LEGAL ISSUES FOR START UPS A NIL A DVANI M ANAGING P ARTNER PRESENTS:

Agenda 1.FORMATION Incorporation Process: Delaware “C” Corp. ; EIN Number; Opening a Bank Account Formation of the Delaware C Corp with India based Founders/Investors Employment Issues; IP issues Working with 3 rd parties: Consultants, employees, and advisors 1.EQUITY STRUCTURE Founder Stock Option Pool Investors 2.FINANCING OPTIONS Angel/Seed Financings Venture Financings 1.STRATEGIC TRANSACTIONS Licensing Agreements Revenue Shares Mergers and Acquisitions

Life Cycle of A Startup EXIT: ACQUISITION EXIT: ACQUISITION BRIDGE ROUND BRIDGE ROUND INITIAL PUBLIC OFFERING SERIES C SERIES C SERIES B SERIES B SERIES A SERIES A BIG CUSTOMER SMALL CUSTOMER SMALL CUSTOMER ANGEL ROUND ANGEL ROUND SERIES D SERIES D Incorporation Founders Stock Stock Incentive Plans Selecting and Negotiating with VCs Licensing IP/Filing Patents Strategic Partnerships The big question: when and how to exit????

Formation Incorporation: Delaware “C” Corp Board and Officers: Need a functioning Board; Need properly appointed Officers Substantial Basis Test Founder Stock Purchase: Do it early Do it properly Working with Third Parties: India Subsidiary; “Cost-Plus” Service Agreement Consultants, Advisors, Employees PIIAs “Rogue” Founder Issue – Who founded Facebook?!

Equity Structure Initial Capital Structure Total Authorized: 10MM shares of Common Stock Difference between Authorized and Issued & Outstanding Capital Founder Stock: 8-9 MM 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)! Founders’ Preferred – Consider in appropriate situations Option Pool : 1-2 MM Vesting: Straight 4 year vesting, 1 year “cliff”, with monthly vesting thereafter Acceleration: Could hamper acquisition Outside Investors: Preferred Stock

Financing Options Seed Financings (Convertible Note Financing): Founders, Friends, Family, Angels, Early Stage VCs Incubators: YC, MS Accelerator, 500Startups, Tandem, Fabric, etc. 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 Draft-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 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 don’t like the distraction of too many observers

Strategic Transactions Licensing Arrangements Licensing Terms: Exclusive versus Non-Exclusive Geographical Limitations Ownership of IP and “Work Product” Other Material Provisions: 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

Thank you! Anil Advani Managing Partner, Inventus Law