PRESENTS

LEGAL ISSUES FOR STARTUPS

Anil Advani
Managing Partner
anil@inventuslaw.com

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

PART I: STRUCTURING U.S. OPERATIONS

Option 1: Reincorporate Indian Company as a U.S. Parent Company

INVESTORS

Investment

U.S. Parent
100%

Option 2: Incorporate a U.S. Subsidiary

INVESTORS

Investment

Founder Stock
Option Plan

Indian Sub
Indian Parent
100%

Option 3: Incorporate an Independent U.S. Company

U.S. Company

U.S.
Company

Founder Stock

Option Plan

Ownership,
Investment
and
Management
will be
unclear

SETTING UP U.S. OPERATIONS (CONTD.)

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

Part II: Life Cycle of a Startup

Employee Matters
Incorporatio
n

Licensing and other IP

Matters

Debt vs. Equity

ANGEL ROUND

EXIT:
ACQUISITION

Strategic
Partnerships

SMALL
CUSTOMER

BIG
CUSTOMER

BRIDGE
ROUND

FORMATION

SERIES A

Stock Incentive Plans

Founders Stock

IP Protection

SERIES B

SERIES C

SERIES D

Selecting and Negotiating with

VCs

INITIAL
PUBLIC
OFFERING

The big
question:
when and
how to
exit????

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

Financing Options
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

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

Venture Financing (contd.)

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

Venture Financing (contd.)

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 dont like
the distraction of too many observers

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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

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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 Companys 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
Dont post hate speech
No spam
No harassment of other users
Data Security
Ensure compliance with the terms youve set
Inform users of the data the Company collects: Personally Identifiable Information (PII)
versus Non-PII
Inform users of the Companys use of their data
Provide users with the opportunity to Opt-Out of use of Cookies

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Terms of Use and Privacy Policy

Risks if you dont 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

Q&A
Thank you!

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