LEGAL ISSUES FOR STARTUPS 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 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

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

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

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: 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

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 (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

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

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

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

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

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