2012 Paul Sweeney

Legal Pitfalls to Avoid
When Starting Up

RamenCamp
Paul Sweeney
May 12, 2012

© 2012 Foley Hoag LLP. All Rights Reserved.

These materials have been prepared solely for general information and
educational purposes. The information protected does not constitute legal
advice, nor does it establish any form of attorney-client relationship with the
author or Foley Hoag LLP. Specific legal issues should be addressed through
consultation with your own counsel, not by reliance on this presentation or
these materials. Attorney Advertising. Prior results do not guarantee a similar
outcome. © Foley Hoag LLP 2012.

United States Treasury Regulations require us to disclose the following: Any
tax advice included in this document and its attachments was not intended or
written to be used, and it cannot be used by the taxpayer, for the purpose of
(i) avoiding penalties under the Internal Revenue Code or (ii) promoting,
marketing or recommending to another party any transaction or matter
addressed herein.

2012 Presentation Title | 2

INTRODUCTIONS

 Corporate lawyer at Foley Hoag LLP
 Named one of the “Top 20 Startup Lawyers in Boston”
 Named one of “Ten Most Innovative Lawyers in US” by
the ABA Journal
 Over 100 venture debt and equity financings since
1998
– Examples:
• SCVNGR (Highland, Google Ventures, Balderton - $15M)
• Kyruus (Highland, Venrock - $5.5 M)
• Vanu (Charles River Ventures, Norwest - $32 M)
 MIT 100K Bus Plan Comp / HBS Business Plan Comp

3

Overview

 Legal Pitfalls For Startups
 Emphasis on practical advice
 Questions


Knowledge is power

5

#1 – Waiting Too Long To Form Entity

 Protect yourself and your assets from personal
liability
 Establish clear ownership rights in corporation’s
assets (e.g. IP)
 Issue equity (“Founder Stock”) to founders
early to avoid tax nightmare


#2 – Failing to Establish Clear
Relationships Among Co-Founders

 Control: How will decisions be made, and who
will make them? President & CEO
 Equity: How will we divide the equity among
ourselves?
 Contributions: Will any of us be investing cash /
IP in the company? How will this be treated?
 Succession: What happens when one of us
leaves?
 Forced Departure: Can one of us be fired? By
whom, and for what reasons?


#3 – Casual Distribution of Equity
Warning Signs:

 “We promised her 3% of the company and agreed that
she wouldn’t get diluted.”
 “We’ll re-adjust the equity distribution as we go along.”
 “I can’t remember what I said he was getting, but I
probably have it somewhere in an email.”
 “We all thought that it was best to focus on building a
great company, not wasting time on paperwork!”


Taking Stock

 Don’t promise percentages; always speak in terms of #
of shares and what they currently represent
 Avoid giving anti-dilution protection to founders or
employees
 Understand the need for future option pool
 Keep accurate cap table and stock ledger – they really
do matter!


#4 – No Reverse Vesting

 100% of founders shares are issued day one, but
company has right to repurchase at the price paid by
the founder (usually nominal) if founder leaves.
 Shares vest over time (usually 4 years)
 Full or partial acceleration if change of control or
termination without cause
 Keep vesting simple and linear
 Consider past activities
 Angel / Venture investors require it anyway
 Critical tax consideration – 83(b) Election


#5 – Casual protection of IP

 Everyone who creates IP on behalf of company should
be bound by NDA/Assignment of Inventions Agreement
 Everyone with whom you share proprietary information
should be bound by NDA – always disclose cautiously
and gradually
 Disclosure of inventions may preclude patentability or
spoil trade secret protection
 Be aggressive with protecting your IP!


#6 – Violating Agreements with
Former Employers

 2 common issues – non-compete/solicit, and IP
 Solution: Review and understand the terms of
agreements that you’ve signed
 Solution: Be careful of hiring from former employer
 Solution: Require all employees to disclose contractual
obligations or represent there are none
 Solution: Beware of landmines – e.g. customer lists,
marketing materials, employee data
 Solution: Don’t use employer’s computers, phones, etc.
to conduct your own business


Final Thoughts

13

Final Thoughts

14

Questions?

Paul Sweeney
Partner
(617) 832-1296
psweeney@foleyhoag.com


2012 Paul Sweeney

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