an international law firm BU TECH COMMERCIALIZATION BOOT CAMP David D. Gammell

an international law firm Starting and Running a Business  Why form an Entity?  What type of Entity to Form?  How to form an Entity? – Focus on proper incentives  How to finance an Entity?  What about Intellectual Property?  How do I make money? Make sure you are diligence ready!

an international law firm Why Form an Entity 1.Reduce potential for personal liability 2.Concentrate intellectual property ownership 3.Structure equity ownership 4.Build brand

an international law firm What Type of Entity 1.Sole proprietorship – doesn’t satisfy four factors 2.Partnership – may not satisfy four factors 3.Limited Liability Company 4.Corporation

an international law firm Considerations When Choosing an Entity 1.Timing 2.Financing trajectory 3.Tax considerations Also, Consider VISA issues

an international law firm How to Form an Entity Corporate Governance and Ownership  Board  Strategic direction  Elected by Stockholder  Executives  Tactical operations  Ownership (Stock vs. Options) – Aligning incentives  Division of Voting Power  Division of Proceeds of Liquidity

an international law firm How to Form an Entity (cont’d) Founder Equity – Align Incentives  Focus on the Founders first (all other issuances will dilute founders equally)  Divide 100% among Founders  Based on expected contribution over vesting period (2- 5 years )  Set current vested portion based on contribution to date, remainder vests over selected period (2-5 years)  Acceleration of vesting  Change of control  Termination (for cause—not for cause)

an international law firm How to Form an Entity (cont’d) Incentives - Vesting  Require founders or managers to subject their original shares to vesting and require shares to be sold back to the Company at original cost or some other formula based on termination of relationship with the Company  Issues:  Stock vs. Options  How much initially vested?  What happens to shares if terminated w/o cause or voluntarily or because of death/disability?  Vesting period: annual/quarterly/monthly?  Buy-out price?

an international law firm How to Form an Entity (cont’d) Stockholder’s Agreement Provides certain control of transfers of company securities and participation in such transfers. Three types of protection:  Right of First Refusal: Right to purchase any securities proposed to be sold by certain stockholders (usually founders, sometimes other stockholders) on the proposed terms  Tag-along / Co-sale Right: Right to participate in proposed sale by certain stockholders  Drag-along / Take-along Right: Right for certain stockholders to take other security holders along in an exit transaction (typically majority of board and some group of stockholder)

an international law firm How to Finance an Entity Sources  Boot strap—self fund, customer funded  Friends and Family  Angel/Venture Capital  Strategic Investor Type of Investment  Loan  Convertible Loan  Common Stock  Preferred Stock

an international law firm How to Finance an Entity (cont’d) Principal Concerns in Financing Transactions ConcernMechanism Influence on Company Composition of Board of Directors Veto Rights over certain Corporate Actions, Negative and Affirmative Covenants Control over exit events Drag-along Rights, Tag-along Rights, Rights of First Refusal, Registration Rights Ownership/Dilution Valuation/Capitalization Antidilution Protection (economic and structural) Pre-emptive Rights (equity) Incentives for Mgmt and Employees Vesting—Options, Restricted Stock

an international law firm How to Finance an Entity (cont’d) Capitalization and Valuation Terminology Pre-Money Valuation:Value of the company prior to investment by the VC. Post-Money Valuation:Value of the company after the investment by the VC, i.e., the sum of the pre-money valuation plus the investment. Fully Diluted Shares:Generally defined as total issued and outstanding securities reported on an as converted to common stock basis. This number usually includes all issued and outstanding preferred stock, issued warrants, and options (often including unissued pool).

an international law firm Four Types of Intellectual Property  Patent  Trade Secret  Copyright  Trademark Focus on Competitive Barriers

an international law firm Patent  Any machine, manufacture, composition of matter, and process (but cannot be law of nature, natural phenomena, or abstract idea)  Must obtain registration from federal government, and can only be registered if proven useful, novel, and unobvious  Provides right to exclude others from making, using, selling, offering to sell, or importing the patented invention  The right lasts from registration until 20 years after filing  Inventors own until they assign

an international law firm Trade Secret  Any information that derives economic value from being secret and for which reasonable efforts are used to keep it secret  No registration system – just need to use reasonable efforts to maintain secrecy  Secret will remain yours until it is revealed; Could last forever  Trade secret vs. Patent  Owner is the one that develops and maintains the secret

an international law firm Copyright  Original work of authorship fixed in a tangible medium of expression  Registration is an option but is not required; copyright notice also is not required  Bundle of rights – reproduce, prepare derivative works, distribute, perform/display publicly, etc.  Rights last for the author/creator life plus 70 years after death  Owner is the creator until he/she assigns or unless it is a “work made for hire”

an international law firm Trademark  Word, name, symbol, etc. that indicates the source of goods or services  Registration possible and enhances rights, but rights come from use and registration not possible without use  Owner can stop others from using same or confusingly similar mark, and the test is “likelihood of confusion”  Right could last forever, but registrations need to be renewed periodically  Owner is entity that uses mark

an international law firm Practical Tips Regarding IP  All officers/employees sign employment agreement:  assign inventions and copyrightable works  agree not to disclose confidential information  All non-officer/employee contributors sign consulting agreement:  assign inventions and copyrightable works  agree not to disclose confidential information

an international law firm Practical Tips Regarding IP  Follow best practices in product/service development:  identify and respect obligations to prior employers  know ramifications of including existing material (e.g., open source)  Have an IP strategy  establish IP policies and procedures  educate officers/employees  document ideas and progress  insert IP checkpoints into product/service development  form and use an IP committee

an international law firm How Do I Make Money  Profit—Operate at a profit  IPO—sale of shares to public  Generally liquidity for insiders only begins 6 months after IPO  Sale—sale of stock or assets for cash or stock

Brown Rudnick LLP an international law firm BOSTON NEW YORK HARTFORD PROVIDENCE WASHINGTON, DC LONDON DUBLIN