Start-ups I: Introduction to Business Law for Entrepreneurs Technology Transfer Seminar Series Brandeis University February 16, 2006 Prepared by: Karin Rivard Assistant Director and Counsel M.I.T. Technology Licensing Office

1 Key Questions  Why do I want to start a company?  Who will fund the company?  Who will run the company?  What are my goals for the company? Answers to these questions dictate the structure of the company.

2 Why Do I Want to Start a Company?  Technology needs me  Seize an opportunity  Challenge of leaving academia  Get rich  All of the above

3 Who Will Fund the Company?  Venture Capital  Angels  Friends and Relatives  Self Funded: mortgage, credit cards, etc.  Strategic Alliance (captive to large business partner)

4 Who Will Run the Company? (and what will my role be?)  CEO/President Me. How hard can it be?Me. How hard can it be? Venture Capitalist or Installed ManagerVenture Capitalist or Installed Manager Friend or other Business ConnectionFriend or other Business Connection  Chief Scientific Officer Me.Me.

5 What are My Goals for the Company?  Build something of lasting value  Sell out as soon as possible  Both

6 Legal Structure of Start-up  Corporation C Corporation: Attractive to VCsC Corporation: Attractive to VCs S Corporation: Attractive to individualsS Corporation: Attractive to individuals  Limited Liability Company (LLC) Tax Benefits to all investorsTax Benefits to all investors Higher Transaction CostsHigher Transaction Costs Difficult to complete future equity transactionsDifficult to complete future equity transactions Must become Corporation before IPOMust become Corporation before IPO

7 Getting Started (C Corporation)  Board of Directors  Stock Issuances and Restrictions: Founders Stock: Common StockFounders Stock: Common Stock Investors Stock: Preferred StockInvestors Stock: Preferred Stock  Employment Agreements Noncompetition ClauseNoncompetition Clause Nondisclosure ClauseNondisclosure Clause IP Assignment ClauseIP Assignment Clause  Location, Location, Location

8 Corporate Structure  Confirm Company Name  Certificate of Incorporation (DE, MA)  Authorized Shares  By-Laws  Board of Directors Chairman of the BoardChairman of the Board  Principal Officers: President, Treasurer and Secretary  Shareholders  Meeting Minutes  Votes/Resolutions

9 Equity Vocabulary  Founders Stock v. Preferred Stock  Restricted Shares v. Registered Shares  Vesting  83(b) Election (Tax Treatment)  Shareholders’ Agreements  Stock Options/Warrants  Stock Option/Purchase Plan; Rule 701  Dilution

10 Employment Agreement Vocabulary  Noncompetition Clause What if still researching at University?What if still researching at University?  Other pre-existing or continuing consulting arrangements?  Nondisclosure Clause  Unacceptable Publication Restrictions?  IP Assignment Clause  Severance Parachute: Gold, Silver or TinParachute: Gold, Silver or Tin

11 Lease Vocabulary  Default  Sublease  Laboratory Ready  Restrictions on Use of Space  Restrictions on Growth

12 Intellectual Property  Who owns it? DO NOT IGNORE THIS!DO NOT IGNORE THIS!  Disclose invention and all research sponsors  Get a license or ownership waiver  Be aware of university conflict of interest policies!

13 Show Me the Money!  You need money to earn money! Banks/Credit Lines (Non-dilutive)Banks/Credit Lines (Non-dilutive) Equity Investors (Dilutive)Equity Investors (Dilutive) Convertible Debt Instruments (Depends)Convertible Debt Instruments (Depends) Strategic AlliancesStrategic Alliances

14 So Now You Are: OrganizedManagedFunded GET TO WORK! (AND HAVE FUN)