual Property
 Who owns IP created prior to incorporation?
– You?
– People who collaborated with you?
– Former employers?
– University?
 Answer: It could be some or all of the above.
 Answer: The Company does not own it (yet).
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10. Protecting Intellectual Property
 How do we make sure that the company owns all of its
intellectual property after incorporation?
 Answer:
– Assignment of inventions agreements
– Non-disclosure agreements
All Founders
By: All Collaborators
All Future Employees
– Licenses from third parties (e.g., universities)
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11. Establishing Relationships with
Employees and Independent Contractors
 Protect the company when establishing relationships with
founders and early-stage employees and independent
contractors, not any single individual
 Standardized terms covering
– At-will employment (offer letters)
– Vesting of equity
– Assignment of inventions
– Non-disclosure
– Non-competition and non-solicitation
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12. Issuing Equity Prior to Fundraising
Allocation of Equity:
 Beware of splitting stock ownership 50/50 among two
founders
 Eliminate discussion of percentages; Translate into share
numbers
 Consider contributions to date and expected roles for the
future
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13. Issuing Equity Prior to Fundraising
Dilution:
 Plan in advance for equity grants to be made to new hires
 Dilution can be a good thing:
– Dilution typically necessary to bring in cash or human capital to
grow the business
– Smaller piece of bigger pie
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14. Issued and Reserved Shares
 Issued shares recommended = 2 million per founder
 Purchase price per share = $0.001 per share
 Total amount paid by each founder = $2,000
 Purposes of initial cash contributions:
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Adequate capitalization (limit liability)
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Pay initial filing fees (Delaware incorporation and
foreign qualification in other state(s))
 Reserve: 20% for stock option pool (1 million shares if two
founders with 2 million shares each)
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15. Vesting of Equity
 Company’s right to repurchase unvested shares of founder
stock at original purchase price
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Compare repurchase of vested shares at fair market value
(reduces incentives)
 Protection for co-founders in the event one or more cofounders leaves
 Helps ensure that co-founders’ equity better reflects actual
contributions
 Expectation of VCs and sophisticated investors that founders
will stay on to build the company
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16. Vesting of Equity
 Typical Schedule: Vesting over 4 years – 1 year cliff of 25%
and monthly thereafter
 Possible up-front vesting as “credit” for service provided to
date
 Acceleration of Vesting
– Option #1: Upon change in control (single trigger) – Generally
disfavored by buyers and VCs; Consider precedent; Possible 2550%, then reduction in number of years vs. retain original
schedule)
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17. Vesting of Equity
 Acceleration of Vesting
– Option #2: Upon termination without cause (single trigger) –
Generally disfavored by company/co-founders and investors
(difficulty establishing cause)
– Option #3: Following sale of the company, if termination without
cause or for good reason (double trigger) – Generally acceptable
(even 100% acceleration – often within 12-18 months of sale)
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18. Section 83(b) Elections
 Founder typically files 83(b) election when issued restricted
stock and paying fair market value for stock
 Without making election, stockholder has taxable income as
stock vests - difference between fair market value of shares
that vested and the price paid for such shares
 With election, taxed on difference between fair market value
of all unvested shares at time of grant and the price paid for
such shares – No tax payment when price equals fair market
value
 Within 30 days of Board approval of issuance
 Consult a tax advisor (personal tax matter)
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19. Lock-Up and Restrictions on Transfer
 Lock-up
– Founder agrees not to sell shares during a specified period
following an IPO
– Typically 180 days

Company Right of First Refusal
– If founder wishes to sell stock to a third party, company has the
right to purchase the stock on the same terms as those offered by
third party
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20. Voting Agreements / Rights of First Refusal
Agreements / Co-Sale Agreements
 Typically put in place in connection with a financing; Do not
recommend such agreements among founders before
financing
- Voting Agreements
•
Election of Directors
•
“Drag Along” provisions
- Rights of Refusal in favor of stockholders
(investors) after company
- Co-Sale Rights in favor of stockholders
(investors)
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21. Conclusions
Do the right (simple) things now - you’ll save time,
effort and expenses later.
 Form the Appropriate Entity
 Protect the Company’s IP
 Establish Relationships with Employees and Independent
Contractors that Benefit the Company
 Issue Equity in a Manner that Plans for the Future
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22. Contact
Josh Fox
joshua.fox@wilmerhale.com
781-966-2007
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Representative Office. This material is for general informational purposes only and does not represent our advice as to any particular set of facts; nor does it represent any undertaking to
keep recipients advised of all legal developments. Prior results do not guarantee a similar outcome. © 2014 Wilmer Cutler Pickering Hale and Dorr LLP
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