This document summarizes the key topics covered in a presentation on legal issues for startups. The presentation is divided into two parts: Part I discusses options for structuring U.S. operations, including reincorporating an Indian company as a U.S. parent, incorporating a U.S. subsidiary, or starting an independent U.S. company. Part II covers the life cycle of a startup, including incorporation, financing options, equity structure, intellectual property protection, and potential exit strategies like acquisition or IPO. Key issues discussed include incorporation processes, employment laws, financing terms, venture capital valuations, and strategic partnership agreements.

1. LEGAL ISSUES FOR STARTUPS
Anil Advani
Managing Partner
anil@inventuslaw.com
PRESENTS

2. 2
Agenda
PART I: STRUCTURING U.S. OPERATIONS
• Reincorporate Indian Company as a U.S. Parent Company
• Incorporate a U.S. Subsidiary
• Incorporate an entirely independent 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
PART I: STRUCTURING U.S. OPERATIONS
• Option 1: Reincorporate Indian 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
Indian Sub
Investment
100%
INVESTORS Indian Parent
U.S. Company
Founder StockInvestment
100%
Founder Stock
Option Plan
Option Plan
U.S.
Company
Ownership, I
nvestment
and
Management
will be
unclear

4. 4
Reincorporate Indian 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 Indian 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 Indian company for sale in India, or directly to Indian 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 Indian 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. 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
Equity Structure
Initial Capital Structure
• Total Authorized: 10MM shares of Common Stock
• Difference between Authorized, Issued, and Outstanding Capital
• Founder Stock: 7-8MM
• 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: 2-3MM
• Vesting: Straight 4 year vesting, 1 year “cliff”, with monthly vesting thereafter
• Acceleration: Could hamper acquisition
• Outside Investors: Preferred Stock

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
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. 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
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
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
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. 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
Q&A
Thank you!