1. LEGAL ISSUES FOR STARTUPS
PRESENTS
LEGAL ISSUES FOR STARTUPS
Anil Advani
Managing Partner

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. 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
Investment
INVESTORS
U.S. Parent
Founder Stock
Option Plan
100%
Indian Sub
Founder Stock
Indian Parent
INVESTORS
Investment
100%
Option Plan
U.S. Company
Ownership, Investment and Management will be unclear
U.S. Company

4. 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:
Not a good option if need to restructure for U.S. financing, licensing and/or potential exit

5. Part II: Life Cycle of a Startup
Employee Matters
Licensing and other IP Matters
EXIT:
ACQUISITION
Incorporation
Debt vs. Equity
Strategic Partnerships
SMALL
CUSTOMER
BIG CUSTOMER
BRIDGE ROUND
ANGEL ROUND
FORMATION
SERIES A
SERIES B
SERIES C
SERIES D
INITIAL PUBLIC OFFERING
Stock Incentive Plans
Selecting and Negotiating with VCs
The big question: when and how to exit????
Founders Stock
IP Protection

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. Financing Options Seed Financings: Venture Capital 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

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. Venture Financing (cont’d.)
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

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. 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. Q&A
Thank you!