What’s my startup worth? How much equity should founders have? How much equity should I give to employees and consultants? How much should I give the VC’s? Silicon Valley startup attorney Roger Royse of the Royse Law Firm discusses the basic valuation and ownership issues involved in a startup’s life, from formation to financing to exit, including how to value your company and the contributions of stakeholders and investors at each step with a particular emphasis on different models, best practices and traps to avoid.

1. Idea To IPO
How to Split the Pie, Raise
Money, and Reward
Contributors
Roger Royse
@rroyse00

2. Disclaimer
No information contained in this presentation is to be construed as legal advice. No
information contained in this presentation is intended or related to any particular factual
situation. Nothing herein forms an attorney-client relationship. If legal advice or other
expert assistance is required, the services of a competent professional should be sought.

3. Splitting the Pie

4. • Limited Liability Company (LLC)
• S Corporation (S Corp)
• C Corporation (C Corp)
• Foreign Corporation
Choice of Entity

5. 1. Operating Agreements
2. S Elections
3. Suspended Losses
4. 704(c) Allocations
5. Venture Capital
6. QSB Stock
7. Stock Option Plans
8. LLC Debt
9. Reorganizations
10. Fringe Benefits
11. Audits and Liabilities
12. Contingent Allocations
Advantages of a C Corporation

6. Note:CaliforniadoesnotfollowfederalincometaxtreatmentofQSBstockunderI.R.C. § 1202.
Qualified Small Business Stock – 1202 and 1045
General Requirements
• Original issue
• Five-year holding period
• 100% post-Sept. 27, 2010
• C Corporation issuer
• Up to $10 million or 10 times basis exclusion
• 1045 Rollover treatment
• $50 million Gross Assets Test
• Active Business Test
• No significant redemptions

7. PEOPLE
Advisors
Founders
Employees &
Consultants

8.  Vesting
 Equal Percentages
 Subjective
 Formula
Founder’s Equity

9. FAST Model
Valuation
Milestones and
Deliverables
Vesting Stock v.
Options
Advisors

10. CURRENCY
• Options
• RSUs
• Restricted Stock
• Phantom Plan Units
Currency

11. www.startuprounds.com
• Who should vest
• How long?
• Acceleration?
• Change of control
• Termination without cause
• Double and single triggers
VESTING Vesting

12. Independent Contractor vs. Employee

13. • Used an algorithm to connect homeowners with contract-for-hire cleaners and to
schedule visits
• Raised $40 million in venture funding
• Treated its cleaners as independent contractors, and not employees
• CEO said the “deciding factor” in failure to raise money and failure was worker
classification lawsuits (Recode July 17, 2015)
The Story of Homejoy

14. • The presumption is that the worker is an Employee (Cal. Lab. Code §3357)
• Different agencies/jurisdictions have different tests
• IRS
• DOL/FLSA
• CA Common Law and EDD
• Statutory Employees
Employment Status: The Law

15. • IRS: The Control Test
• Behavioral Control
• Financial Control
• Type of Relationship
• DOL/FLSA: Economic Realities Test/Silk Factors
• Focus is on the degree of control the Company has over the worker performing the service. The key
inquiry is the right to control not whether the Company actually exercises the control.
• In July 2015, DOL issued administrative guidance and explained that the test focuses on whether the
worker is economically dependent on the hiring entity or is in business for herself/himself.
• CA Common Law/EDD: S. G. Borello & Sons, Inc. v Dept. of Industrial
Relations (1989) 48 Cal.3d 341
• This is a multi-factored test with the most significant factor considered is whether the principal has
control or the right to control the worker as to the work done and the manner and means in which it is
performed.
• Statutory Employees
Employment Status: The Law

16. • Dynamex Operations West, Inc. v. Superior Court of Los Angeles adopts a three-
factor ABC test, which presumes a worker is an employee unless all of the
following tests are satisfied
• Worker is free from control and direction of hiring authority
• Worker performs work outside the usual course of the hiring entity’s
business, AND
• Worker is engaged in an independently established trade, occupation of
business of the same nature
Dynamex Decision

17. • Decision applies “for purposes of California wage orders” (emphasis in original),
not for tax classifications
• Worker may be classified differently for different purposes
• Will the EDD use Dynamex and become more aggressive?
• EDD has not stated that it will apply Dynamex
Dynamex and Tax?

18. • California Assembly Bill 5 would codify Dynamex in the Labor Code and the
Unemployment Insurance Code “For purposes of the provisions of this code and
the Unemployment Insurance Code, and for the wage orders of the Industrial
Welfare Commission…”
• Numerous carve-outs proposed
AB-5

19. • Uber, Lyft and DoorDash threatened to spend $90 million on a 2020 ballot
measure unless the Legislature passes a new bill allowing them to avoid
classifying drivers as employees
• California Labor Federation, representing 1,200 unions with 2.1 million members,
vowed to defeat the effort (LA Times August 30, 2019)
AB-5

20. • Employee vs Independent Contractor
• Wage & Hour Laws
• Intellectual Property Issues
• Prior Employer’s Facilities
• Invention Assignments
VESTINGAdditional Considerations

21. Protect IP
Protect your intellectual property from employees,
consultants, and/or competitors
• PIAIA or CIAIA
• Broadly Drafted Invention Assignments
• Federal Defend Trade Secrets Act
• Provisional Patents

22. Raising Money

23. • Founders
• Family & Friends
• Angel Investors
• Private Equity Funds
• Banks
• Venture Capital
Early Stage Investment Sources

24. SAFE Priced roundsConvertible Debt
Seed Funding

25. • Common Stock
• Options
• Warrants
• Convertibles
• Preferred Stock
Cap Table

26. Founders 5,000,000 38% 5,000,000 45%
Stock Pool 2,000,000 15% n/a
Series A 3,000,000 23% 3,000,000 27%
Series B 3,000,000 23% 3,000,000 27%
total 13,000,000 100% 11,000,000 100%
Capitalization

27. Founders 5,000,000 50% 5,000,000 63%
Stock Pool 2,000,000 20% n/a
Series A 3,000,000 30% 3,000,000 38%
Series B 0% 0 0%
total 10,000,000 100% 8,000,000 100%
Capitalization

28. Founders 5,000,000 71% 5,000,000 100%
Stock Pool 2,000,000 29% n/a
Series A
Series B
total 7,000,000 100% 5,000,000 100%
Capitalization

29. Founders 5,000,000 100% 5,000,000 100%
Stock Pool 0% n/a
Series A 0%
Series B 0%
total 10,000,000 100% 5,000,000 100%
Capitalization

30. • VC or Institutional Investor
• Preferred Stock
• Valuation Methods
• Score Card
• Venture Capital Method
• Berkus Method
• Cayenne Calculator
• Risk Factor Summation
• Negotiation
The Priced Round

31. www.startuprounds.com
• When to mention valuation
• Staged Investment
• Liquidation Preference
• Control
• Blocking rights
• Drags and tags
• Anti-Dilution protection
VC Negotiations

32. Other Financiers
• Private Equity
• Crowdfunding
• Strategic Investors

33. Crowdfunding

34. • Total global crowdfunding volume $34B (2015)*
• P2P lending: $25B
• Reward and donation crowdfunding: $5.5B
• Equity crowdfunding: $2.5B
• North America crowdfunding $17.2B
• World Bank estimated total crowdfunding market $90B by 2020, however, trend of
crowdfunding doubling year over year reach this level by 2017.**
• Comparison –
• Venture capital industry invests an average of $30B annually**
• Angels invest an average of $20B annually**
* Massolution Crowdfunding Industry 2015 Report
** Forbes “Trends Show Crowdfunding to Surpass VC in 2016”
Crowdfunding by the Numbers
Slide provided by:
Dawn Rhea, Moss Adams
Carolyn Lee, Morgan, Lewis & Bockius
Annette Nellen, San Jose State University

35. • Campaign owner selects crowdfunding platform (e.g., Kickstarter.com, Indiegogo.com,
GoFundMe.com).
• Differences exist such as whether must hit target to get funds, whether for business or
personal, others.
• Campaign owner creates a campaign, telling the story of their product, idea, concept or
reason for fundraising.
• Third-parties “contribute” funds to the campaigns.
• Funds raised are distributed to campaign owner less any applicable fees assessed (e.g., by
the platform itself, credit card processors, foreign currency conversion, etc.).
• Some sites require that “target” be met to get the funds.
• Campaign owner, in exchange for this contribution may:
• Do nothing, including provide nothing in return to the contributors
• Provide a product or ownership interest
• Provide a nominal value perk such as a logo tee shirt/tickets to an event
Crowdfunding Campaign Overview
Slide provided by:
Dawn Rhea, Moss Adams
Carolyn Lee, Morgan, Lewis & Bockius
Annette Nellen, San Jose State University

36. Exemption from Registration
• The private company issuer (aggregated with predecessors and companies under
common control) may sell up to $1.07 million of securities in a 12-month period
[adjusted for inflation]
• Individual investments in all crowdfunding issuers in a 12-month period are limited to:
• If either their annual income or net worth is less than $107,000, then the greater of:
• $2,200 or
• 5 percent of the lesser of their annual income or net worth
• If both their annual income and net worth are equal to or more than $107,000, then
• 10 percent of the lesser of their annual income or net worth (up to a maximum of
$107,000)
• Issuer may rely on intermediary’s calculation of investor limits, unless issuer knew it
was or would be wrong
• Process is likely to prove expensive and overly burdensome
• Effective as of May 16th, 2016
Crowdfunding

37. • Investment must be through the online platform of an “intermediary” broker or
funding portal
• Intermediary must register with the SEC and FINRA
• Issuer can only use one intermediary in any concurrent offerings based off of crowdfunding
exemption; however, multiple crowdfunding offerings may be conducted using different portals
so long as the aggregate amount in the same 12-month period does not exceed the 1.07 million
limit
• Many limitations on what entities can be intermediaries (e.g., must be good actor)
• Stringent limitations on having financial interests in issuers using platform
• Only allow issuers if reasonable to believe they are compliant, and there is no reasonable basis
to think there is a potential for fraud
• Cannot accept commitment from investor until investor has account with platform, and platform
provides needed information
• Must make sure investors aren’t exceeding their caps, and that they acknowledge and
understand the risks
• Must provide communication services between investors and issuer
• Many other requirements and filings
Crowdfunding

38. Data of 2016
There are 21 registered funding portals as of December 2016. Wefunder portal
continues to hold a majority of the market share, with 70 of the year’s 169 offerings
hosted on its platform. The StartEngine portal maintained the second spot, hosting
29 offerings in 2016.
Source: Drinker Biddle Crowdfunding Report
41.7%
17.2%
41.1%
2016 Funding Portal Market Share
Wefunder
StartEngine
Others
38
Crowdfunding

39. Data of 2016
Source: Drinker Biddle Crowdfunding Report
Crowdfunding

40. Points for Consideration
• Crowdsourcing through donations (e.g., IndieGoGo and Kickstarter) may be cheaper and easier, and
does not require the company to issue equity
• Advertising terms of offer is restricted
• Issuer can only direct investors to broker/funding portal
• Costs of disclosure and reporting (15%)
• Use of intermediary
• Risk of fraud
• High number of unsophisticated investors
• Fiduciary duties to all investors
• Could be a concern for VCs in future fundraisings
• Liability
• Rule 10b-5 liability
• New Section 4A(c) liability for issuer, its officers and directors and anyone “selling”
including promoting the offering
Crowdfunding

41. • Rule 506 now provides for two different types of private offering:
• Rule 506(b) is essentially the same as the old Rule 506, providing an exemption
for non-public offerings but prohibiting general solicitation
• Rule 506(c) is a new exemption that allows general solicitation, but with certain
restrictions and filing requirements
• Rule 506(c): issuers can offer securities through means of general solicitation as
long as:
• All purchasers are accredited investors; and
• The issuer takes “reasonable steps” to verify the purchasers’ accredited
investor status
Accredited Only Investments

42. • The proposed regulations pose a number of potential problems to pitch
competitions, for example:
• The pitch could be considered a general solicitation and therefore any
presentation materials would need to be filed with the SEC
• If the pitch is amended after feedback from judges then the new presentation
would need to be filed with the SEC before the next pitch
• Issuers that break the rules are subject to a one year penalty
• Very onerous and essentially a death penalty for early stage companies
Pitch Competitions

43. • The oldest exemption issued by the SEC
• Although it allowed non-accredited investors to invest, was rarely used, because
of high compliance costs relative to the maximum funds raised
• $5 million maximum offering
• Did not preempt state law registration, requiring registrations in many states
• The JOBS Act included legislation to create what is nicknamed “Regulation A+”,
an upgrade to Regulation A
• The new Regulation A keeps the allowance of non-accredited investors, and
features two kinds of Regulation A offerings, called “Tiers”:
• Tier 1, with a $20 M maximum, does not preempt state law registration, but has low federal
compliance burdens
• Tier 2, with a $50 M maximum, preempts state law registration, but has high federal
compliance burdens including ongoing semi-annual, annual, and current disclosures
Reg. A – History

44. • Community supported crowd sale of cryptocurrency tokens issued by startups
based on private Blockchain technology
• Creates liquidity and growth equity without giving up equity in a company
• Tokens are sold in exchange for Bitcoin, Ether, and government fiat
• No clear tax guidance
Initial Coin Offering (“ICO”)

45. • In certain cases, the tokens or coins will be securities and may not be lawfully sold
without registration with the SEC or pursuant to an exemption from registration
• Will depend on the facts and circumstances including the economic realities of the
transaction
• Tokens can have different utilities and rights
• Regulation A, Regulation D, or Regulation CF can be used
• Potential CFTC and FinCEN Compliance
• US vs. Offshore Offering
ICOs (cont.)

46. Utility
• Use of Token
• Secondary Trading
• Scarcity
• Voting + Democratized
Issuer
Law
• Securities Law
• Regulatory
• Tax
• AML/KYC
• Anti Fraud
$
Step 2: Build
Platform
Step 1:
Pre-Sale
$orCrypto
SAFT
Investors
Step 3: ICO
Tokens
Investors
The ICO: The Internet Boom on Steroids

47. Name
Amount
Raised
Start
Date
End
Date
Description
1 EOS $4,197,956,136
Jun 26,
2017
Jun 01,
2018
EOS has raised the highest amount of funds ever in it's ico, making over 4 billion dollars. EOS is a platform that supports decentralized apps. It aims
to make work easier for develops to make these apps. For these apps it will provide things like
2 Telegram ICO $1,700,000,000
Feb 28,
2018
Mar 31,
2018
Telegram's ICO aimed to use the funds generated from the token sale to expand its functionality via Blockchain technology beyond simple
messaging services. It is hoped that this extra functionality to increase telegrams user base beyond its current 200
3 Petro $735,000,000
Feb 20,
2018
Mar 19,
2018
The Venezuelan government have attempted to circumnavigate economic sanctions by creating their own cryptocurrency and using it as a
payment method for oil. This is the first officially government backed cryptocurrency.
4 TaTaTu $575,000,000
Jun 11,
2018
Jun 22,
2018
The TaTaTu platform aims to revolutionise social media and entertainment via their Blockchain platform. Consumers of content will be paid for
their viewership as well as for supplying it. Further features include using the accumulated TaTaTu token to pay
5 Dragon $420,000,000
Feb 15,
2018
Mar 15,
2018
Dragon Coin an ERC 20 token will be used to grant access at Casinos powered by Dragon's Blockchain. All the casinos facilities will be managed by
Dragon parter junkets.
6 HetaChain $190,051,316
Oct 01,
2018
Dec 10,
2018
HETACHAIN is a super-fast DPoS + BFT hybrid blockchain network focused on addressing the age-long scalability dilemma and pushing forth a truly
democratically governed platform built for industry scale transactions while also uniquely designed for private
7 Bankera $150,949,194
Nov 27,
2017
Mar 01,
2018
Bankera is a regulated bank for blockchain. Using a structure similar to a banking system, it allows itself to provide financial servicing like
payments, loans and deposits, and investments while being fully in support of cryptocurrencies.
8 tZERO (STO) $134,000,000
Dec 06,
2017
Aug 06,
2018
tZERO aims to create a front end trading system that provides itself as an alternative to the traditional securities market. Using features like risk
management it allows users to safely buy tokens without overspending or buying the wrong one.
8 Basis $133,000,000
Apr 18,
2018
Apr 18,
2018
Basis is a price stable cryptocurrency with an algorithmic central bank. It's goal is to develop monetary policies to make sure that cryptocurrencies
have purchasing limits and their prices do not have any more massive fluctuations.
9
Orbs (Private
Sale)
$118,000,000
Feb 15,
2018
May 15,
2018
Orbs is the first blockchain that will work with real world business. It aims to take cryptocurrency to a consumer level exchange. Large corporations
can comfortably use Obs to create apps that work on blockchain but also accomodate real world business la
10 KitToken $117,447,182
Jul 20,
2018
Aug 31,
2018
KitToken’s goal is to create security and sustainability within the blockchain environment. This new environment will provide features that
increase security from a blockchain based setting, it will also only charge a fraction of the large percenta
As of Jun 1, 2019. Source: https://www.coinschedule.com/stats/
Top 10 ICOs in 2018

48. As of Jun 1, 2019. Source: https://www.coinschedule.com/stats/
Name
Amount Raised Start Date End Date Description
1 BITFINEX $1,000,000,000 May 05, 2019 May 13, 2019
Bitfinex is a cryptocurrency exchange owned and operated by iFinex Inc., which is headquartered in Hong Kong and registered in the
British Virgin Islands. Since then iFinex, through its trading platforms, has become one of the best-known and recognized c
2 GCBIB $142,686,051 Oct 15, 2018 Jan 31, 2019
GCBIB (Genesis Crypto Blockchain Investment Bank) is primarily an investment bank, with a crypto to fiat exchange infrastructure that
helps bridge the gap between the emerging crypto market and existing financial services. Powered by a combination of Bl
3 Tron Game Global $80,000,000 Apr 16, 2019 May 31, 2019
TRON GAME GLOBAL PAY (GTP) is a project that is currently laying the foundation for Internet decentralization about GAME
BLOCKCHAIN.
4 Bolton Coin $67,830,000 Aug 20, 2018 Feb 28, 2019
BOLTON Coin (BFCL) offers a new amazing and unique approach to investing in the crypto sphere, generating aggregates profits from
tangible luxurious markets such as gold and diamonds mining, real estate, integrated by eco-sustainable energy and extraordin
5 Kinesis $59,278,000 Feb 16, 2018 Mar 18, 2019
Kinesis is a yield-bearing digital currency based on 1:1 allocated physical gold and silver. The vision for Kinesis is to deliver an
evolutionary step beyond any monetary and banking system available today.
6 Thunder Token $50,500,000 May 09, 2019 May 09, 2019 Thunder Token is a new crypto token that has high throughput and confirms transactions in seconds.
7 BQT $37,000,000 Aug 18, 2018 Mar 18, 2019
BQT Exchange Platform provides secure, interactive and flexible Social Trading Environment and user-friendly interface for its
community to manage various types of transactions consisting of many crypto assets.
8 Shercoin $36,000,000 Feb 01, 2019 May 02, 2019
The SherCoin team has realized that the best way to create a good cryptocurrency that will achieve mass adoption is by creating a multi-
functional token that has more than one utility.
9 Percival $35,000,000 Mar 05, 2019 Mar 26, 2019
Percival is also focused on the security provision to keep participant’s property and right, and to make it a goal to maintain the market
stabilization.
10 IPUX $35,000,000 Jan 15, 2019 Apr 30, 2019
IPUX is not only successfully operating, and has blueprints to develop, e-commerce, agriculture, and health and wellness related
businesses in ASEAN, but we are also providing solutions leveraging blockchain technology, smart contracts, AI, big data and I
Top 10 ICOs in 2019

49. • ICOs
• Tokens offered to investors to participate in some aspect of a platform. All
cryptocurrency is received upfront by developers. Anyone with
cryptocurrency can invest anonymously.
• IEOs
• Like ICOs but the token is sold by an exchange leading to better vetting,
compliance, marketing and liquidity.
• DAICOs
• Like ICOs, except the holders of tokens can vote to release money to
developers or refund money to shareholders over time.
• STOs
• Allows an offline regulated security to be sold on the blockchain. Can convey
ownership to shares in a company, precious metals, real estate, or debt
functioning in a similar manner to a corporate bond.
https://hackernoon.com/a-comprehensive-guide-to-the-next-generation-of-crypto-funding-v-ico-ieo-daico-eto-sto-939909782da6
49
Crypto Funding: ICOs, IEOs, DAICOs and STOs

50. Crypto Funding: New models are replacing ICOs

51. • Developers create a token and sell it directly to anyone with cryptocurrency.
Investors can invest millions and be completely anonymous.
• Developers receive cryptocurrency immediately.
• Tokens are usually empowered to give the users rights to use a future platform.
• Many tokens become fully liquid on exchanges, but may have to pay listing fees.
• Used to raise billions in 2017 and 2018, but interest has significantly decreased
due to high loses for investors and regulatory action including outright bans in
several countries including China.
• https://www.bitcoinmarketjournal.com/ico-regulations/
• Can easily qualify as unregistered securities causing SEC enforcement actions:
• https://www.coindesk.com/the-sec-is-suing-kik-for-its-2017-ico
ICOs

52. • Similar to an ICO except a cryptocurrency exchange runs the token sale.
• Purchasers of the tokens must be vetted by the exchange’s AML/KYC process.
• Exchange helps with marketing, regulatory compliance and vetting of the
company.
• Provides investors with more confidence because the exchange is putting their
reputation on the line for the company. The company is also immediately listed
on the exchange.
• Most IEO platforms are located outside the U.S. and don’t want U.S. investors.
Major platforms are located in Singapore, Malta, Hong Kong and Seychelles.
IEOs

53. • Proposed by Ethereum founder Vitalik Buterin as a solution to the abuses of ICOs.
• Allows ICO token owners to vote on releasing money to the project developers
based on milestones.
• In extreme cases, token owners can vote to return all money back to investors.
Thus, there is a significant risk that developers will not receive all funds raised.
• Investors can be completely anonymous, but have more control of the project.
• Have similar regulatory issues as ICOs.
• Abyss, a gaming platform, is one of the first DAICOs
• https://www.theabyss.com/daico
DAICOs

54. • Promoted by exchanges as a way to trade regulated securities on the blockchain
in compliance with all laws.
• Investors can only send/receive tokens from AML/KYC identified accredited
investors on the blockchain.
• Tokens are tied directly to real world securities held in custody by the sponsoring
exchange. Tokens can represent rights to stock, or assets such as real estate or
commodities.
• Offerings are highly supervised by and integrated into sponsoring exchange.
• Cheaper alternative to an IPO, and unlike a VC round, investors get liquidity
among other accredited investors immediately.
https://cointelegraph.com/explained/what-is-an-sto-explained
STOs

55. • International Markets for IEOs, ICOs and DAICOs
• Switzerland
• Singapore
• Malta
• Seychelles
• Hong Kong
• Gibraltar
• Cayman
Tokenization and Crypto Funding

56. • Tax
• Tax perspective: Is token equity?
• Presale and SAFT
• IRS view
• Legal
• Anti-money laundering and KYC
• Patent issues
• Securities
• Federal, foreign and state laws
• Regulation
• Is my token a security?
• A currency?
• A commodity?
• Privacy
• Data Ownership
Tokenization and Crypto Funding

57. • SEC Chairman and CFTC Chairman’s February Testimony before the Committee of Banking,
Housing, and Urban Affairs: “…structures of ICOs that I have seen involve the offer and sale of
securities and directly implicate the securities registration requirements and other investor
protection provisions of our federal securities laws.”
• SEC Chairman Clayton: Market professionals and gatekeepers must act responsibly and hold
themselves to high standards. In the ICO space "they can do better”.
• SEC warned against ICO Sponsors not making adequate disclosures and cautioned market
participants against promoting or touting the offer and sale of coins without first determining
whether the securities laws apply to those actions.
• Howey Test
• An investment of money, in a common enterprise, with a reasonable expectation of profits,
and to be derived from the entrepreneurial or managerial efforts of others.
• The Risk Capital Test
• The sale of membership to a country club was a security; substance over form
• Investors were risking their capital in expectation of receiving the benefits of club
membership, which was in the control of the issuers of the membership
Is my token a security?

58. Enforcement Actions
• The SEC’s Cyber Unit - Division of Enforcement
• focused on misconduct involving distributed ledger technology and ICOs, the spread of false
information through electronic and social media, brokerage account takeovers, hacking to
obtain nonpublic information and threats to trading platforms and works closely with the
SEC’s cross-divisional Distributed Ledger Technology Working Group
• DAO Token – model described by one of the DAO founders as similar to “buying
shares in a company and getting…dividends”
• Munchee - restaurant meal reviews
• SEC halted cease and desist – unregistered securities
• ICO targeted investors, who had an expectation of future profits, rather than users of the
products, with intention to use proceeds to develop application and future “ecosystem”,
which would increase the value the MUN token
• Marketing materials stated additional development and ecosystem would increase the price
of the MUN token and could trade on secondary market within 30 day after ICO

59. FINCEN Feb 13 2018 Letter
Financial Crime Enforcement Network (FINCen), Dep’t of Treasury letter to Senator Ron Wyden (D-
Ore)
1. A developer that sells convertible virtual currency (i.e., bitcoin, ether, ripple, etc) including in
the form of ICO coins or tokens, in exchange for another type of value that substitutes for
currency is a money transmitter and must comply with AML/CFT requirements that apply to
this type if MSB (and register as a MSB with FInCen - a form filed annually and disclosure of
some financial information).
2. An exchange that sells ICO coins or tokens, or exchanges them for other virtual currency, fiat, or
other value that substitutes for currency, would typically also be a money transmitter.
3. FInCEN AML/CFT rules likely do not apply to ICO structures where (a) the tokens are offered as
securities - SEC jurisdiction and their AML/KYC requirements or (b) future interests in
commodities - CFTC jurisdiction and their AML/KYC requirements.
59

60. FINCEN May 9 2019 Letter
Financial Crime Enforcement Network (FINCen), Dep’t of Treasury letter on what constitutes a
Money Service Business (MSB)
• dApp developers are not MSBs, but once they deploy a dApp they are:
“5.2.3. Status of a DApp User conducting financial activities Once the DApp is finalized and in
production, FinCEN regulations may apply to persons who use the DApp to conduct certain financial
activities. For example, if an investor or an owner/operator uses or deploys the DApp to engage i n
money transmission denominated in CVC, then the investor or the owner/operator generally qualifies
as a money transmitter under the BSA. Likewise, as men tioned above, if the developer of the DApp
uses or deploys the DApp to engage in money transmission, then the developer will also qualify as a
money transmitter.”
• Those using cryptocurrency for their own business purposes and not acting as an intermediary
are exempt though:
“Unhosted wallets are software hosted on a person’s computer, phone, or other device that allow the
person to store and conduct transactions in CVC. … they are not a money transmitter.”
Source: https://www.fincen.gov/sites/default/files/2019-05/FinCEN%20CVC%20Guidance%20FINAL.pdf
60

61. Tax Considerations
• Equity?
• Debt?
• Capital asset?
• Barter exchange?
• Prepaid goods or services?
• Subpart F Issues: CFC/PFIC?
• Deferral?
• Open - transaction?
• Forward contract ?
• Executory Agreement to Sell?
• Information Reporting
• FATCA
• FBAR

62. Other Interested Agencies
• Commodity Futures Trading Commission (“CFTC”)
• Commodity “Interests”
• Financial Crimes Enforcement Network (“FinCEN”)
• Money Services Business: user, administrator, exchanger
• Money transmitters licenses: state-by-state requirement
• IRS: Tax Considerations
• Consumer Protections
• Breach of contract, false advertising, fraudulent or negligent inducement
• Industry Specific Regulations
• Global Regulatory Regimes

63. Rewarding Contributors
• Stock
• Options
• Phantom Stock
• Carve out plans

64. Tax Stakes
• Capital gains 23.8% federal
• Ordinary income up to 37% federal

65. Retention Value
• Vesting periods
• Acceleration
• Preferred stock preferences
• Acqui-hires
• Options for service companies

66. M&A Planning
• Intellectual Property
• Cap tables
• Manage preferences
• Share the earnouts
• Vesting and Noncompetes

67. IP
Ownership
Lawsuits
Government
Consents
Forecasting Legal
Stock
Pricing
Funding
Diligence

68. ROYSE LAW FIRM, PC
Contact Us
PALO ALTO
1717 Embarcadero Road
Palo Alto, CA 94303
LOS ANGELES
11150 Santa Monica Blvd.
Suite 1200
Los Angeles, CA 90025
SAN FRANCISCO
135 Main Street
12th Floor
San Francisco, CA 94105
Palo Alto Office: 650-813-9700
CONTACT US
www.rroyselaw.co
m
@RoyseLaw
MENLO PARK
149 Commonwealth Drive,
Suite 1001
Menlo Park, CA 94025
SANTA MONICA
520 Broadway
Suite 200
Santa Monica, CA 90401
SAN FRANCISCO
135 Main Street
12th Floor
San Francisco, CA 94105
Menlo Park Office: 650-813-9700
CONTACT US
www.rroyselaw.com
@RoyseLaw
ORANGE COUNTY
135 S. State College Blvd
Suite 200
Brea, CA 92821