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LEGAL ISSUES FOR STARTUPS
Etohum – Istanbul
October 7, 2016
Anil Advani
Managing Partner
anil@inventuslaw.com
PRESENTS
2
Agenda
PART I: STRUCTURING U.S. OPERATIONS
• Reincorporate Foreign Company as a U.S. Parent Company
• Incorporate a U.S....
3
PART I: STRUCTURING U.S. OPERATIONS
• Option 1: Reincorporate Foreign Company as a U.S. Parent Company
• Option 2: Incor...
4
Reincorporate Foreign Company as a U.S. Parent company:
• Only viable option where the investors and/or potential exit a...
5
Part II: Life Cycle of a Startup
EXIT:
ACQUISITION
BRIDGE
ROUND
INITIAL
PUBLIC
OFFERING
SERIES CSERIES BSERIES A
BIG
CUS...
6
Equity Structure
Initial Capital Structure
• Total Authorized: 10MM shares of Common Stock
• Difference between Authoriz...
7
Seed Financings:
• Founders, Friends, Family, Angels, Early Stage VCs
• Incubators: YC, Idea labs, Citrix Accelerator, 5...
8
Venture Financing - Term Sheet
Three Main Purposes of Term Sheet
• Pricing/Valuation
• Percentage of the Company to be s...
9
Venture Financing (cont’d.)
Valuation
• Methodology for valuation:
• Discounted Cash Flow
• Multiple of Revenues/Sales, ...
10
Privileges of Preferred Stock
• Voting (Board) rights
• Protective Provisions
• Dividends: Cumulative versus non-cumula...
11
Strategic Transactions
Licensing Arrangements
• License Terms:
• Exclusive versus Non-Exclusive
• Geographical Limitati...
12
Terms of Use and Privacy Policy
Why are these policies important?
• Contract with Users
• Subject Users to terms and co...
13
Terms of Use and Privacy Policy
Risks if you don’t have these policies in place?
• Unchecked liability
• Collecting Use...
14
Q&A
Thank you!
Startup Istanbul 2016 / Anil Advani - Inventus Law
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Startup Istanbul 2016 / Anil Advani - Inventus Law

Presentation of Anil Advani at Startup Istanbul 2016,
6-10 October, Istanbul, Turkey

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Startup Istanbul 2016 / Anil Advani - Inventus Law

  1. 1. 1 LEGAL ISSUES FOR STARTUPS Etohum – Istanbul October 7, 2016 Anil Advani Managing Partner anil@inventuslaw.com PRESENTS
  2. 2. 2 Agenda PART I: STRUCTURING U.S. OPERATIONS • Reincorporate Foreign Company as a U.S. Parent Company • Incorporate a U.S. Subsidiary of the Foreign Company • Incorporate an entirely independent U.S. Company PART II: LEGAL ISSUES RELATING TO A STARTUP COMPANY Incorporation Process Employment Issues; IP Ownership Issues Equity Structure Financing Options Strategic Transactions
  3. 3. 3 PART I: STRUCTURING U.S. OPERATIONS • Option 1: Reincorporate Foreign Company as a U.S. Parent Company • Option 2: Incorporate a U.S. Subsidiary • Option 3: Incorporate an Independent U.S. Company INVESTORS U.S. Parent Foreign Sub Investment 100% INVESTORS Foreign Parent U.S. Company Founder Stock Investment 100% Founder Stock Option Plan Option Plan U.S. Company Ownership, Investment and Management will be unclear
  4. 4. 4 Reincorporate Foreign Company as a U.S. Parent company: • Only viable option where the investors and/or potential exit and/or most strategic customers and/or partners located in the U.S. • Tax issues need to be handled carefully; valuation of Foreign company shares needed • All IP, founder stock, Option Pool, Investors, Customers and Revenues will be held in the U.S. Company • Need to carefully structure management, Board and Shareholding • IP can be licensed to Foreign company for sale in India, or directly to Foreign customers through website • Transfer Pricing Issues; Immigration related issues Incorporate a U.S. Subsidiary Company: • Good option where the purpose of U.S. company is limited. For example, for collections from, or marketing and managing, U.S. customers of the Foreign company • Easy to set up and operate Incorporation a completely independent company: • Easy to set up and operate • Not a good option if need to restructure for U.S. financing, licensing and/or potential exit SETTING UP U.S. OPERATIONS (CONTD.)
  5. 5. 5 Part II: Life Cycle of a Startup EXIT: ACQUISITION BRIDGE ROUND INITIAL PUBLIC OFFERING SERIES CSERIES BSERIES A BIG CUSTOMER SMALL CUSTOMERANGEL ROUND SERIES D Incorporation Founders Stock Stock Incentive Plans Selecting and Negotiating with VCs Debt vs. Equity Employee Matters IP Protection Licensing and other IP Matters Strategic Partnerships The big question: when and how to exit????
  6. 6. 6 Equity Structure Initial Capital Structure • Total Authorized: 10MM shares of Common Stock • Difference between Authorized, Issued, and Outstanding Capital • Founder Stock: 8-9 MM • Issue stock early to avoid tax issues • Vesting (look back period for vesting) • Acceleration: Single Trigger versus Double Trigger • 83(b) elections: file on time (within 30 days of purchase)! • Option Pool: 1-2MM • Vesting: Straight 4 year vesting, 1 year “cliff”, with monthly vesting thereafter • Acceleration: Could hamper acquisition • Outside Investors: Preferred Stock
  7. 7. 7 Seed Financings: • Founders, Friends, Family, Angels, Early Stage VCs • Incubators: YC, Idea labs, Citrix Accelerator, 500 Startups, Tandem, and Alchemist • Convertible Notes with a “kicker”, either a discount or warrant coverage • Typically between $250k to $1MM • Debt that converts into preferred equity in the “next qualified financing” • Avoid any additional rights to seed investors, although institutional investors may require right to lead the next round, management rights, board seat and protective provisions • Look out for any issues that may affect future financings. Venture Capital Financings: • Valuations • Preferred Stock Strategic Transactions: • Licensing Arrangements • Revenue Share; Affiliation Agreements; Reseller Agreements • Mergers and Acquisitions Financing Options
  8. 8. 8 Venture Financing - Term Sheet Three Main Purposes of Term Sheet • Pricing/Valuation • Percentage of the Company to be sold (Pre and Post Money) • Liquidation Preferences • Dividends • Anti-Dilution Protections • Management/Controls • Board Rights • Protective Provisions • Covenants • Liquidity Rights • Co-Sale/Right of First Refusal • Registration Rights • Drag-Along Rights • Redemption Rights
  9. 9. 9 Venture Financing (cont’d.) Valuation • Methodology for valuation: • Discounted Cash Flow • Multiple of Revenues/Sales, Multiple of Earnings • Customers, Revenues, Management Team, Patent Strategy, Competition, Size of the market, other precedents • Getting multiple term sheets always helps, but be careful how you play your horses! • Watch out for milestone based investments • Not the only issue to think about Time, Process, and Expense • Time: 2-3 months from start to finish • Process: IP diligence, Legal diligence, Schedule of Exceptions, Financing Documents • Expenses: Legal fees (both sides), Investor expenses
  10. 10. 10 Privileges of Preferred Stock • Voting (Board) rights • Protective Provisions • Dividends: Cumulative versus non-cumulative; should be non-cumulative and discretionary, i.e., “when, as and if declared by the Board” • Conversion Rights: Right to convert into Common Stock; Upon requisite preferred holders’ consent or upon a “qualified” IPO • Anti-dilution Protection: Full Ratchet is bad; Broad-based weighted average is good and standard • Redemption: Watch out, not a good sign; right should be at least 5 years out and spread over a period of time • Registration rights: standard registration rights OK, nothing to fight over • Information Rights: standard information rights OK, nothing to fight over; limit to “Major Investors” • Right of First Offer: maintain their pro rata ownership; right to “gobble up”; limit to “Major Investors” • Right of First Refusal and Co-Sale Agreement: OK, but understand how it works • Board Observer Rights: OK, but need to be careful as VCs don’t like the distraction of too many observers Venture Financing (cont’d.)
  11. 11. 11 Strategic Transactions Licensing Arrangements • License Terms: • Exclusive versus Non-Exclusive • Geographical Limitations • Ownership of IP and “Work Product” • Other Material Provisions: Fee Structure, Term, Termination, Assignment, and Indemnification. Partnerships • Affiliate Agreements • Reseller Agreements Mergers and Acquisitions • Set up right legal structure • Ownership of IP is critical • Contract terms play a big role in valuation
  12. 12. 12 Terms of Use and Privacy Policy Why are these policies important? • Contract with Users • Subject Users to terms and conditions • Key Terms: Registration requirements (Restrict use of site or app to users of a certain age), IP Ownership, Define fee structure, Limit Company’s liability, Define publicity rights, Indemnification, Assignment, Jurisdiction, Customer Support and Questions • Content License: • Limited license for use of your site and content to users • Users assign their content ownership rights to the company • Compliance with Digital Millennium Copyright Act • Restrict User Activity • Don’t post hate speech • No spam • No harassment of other users • Data Security • Ensure compliance with the terms you’ve set • Inform users of the data the Company collects: Personally Identifiable Information (PII) versus Non-PII • Inform users of the Company’s use of their data • Provide users with the opportunity to Opt-Out of use of Cookies
  13. 13. 13 Terms of Use and Privacy Policy Risks if you don’t have these policies in place? • Unchecked liability • Collecting User Data without consent • No restrictions on User activity • Lost value • Unclear ownership of content/contributions • Copyright, patent, and trademark implications Challenges with these policies? • Acceptance of the policies by users • Should ‘Manifest Consent’ • Evolving Rules • EU new standards on cookies differ from other countries • Global Enforcement issues
  14. 14. 14 Q&A Thank you!

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