LEGAL ISSUES
FOR START-UPS
November 11, 2011
Adam Hull
Travis Wilson
Start-Up Right So You Don’t
Have to Shut Down
 Protecting Your Personal Ass
 Choosing Which Entity to Form
 Choosing Where to Form it
 Negotiating and Drafting Organizational Documents
 Getting the Company Up and Running
 Maintaining the Liability Shield
 Taking on Investors & Exit Strategies
Start-Up Right So You Don’t Have
to Shut Down
 Protecting Your Personal Assets
 Choosing Which Entity to Form
 Choosing Where to Form it
 Negotiating and Drafting Organizational Documents
 Getting the Company Up and Running
 Maintaining the Liability Shield
 Taking on Investors and Exit Strategies
Choosing Which Entity
to Form
 No Entity or D/B/A Only
 Partnership
 Limited Partnership
 LLC
 Corporation
 L3C
Taxation of Corporations
Double Taxation
Dividend
Dividend
Taxation of LLCs Pass Through
Tax Treatment
Distribution
Distribution
Taxation of S-Corps Pass Through
Tax Treatment Plus Dividends
Dividend
Salary
C-Corp vs. LLC
 Tax Treatment
 Liability Shield
 Limitations on Ownership
 Types of Equity Interests
 Common & Preferred Interests
 Options & Warrants (No ISOs for LLC)
 Authorized Stock vs. Units
 Flexibility
S-Corp vs. LLC
 Tax Treatment
 Liability Shield
 Limitations on Ownership
 Flexibility
 LLCs as S-Corps
Tax Issues for LLC Members
 Phantom Income
 Mandatory & Elective Distributions
Start-Up Right So You Don’t Have
to Shut Down
 Protecting Your Personal Assets
 Choosing Which Entity to Form
 Choosing Where to Form it
 Negotiating and Drafting Organizational Documents
 Getting the Company Up and Running
 Maintaining the Liability Shield
 Taking on Investors & Exit Strategies
Choosing Where to Form
 Local vs. Foreign Jurisdictions




Authority
Local Filing Requirements
Foreign Filing Requirements
Registered Agent
 Jurisdictions to Consider
 Delaware
 Nevada & Wyoming
 Utah
 Jurisdictions to Avoid - California
Start-Up Right So You Don’t Have
to Shut Down
 Protecting Your Personal Assets
 Choosing Which Entity to Form
 Choosing Where to Form it
 Negotiating and Organizational Documents
 Getting the Company Up and Running
 Maintaining the Liability Shield
 Taking on Investors & Exit Strategies
Specific Provision to Consider
(Preparing the Pre-Nup)
These Concepts Apply Universally – Sort of…
 Management Structure (Members, Managers & Officers)
 Types of Ownership
 Rights & Obligations of Each Series
 Distributions
 Capital Call Obligations
 Restrictions on Transfer (ROFR, Drag Rights, Tag Rights &
Rights of Assignee)
 Buy/Sell Provisions
 Indemnification & Advancement of Costs for Managers &
Officers
Specific Provision to Consider
(Preparing the Pre-Nup) – Cont…
These Concepts Apply Universally – Sort of…
 Advanced Concepts for Specialty/Tech Companies
 Equity Vesting
 Invention Assignment
 IP Ownership/Assignment
Start-Up Right So You Don’t Have
to Shut Down
 Protecting Your Personal Assets
 Choosing Which Entity to Form
 Choosing Where to Form it
 Negotiating and Drafting Organizational Documents
 Getting the Company Up and Running
 Maintaining the Liability Shield
 Taking on Investors & Exit Strategies
Getting the Company Up
and Running
 Federal Employer Identification Number
 Sales & Use Tax License
 Bank Accounts
 Business Licenses
 Insurance
 Trademarks & Other Intellectual Property Considerations
 Employee/Independent Contractor Agreements
 Formation Due Diligence – Founder Concerns
Knowing Which Hat You are
Wearing
• Fiduciary Duties
• Compensation
• Fiduciary Duties
• Compensation
• Fiduciary Duties
• Compensation
Start-Up Right So You Don’t Have
to Shut Down
 Protecting Your Personal Assets
 Choosing Which Entity to Form
 Choosing Where to Form it
 Negotiating and Drafting Organizational Documents
 Getting the Company Up and Running
 Maintaining the Liability Shield
 Taking on Investors & Exit Strategies
Maintaining the Liability Shield
 Basic Principle – Owners Not Liable
 Piercing the Veil
 Preventing Veil Piercing Arguments
 Money
 Management Using Formalities
 Remembering Which Hat You Are Wearing
 Take a Mulligan (Ratifying Past Acts)
 Sign in Your Official Capacity
 Become a Tree Hugger
Become a Tree Hugger
(Utilizing Subsidiaries)
The
Company
IP
Profit
Stream #1
1. Separating Assets
2. Limiting the Contracting Parties
3. Intercompany Agreements
Profit
Stream #2
Property
Start-Up Right So You Don’t Have
to Shut Down
 Protecting Your Personal Assets
 Choosing Which Entity to Form
 Choosing Where to Form it
 Negotiating and Drafting Organizational Documents
 Getting the Company Up and Running
 Maintaining the Liability Shield
 Taking on Investors & Exit Strategies
Taking on Investors
 Private Offerings (33 & 34 Acts)
 Registration Requirement
 Unregistered Offerings
 Accredited Investors
 Anti-Fraud Requirements
 Promoting 3Ps Private Offering (New Laws)
 Dealing With Angels, VCs & Private Equity Funds
 To I-Bank or Not to I-Bank
Early Stage VC Investment
Trends
Exit Strategies
 No Exit
 Profitable Existence
 Joint Ventures
 Sale of Assets (Tax Consideration for Corps)
 Merger or Sale of Company
 IPOs
Final Thoughts—
Preventing Implosion
 Get Help – Do it Right the First Time
 Don’t Assume that Fair = Legal
 Abide by the Terms of Your Organizational Documents
 Get Insurance
 Hire a CPA (a good one)
 Consider a Part-Time CFO
 Be Nice
LEGAL ISSUES
FOR START-UPS
Adam Hull, Attorney at Law
[email protected]
Travis Wilson, Attorney at Law
[email protected]