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LEGAL ISSUES FOR GAMING
COMPANIES AND THEIR FOUNDERS


         Anil Advani
       Managing Partner
        Inventus Law
Life Cycle of a Startup
                                Licensing and other
       Employee Matters
                                IP Matters
Formation                                                                        EXIT:
                                          Strategic
                                                                              ACQUISITION
            Debt vs. Equity               Partnerships
                                SMALL            BIG           BRIDGE
         ANGEL ROUND          CUSTOMER        CUSTOMER         ROUND




                                                                                 INITIAL
                   SERIES A          SERIES B       SERIES C       SERIES D      PUBLIC
                                                                                OFFERING
Founders
Stock
        Option Plan           Selecting and
                                                                               The big
                              Negotiating with VC’s
                                                                               question:
                              IP Protection                                    when and
                                                                               how to
                                                                               exit????
Equity Structure: Founders and Third Parties
Identifying the “Real” Founders
      –       Need to be fair, not equal, among the founders
      –       Single Founder versus multiple founders
      –       Co-Founding with Friends and Relatives
      –       Founders versus Founding Team


Initial Capital Structure
      –       Initial Authorized: 10MM shares of Common Stock
          •   Founder Stock : 7-8 MM
          •   Option Pool: 2-3 MM
      –       Terms of Founder Stock /Options:
          •   Issue stock to Founders early to avoid tax issues ; 83(b) elections: file on time (within 30 days of
              purchase)!
          •   Acceleration: Single Trigger versus Double Trigger; Wrong acceleration terms could hamper
              acquisition
          •   Vesting for Options: Straight 4 year vesting; 1 year “cliff”, with monthly vesting thereafter
Financing Options
Seed Financings:
     •       Founders, Friends, Family, Angels, Early Stage VCs
     –       Incubators: YC, Idea labs, Citrix Accelerator, Startups500, 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
Venture Financing
Three Main Components of Venture Financing Process
     –       Pricing/Valuation
         •   Percentage of the Company to be sold (Pre and Post Money)
         •   Liquidation Preference
     –       Management/Controls
         •   Board Rights
         •   Protective Provisions; Covenants
         •   Drag-Along Rights
     –       Liquidity Rights
         •   Co-Sale/Right of First Refusal
         •   Registration Rights
         •   Anti-Dilution Protections
         •   Redemption Rights
Time, Process and Expense
     –       Time: 2-3 months from start to finish; Legal fees (both sides), Investor expenses
     –       Process: IP diligence, Legal diligence, Schedule of Exceptions; Financing Documents
Strategic Transactions
Licensing Arrangements
     –  License Terms:
      • Exclusive versus Non-Exclusive
      • Geographical Limitations
     – Ownership of IP and “Work Product”
     – Other Material Provisions: Term, Termination, Assignment, and Indemnification.


Partnerships
     –   Revenue Share Agreements: Zynga- Facebook Agreements
     –   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
Q&A


 Thank you!


 Anil Advani
anil@inventuslaw.com

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Anil Advani

  • 1. LEGAL ISSUES FOR GAMING COMPANIES AND THEIR FOUNDERS Anil Advani Managing Partner Inventus Law
  • 2. Life Cycle of a Startup Licensing and other Employee Matters IP Matters Formation EXIT: Strategic ACQUISITION Debt vs. Equity Partnerships SMALL BIG BRIDGE ANGEL ROUND CUSTOMER CUSTOMER ROUND INITIAL SERIES A SERIES B SERIES C SERIES D PUBLIC OFFERING Founders Stock Option Plan Selecting and The big Negotiating with VC’s question: IP Protection when and how to exit????
  • 3. Equity Structure: Founders and Third Parties Identifying the “Real” Founders – Need to be fair, not equal, among the founders – Single Founder versus multiple founders – Co-Founding with Friends and Relatives – Founders versus Founding Team Initial Capital Structure – Initial Authorized: 10MM shares of Common Stock • Founder Stock : 7-8 MM • Option Pool: 2-3 MM – Terms of Founder Stock /Options: • Issue stock to Founders early to avoid tax issues ; 83(b) elections: file on time (within 30 days of purchase)! • Acceleration: Single Trigger versus Double Trigger; Wrong acceleration terms could hamper acquisition • Vesting for Options: Straight 4 year vesting; 1 year “cliff”, with monthly vesting thereafter
  • 4. Financing Options Seed Financings: • Founders, Friends, Family, Angels, Early Stage VCs – Incubators: YC, Idea labs, Citrix Accelerator, Startups500, 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
  • 5. Venture Financing Three Main Components of Venture Financing Process – Pricing/Valuation • Percentage of the Company to be sold (Pre and Post Money) • Liquidation Preference – Management/Controls • Board Rights • Protective Provisions; Covenants • Drag-Along Rights – Liquidity Rights • Co-Sale/Right of First Refusal • Registration Rights • Anti-Dilution Protections • Redemption Rights Time, Process and Expense – Time: 2-3 months from start to finish; Legal fees (both sides), Investor expenses – Process: IP diligence, Legal diligence, Schedule of Exceptions; Financing Documents
  • 6. Strategic Transactions Licensing Arrangements – License Terms: • Exclusive versus Non-Exclusive • Geographical Limitations – Ownership of IP and “Work Product” – Other Material Provisions: Term, Termination, Assignment, and Indemnification. Partnerships – Revenue Share Agreements: Zynga- Facebook Agreements – 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
  • 7. Q&A Thank you! Anil Advani anil@inventuslaw.com