First Steps to Create and Protect Value
for the
Emerging Technology Company
First Steps:
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Decide on form of entity
Issue equity for:
• Cash
• Debt
• IP
• Other assets
• Service
Determine equity split among founders
Protect IP:
• Get assignments for IP transferred for stock or cash
• Get assignments for IP to be developed for services
• Get confidentiality from service providers
Form of entity:
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LLC or Corporation?
• LLC avoids double-taxation
• Only C Corps file for IPOs
If expect to need institutional venture capital, C Corp is preferred entity
• VCs prefer C Corps
• Angel or seed investors less biased, so LLC’s should be okay
• If don’t expect to need VCs, go with LLC
Choose appropriate form of entity now to avoid complications later
Allocate and Issue Equity:
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First determine relative values of current contributions:
• The business idea
• Cash invested
• Transfer of property (IP, equipment, etc.)
The sum of these values is the pre-money enterprise valuation
• Example: Assume total value is $250,000 and issue 250,000
shares
• Pre-money valuation is $1.00 per share
• 100,000 for IP or business idea
• 50,000 for $50,000 cash
• 100,000 for future services
• Require equity for future services to vest over time
• 3 or 4 years; some can vest immediately (say 10-25%)
Document the issuances with subscription agreements
Protect IP:
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IP protection is essential for future sale of company
Not just patents, but also trade secrets/confidentiality
Investors/buyers want assurance that trade secrets
are protected
IP due diligence to determine that all employees/third parties
• are under confidentiality
• have assigned inventions to company
Methods of Protection
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CDAs/NDAs
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Employee/Consultant Agreements
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Material Transfer Agreements
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Sensitive Information Programs
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Label Everything!
Use of Employee Agreements
• Essential features:
• Assignment of all inventions to company
• Confidentiality obligation
• List of prior inventions to be excluded
• Other terms:
• Noncompete
• Nonsolicitation of employees or customers
• Get signed at start date
• Later could jeopardize enforceability
Agreements with Third Parties
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Confidential Disclosure Agreements/Nondisclosure Agreements
Essential for every contact where confidential information to be shared
Noncompetition Agreements
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Unconstitutional in OK in context of employment
Use of other forms of restrictions:
• non-solicitation of customers, employees