1. Incorporation
and other early-stage legal issues
August 11, 2009
Yoichiro (“Yokum”) Taku Jesse Chew
Direct: (650) 354-4251 Direct: (650) 565-3839
ytaku@wsgr.com jchew@wsgr.com
www.startupcompanylawyer.com
Troy Foster
Direct: (650) 565-3600
tfoster@wsgr.com

2. When do I need to incorporate a company?
• Pitching investors at TheFunded Founder Institute
• More than one founder working on project
• IP creation
• Hiring employees or third party contractors
• Option grants
• Launching product/service
• Corporate liabilities (i.e. office lease)
• Start long-term capital gain
• Visa issues
DOC# 2

3. What situations might require special consideration?
• Founder is an employee of another company
• Founder is not a U.S. citizen/permanent resident
• Founder already has incorporated an entity
– LLCs, S corps, non-DE corps
• Most of the business is non-U.S.
• Pre-incorporation agreements
DOC# 3

4. What documents should I review if I still am
employed?
• Offer letter
• Proprietary Information and Invention Assignment
Agreement
• Conflict of interest policy
• Other employee documents
DOC# 4

5. What if I already incorporated a company?
• If non-DE corporation, then create a DE parent holding
company using Founder Institute form documents
– Eventually dissolve existing corporation before end of year
• If DE corporation, then amend and restate Certificate of
Incorporation using Founder Institute form documents
• If investors or non-founder equity holders, then probably leave
things alone unless something is broken
DOC# 5

6. Why shouldn’t I incorporate an LLC?
• Venture capital investors do not want Unrelated Business
Taxable Income and cannot invest in LLCs
• Stock options difficult to grant
• Complicated to mimic typical preferred stock rights in an LLC
operating agreement
• Attorney fees are higher
• S corporations are okay until they have entity shareholders
DOC# 6

7. What happens during the incorporation
process?
• Founder needs to sign WSGR engagement letter
and provide a check to cover out of pocket
expenses
• Founder fills out incorporation questionnaire
• WSGR reviews to ensure completeness
• WSGR checks for obvious trademark issues on
name and sends summary report
• WSGR provides founder with customized
incorporation documents
DOC# 7

8. What incorporation documents are created?
• Certificate of incorporation
• Action by incorporator
• Bylaws
• Certificate of adoption of bylaws
• Initial board consent
• Initial stockholders consent
• At-will employment, confidential information,
invention assignment and arbitration agreement
DOC# 8

9. What incorporation documents are created?
(continued)
• Equity incentive plan
• Stock option agreement
• Restricted stock purchase agreement
• Indemnification agreement
• WSGR will also provide forms of offer letter,
consulting agreement and NDAs as part of
incorporation process
DOC# 9

10. What happens during the incorporation
process? (continued)
• Founder signs certificate of incorporation
– WSGR files with Delaware Secretary of State
– Confirmation back within 24 to 48 hours (expedited filing
available)
• Other documents signed
• Founder obtains employer identification number (IRS)
• Open bank account
• Deposit checks for founders stock
• 83(b) filing – founder responsible (WSGR will NOT file)
• Securities law filings (WSGR will file)
DOC# 10

11. Should I worry about trademark issues?
• Do you own research before deciding on a name
• Please review WSGR Guide to Trademark Issues for a New
Company which we will send with initial company name screening (or
online below)
– http://www.startupcompanylawyer.com/2008/03/07/what-
trademark-and-other-legal-issues-are-involved-in-selecting-a-
company-name/
• Please fill out business description in incorporation questionnaire
• Basic WSGR trademark search to avoid any obvious issues (~$400)
– Included in incorporation process for Founder Institute
companies
• In-depth search (~$1300)
• Trademark application ( ~$4500)
– If not controversial
DOC# 11

12. What should the company’s capitalization
table look like?
• Authorized
– Class A common – 15,000,000
– Class F common – 9,000,000
• Fully-diluted capitalization at initial formation
– Class A common – none
– Class F common – 9,000,000
– Option pool (Class A common) – 1,000,000
• Please note that there is an extra 5,000,000 shares
of Class A common authorized for future issuances
DOC# 12

13. What happens if I have additional founders or need to
sell stock to investors?
• Newly issued shares are sold by the company
– Founders do not sell their existing shares
• May require amending the Certificate of
Incorporation if there aren’t enough authorized
shares
• Need to amend and restate the Certificate of
Incorporation to create preferred stock at the time of
a financing
DOC# 13

14. What is Class F common stock?
• Super-voting (10 votes per share)
• Election of Class F director (with 2 votes per
director)
• Protective provisions
• Convertible into Class A common stock
DOC# 14

15. What happens to Class F when investors
invest?
• Companies like Google, Broadcom and at least one mentor
company with top tier VCs has super-voting common stock
• Company potentially has additional leverage when negotiating
with VCs (more chips to trade)
• All of these “founder favorable” provisions can be eliminated
upon a financing, but it is simply a negotiation
• The best way to preserve some of these provisions is to
outperform competitors because only elite companies will
have real leverage
DOC# 15

16. How should founders stock vest?
• Stock is issued and voting, but subject to
repurchase by the company if the founder is
terminated for any reason
• Vesting commencement date
– Credit for pre-incorporation time
• Founder Institute recommendation
– 1/48th per month with no cliff
– Acceleration – single trigger upon a change of
control
– Please note that this is very founder favorable
DOC# 16

17. What is in the restricted stock purchase
agreement?
• Purchase price
– Typically set very low (i.e. $0.001 per share)
– May not be appropriate if founder is contributing
valuable IP
• Repurchase right/vesting/acceleration
• Right of first refusal on transfers
• Escrow of shares
• IPO lockup
• 83(b) election
DOC# 17

18. What are out of pocket costs of
incorporation?
• Certificate of Incorporation
– Delaware fees - $130
– Filing service fees - $135
– Accelerated filing available ($40 for 24 hour, $500 for two
hour confirmation)
• Qualification to do business
– California - $350 (includes state and filing service fees)
– Other states
• Agent for Service of Process
– Delaware - $185
– California - $185 (most use business address)
– Other states
DOC# 18

19. What are out of pocket costs of
incorporation? (continued)
• Securities filings
– CA 25102(f) – ~$25 (depends on issue price)
– CA 25102(o) – ~$200 (varies based on issue price)
Attached consent to service of process needs to be
notarized
– Form D - $300 per state (rare)
• Franchise taxes
– Delaware - $75 minimum + $25 filing fee
– California - $800 minimum
• Recurring costs
– Agent for service of process
– State franchise taxes
DOC# 19

20. How do I keep incorporation costs to a minimum?
• Be educated
• Completely fill out incorporation questionnaire
– Do not make WSGR ask for follow-up information
• Do not make changes
– Every change requires time to revise documents
• Avoid custom drafting
– Custom acceleration on termination without cause or
resignation for good reason
• Keep good records
DOC# 20

21. Why should I avoid online incorporation services?
• Documents generally need to be redone anyway
• Most people ignore the package of paper they
receive after initial incorporation
• No restricted stock purchase agreement to impose
founder vesting, right of first refusal on stock
transfers, IPO lockup
• IP assignment clauses typically do not exist or are
inadequate
DOC# 21

22. Questions
• Please read www.startupcompanylawyer.com first
DOC# 22