The speaker will highlight and discuss of a number of case stories which illustrate frequent missteps made by entrepreneurs and start ups. Topics will include: when and how to document your deal capitalization raising funds attracting investors and more! The discussion will use real case stories to illustrate each topic in a meaningful and easy to understand manner. By understanding these common missteps, entrepreneurs and startups will be better able to more successfully navigate the pitfalls and traps that can keep their startup from getting off the ground.

1. © Copyright 2022 by K&L Gates LLP. All rights reserved.
Alidad Vakili, K&L Gates LLP
March 31, 2022
How to Avoid Big Startup
Mistakes
Idea to IPO

2. These materials have been prepared solely for educational purposes.
The presentation of these materials does not establish any form of
attorney-client relationship with the author or K&L Gates. Particular
legal issues should be addressed through consultation with your own
legal counsel, not by reliance on this presentation or these materials.
Attorney Advertising. Prior results do not guarantee a similar outcome.
© K&L Gates LLP 2022.
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be advised that any U.S. federal tax advice contained in this
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or recommending to another party any transaction or matter addressed
within.
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3. OVERVIEW
 My Background
 Overview
 Documenting the Deal
 Capitalization
 Good Corporate Hygiene
 Preparing for Your First Deal
 Diligence
 Q&A
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4. BACKGROUND
 Corporate attorney with a practice
focus on Emerging Growth and
Venture Capital.
 I work out of our San Francisco
office and have worked with
companies throughout the US and
the world.
 I enjoy working with and helping
entrepreneurs on startup
adventures from startup to liquidity.
klgates.com 4
Alidad Vakili
Counsel
+1.415.882.8039
alidad.vakili@klgates.com

5. Review of Audience Survey
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Overview
"Failure is simply the opportunity to begin again, this
time more intelligently."
~Henry Ford

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DOCUMENTING THE DEAL
The Napkin Deal
• Founder invited friend to join as co-founder with
equal ownership (50/50)
• Friend promised manufacturing services
• Signed a one page agreement
• Friend couldn’t deliver
• Relationship broke down
• Friend walked with 50% of company

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DOCUMENTING THE DEAL
Resolution:
• Founder bought out friend for $75,000
Key Takeaways:
• Do your diligence
• Troubleshoot (ask the “what if questions”)
• Seek legal advice
• Document the deal properly
• Resolution cost 10+ times more than it should
have

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DOCUMENTING THE DEAL
How to Document the Deal (properly):
• One Example - Term Sheet (aka, LOI, MOU)
• Outline relationship
• Parties
• Key terms
• Timetable and obligations of parties
• Binding vs. non-binding or hybrid of both?
• Confidentiality
• Exclusivity
• Transaction expenses

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CAPITALIZATION
Cap Table Chaos:
• Corporation formed with minimal authorized shares
• Two forward splits stock
• Documentation handled internally by company
• Company issued shares based on split numbers
• COI never amended:
• Share splits never authorized (i.e., never happened)
• Company exceed authorized number of shares

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CAPITALIZATION
Resolution:
• Had to clean up the capitalization
• Had to disclose problems to existing
stockholders
Key Takeaways:
• Capitalization structure and changes requires
proper planning and guidance
• Documentation needs to be prepared and
effected properly
• Resolution cost significantly more than
necessary

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CAPITALIZATION
To Give or not to Give?
• Striking the right balance when allocating equity
• Capitalization
• Think backwards when planning
• Ownership
• Control
• Dilution (plan for it – it’ll happen)
• Incentivize your team
• Proper documentation
• Vesting
• Repurchase rights

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GOOD CORPORATE HYGIENE
Missteps for the Unwary:
• Proper Documentation is Key
• Invalid or defective shareholder actions
• Invalid or defective board actions
• In some cases can be fixed by having board
or stockholders ratify action.

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GOOD CORPORATE HYGIENE
Missteps for the Unwary :
• Waking a Sleeping Devil: Stock and option
pricing:
• Company issues options to employees and
consultants – not priced properly creating
409A issues.
• Issue discovered during diligence during M&A
transaction
• Employees cashed out and paid extra to cover
the additional tax from options being priced
too low.

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GOOD CORPORATE HYGIENE
Missteps for the Unwary :
• Contract (mis)management
• Not keeping track of agreements or important
terms
• Not seemingly important until there is a deal
in play and the other side is asking questions

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GOOD CORPORATE HYGIENE
Missteps for the Unwary:
• Protecting the Crown Jewels:
• Key consultant (software engineer)
• No proper IP assignment agreement
• Agreement contained fine print giving rights
to discoveries by consultant to consultant
and not company

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GOOD CORPORATE HYGIENE
Missteps for the Unwary:
Resolution:
• Negotiated settlement with consultant
Key Takeaways:
• Protect the Crown Jewels – Document rights
• CIIAAs (aka PIIAAs)
• Know the devil in the details in agreements
you sign with consultants, vendors, etc. Read
the fine print
• States laws differ – may need specific
language tailored to specific state’s laws to
be enforceable
• Resolution cost more than necessary

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PREPARING FOR YOUR FIRST DEAL
Prepare before your start preparing:
• Organization
• Answer the investors questions before they
ask them
• Organize your documents, data room, etc.
before you sign your term sheet.
• Use advisors efficiently
“Before anything else, preparation is the key to success.”
~Alexander Graham Bell

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DILIGENCE
The Snack Food SNAFU:
• Snack food company approached by distributor
looking for new product
• Company negotiates verbal deal with distributor
and starts working on initial order of 500K bars
• Distributor fronts costs for new equipment
• Company finally gets around to calling their lawyer
to “document their deal”
• Disaster ensues at meeting

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DILIGENCE
The Snack Food SNAFU:
Resolution:
• Company couldn’t deliver on order
• Had to pay distributor back for advances
Key Takeaways:
• Do your diligence before you commit
• Misstep cost company its largest order and any
future orders it may have received

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PARTING THOUGHTS…
Do your homework
Spend the time upfront to organize your startup and
establish procedures and organizational habits that will
make future transactions more efficient and less costly

22. QUESTIONS / COMMENTS
Alidad Vakili
alidad.vakili@klgates.com