tag:blogger.com,1999:blog-33062618044045512802024-03-13T19:59:54.856-07:00Startup VoiceStartup Voicehttp://www.blogger.com/profile/01289381273991991152noreply@blogger.comBlogger46125tag:blogger.com,1999:blog-3306261804404551280.post-6843262871284934372016-08-10T21:00:00.000-07:002016-08-10T20:58:44.871-07:00Summary of Blog Post Topics on Startup Voice<font face="Georgia" size="3">To find a post of interest, use the search box at the top left-hand corner of the screen, review the list of "labels" on the right, or simply browse the posts listed below by topic.<p>
I have tried to provide on my blog answers to most frequently asked questions relating to company formation and obtaining investment. If there are other general interest topics that you would like to see covered, please make a note of it in the comments section and maybe sometime soon you will see an answer posted on this blog!
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<font face="Calibri" size="2"><b>General</b>
<ul><li><a href="http://startupvoice.blogspot.com/2013/07/expertorama-interview-commonly-asked.html">Commonly Asked Startup Questions Answered</a> (Expertorama Interview)
<li><a href="http://startupvoice.blogspot.com/2013/09/10-basic-principles-of-effective.html">10 Basic Principles of Effective Networking</a>
<li><a href="http://startupvoice.blogspot.com/2016/08/silicon-valley-series-corporate-law.html">“Silicon Valley” Series – a corporate law perspective</a></ul><p>
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<p><b>Company Formation & Corporate Maintenance</b>
<ul><li><a href="http://startupvoice.blogspot.com/2012/10/startups-choosing-between-llc-and.html">Startups: Choosing between an LLC and a Corporation</a>
<li><a href="http://startupvoice.blogspot.com/2011/05/preincorporation-agreements-what-are.html">Preincorporation Agreements</a>
<li><a href="http://startupvoice.blogspot.com/2012/03/cap-tables-for-startups.html">Cap Tables for Startups</a>
<li><a href="http://startupvoice.blogspot.com/2013/06/getting-to-reasonable-cap-table-how.html">Getting to a Reasonable Cap Table: How Many Shares to Authorize Initially? What Classes of Shares to Authorize? How Many Shares to Issue to Founders?</a>
<li><a href="http://startupvoice.blogspot.com/2013/08/should-founders-shares-be-subject-to.html">Should Founders’ Shares be Subject to Vesting</a>
<li><a href="http://startupvoice.blogspot.com/2012/12/us-incorporation-and-flips-faqs.html">US Incorporation and Flips FAQs</a>
<li><a href="http://startupvoice.blogspot.com/2013/04/flip-it-guide-to-flipping-your-company.html">FLIP IT! A Guide to Flipping Your Company to the U.S.</a>
<li><a href="http://startupvoice.blogspot.com/2012/01/documenting-startup-expenses-by.html">Documenting Startup Expenses by Founders</a>
<li><a href="http://startupvoice.blogspot.com/2014/01/information-rights-of-shareholders-in.html">Information Rights of Shareholders in a California Corporation</a>
<li><a href="http://startupvoice.blogspot.com/2012/11/private-company-board-of-directors-faqs.html">Private Company Board of Directors FAQs</a>
<li><a href="http://startupvoice.blogspot.com/2012/05/startup-hiring-typical-equity.html">Startup Hiring - Typical Equity Compensation Ranges for Early-Hires</a></ul><p>
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<p><b>Fundraising Process</b>
<ul><li><a href="http://readymag.com/StartupVoice/Startup/">Silicon Valley Fundraising Trip |
Tips for the Non-U.S. Based Startup Founder</a> (Readymag Presentation)
<li><a href="http://startupvoice.blogspot.com/2013/09/what-can-startups-disclose-before.html">What Can Startups Disclose, Before Filing a Patent Application</a>
<li><a href="http://startupvoice.blogspot.com/2015/01/what-do-startup-investors-want.html">What Do Startup Investors Want?</a>
<li><a href="http://startupvoice.blogspot.com/2013/09/the-right-time-to-fundraise-in-silicon.html">The Right Time to Fundraise in the Silicon Valley</a>
<li><a href="http://startupvoice.blogspot.com/2013/09/preparing-for-silicon-valley.html">Preparing for a Silicon Valley Fundraising Trip</a>
<li><a href="http://startupvoice.blogspot.com/2011/01/quora-raising-venture-capital.html">Raising Venture Capital</a> (Quora Answer)
<li><a href="http://startupvoice.blogspot.com/2013/01/roadmap-to-finding-venture-capital.html">Roadmap to Finding Venture Capital Investors</a>
<li><a href="http://startupvoice.blogspot.com/2012/02/speaking-vc-speak-waterfall-analysis.html">Speaking VC Speak: Waterfall Analysis</a>
<li><a href="http://startupvoice.blogspot.com/2013/08/Preparing-Financing-Term-Sheet.html">Who Prepares a Financing Term Sheet - the Startup or the Investor?</a>
<li><a href="http://startupvoice.blogspot.com/2012/10/negotiating-with-investors-how-far-is.html">Negotiating with Investors: How far is too far?</a>
<li><a href="http://startupvoice.blogspot.com/2013/07/effect-on-startups-of-sec-changes.html">Effect on Startups of SEC Changes Eliminating the Prohibition on General Solicitation in Certain Offerings</a>
<li><a href="http://startupvoice.blogspot.com/2013/05/coming-to-silicon-valley-to-raise-money.html">Interview with a Client: Coming to the Silicon Valley to Raise Money</a></ul><p>
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<p><b>Investment Terms</b>
<ul><li><a href="http://startupvoice.blogspot.com/2012/11/antidilution-protection-faqs.html">Antidilution Protection FAQs</a>
<li><a href="http://startupvoice.blogspot.com/2012/08/seed-financing-equity-or-debt.html">Seed Financing: Equity or Debt?</a>
<li><a href="http://startupvoice.blogspot.com/2011/12/annotated-convertible-promissory-note.html">Annotated Convertible Promissory Note</a>
<li><a href="http://startupvoice.blogspot.com/2015/09/convertible-promissory-notes-3-mistakes.html">Convertible Promissory Notes: 3 Mistakes to Avoid</a></ul><p>
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<p><b>Investors' Perspective</b>
<ul><li><a href="http://startupvoice.blogspot.com/2012/08/convertible-promissory-notes-investors.html">Convertible Promissory Notes</a>
<li><a href="http://startupvoice.blogspot.com/2012/08/legal-due-diligence-investors.html">Legal Due Diligence</a></ul><p>
<hr></font>Startup Voicehttp://www.blogger.com/profile/01289381273991991152noreply@blogger.com83tag:blogger.com,1999:blog-3306261804404551280.post-62392954135226559392016-08-10T20:56:00.001-07:002016-08-10T20:56:34.231-07:00“Silicon Valley” Series – a corporate law perspective<font face="Georgia" size="3">Over the past week or two, I binge-watched the first three seasons of HBO’s much talked-about series “Silicon Valley.” In truth, I only started watching because everyone was talking about it, and I felt that, given what I do, I needed to be able to participate in the conversation. But, I confess, I got sucked in, despite what, in my book, is an overabundance of profanity.<p>
Given that counseling startups on corporate matters is my life, and one that I enjoy immensely, for that matter, I thought it would be interesting to analyze the legal basis to support Pied Piper’s predicament. <p>
<b>SPOILER ALERT! Don’t read any further if you don’t want to know what happens in the series through the end of the third season.</b></font><p>
<hr><p>
<font face="Calibri" size="2"><b>Board of Directors.</b> The Board of Directors plays a key role in the fate of any company and we see the Board meet maybe four or five times throughout the series to make some pretty key decisions. But what is actually required for a Board to make a decision, legally-speaking? Here’s where the show took some liberties, for dramatic effect. There are only two ways that a Board can vote – by <i>unanimous</i> written consent, or at a meeting of the Board. The meeting must be attended by at least a majority of the directors, but all directors must be aware of the meeting. Meetings can be either regular (based on a pre-approved scheduled) or special. Each director must, typically, be given at least 48 hours’ prior notice of a special board meeting. Board meetings can be called on shorter notice, but only if each director waives notice.<p>
<i>If you’d like to get technical, notice requirements for special board meetings along with other corporate governance matters, can be found in the bylaws of a company. If you are a stockholder of a US corporation, the corporation is required to provide you with a copy of its bylaws on request.</i><p>
How is it possible that Richard Hendricks did not know he was being fired as the CEO? In the show, Monica is the one to tell him. It’s a huge surprise and disappointment! But only the Board of Directors can fire or hire the CEO. They didn’t do it by written consent, because it has to be unanimous and Richard did not sign it. So they did it at a meeting, which he did not attend. That the CEO would miss a Board meeting is possible, though unlikely. However, It seems, he did not even know that a meeting of the Board was being held. Oops, that’s a problem from a corporate law perspective!<p>
We see the same flop when Jack Barker, the outside CEO, gets fired in the next season. Richard and his co-founders come to the office to find his empty chair and Laurie Bream cleaning out his office. After Russ Hanneman sells his position to Raviga, Raviga acquires control of Pied Piper’s Board (three votes to Richard and Erlich’s two), so at a meeting they could certainly outvote the other members. But how ever did they meet in secret, without Richard knowing? But, let’s admit, the version in Silicon Valley is more fun! Laurie unexpectedly retaliating against Jack for his arrogance – a total Hollywood trope, no?<p>
<b>Convertible Loan.</b> When Hanneman first offers a term sheet, the Pied Piper team is very excited. It saves them from having to sell to Hooli, and Jared (the only one to read it) thinks the term sheet isn’t bad. “It’s even structured as a loan,” they say, or something along those lines, making it sound like that’s the next best thing since sliced bread. Since we are talking startups, I can only assume they meant that he offered them a convertible promissory note. <p>
For a $5M investment, at an early stage, using a convertible note is odd. Typically, we see convertible loans being used for much smaller investments early on. It is especially odd given that Hanneman apparently included a number of significant rights for himself, which aren’t usually given in a bridge financing. The primary reason why startups like convertible note financings is the simpler framework, which can be put in place in a matter of days, if needed, and at a fraction of the cost of a full-blown equity round. <p>
An equity financing (the sale of shares), on the other hand, usually comes with all kinds of bells and whistles, which can take weeks or even months to properly negotiate with the investor and his counsel. Basically, doing a complex convertible note deal defeats the purpose of such investment structure for the company. So, let’s just say, whatever Hanneman’s term sheet said, it was a far cry from a standard Silicon Valley bridge financing deal, though certainly possible. For the sake of honesty, I will say that I have seen very simple equity deals with almost no bells and whistles and unduly complex convertible debt financings loaded with investor rights, even for much smaller investments than $5M. So, sometimes reality can be even stranger than fiction. <p>
Later in the series, Hanneman’s assets fall below a billion, and he is no long a member of the three comma club. To remedy this, he sells his interest in Pied Piper to Raviga Capital. But what exactly did he sell? It sounded like he was selling shares. But if his investment had been in the form of a convertible note financing (a “loan”), he would not have had shares. Convertible notes will normally convert in a qualified (sufficiently large) equity financing round, which Pied Piper did not have. So, if Hanneman invested on a note, it should still be a note. Ok, maybe in the series they didn’t get into the fine details that I find so interesting. Maybe Raviga Capital acquired the promissory note. But it sure didn’t sound like it. In fact, on CrunchBase – yes, Pied Piper has a CrunchBase profile – Hanneman is listed as a Series A investor (<a href="https://www.crunchbase.com/organization/pied-piper/investors">https://www.crunchbase.com/organization/pied-piper/investors</a>). Series A is a series of preferred shares, which are typically sold in an early equity financing (following Series Seed and preceding Series B).<p>
<b>Blocking Rights.</b> Remember when Laurie buys Erlich’s shares for next to nothing, giving him just enough to cover his debt? She then explains to Richard, when he confronts her, in an exasperated manner, that under the terms that she inherited from Hanneman, she had the right to block any sale by Erlich. Full blocking rights on a sale by another stockholder? That is very unusual! Company right of first refusal on transfers by founders – sure! That’s quite standard. But all that would do is give Pied Piper the right to buy out Erlich if he had a third-party buyer for his shares, having to match the price offered to him by his buyer (in this case, $5M for half of his shares). Investor’s right of first refusal – could be. But that would give Raviga Capital the right to match Russ Hanneman’s price, and buy the shares that Erlich was offering to Russ Hanneman. No standard rights offered to investors would grant Raviga Capital the kind of blocking rights that it seems to enjoy in the series. In the U.S. and especially in Silicon Valley deals, we just don’t see an outright block by an investor on the sale of shares by another. So that was a bit sensationalist. Of course, just because the series is called “Silicon Valley” doesn’t actually mean it has to depict its protagonists being offered middle-of-the-road standard investment terms, and this is another instance where they weren’t. <p>
<b>Drag-Along.</b> How was Raviga able to force the sale of Pied Piper? Control of the Board alone is not enough here. Such a sale would require an affirmative stockholder vote by, at a minimum, a majority of the outstanding shares, and Raviga is not a majority stockholder. I can only assume that among the terms that Pied Piper accepted from Russ Hanneman was a drag-along. A drag-along is a voting agreement among stockholders, which allows one group of stockholders to force the others to vote to approve an acquisition of their choosing. The group of stockholders that can force the sale depends on the deal. In certain scenarios, it can be a single influential investor. A drag-along would provide the necessary mechanism to support the forced sale of Pied Piper to Bachmanity.<p>
<b>Lawyer.</b> How is it that Pied Piper does not have its own corporate lawyer after two rounds of financing? We are initially led to believe that Ronald LaFlamme, the extravagant guitar-playing chap, is Pied Piper’s lawyer. But he is actually counsel to Raviga! It’s on Raviga’s website – yes, Raviga has a website (<a href="http://www.raviga.com/index.html#section-team">http://www.raviga.com/index.html</a>). When Pied Piper is about to enter into a white-label licensing agreement for its box, it’s Monica, who catches the grant of exclusive intellectual property rights to the customer. If it wasn’t clear enough in the show, that really is a huge red flag in a commercial agreement. So here we are, about to sign a multi-million dollar commercial agreement and an attorney representing Pied Piper hasn’t so much as laid eyes on it? Sure, Pied Piper is next-to-broke for much of the show, but this episode was actually at the height of its glory. Then again, maybe if Pied Piper had corporate representation from the outset, the founders wouldn’t have found themselves at the total mercy of their investors! And that is not a bad self-serving message for me to conclude on.<p>
Happy company-making and enjoy Season 4, coming in 2017!</font>
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<br />
<br />
<table><tbody>
<tr><td><a href="http://www.efimchik.com/"><img alt="White Summers" border="0" height="80" src="http://www.efimchik.com/WS-logo-1.jpg"></a></td><td> </td><td valign="middle"><span style="font-family: Georgia; font-size: xx-small;"><a href="http://www.efimchik.com/">Inna Efimchik</a>, a Partner at <a href="http://www.white-summers.com/">White Summers Caffee & James LLP</a>, specializes in assisting emerging technology companies in Silicon Valley and beyond, providing incorporation, financing, and licensing services as well as general corporate counseling.</span></td></tr>
</tbody></table>
<span style="font-size: xx-small;"><a href="http://www.blogger.com/blogger.g?blogID=3306261804404551280" name="disclaimer"><b>LEGAL DISCLAIMER</b></a></span><br /><p>
<span style="font-size: xx-small;"><b>Copyright Notice.</b> The copyright for all original content in this post and any linked files is owned by Inna Efimchik. All rights are reserved.</span><br /><p>
<span style="font-size: xx-small;"><b>No Attorney-Client Relationship.</b> This post has been prepared by Inna Efimchik of White Summers for general informational purposes only. The information provided herein does not constitute advertising, a solicitation or legal advice. Neither the availability, transmission, receipt nor use of any information included herein is intended to create, or constitutes formation of, an attorney-client relationship or any other special relationship or privilege. You should not rely upon this post for any purpose without seeking legal advice from licensed attorneys in the relevant state(s).</span><br /><p>
<span style="font-size: xx-small;"><b>Compliance with Laws.</b> You agree to use the information provided herein in compliance with all applicable laws, including applicable securities laws, and you agree to indemnify and hold Inna Efimchik and White Summers Caffee & James LLP harmless from and against any and all claims, damages, losses or obligations arising from your failure to comply.</span><br /><p>
<span style="font-size: xx-small;"><b>Disclaimer of Liability.</b> ALL INFORMATION IS PROVIDED AS-IS WITH NO REPRESENTATIONS OR WARRANTIES, EITHER EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE AND NONINFRINGEMENT. YOU ASSUME COMPLETE RESPONSIBILITY AND RISK FOR USE OF THE INFORMATION IN THIS POST.</span><br /><p>
<span style="font-size: xx-small;">Inna Efimchik expressly disclaims all liability, loss or risk incurred as a direct or indirect consequence of the use of any information provided herein. By using any information in this post, you waive any rights or claims you may have against Inna Efimchik and White Summers Caffee & James LLP in connection therewith. </span><br />
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Startup Voicehttp://www.blogger.com/profile/01289381273991991152noreply@blogger.com24tag:blogger.com,1999:blog-3306261804404551280.post-80875949639598494332015-09-15T09:30:00.000-07:002015-09-16T12:35:09.432-07:00Convertible Promissory Notes: 3 Mistakes to Avoid<font face="Georgia" size="3">To raise a Series A round these days a startup has to have a product, users, and traction. It may take a lot less money to get there than it did in 1999, but most startups still can’t bootstrap their way there. So before a company ever raises a Series A round, or even before it raises a Series Seed round, it will usually raise a convertible promissory note round, also known as a bridge financing.</font><p>
<font face="Calibri" size="2">While a convertible note financing is one of the simplest types of investment transactions, there are still a few nuances that, when done wrong, can really hurt a company down the road. For a very detailed write-up about convertible promissory note terms and structure, you can read my <a href="http://startupvoice.blogspot.com/2011/12/annotated-convertible-promissory-note.html">Annotated Convertible Promissory Note</a> post. This post, on the other hand, is dedicated to some more nuanced mistakes to avoid.<p>
All of the mistakes that we are going to discuss in this post are ones that won’t manifest themselves until there is a qualified equity financing, the note matures, or there are circumstances that require that the terms of the note be amended.<p>
<ol>
<li><b>Conversion into a Shadow Series of Preferred.</b> Let’s start with what is usually seen as the culmination of a startup’s early success – it has a term sheet for an equity financing round at a valuation that is significantly higher that then conversion cap on the notes. In this situation, the investors will typically insist that, despite what the note conversion provisions state, the notes convert into a shadow series of preferred stock, rather than the same series of preferred as the new investor. <p>
The reason is that the certificate or the articles of incorporation, state in dollars the liquidation preference of each series of stock. If the purchase price per share of the new investors is $1.00 per share in the Series A round, and they are getting a 1x liquidation preference, then the liquidation preference of the Series A will be $1.00 per share. However, if the conversion price of the notes is only $0.10 per share, which may be the case if their conversion cap was 1/10 of the valuation of the new round, then with a $1.00 per share liquidation preference on each of their shares, the early investors would be getting a 10x return. This is not something that new investors will typically agree to. If there is no provision in the notes for conversion into a shadow series of preferred, and if the note investors don’t want to amend their notes, the equity financing can fall apart! Even if it doesn’t fall apart, the timing can slow down significantly, as management tries to work this out with their early investors.<p>
For this reason, we recommend the automatic conversion provision in the notes to provide for conversion into a shadow series of Preferred Stock, if so requested by the new investor.<p>
<li><b>Conversion on Maturity.</b> Convertible notes, despite the way that they are frequently being used by startups, are debt instruments, and as such, they have a maturity date. A “Maturity Date” is the date by which the debt must be returned, if not converted into equity. Startups, however, are not usually in the business of repaying convertible promissory notes, nor is repayment the result for which their investors are hoping when they make the investment. <p>
As we know, building a company comes with many variables, and despite everyone’s best intentions and efforts, it is neither unlikely nor uncommon for a company to fail to raise a qualifying equity financing round prior to the maturity date. If that happens, there are several ways it could play out. The investors could agree to extend the maturity date and give the company time to raise an equity round. Or, if they are disappointed with how management has been running the company, they could demand repayment. If there has not been a qualifying equity financing round, it is unlikely that the company would be able to repay this loan, even if it has revenues. Of course, if its revenues are sufficient to repay the loan, it’s unlikely that the investors would want to be repaid!<p>
For this reason, we recommend building into each note from the outset a formula for how the note will convert on maturity if it has not converted prior to such time in a qualified equity financing. The parties should decide on the class and series of shares into which the note will convert on maturity, which can either be common stock, a new series of preferred stock, or an existing series of preferred stock, if the company already has issued preferred stock. If the note is going to convert into a new series of preferred stock, then the parties have to agree on at least the basic rights, preferences and privileges of this series. The notes should also specify the valuation that will be used in the conversion or another algorithm that will be used to determine the number of shares that will be issued to the investors in the conversion in cancellation of the loan.<p>
<li><b>Amendment Provisions.</b> The “Amendment” section of an agreement is the section that specifies how that agreement may be changed in the future. If there are only two parties to an agreement, this is simple – the agreement can be changed with the consent of both parties. On the other hand, if we have an agreement with many parties, like a shareholders’ agreement among fifteen shareholders, in order to make it possible to ever amend that agreement, we might set some minimum threshold, e.g., the shareholders representing a majority of the voting interests must approve the change for it to apply to the agreement and bind all the other shareholders. This prevents one party from holding everyone else hostage when changes need to be made. <p>
Now that we understand the principle of it, let’s talk about how it applies to convertible notes. On the one hand, each note is an instrument issued by one party – the company, to the other – its investor. If there are 15 investors, then there are 15 different notes. On the other hand, we can think of these notes as part of one bridge financing transaction. They will usually have substantially the same terms, and will frequently be issued pursuant to a single note purchase agreement to which all of the investors will be parties. Finally, in the ideal world, all of these notes will convert in the company’s next equity financing into most likely the same series of stock with the same rights, preferences and privileges. From this perspective, it is in the company’s interests to make the process of amending the notes, which frequently must be done in connection with a qualified financing round, as painless as possible. If, in order to amend 15 notes, the company must get the consent of each of the 15 investors, this slows down the equity transaction and gives each of the investors a lot of leverage. For this reason, our strong recommendation is to draft the amendment provisions of the promissory notes issued by a company as part of the same bridge financing transaction, even if that transaction spans over the course of six months or a year, to allow for amendment by a majority-in-interest of the note holders.</ol><p>
Happy company making!</font>
<br />
<br />
<br />
<table><tbody>
<tr><td><a href="http://www.efimchik.com/"><img alt="White Summers" border="0" height="80" src="http://www.efimchik.com/WS-logo-1.jpg" /></a></td><td> </td><td valign="middle"><span style="font-family: Georgia; font-size: xx-small;"><a href="http://www.efimchik.com/">Inna Efimchik</a>, a Partner at <a href="http://www.white-summers.com/">White Summers Caffee & James LLP</a>, specializes in assisting emerging technology companies in Silicon Valley and beyond, providing incorporation, financing, and licensing services as well as general corporate counseling.</span></td></tr>
</tbody></table>
<span style="font-size: xx-small;"><a href="http://www.blogger.com/blogger.g?blogID=3306261804404551280" name="disclaimer"><b>LEGAL DISCLAIMER</b></a></span><br /><p>
<span style="font-size: xx-small;"><b>Copyright Notice.</b> The copyright for all original content in this post and any linked files is owned by Inna Efimchik. All rights are reserved.</span><br /><p>
<span style="font-size: xx-small;"><b>No Attorney-Client Relationship.</b> This post has been prepared by Inna Efimchik of White Summers for general informational purposes only. The information provided herein does not constitute advertising, a solicitation or legal advice. Neither the availability, transmission, receipt nor use of any information included herein is intended to create, or constitutes formation of, an attorney-client relationship or any other special relationship or privilege. You should not rely upon this post for any purpose without seeking legal advice from licensed attorneys in the relevant state(s).</span><br /><p>
<span style="font-size: xx-small;"><b>Compliance with Laws.</b> You agree to use the information provided herein in compliance with all applicable laws, including applicable securities laws, and you agree to indemnify and hold Inna Efimchik and White Summers Caffee & James LLP harmless from and against any and all claims, damages, losses or obligations arising from your failure to comply.</span><br /><p>
<span style="font-size: xx-small;"><b>Disclaimer of Liability.</b> ALL INFORMATION IS PROVIDED AS-IS WITH NO REPRESENTATIONS OR WARRANTIES, EITHER EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE AND NONINFRINGEMENT. YOU ASSUME COMPLETE RESPONSIBILITY AND RISK FOR USE OF THE INFORMATION IN THIS POST.</span><br /><p>
<span style="font-size: xx-small;">Inna Efimchik expressly disclaims all liability, loss or risk incurred as a direct or indirect consequence of the use of any information provided herein. By using any information in this post, you waive any rights or claims you may have against Inna Efimchik and White Summers Caffee & James LLP in connection therewith. </span><br />
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<br />Startup Voicehttp://www.blogger.com/profile/01289381273991991152noreply@blogger.com6tag:blogger.com,1999:blog-3306261804404551280.post-80977223264431439662015-01-23T09:00:00.000-08:002015-01-26T23:02:03.536-08:00What Do Startup Investors Want?<font face="Georgia" size="3">It is a well-known fact that startup investors, whether they are angels or venture capitalists, ultimately make their investment decisions emotionally, or, to say it another way, based on a gut feeling.<p>
However, if you are an entrepreneur looking for funding for your startup, this knowledge alone does not help because it does not answer the question “what does an entrepreneur need to convey to the investor, for the investor to have the right emotional reaction which leads him to write the check”.<p>
What then do early-stage investors in the tech sector look for when they are evaluating a project? What are the factors that make them excited about one project but not another?</font><p>
<font face="Calibri" size="2"><b>People.</b> The investor needs to believe in, in fact, be inspired by, the entrepreneur and his initial team. He needs to be convinced that this particular team has at least the following characteristics:
<ol><li>the necessary technical skills to complete the project in the proposed timeframe,
<li>the required steadfastness, dependability, and firmness of character to see the project through, and
<li>the personalities among the founding team that will complement, rather than detract from, one another, especially when times get tough (as they often do in startups).</ol><p>
Some ways to demonstrate to an investor that the team has what it takes, to name just a few, are (i) a history of working together as a team on a prior successful project, or (ii) external validation of the project for which funding is being sought through market traction.<p>
<b>Opportunity. </b><p>
<i>Economic.</i> To elicit the right emotional response from an investor, an entrepreneur needs to persuade the investor that, when properly executed by the right team, there is tremendous economic opportunity in the project. That may mean that the project is in a fast-growing market and that its premise is promising in light of what are perceived to be future trends. It also means that the investor can (and does) imagine a scenario where, with the right execution, the project will generate a significant economic upside, a return on investment of 10 to 30X.<p>
<i>Impact.</i> Some investors will be looking specifically for projects which promise to generate a measurable, beneficial social or environmental impact alongside a compelling financial return. This is called impact investing and it is becoming more widespread. When pitching, it is critical for the entrepreneur to know whether the investor subscribes to this investment mandate. If so, he will be a lot more excited about a project that seeks to build literacy than the next “Cut the Rope” app.<p>
<b>Competitive Advantage.</b> Finally, there needs to be a convincible competitive advantage, one that will allow this particular project to succeed over others in the same space. Its people, with deep specific expertise in an obscure area highly relevant to the project, for example, may be such competitive advantage. It may also be the technology behind the project, preferably protected by strong patents. Having a significant head start in an industry with a high barrier to entry might be another. <p>
One way or another, an investor needs to feel that the horse he is asked to put his money on, the particular project that he is asked to invest in, in keeping with the metaphor, will come in first. The factors listed above, when applied to a startup especially, are highly subjective. It is the entrepreneur who is able to convince investors that his project excels in all three categories that attracts capital easily and gracefully!<p>
Happy company making!<p>
Inna</font>
<br />
<br />
<br />
<table><tbody>
<tr><td><a href="http://www.efimchik.com/"><img alt="White Summers" border="0" height="80" src="http://www.efimchik.com/WS-logo-1.jpg" /></a></td><td> </td><td valign="middle"><span style="font-family: Georgia; font-size: xx-small;"><a href="http://www.efimchik.com/">Inna Efimchik</a>, a Partner at <a href="http://www.white-summers.com/">White Summers Caffee & James LLP</a>, specializes in assisting emerging technology companies in Silicon Valley and beyond, providing incorporation, financing, and licensing services as well as general corporate counseling.</span></td></tr>
</tbody></table>
<span style="font-size: xx-small;"><a href="http://www.blogger.com/blogger.g?blogID=3306261804404551280" name="disclaimer"><b>LEGAL DISCLAIMER</b></a></span><br /><p>
<span style="font-size: xx-small;"><b>Copyright Notice.</b> The copyright for all original content in this post and any linked files is owned by Inna Efimchik. All rights are reserved.</span><br /><p>
<span style="font-size: xx-small;"><b>No Attorney-Client Relationship.</b> This post has been prepared by Inna Efimchik of White Summers for general informational purposes only. The information provided herein does not constitute advertising, a solicitation or legal advice. Neither the availability, transmission, receipt nor use of any information included herein is intended to create, or constitutes formation of, an attorney-client relationship or any other special relationship or privilege. You should not rely upon this post for any purpose without seeking legal advice from licensed attorneys in the relevant state(s).</span><br /><p>
<span style="font-size: xx-small;"><b>Compliance with Laws.</b> You agree to use the information provided herein in compliance with all applicable laws, including applicable securities laws, and you agree to indemnify and hold Inna Efimchik and White Summers Caffee & James LLP harmless from and against any and all claims, damages, losses or obligations arising from your failure to comply.</span><br /><p>
<span style="font-size: xx-small;"><b>Disclaimer of Liability.</b> ALL INFORMATION IS PROVIDED AS-IS WITH NO REPRESENTATIONS OR WARRANTIES, EITHER EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE AND NONINFRINGEMENT. YOU ASSUME COMPLETE RESPONSIBILITY AND RISK FOR USE OF THE INFORMATION IN THIS POST.</span><br /><p>
<span style="font-size: xx-small;">Inna Efimchik expressly disclaims all liability, loss or risk incurred as a direct or indirect consequence of the use of any information provided herein. By using any information in this post, you waive any rights or claims you may have against Inna Efimchik and White Summers Caffee & James LLP in connection therewith. </span><br />
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<br />Startup Voicehttp://www.blogger.com/profile/01289381273991991152noreply@blogger.com9tag:blogger.com,1999:blog-3306261804404551280.post-80996278643078103222014-01-06T09:00:00.000-08:002014-01-06T12:43:27.497-08:00Information Rights of Shareholders in a California Corporation<font face="Georgia" size="3">Generally, all shareholders of a corporation registered in California are entitled to obtain from the corporation, upon request, certain corporate information. The type of information and the requirements that a shareholder must meet to get access to it it depend on the size of the corporation and the size of the shareholder’s equity interest in the corporation. In certain instances, it is required that the shareholder state a “purpose reasonably related to such interest.”<p></font>
<font face="Calibri" size="2"><b>When Is “Reasonably Related Purpose” Not Required</b>
<ul><li>Generally, all shareholders irrespective of the size of their equity ownership in a corporation are entitled to receive an annual report (CA Corporations Code Section 1501), <i>except that</i> a corporation with fewer than 100 shareholders may expressly waive this requirement in its bylaws. In such a case, the shareholders are entitled to receive a financial report similar to what an annual report should entail.
<li>All shareholders irrespective of their of the size of their equity ownership are entitled to receive a copy of the corporation’s bylaws (CA Corporations Code Section 213).
<li>All shareholders irrespective of of the size of their equity ownership are entitled to receive the results of vote at a regular, special or annual meeting (CA Corporations Code Sections 1509-1511).
<li>Shareholders owning individually <i>or</i> in the aggregate at least 5% of corporate shares are entitled to obtain and copy shareholders register and records (CA Corporation Code Section 1600) and quarterly financial information (CA Corporations Code Section 1501(c)-(d)).</ul><p>
<b>When Is a “Reasonably Related Purpose” Required?</b> Other than the situations delineated above, all other shareholders are required to state <i>in writing</i> a reasonable relationship between their interest in the corporation and the purpose of their inspection of books and records. In fact, if such relationship purpose of inspection of records and books is stated, then such shareholders are entitled to inspect (CA Corporations Code Sections 1600 and 1601):
<ul><li>Shareholder lists and Records
<li>Minutes of Books and Records
<li>Accounting Books </ul><p>
<b>What is a “Reasonably Related Purpose”?</b> The courts are unfortunately not clear on the answer and the legislation is not clear as to the time frame during which the written demand should be made on the corporation. Hence, the corporation is afforded some time to intelligently evaluate the “reasonable purpose” and ascertain the next course of action. If the corporation decides to withhold the information to a shareholder owning less than 5% of shares in the corporation, then the next venue will probably be courts.<p>
<b>What is an Annual Report? </b> An Annual Report encompasses the following (CA Corporations Code Section 1501(a)):
<ul><li>Income Statement; and
<li>Statement of Cash Flows for the Applicable Fiscal Year</ul><p>
<b>Other Important Rules </b>
<ul><li>The statutory right of shareholders to inspect and copy corporate books cannot be limited by articles of incorporation or bylaws. (CA Corporations Code 1600(d)).
<li>The copies of corporate books, under this section, could be made by person, attorney or agent. (CA Corporations Code 1600(d)).
<li>The shareholder’s right is to inspect records at the corporation’s office and to make copies and extracts of the records. The corporation has no obligation so send such records to the shareholder.</ul><p>
Happy company making!<p>
Inna</font>
<br />
<br />
<br />
<table><tbody>
<tr><td><a href="http://www.efimchik.com/"><img alt="White Summers" border="0" height="80" src="http://www.efimchik.com/WS-logo-1.jpg" /></a></td><td> </td><td valign="middle"><span style="font-family: Georgia; font-size: xx-small;"><a href="http://www.efimchik.com/">Inna Efimchik</a>, a Partner at <a href="http://www.white-summers.com/">White Summers Caffee & James LLP</a>, specializes in assisting emerging technology companies in Silicon Valley and beyond, providing incorporation, financing, and licensing services as well as general corporate counseling.</span></td></tr>
</tbody></table>
<span style="font-size: xx-small;"><a href="http://www.blogger.com/blogger.g?blogID=3306261804404551280" name="disclaimer"><b>LEGAL DISCLAIMER</b></a></span><br /><p>
<span style="font-size: xx-small;"><b>Copyright Notice.</b> The copyright for all original content in this post and any linked files is owned by Inna Efimchik. All rights are reserved.</span><br /><p>
<span style="font-size: xx-small;"><b>No Attorney-Client Relationship.</b> This post has been prepared by Inna Efimchik of White Summers for general informational purposes only. The information provided herein does not constitute advertising, a solicitation or legal advice. Neither the availability, transmission, receipt nor use of any information included herein is intended to create, or constitutes formation of, an attorney-client relationship or any other special relationship or privilege. You should not rely upon this post for any purpose without seeking legal advice from licensed attorneys in the relevant state(s).</span><br /><p>
<span style="font-size: xx-small;"><b>Compliance with Laws.</b> You agree to use the information provided herein in compliance with all applicable laws, including applicable securities laws, and you agree to indemnify and hold Inna Efimchik and White Summers Caffee & James LLP harmless from and against any and all claims, damages, losses or obligations arising from your failure to comply.</span><br /><p>
<span style="font-size: xx-small;"><b>Disclaimer of Liability.</b> ALL INFORMATION IS PROVIDED AS-IS WITH NO REPRESENTATIONS OR WARRANTIES, EITHER EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE AND NONINFRINGEMENT. YOU ASSUME COMPLETE RESPONSIBILITY AND RISK FOR USE OF THE INFORMATION IN THIS POST.</span><br /><p>
<span style="font-size: xx-small;">Inna Efimchik expressly disclaims all liability, loss or risk incurred as a direct or indirect consequence of the use of any information provided herein. By using any information in this post, you waive any rights or claims you may have against Inna Efimchik and White Summers Caffee & James LLP in connection therewith. </span><br />
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<br />Startup Voicehttp://www.blogger.com/profile/01289381273991991152noreply@blogger.com2tag:blogger.com,1999:blog-3306261804404551280.post-59724107523589011582013-09-30T09:00:00.000-07:002013-09-30T09:38:50.695-07:00What Can Startups Disclose, Before Filing a Patent Application<font face="Georgia" size="3"><img src="http://www.gellisgroup.com/images/photos/photo-mark-beloborodov.jpg" align="right">The current wisdom on attracting investment for a startup states that the way to get the attention of frazzled investors is to present them with a short video that draws them in. From the perspective of getting emotional buy-in from investors and willingness to spend 5-10 minutes reading a startup’s executive summary or browsing its investor deck, a promo video is the way to go.<p>
But if a startup has not yet filed at least a provisional patent application, what can be the ramifications of such a video? I have asked <a href="www.linkedin.com/in/beloborodov">Mark Beloborodov</a>, an experienced U.S. patent attorney, to explain the risks of early disclosure.<p></font>
<font face="Calibri" size="2"><b>America Invests Act.</b> According to the expanded definition of “prior art” pursuant to the <a href="http://www.uspto.gov/aia_implementation/20110916-pub-l112-29.pdf">Leahy–Smith America Invents Act</a> (AIA) that went into effect on March 16, 2013, public use, sales, publications, and other disclosures available to the public anywhere in the world as of the filing date bar patentability. Public disclosure of the invention by the inventor (or someone else who “obtained” the disclosed subject matter from the inventor) within one year prior to filing (inventor's "publication-conditioned grace period") constitutes an exception. This exception is a concession to opponents of the AIA’s “first-to-file” regime that already exists in the European Union and the rest of the world, and a carryover from pre-AIA patent law, which has traditionally given startups comfort to discuss their invention publicly before filing a U.S. patent application, in connection, for instance, with fundraising efforts.<p>
<b>Product for Sale.</b> One potential problem that a promo video featuring the product may pose is that it may not fall within the “publication by inventor” exception, but may instead be considered an offer of sale of the product featured. Any novel and non-obvious features, functionalities and attributes implemented in the product that, prior to the video’s release, constituted patentable inventions, may suddenly fall into the public domain and thereby substantially reduce the value of the business.
Publication. But suppose that the promo video (or an article) does not reach the level of the offer for sale and qualifies for the publication-conditioned grace period. Does that mean that it is safe in those circumstances to disclose inventions, for which a patent application has not been filed?<p>
It’s not so simple, says Mark. While the disclosed inventions themselves may still be protected, what if a public discussion is spurred by the disclosure that builds on the information made public by the inventors? Anything that is generated in that public discussion above and beyond what the inventors disclosed falls into the public domain. If the initial publication disclosed only part of the invention, and then other elements of the invention surfaced in subsequent public disclosures, even such other elements previously known to the inventors, patent protection for those elements may not be sought later. So any disclosure prior to at least a provisional patent application is fraught with risk even in the US, not to mention loss of patent protection for the invention as a whole in other countries.<p>
<b>The Band-Aid Solution.</b> So what’s one to do? In the perfect world, a startup’s patent application would be prepared by a patent attorney in advance of starting to pitch investors and certainly well in advance of publicly distributing promotional materials. Such application, even if a provisional one, would be drafted after careful consideration of the invention and would contain a detailed and enabling disclosure of how it is made and operates, which fully supports patent claims to be included later in the full-blown application.<p>
But we don’t live in the perfect world. To preserve intellectual property rights in the product or solution that will be the subject of an upcoming promotional video, Mark recommends making at least a minimalist provisional patent application filing before the video becomes public. Even if the filing consists of little more than the video script, overview of key components of the invention, and annotated screen shots illustrating them, risky as it is, it’s better than nothing. After the founder strings together the materials that will go into the promo video, it is advisable to have a patent attorney do a quick review. This might translate in total into a $1,000-$1,500 cost, including the filing fee, but, if it may preserve intellectual property rights that might otherwise be lost forever, seems like a good compromise.<p>
Happy company making!<p>
Inna</font>
<br />
<br />
<br />
<table><tbody>
<tr><td><a href="http://www.efimchik.com/"><img alt="White Summers" border="0" height="80" src="http://www.efimchik.com/WS-logo-1.jpg" /></a></td><td> </td><td valign="middle"><span style="font-family: Georgia; font-size: xx-small;"><a href="http://www.efimchik.com/">Inna Efimchik</a>, a Partner at <a href="http://www.white-summers.com/">White Summers Caffee & James LLP</a>, specializes in assisting emerging technology companies in Silicon Valley and beyond, providing incorporation, financing, and licensing services as well as general corporate counseling.</span></td></tr>
</tbody></table>
<span style="font-size: xx-small;"><a href="http://www.blogger.com/blogger.g?blogID=3306261804404551280" name="disclaimer"><b>LEGAL DISCLAIMER</b></a></span><br /><p>
<span style="font-size: xx-small;"><b>Copyright Notice.</b> The copyright for all original content in this post and any linked files is owned by Inna Efimchik. All rights are reserved.</span><br /><p>
<span style="font-size: xx-small;"><b>No Attorney-Client Relationship.</b> This post has been prepared by Inna Efimchik of White Summers for general informational purposes only. The information provided herein does not constitute advertising, a solicitation or legal advice. Neither the availability, transmission, receipt nor use of any information included herein is intended to create, or constitutes formation of, an attorney-client relationship or any other special relationship or privilege. You should not rely upon this post for any purpose without seeking legal advice from licensed attorneys in the relevant state(s).</span><br /><p>
<span style="font-size: xx-small;"><b>Compliance with Laws.</b> You agree to use the information provided herein in compliance with all applicable laws, including applicable securities laws, and you agree to indemnify and hold Inna Efimchik and White Summers Caffee & James LLP harmless from and against any and all claims, damages, losses or obligations arising from your failure to comply.</span><br /><p>
<span style="font-size: xx-small;"><b>Disclaimer of Liability.</b> ALL INFORMATION IS PROVIDED AS-IS WITH NO REPRESENTATIONS OR WARRANTIES, EITHER EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE AND NONINFRINGEMENT. YOU ASSUME COMPLETE RESPONSIBILITY AND RISK FOR USE OF THE INFORMATION IN THIS POST.</span><br /><p>
<span style="font-size: xx-small;">Inna Efimchik expressly disclaims all liability, loss or risk incurred as a direct or indirect consequence of the use of any information provided herein. By using any information in this post, you waive any rights or claims you may have against Inna Efimchik and White Summers Caffee & James LLP in connection therewith. </span><br />
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<br />Startup Voicehttp://www.blogger.com/profile/01289381273991991152noreply@blogger.com3tag:blogger.com,1999:blog-3306261804404551280.post-34646638294245445952013-09-09T09:00:00.000-07:002013-09-09T13:32:50.720-07:00Preparing for a Silicon Valley Fundraising Trip<font face="Calibri" size="2"><i>[This post is an excerpt from my presentation entitled <a href="http://readymag.com/StartupVoice/Startup/"><b>Silicon Valley Fundraising Trip: Tips for the Non-U.S. Based Startup Founder</a></b>.]<p></i></font>
<font face="Georgia" size="3">If you are traveling to the Silicon Valley to raise capital for your startup from abroad, you can save yourself a lot of time and make the trip more efficient by preparing thoroughly and doing your homework before the trip. Here are some things that should not be overlooked:<p></font>
<font face="Calibri" size="2"><b>Research.</b> Before your trip, sign up for startup networks, groups and mailing lists, to receive announcements about upcoming events. (This is covered in more detail in the full version of my <a href="http://readymag.com/StartupVoice/Startup/">presentation</a>.) You should know which venture capital firms and super-angels are investing in your space. You should research and consider which strategic investors you should target, if any. Based on your research, prepare a list of 10 to 20 people that you’d like to meet while you are here. This list is aspirational, so if you do not get the opportunity to meet all of them, you have not failed.<p>
<b>LinkedIn.</b> Create a LinkedIn profile, if you don’t already have one. If you have one, check to see if it's time to review and update it. This is your business resume. Most professionals rely on it!<p>
Don’t be lazy – take the time to write-up prior projects and experience, your education, and anything else relevant to what you are doing and to who you are now. This is your chance to tell people what you want them to know about you!<p>
Note that LinkedIn is also a great place to do your own “diligence” about the people you’ll meet while networking, through introductions, or otherwise.<p>
<b>Video Presentation.</b> If you have the resources, create a short video teaser and post it on YouTube or Vimeo for easy sharing with new contacts.
A few excellent examples are below. Notice how effective it is if the teaser can demo your product or service. A picture is worth a thousand words. And a video is worth at least a thousand pictures, charts and graphs.<p>
<li><a href="http://www.youtube.com/watch?v=RHnUSKIULbs" target="new">MapsWithMe Teaser</a><br>
<li><a href="http://www.youtube.com/watch?v=0sUBjIzYv6k" target="new">Posse Teaser</a><br>
<li><a href="http://vimeo.com/51209650#" target="new">Readymag Teaser</a><br>
<li><a href="http://www.youtube.com/watch?v=qy9GPEpLTbo" target="new">Robin Teaser</a><p>
Videos work well to get you a foot in the door (not seal the deal for you). Before an investor takes the time to read your executive summary, in fact, before he even makes the decision about whether it's worth his time to do so, it is helpful if you can get him excited (or at least curious) about your product or service. The way to do it is by offering information in an easy and fun format - video - that appeals to the viewer's emotions, not just his intellect.<p>
<b>Executive Summary / Presentation.</b> VCs don't read business plans. They just don't have enough hours in the day to screen companies based on their business plans, and, frankly, with business at an early stage, a business plan reads more like astrological predictions than fact.<p>
Still, if you are talking to an investor at a networking event, or have been introduced to an investor by email, he will want to see <i>something</i> in writing about your company. You will be expected to send an executive summary (a one-pager that introduces the investor to your company and piques his interest) or, more frequently these days, an investor slide deck (8-10 PowerPoint slides that serve the same purpose but are easier on the eyes).<p>
Instead of trying to work with your team back home when you are already here, faced with a time difference and time pressure, prepare this before you come. You may have to adjust it based on the feedback you receive from investors, but if you have a solid draft, it will make your life easier.<p>
A really well-made executive summary or deck can set apart your startup from the rest and give you a fighting chance at a more involved look from the investor.<p>
You can work with designers and advisors to help solidify your message in your materials. But do not hire someone to write them for you. You have to <i>own</i> your materials, and by that I don't mean the legal sense of ownership, but in the sense that you stand behind each word in that document and, if prompted, can expand in verbal or written format on any of the points made in it!<p>
<b>U.S. Phone Number.</b> With your Google account, you can get a free Google Voice number and set up call-forwarding from that number to your temporary U.S. number.<p>
Google Voice also offers voicemail functionality. Make it easy on your callers - record a greeting with your name and the name of your company, so that they know they reached the right number.<p>
<b>Business Cards.</b> Your business card should be in English and should contain (1) your company name (and if you have not registered the company, the name that you think you will use), (2) your name and title, (3) your corporate domain email address, (4) the address of your physical office (if any), and (5) your U.S. phone number.<p>
Note that you don’t have to spell your name on the card the way it is spelled in your passport. Feel free to spell it in a way that will make it easy for English speakers to read. This will save you time and annoyance, unless, of course, you like correcting people and having off-topic conversations about foreign names, the English language, pronunciation, etc.<p>
<b>Credit Cards.</b> The most common and convenient payment method for most things that you’ll need to buy on your trip will be a credit card. Every online purchase will require it and some merchants (like car rental places) will take your credit card number as a security deposit, even if you pay cash.<p>
When getting ready for your trip, make sure there is money in the account tied to the card that you are taking with you. To really play it safe, take several credit cards tied to accounts at different banks. It is best to call ahead, and let your bank know that you will be in the United States. Sometimes banks will suspect identity theft and block your card, if there is unexpected activity on your card in a foreign jurisdiction. Nothing quite makes travel so uncomfortable, as having your credit cards lock up, when you are relying on them as a primary payment method!<p>
<b>Driver's License.</b> While you are visiting California, you are permitted to drive with your valid foreign license. Make sure to take it with you, as you are packing for your trip, and that it does not expire during your trip (rendering it no longer valid).<p>
Happy company making!<p>
Inna</font>
<br />
<br />
<br />
<table><tbody>
<tr><td><a href="http://www.efimchik.com/"><img alt="White Summers" border="0" height="80" src="http://www.efimchik.com/WS-logo-1.jpg" /></a></td><td> </td><td valign="middle"><span style="font-family: Georgia; font-size: xx-small;"><a href="http://www.efimchik.com/">Inna Efimchik</a>, a Partner at <a href="http://www.white-summers.com/">White Summers Caffee & James LLP</a>, specializes in assisting emerging technology companies in Silicon Valley and beyond, providing incorporation, financing, and licensing services as well as general corporate counseling.</span></td></tr>
</tbody></table>
<span style="font-size: xx-small;"><a href="http://www.blogger.com/blogger.g?blogID=3306261804404551280" name="disclaimer"><b>LEGAL DISCLAIMER</b></a></span><br /><p>
<span style="font-size: xx-small;"><b>Copyright Notice.</b> The copyright for all original content in this post and any linked files is owned by Inna Efimchik. All rights are reserved.</span><br /><p>
<span style="font-size: xx-small;"><b>No Attorney-Client Relationship.</b> This post has been prepared by Inna Efimchik of White Summers for general informational purposes only. The information provided herein does not constitute advertising, a solicitation or legal advice. Neither the availability, transmission, receipt nor use of any information included herein is intended to create, or constitutes formation of, an attorney-client relationship or any other special relationship or privilege. You should not rely upon this post for any purpose without seeking legal advice from licensed attorneys in the relevant state(s).</span><br /><p>
<span style="font-size: xx-small;"><b>Compliance with Laws.</b> You agree to use the information provided herein in compliance with all applicable laws, including applicable securities laws, and you agree to indemnify and hold Inna Efimchik and White Summers Caffee & James LLP harmless from and against any and all claims, damages, losses or obligations arising from your failure to comply.</span><br /><p>
<span style="font-size: xx-small;"><b>Disclaimer of Liability.</b> ALL INFORMATION IS PROVIDED AS-IS WITH NO REPRESENTATIONS OR WARRANTIES, EITHER EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE AND NONINFRINGEMENT. YOU ASSUME COMPLETE RESPONSIBILITY AND RISK FOR USE OF THE INFORMATION IN THIS POST.</span><br /><p>
<span style="font-size: xx-small;">Inna Efimchik expressly disclaims all liability, loss or risk incurred as a direct or indirect consequence of the use of any information provided herein. By using any information in this post, you waive any rights or claims you may have against Inna Efimchik and White Summers Caffee & James LLP in connection therewith. </span><br />
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Startup Voicehttp://www.blogger.com/profile/01289381273991991152noreply@blogger.com4tag:blogger.com,1999:blog-3306261804404551280.post-68884180380736641882013-09-04T09:00:00.000-07:002013-09-09T13:34:13.054-07:0010 Basic Principles of Effective Networking<font face="Calibri" size="2"><i>[This post is an excerpt from my presentation entitled <b><a href="http://readymag.com/StartupVoice/Startup/">Silicon Valley Fundraising Trip: Tips for the Non-U.S. Based Startup Founder</a></b>.]</i></font><p>
<font face="Georgia" size="3">Networking events are a lot of work. But if you are building up your network, networking at startup events can be a great way to get exposure to a lot of people fast.<p>
Because networking is hard work, if you are going to do it, you might as well make the most of it. My suggestions are based solely on my own personal experience and reflect either what has worked for me or my observations of the behavior of others. There may be other effective networking tactics, so if you are feeling anxious about this, read a few more articles (or books) for a deeper dive.</font><p>
<font face="Calibri" size="2"><b>1. Set the Right Goals.</b> Make sure you set the right goals and expectations for yourself when you go out to network. Chances are that you will not meet and win over an investor at a networking event (unless the event is a pitch competition than you win, and frequently not even then).<p>
What you should really be hoping to do is to ingratiate yourself with three to five well-connected individuals, who will make introductions for you to people in their network. Note that the people that you get introduced to may not be your investors either.<p>
The goal of networking is to grow your network because you never know where your investors, customers, or even future employees may come from. Approach networking with an open mind, and good things will come!<p>
<b>2. Dress to Impress.</b> When you go to events, you want to be memorable, stand out in the crowd. That way, when someone you spoke to for a few minutes wants to introduce you to someone else at the event, he can find you again in the crowd. As with anything, you have to be careful not to overdo this, because if you are too outlandish in your wardrobe, you might be memorable, but it won’t score you any points. The trick is to stand out in a positive way.<p>
At the very least, if you have a T-shirt with your company’s logo, wear that. It may not be very original, but it will be a good conversation starter, and people with a visual memory are more likely to remember the name of your company if it’s written across your chest.<p>
<b>3. Don’t Forget Your Business Cards.</b> Business cards are cheap, so stock up and bring enough. Sure, if you run out, you can add the person you are speaking with on LinkedIn during the conversation or take his card and write your name on the back of it. But coming unprepared does not characterize you well, and if there is at least a small chance someone will keep your pretty business card around and will remember about you some time in the future when it could be advantageous to you, you can be sure they'll toss your info scribbled on the back of their card. LinkedIn is pretty good, but unless you have a stellar memory for names, it can be hard to find the contact that you need among your 500+ contact list. So, personally, I prefer cards.<p>
But don't mistake the exercise of handing out cards for networking. If you hand out your cards like they are on fire, but don't cement it with at least 3-5 minutes of solid conversation with the folks you gave the card to, you may as well have thrown them in the trash.<p>
<b>4. Forget Your Comfort Zone.</b> Networking is not comfortable. It would be easy if relevant contacts would line up to meet with us in an orderly fashion when we show up at an event. In fact, that’s not what happens at all. You are lucky if you are approached by another networker looking to strike up conversation. More frequently, you find yourself in a room surrounded by small groups deeply immersed in their own private conversations. Those small groups look intimidating.<p>
But if you stay within your comfort zone and hover in the corner, waiting to be approached, which might be your natural inclination, you will be wasting precious time. So try to make eye-contact with someone in a group, to see if they’ll welcome you to join them, or just shamelessly insert yourself into a group and when there is a pause in conversation, extend your hand and introduce yourself. At a networking event, no one will think worse of you for doing so. Sometimes, the topic of discussion will be so narrow that after a few uncomfortable minutes you will decide to leave to look for another place to park, but the more polite networkers will attempt to integrate the newcomer into their conversation.<p>
<b>5. Stay Positive.</b> If you want to leave a positive impression, you have to radiate positive energy. If you complain about your suppliers and customers, or put down your partners, employees or investors, it leaves a bad taste with the person you are speaking to. So focus on the positives. Be that person that everyone will enjoy talking to!<p>
<b>6. Keep Conversation Light.</b> If you want to make more than a single connection at an event, you will need to move fairly quickly from one conversation to the next. Keep in mind that no matter how passionately you feel about public policy or politics, a tech networking event is not the place to get entangled in a heated debate, whether about the conflict in the Middle East, the shortcomings of the Obama administration, a woman's right to abortion, the right to bear arms, or U.S. world domination. In general stay away from religion and politics, unless it is to say that you are hoping that the Startup Visa initiative passes, which is a pretty safe bet.
Finally, remember to smile! There is nothing as disarming as a genuine smile, so it is going to be your best networking weapon!<p>
<b>7. Listen First.</b> When you engage in a one-on-one conversation with someone at a networking event, even if you are burning to proselytize anyone who will listen to the cause of your amazing company, recognize that everyone there has a story.<p>
If you practice active listening – paying close attention to what the other person is saying, reading their body language, asking follow up questions, sharing information that they may consider valuable, and looking for ways you could help – you will find people more interested in your story, and willing to help, whether with advice, introductions, or empathy.<p>
<b>8. Don’t Be a Salesman.</b> Think about how you feel when you are approached by a salesman. What’s your first reaction? I know mine is, “No, thank you!”
The last thing you want to do at a networking event is to be perceived as a salesman. Instead, you want to be seen initially as someone who is easy and interesting to talk to and eventually, as a good long-term contact.<p>
<b>9. Follow Up.</b> You have to follow up, if you don’t want all that networking to have been in vain.<p>
If you promised to send your executive summary, do so within a few hours of the meeting, if you can, and within 24 hours at most. If the person you talked to promised to send you something, follow up with them after the meeting and remind them. They have busy lives, so take the initiative!<p>
When you are networking, you are building up your social capital, so don’t just be dependable when it can stand to benefit you. If you promised a networking contact to send the name of an app that slipped your mind during the conversation or to make an intro to a good web designer, do it.<p>
The greatest value of networking is in the long-term connections that you form. For this reason, strong follow up is essential. Invite contacts that you make at a networking event that you would like to make a more permanent part of your network to meet with you for coffee sometime that week. Almost no one will turn down a coffee offer, unless (a) it’s a VC, or (b) you are perceived as a salesman.<p>
<b>10. Have Patience!</b> Have patience with the process and try to enjoy it! Networking does not produce immediate rewards, but it does pay off in the long-run!<p>
Happy company making!<p>
Inna</font>
<br />
<br />
<br />
<table><tbody>
<tr><td><a href="http://www.efimchik.com/"><img alt="White Summers" border="0" height="80" src="http://www.efimchik.com/WS-logo-1.jpg" /></a></td><td> </td><td valign="middle"><span style="font-family: Georgia; font-size: xx-small;"><a href="http://www.efimchik.com/">Inna Efimchik</a>, a Partner at <a href="http://www.white-summers.com/">White Summers Caffee & James LLP</a>, specializes in assisting emerging technology companies in Silicon Valley and beyond, providing incorporation, financing, and licensing services as well as general corporate counseling.</span></td></tr>
</tbody></table>
<span style="font-size: xx-small;"><a href="http://www.blogger.com/blogger.g?blogID=3306261804404551280" name="disclaimer"><b>LEGAL DISCLAIMER</b></a></span><br /><p>
<span style="font-size: xx-small;"><b>Copyright Notice.</b> The copyright for all original content in this post and any linked files is owned by Inna Efimchik. All rights are reserved.</span><br /><p>
<span style="font-size: xx-small;"><b>No Attorney-Client Relationship.</b> This post has been prepared by Inna Efimchik of White Summers for general informational purposes only. The information provided herein does not constitute advertising, a solicitation or legal advice. Neither the availability, transmission, receipt nor use of any information included herein is intended to create, or constitutes formation of, an attorney-client relationship or any other special relationship or privilege. You should not rely upon this post for any purpose without seeking legal advice from licensed attorneys in the relevant state(s).</span><br /><p>
<span style="font-size: xx-small;"><b>Compliance with Laws.</b> You agree to use the information provided herein in compliance with all applicable laws, including applicable securities laws, and you agree to indemnify and hold Inna Efimchik and White Summers Caffee & James LLP harmless from and against any and all claims, damages, losses or obligations arising from your failure to comply.</span><br /><p>
<span style="font-size: xx-small;"><b>Disclaimer of Liability.</b> ALL INFORMATION IS PROVIDED AS-IS WITH NO REPRESENTATIONS OR WARRANTIES, EITHER EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE AND NONINFRINGEMENT. YOU ASSUME COMPLETE RESPONSIBILITY AND RISK FOR USE OF THE INFORMATION IN THIS POST.</span><br /><p>
<span style="font-size: xx-small;">Inna Efimchik expressly disclaims all liability, loss or risk incurred as a direct or indirect consequence of the use of any information provided herein. By using any information in this post, you waive any rights or claims you may have against Inna Efimchik and White Summers Caffee & James LLP in connection therewith. </span><br />
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<br />Startup Voicehttp://www.blogger.com/profile/01289381273991991152noreply@blogger.com1tag:blogger.com,1999:blog-3306261804404551280.post-53698351348147459052013-09-02T09:00:00.000-07:002013-09-09T13:34:49.287-07:00The Right Time to Fundraise in the Silicon Valley<font face="Calibri" size="2"><i>[This post is an excerpt from my presentation entitled <b><a href="http://readymag.com/StartupVoice/Startup/">Silicon Valley Fundraising Trip: Tips for the Non-U.S. Based Startup Founder</a></b>.]</i></font><p>
<font face="Georgia" size="3">The Silicon Valley is a fantastic place to visit almost any time of year. We have great weather here year-round, many tourist attractions within a stone’s throw of one another, and fantastic sights for the nature enthusiast.<p>
But if your goal is to travel to the Silicon Valley with the goal of raising venture capital for your foreign-based startup, to avoid disappointment, set the right expectations, and make the most out of your trip, consider whether your startup is primed and ready for this step.<p></font>
<font face="Calibri" size="2"><b>Ripe for US Fundraising.</b> The best time for a foreign startup to come to the Silicon Valley to raise venture capital is when it can make the following statements truthfully:
<ul><li>We raised a small seed round of capital with a local venture capital firm and angels
<li>We have publicly launched our product in our country
<li>Our product has gained significant traction in our domestic market
<li>We are ready to launch our product on the US market
<li>We are opening an office in the US that will be handling US operations and marketing
<li>Our management team has already relocated to the US (or is relocating to the US within 3-6 months)
<li>Our CEO reads, writes and speaks fluent English and is able to present our company to US investors, strategic partners, and clients in a clear, competent and confident manner.</ul><p>
<b>Almost There.</b> If a startup meets some (maybe 4-5) but not all of the criteria above, it does not mean that the founders should not come to the Silicon Valley to fundraise. But it does increase the likelihood that this is going to be the first of several trips. A startup at that stage may still be able to successfully raise capital from Silicon Valley VCs, but it may easily take 6 to 12 months or longer and multiple trips to get to a term sheet.<p>
Raising money in the Silicon Valley is difficult, even for companies that fit all of the criteria above. So a company that does not, has a greater hurdle to overcome. Still, I believe the preliminary trip, if approached correctly, with due preparation, forethought, and the right expectations, can be instrumental in laying the groundwork for a future financing by giving the founder an opportunity to establish contacts, by growing the founder’s professional network in the Silicon Valley, and by clarifying areas of improvement in the startup’s fundraising position.<p>
<b>More Work to Do at Home.</b> A startup that either has not launched a product, or has launched a product but it has not seen significant adoption domestically, and that has not received support from its local investors, has more work to do at home before venturing out to fundraise internationally. That is not to say that such startups should not attend international conferences or take business development trips, whether to the Silicon Valley or elsewhere. I just think it will be more productive to realize that it may be too early to be fundraising abroad in earnest, so the trip, if taken, should have other purposes and expectations attached to it in the founders’ minds.<p>
<b>The Chief Executive Officer.</b> To state the obvious, the right CEO makes the difference between a startup that gets venture capital funding and one that does not. As we said above, to be successful at raising capital in the United States, the foreign CEO has to have fluent written and conversational English, though he or she may speak with an accent and many do. The CEO must also have the personal and business skills that make him or her a good person to represent the startup in investor meetings.<p>
But what if the CEO does not have good English? Unfortunately, neither engaging translators to assist in pitch meetings, nor hiring U.S. promoters or U.S. investor relations specialists to help with fundraising, actually works.<p>
Ultimately, the investors have to believe that the core team has what it takes to succeed, and if the investors have a language barrier with the CEO, they will simply not have sufficient basis to form that belief. The solution is one that is true for all companies, local or foreign – if the CEO is not the man (or woman) for the job, find a CEO who is!<p>
In startups, one of the founders is the CEO by necessity. Sometimes it is the right fit. And at other times it is not. Sometimes it is the right fit for the country, where the startup is based, but not for the U.S. Any company that hopes to be successful must recognize wherein lie its team’s weaknesses and fill them with new hires. If the current CEO will not be able to fundraise successfully in the U.S., the startup should entertain the idea of recruiting a U.S.-based CEO or another CEO in their country with solid “western” experience. In that situation, the current CEO can take another title, whether it is President, Chief Technology Officer, Chief Financial Officer, or whatever else best fits his or her strengths. Unfortunately, relinquishing the helm can be a major pain point for founders. I am sure some of my readers are wincing as they read this advice.<p>
<b>The Bottom Line.</b> If the founders of a startup believe they absolutely must raise capital in the United States, and if, after honestly assessing the strengths and weaknesses of the current team, they realize that they do not have the right candidate among them for the job, then they have to reconcile themselves to the difficult reality that such candidate must be found elsewhere. The same, incidentally, goes for filling any other holes that stand in the way of a startup’s success in raising capital in the United States – these holes must be (a) identified, (b) evaluated, and (c) resolved, preferably prior to the founders investing very heavily into their U.S. fundraising efforts.<p>
However, it may also be the case that, despite some initial flirtation with the idea of coming to the United States to raise capital, the founders will ultimately decide that their chances of raising funds domestically, or in Europe, or in Asia will be better than in the United States and will come at a lower cost (emotional, financial, temporal).<p>
There may be a lot of investment capital aggregated in the Silicon Valley, but there are oh so many contenders from all over the world all vying for it!<p>
<b>Disclaimer.</b> Regardless of how well-positioned your startup may be to raise capital, be prepared for the process, almost invariably, to be more frustrating, more disruptive to your business processes, and to take longer, than you expect. There is no guarantee that the process, even when it is well-executed, will result in raising VC capital in the Silicon Valley.<p>
Happy company making!<p>
Inna</font>
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<br />
<table><tbody>
<tr><td><a href="http://www.efimchik.com/"><img alt="White Summers" border="0" height="80" src="http://www.efimchik.com/WS-logo-1.jpg" /></a></td><td> </td><td valign="middle"><span style="font-family: Georgia; font-size: xx-small;"><a href="http://www.efimchik.com/">Inna Efimchik</a>, a Partner at <a href="http://www.white-summers.com/">White Summers Caffee & James LLP</a>, specializes in assisting emerging technology companies in Silicon Valley and beyond, providing incorporation, financing, and licensing services as well as general corporate counseling.</span></td></tr>
</tbody></table>
<span style="font-size: xx-small;"><a href="http://www.blogger.com/blogger.g?blogID=3306261804404551280" name="disclaimer"><b>LEGAL DISCLAIMER</b></a></span><br /><p>
<span style="font-size: xx-small;"><b>Copyright Notice.</b> The copyright for all original content in this post and any linked files is owned by Inna Efimchik. All rights are reserved.</span><br /><p>
<span style="font-size: xx-small;"><b>No Attorney-Client Relationship.</b> This post has been prepared by Inna Efimchik of White Summers for general informational purposes only. The information provided herein does not constitute advertising, a solicitation or legal advice. Neither the availability, transmission, receipt nor use of any information included herein is intended to create, or constitutes formation of, an attorney-client relationship or any other special relationship or privilege. You should not rely upon this post for any purpose without seeking legal advice from licensed attorneys in the relevant state(s).</span><br /><p>
<span style="font-size: xx-small;"><b>Compliance with Laws.</b> You agree to use the information provided herein in compliance with all applicable laws, including applicable securities laws, and you agree to indemnify and hold Inna Efimchik and White Summers Caffee & James LLP harmless from and against any and all claims, damages, losses or obligations arising from your failure to comply.</span><br /><p>
<span style="font-size: xx-small;"><b>Disclaimer of Liability.</b> ALL INFORMATION IS PROVIDED AS-IS WITH NO REPRESENTATIONS OR WARRANTIES, EITHER EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE AND NONINFRINGEMENT. YOU ASSUME COMPLETE RESPONSIBILITY AND RISK FOR USE OF THE INFORMATION IN THIS POST.</span><br /><p>
<span style="font-size: xx-small;">Inna Efimchik expressly disclaims all liability, loss or risk incurred as a direct or indirect consequence of the use of any information provided herein. By using any information in this post, you waive any rights or claims you may have against Inna Efimchik and White Summers Caffee & James LLP in connection therewith. </span><br />
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<br />Startup Voicehttp://www.blogger.com/profile/01289381273991991152noreply@blogger.com2tag:blogger.com,1999:blog-3306261804404551280.post-87907861512891638702013-08-24T10:00:00.000-07:002013-08-25T18:43:28.474-07:00Should Founders’ Shares be Subject to Vesting<font face="Georgia" size="3">In the startup world, contributors are frequently incentivized with shares of stock in the venture to align their interests with those of the startup. These shares sometimes represent a significant percent of the company’s total capitalization, especially in the early days, when there are few contributors and the contribution of each contributor is therefore that much more significant.</font><p>
<font face="Calibri" size="2"><b>Who Should Have Vesting.</b> Every contributor’s shares in a venture should be subject to vesting. I use the term “contributor” here because these concepts apply not just to the founders, or the early employees, or the consultants, but to anyone in a startup who is incentivized by a grant of shares, or the right to purchase shares (known as a stock option).<p>
<b>Vesting Definition.</b> Vesting is the process, whereby shares or stock options granted to a contributor are, in effect, earned over a period of time, such that they may be repurchased or cancelled, as applicable, in whole or in part, from the contributor if his involvement with the venture does not continue for the entirety of the vesting term.<p>
<b>Vesting Term.</b> Vesting should be imposed over a term, typically calculated in months, that is the shorter of (a) the period over which the contributor is expected to meaningfully contribute to the venture, or (b) 48 months.<p>
<b>No Cliff on Founder Shares.</b> There is usually no cliff on founders’ shares—their shares vest monthly from the beginning and frequently they get “credited” in their vesting for the number of months that they worked on the project prior to getting their shares. For example, if a founder worked on his startup for a year before he was issued shares, it is not uncommon for his shares to be 1/4th vested up front, and the remaining shares to vest monthly over 36 months.<p>
<b>Cliff on Shares by Other Contributors.</b> By contrast, non-founder contributors typically have what is known as a “cliff” on their vesting—a block of time up-front, during which they are tested to make sure they are a good fit. At the end of the cliff, which is usually a year for full-time hires and may be shorter for other contributors, a portion of the contributor’s total share grant, usually proportionate to the ratio of the cliff period to the entire vesting period, vests at once. However, if the contributor’s services to the company are terminated before the cliff runs out, none of the shares vest.<p>
<b>Vesting Acceleration.</b> Sometimes the vesting of founders’ shares or the shares of other top contributors, accelerates in full or in part upon the happening of certain events. Most typically, vesting accelerates, if at all, either on a single trigger (which can be termination of the contributor or acquisition of the company), or on a double-trigger (termination of the contributor in connection with an acquisition of the company). Vesting acceleration is a heavily negotiated term whether with investors, new hires, or an acquirer of the company.<p>
<b>Why Do We Need Vesting.</b> There are several good reasons why it is a very good idea to impose vesting on the founders’ shares.<p>
First of all, investors insist that the founders’ and other contributors’ shares be subject to vesting. So if the founders do not subject their own shares to vesting in the beginning, when they engage with investors, imposing vesting on founder shares will almost invariably be one of the conditions to the investment. Founders who impose vesting on their own shares may get better terms than those that investors will require of them. But as long as those terms are reasonable, investors will typically not require founders to amend their vesting terms.<p>
But even if investors are not in the picture, as long as there is more than one founder, imposing vesting on all founders protects the company and its viability. Let’s consider an example to see why vesting can make or break a company. All names, characters and specifics are completely made up, but situations like this in an assortment of variations come up all the time.<p>
<ul><i>GameFriends is a startup developing a new social gaming application. Jim does the coding and Rhonda does the graphics. Jim and Rhonda have known one another since college and came up with the idea over coffee one day. They started working on GameFriends a few months ago and agreed that everything would be split fifty-fifty between them. They have not incorporated the business yet, waiting to complete a game first.<p>
At a gaming conference, Jim and Rhonda meet Pete. Pete has an MBA from Stanford and did a summer internship at a venture fund. Pete is a gamer and after spending several long weekends talking to Pete about their vision, they decide that they would benefit from Pete’s business expertise in getting GameFriends off the ground. Pete agrees to join the company for a 20% stake, but insists that they need to incorporate the venture and formally issue shares. Everyone agrees. The founders incorporate the venture with 10,000,000 authorized shares of Common Stock, of which Jim and Rhonda hold 4,000,000 each and Pete holds another 2,000,000.<p>
Jim and Rhonda trust each other, so they decide they don’t need vesting on their own shares. Since Pete is new, they decide to have his shares vest monthly over one year.<p>
In the meantime, Rhonda’s sister, who is working on a children’s book, asks Rhonda to help with illustrations. Rhonda can’t say ‘no’ to her sister, she’s always really liked doing children’s books illustrations, and her sister promised to pay her! She decides she can help her sister, while continuing her role with GameFriends.<p>
Unfortunately, she isn’t able to do both well. She takes longer to respond to Jim’s emails and lets his calls go to voicemail because she feels bad about not having her deliverables ready when she promised.<p>
After a couple of months, Jim and Rhonda have a heated discussion, where Jim accuses Rhonda of not being dedicated to the project and Rhonda defends herself and finds fault with Jim’s own coding efficiency, which she thinks is to blame for their first game not being ready yet. Rhonda is upset and decides to leave the project. She has 40% of the company at this time.
In order to finish the project, Jim needs to bring on another graphical artist. At a high school reunion, Jim runs into a good friend of his, Kevin, who would be perfect to replace Rhonda. Jim wants to bring him on and offers him 4,000,000 shares in the company, the same number of shares that Rhonda received. Kevin is interested, until he realizes that a large percent of the company belongs to a former co-founder, who is no longer involved.<p>
Here is what the capitalization looks like: Jim and Rhonda each have 4,000,000 shares, Pete has 2,000,000 shares and Jim would like to offer Kevin 4,000,000. If Kevin accepts, he will have approximately 28.5% of the company, but so will Rhonda, who invested only a few months of her life into the project.<p>
Kevin turns down the offer. When Pete realizes that there is not anyone to replace Rhonda, he leaves as well. At this point, 6 months have passed since he joined the company. Because his shares are subject to vesting over 12 months, half of his shares have vested. The company repurchases the remaining shares.<p>
Jim is now the only one left, trying to salvage the business. Rhonda and Pete together hold 5,000,000 shares and Jim holds the remaining 4,000,000, or roughly 44.5%. It is very difficult for Jim to bring on either a new graphic artist or a new business person because such a large percent of the company is owned by people, who are not contributing to the business. Jim closes the company and accepts a job at Zynga.</i></ul><p>
GameFriends could have avoided this untimely demise, if Jim and Rhonda had not made critical mistakes at the formation stage. Had Jim and Rhonda’s shares had vesting on them, then, when Rhonda left, GameFriends could have repurchased most of her shares, which could have gone to Kevin instead. Pete’s shares were subject to vesting, but the vesting period was too short, which is why he ended up with over 10% of the company when he left 6 months later.<p>
When shares are granted to contributors, the expectation is that they will continue to contribute for some significant period of time. If they don’t, their shares have to be made available to other contributors, who will be brought in to take their place. Otherwise, those who stay with the company suffer dilution, when additional shares have to be issued to attract replacement contributors, and the recruiting process itself becomes very difficult.<p>
For this reason, to improve a venture’s chances for success, it is the industry practice for the founders’ shares to be subject to vesting.<p>
Happy company making!<p>
Inna</font>
<br />
<br />
<br />
<table><tbody>
<tr><td><a href="http://www.efimchik.com/"><img alt="White Summers" border="0" height="80" src="http://www.efimchik.com/WS-logo-1.jpg" /></a></td><td> </td><td valign="middle"><span style="font-family: Georgia; font-size: xx-small;"><a href="http://www.efimchik.com/">Inna Efimchik</a>, a Partner at <a href="http://www.white-summers.com/">White Summers Caffee & James LLP</a>, specializes in assisting emerging technology companies in Silicon Valley and beyond, providing incorporation, financing, and licensing services as well as general corporate counseling.</span></td></tr>
</tbody></table>
<span style="font-size: xx-small;"><a href="http://www.blogger.com/blogger.g?blogID=3306261804404551280" name="disclaimer"><b>LEGAL DISCLAIMER</b></a></span><br /><p>
<span style="font-size: xx-small;"><b>Copyright Notice.</b> The copyright for all original content in this post and any linked files is owned by Inna Efimchik. All rights are reserved.</span><br /><p>
<span style="font-size: xx-small;"><b>No Attorney-Client Relationship.</b> This post has been prepared by Inna Efimchik of White Summers for general informational purposes only. The information provided herein does not constitute advertising, a solicitation or legal advice. Neither the availability, transmission, receipt nor use of any information included herein is intended to create, or constitutes formation of, an attorney-client relationship or any other special relationship or privilege. You should not rely upon this post for any purpose without seeking legal advice from licensed attorneys in the relevant state(s).</span><br /><p>
<span style="font-size: xx-small;"><b>Compliance with Laws.</b> You agree to use the information provided herein in compliance with all applicable laws, including applicable securities laws, and you agree to indemnify and hold Inna Efimchik and White Summers Caffee & James LLP harmless from and against any and all claims, damages, losses or obligations arising from your failure to comply.</span><br /><p>
<span style="font-size: xx-small;"><b>Disclaimer of Liability.</b> ALL INFORMATION IS PROVIDED AS-IS WITH NO REPRESENTATIONS OR WARRANTIES, EITHER EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE AND NONINFRINGEMENT. YOU ASSUME COMPLETE RESPONSIBILITY AND RISK FOR USE OF THE INFORMATION IN THIS POST.</span><br /><p>
<span style="font-size: xx-small;">Inna Efimchik expressly disclaims all liability, loss or risk incurred as a direct or indirect consequence of the use of any information provided herein. By using any information in this post, you waive any rights or claims you may have against Inna Efimchik and White Summers Caffee & James LLP in connection therewith. </span><br />
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<br />Startup Voicehttp://www.blogger.com/profile/01289381273991991152noreply@blogger.com1tag:blogger.com,1999:blog-3306261804404551280.post-49639691223537715432013-08-05T09:00:00.000-07:002013-08-12T00:49:06.572-07:00Who Prepares a Financing Term Sheet - the Startup or the Investor?<font face="Georgia" size="3">Frequently, a startup that is starting the fundraising process feels that it should prepare a term sheet to take to prospective investors. Whether this is necessary and serves it well depends on two key factors (a) the type of investor that it is targeting, and (b) the stage/type of financing.<p></font>
<font face="Calibri" size="2"><b>Type of Investor: Angels vs. VCs</b><p>
Generally speaking, if a company is targeting angel investors, and especially if the idea is to get a group of angel investors to participate on substantially the same terms, it is fairly typical to approach these investors with a company-prepared term sheet.<p>
Note, however, that in a bridge (convertible note) financing, and if the amount requested from each angel investor is small, it may be prudent to skip the term sheet step altogether, and to present investors with a draft convertible promissory note instead of a term sheet. This can save time and costs. In an equity financing, the simplest of which are still more complex than an average bridge financing, a term sheet may be unavoidable.<p>
Approaching venture capital firms with a term sheet, unless it's for a follow-on financing on terms from the previous round, is unlikely to be beneficial. In fact, if anything, it might hurt the startup: the venture capital firm that will lead the round will prepare its own term sheet, but if the startups presented its own term sheet with concessions (investor-favorable terms), those investor favorable terms are very likely to be incorporated into the term sheet ultimately presented by the venture capital firm, even though it may not be a standard term for that stage of financing for the fund.<p>
<b>Stage of Financing: First Financing vs. Successive Financing</b><p>
In the context of a rolling bridge financing, once the first investor has invested, the terms of that investment can be used as a benchmark with other investors that the startup targets. If there is a shift in leverage, making it easier to the startup to raise money (as it gains traction, for instance), the terms might stay substantially, but not exactly the same, with the valuation cap increasing or falling away entirely, as an example.<p>
The first time that a company raises funding through the sale of equity (stock financing), negotiating the right terms is of utmost importance. The bulk of the terms will stay the same, or get worse, through successive rounds. The only term that will, hopefully, improve is valuation. But the control terms will, at best, stay the same, and very commonly will get more complicated and cumbersome as more investors are involved.<p>
When a startup is doing well, and has supportive existing venture capital investors, who are going to invest in the new round, it is quite typical for the startup to mark-up the term sheet from the last round of financing and to use that as the starting point for negotiations with the new investor. The support of the existing investor cannot be understated in this situation. When Accel, Kleiner Perkins, Sequoia or Andreessen Horowitz (it certainly helps to have a first tier VC as an investor) tell the new investor that they like the terms from the prior round and expect them to stay substantially the same in this round, that's what happens.<p>
<b>Where Does a Startup Get a Term Sheet?</b><p>
Of course, your attorney will be happy to provide you with a term sheet, drafted for your specific needs. No amount of reading insightful blog posts, such as this one, will fully replace consulting with a knowledgeable startup attorney. But if you are not going to be using your attorney for this, or if you would just like to educate yourself about term sheets before talking to an attorney or to investors, here are some resources:</p>
<li>The <a href="http://www.seriesseed.com/files/series-seed---term-sheet-v-3-1.doc">Series Seed term sheet</a> is a good template for a very simple first equity financing. If your investors agree to it, you can save yourself time and money by using the other Series Seed forms as well, which are much simpler than, for instance, the <a href="http://www.nvca.org/index.php?option=com_content&view=article&id=108&Itemid=136">NVCA form documents</a> and better tailored to a financing involving angel investors and a small amount of capital.<p>
<li>Wilson Sonsini has done a good deed and created online term sheet generators for <a href="http://www.wsgr.com/WSGR/Display.aspx?SectionName=practice/termsheet-convertible.htm">convertible note financings</a> and <a href="http://www.wsgr.com/WSGR/Display.aspx?SectionName=practice/termsheet.htm">equity financings</a>. In order to generate a term sheet using one of these generators, you have to answer a number of questions, some of which may be difficult if you are not at ease with the vocabulary and the nuances of financings. However, at the very least, it's a good way to see what questions you should be asking yourself and your investors about the terms of your transaction.<p>
<li>Not to be outdone by Wilson Sonsini, Orrick also has put out its term sheet creators for <a href="https://tsc.orrick.com/interview.aspx?tpl=tsc+term+sheet+for+bridge+financing.rtf">convertible note financings</a> and <a href="https://tsc.orrick.com/interview.aspx?tpl=tsc+term+sheet+for+preferred+stock+financing.rtf">preferred stock financings</a>. If you try both Orrick's and Wilson Sonsini's, let me know in comments which one you like better and why.<p>
Happy company making!<p>
Inna</font>
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<br />
<br />
<table><tbody>
<tr><td><a href="http://www.efimchik.com/"><img alt="White Summers" border="0" height="80" src="http://www.efimchik.com/WS-logo-1.jpg" /></a></td><td> </td><td valign="middle"><span style="font-family: Georgia; font-size: xx-small;"><a href="http://www.efimchik.com/">Inna Efimchik</a>, a Partner at <a href="http://www.white-summers.com/">White Summers Caffee & James LLP</a>, specializes in assisting emerging technology companies in Silicon Valley and beyond, providing incorporation, financing, and licensing services as well as general corporate counseling.</span></td></tr>
</tbody></table>
<span style="font-size: xx-small;"><a href="http://www.blogger.com/blogger.g?blogID=3306261804404551280" name="disclaimer"><b>LEGAL DISCLAIMER</b></a></span><br /><p>
<span style="font-size: xx-small;"><b>Copyright Notice.</b> The copyright for all original content in this post and any linked files is owned by Inna Efimchik. All rights are reserved.</span><br /><p>
<span style="font-size: xx-small;"><b>No Attorney-Client Relationship.</b> This post has been prepared by Inna Efimchik of White Summers for general informational purposes only. The information provided herein does not constitute advertising, a solicitation or legal advice. Neither the availability, transmission, receipt nor use of any information included herein is intended to create, or constitutes formation of, an attorney-client relationship or any other special relationship or privilege. You should not rely upon this post for any purpose without seeking legal advice from licensed attorneys in the relevant state(s).</span><br /><p>
<span style="font-size: xx-small;"><b>Compliance with Laws.</b> You agree to use the information provided herein in compliance with all applicable laws, including applicable securities laws, and you agree to indemnify and hold Inna Efimchik and White Summers Caffee & James LLP harmless from and against any and all claims, damages, losses or obligations arising from your failure to comply.</span><br /><p>
<span style="font-size: xx-small;"><b>Disclaimer of Liability.</b> ALL INFORMATION IS PROVIDED AS-IS WITH NO REPRESENTATIONS OR WARRANTIES, EITHER EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE AND NONINFRINGEMENT. YOU ASSUME COMPLETE RESPONSIBILITY AND RISK FOR USE OF THE INFORMATION IN THIS POST.</span><br /><p>
<span style="font-size: xx-small;">Inna Efimchik expressly disclaims all liability, loss or risk incurred as a direct or indirect consequence of the use of any information provided herein. By using any information in this post, you waive any rights or claims you may have against Inna Efimchik and White Summers Caffee & James LLP in connection therewith. </span><br />
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<br />Startup Voicehttp://www.blogger.com/profile/01289381273991991152noreply@blogger.com4tag:blogger.com,1999:blog-3306261804404551280.post-32880311869456536192013-07-23T11:20:00.000-07:002013-08-20T17:46:06.338-07:00Effect on Startups of SEC Changes Eliminating the Prohibition on General Solicitation in Certain Offerings<font face="Calibri" size="2"><i>[A Russian-language version of this article may be found on <a href="http://www.firrma.ru/data/articles/1802/">Firrma.ru</a>]</i></font><p>
<font face="Georgia" size="3">In April 2012, Congress passed the much-awaited <a href="http://www.gpo.gov/fdsys/pkg/BILLS-112hr3606enr/pdf/BILLS-112hr3606enr.pdf">Jumpstart Our Business Startups Act</a> (JOBS Act), which directed the SEC to draft regulations removing the prohibition on general solicitation and general advertising for securities offerings relying on Rule 506, <i>provided that</i> sales are limited to accredited investors <i>and</i> an issuer takes reasonable steps to verify that all purchasers of the securities are accredited investors.<p>
On July 10, 2013, more than a year later, the SEC has finally issued the final rules that will implement the JOBS Act legislation.<p></font>
<font face="Calibri" size="2"><b>Securities Laws Overview.</b> Under the current U.S. federal securities laws, companies seeking to raise capital through the sale of securities must either register the securities offering with the SEC or rely on an exemption from registration. <a href="http://www.sec.gov/answers/rule506.htm">Rule 506</a> of Regulation D is the most widely-used exemption from registration. In an offering that qualifies for the Rule 506 exemption, an issuer may raise an unlimited amount of capital from an unlimited number of "accredited investors" and up to 35 non-accredited investors.<p>
"<a href="http://www.sec.gov/answers/accred.htm">Accredited investors</a>," as defined in Rule 501 of Regulation D, are individuals who meet certain minimum income or net worth levels, or certain institutions such as trusts, corporations, or charitable organizations that meet certain minimum asset levels. A person qualifies as an "accredited investor" if he or she has either (a) an individual net worth or joint net worth with a spouse that exceeds $1 million at the time of the purchase, excluding the value (and any related indebtedness) of a primary residence; or (b) an individual annual income that exceeded $200,000 in each of the two most recent years or a joint annual income with a spouse exceeding $300,000 for those years, and a reasonable expectation of the same income level in the current year.<p>
<b>Changes to Rule 506 Generally.</b> The final rules approved by the SEC make changes to Rule 506 to permit issuers to use general solicitation and general advertising to offer their securities provided that (a) the issuer takes reasonable steps to verify that the investors are "accredited investors"; and (b) all purchasers of the securities qualify as "accredited investors" or the issuer reasonably believes that the investors so qualify at the time of the sale of the securities. In other words, there is no restriction on who an issuer can <i>solicit</i>, but an issuer faces restrictions on who is permitted to <i>purchase</i> its securities, if general solicitation or general advertising is used as a means of capital raising. Nevertheless, issuers conducting Rule 506 offerings without the use of general solicitation or general advertising may continue to conduct securities offerings in the same manner as they did previously and aren't subject to the new verification rule.<p>
<b>Changes to Form D Filing.</b> Prior to new regulations going into effect, an issuer selling securities using Rule 506 was required to file a <a href="http://www.sec.gov/about/forms/formd.pdf">Form D</a> no later than 15 calendar days after the first sale of securities in an offering. Under the new rules, issuers that intend to engage in general solicitation as part of a Rule 506 offering would be required to file the Form D (a) at least 15 calendar days before engaging in general solicitation for the offering and (b) within 30 days after completing an offering to update the information contained in the Form D and indicate that the offering has ended.<p>
The scope of Form D is also being expanded to include such additional information as:<ul>
<li>identification of the issuer's website;
<li>expanded information on the issuer;
<li>the offered securities;
<li>the types of investors in the offering;
<li>the use of proceeds from the offering;
<li>information on the types of general solicitation used; and
<li>the methods used to verify the accredited investor status of investors.
</ul><p>
<b>Solicitation Materials.</b> Under the new rules, as part of SEC's monitoring process, issuers will be required to submit written general solicitation materials used in the offering on the SEC website. Materials submitted in this manner would not be available to the general public.<p>
<b>Verification of Accredited Investor Status.</b> The final rules provide a non-exclusive list of methods that issuers may use to satisfy the verification requirement for individual investors. For instance, an issuer may review copies of any IRS form that reports the income of the purchaser and obtain a written representation that the purchaser will likely continue to earn the necessary income in the current year. Alternatively, an issuer may receive a written confirmation from a registered broker-dealer, SEC-registered investment adviser, licensed attorney, or certified public accountant that such entity or person has taken reasonable steps to verify the purchaser's accredited status.<p>
<b>Disqualification for Bad Acts.</b> A restriction in the new rules states that an issuer cannot rely on the Rule 506 exemption if the issuer or any other person covered by the rule had a "disqualifying event." Persons covered by the rule include directors and certain officers, 20% beneficial owners, promoters, and persons compensated for soliciting investors. A "disqualifying event" may be a criminal conviction in connection with the purchase or sale of a security, making of a false filing with the SEC or arising out of the conduct of certain types of financial intermediaries within 10 years of the proposed sale of securities, or other types of misconduct relating to the securities and trading markets. However, an exception from disqualification exists when the issuer can show it did not know and, in the exercise of reasonable care, could not have known, that a covered person with a disqualifying event participated in the offering.<p>
<b>Disqualification for Failure to Make Timely Filings.</b> An issuer is disqualified from using the Rule 506 exemption in any new offering if the issuer or its affiliates did not comply with the Form D filing requirements in a Rule 506 offering. The disqualification would continue for one year beginning after the required Form D filings are made.<p>
<b>Impact of Changes on Startups.</b> The JOBS Act sought to make it easier for a company to find investors and thereby raise capital. Have the regulations that have been adopted by the SEC faithfully followed legislative intent, improving the capital raising experience for companies? Only time will provide us with a definitive answer, but in the meantime, here are some factors that will weigh on the success of the legislation as a game-changer in the industry:<ul>
<li><i>Demand by Investors:</i> whether there in fact exists a large pool of "accredited investors" who would invest (more frequently and in greater amounts than they are currently) given better access to a pipeline of private offerings;
<li><i>Longevity:</i> whether, even if there is an initial spike in investments by new accredited investors, the novelty and excitement will not wear off, especially as initial investor optimism faces the harsh realities of investing in early-stage emerging technology companies;
<li><i>Non-Accredited Investors:</i> whether the "either/or" nature of the new rules, preventing companies from engaging in general solicitation along-side other fundraising activities, potentially to non-accredited investors, will cause companies not to take full advantage of the new rules;
<li><i>Compliance Hardships:</i> whether the requirements for additional filings (e.g., expanded Form D, solicitation materials), state securities laws, as well as the burden placed on the companies to reasonably ascertain the status of their investors as "accredited investors," coupled with disqualification from use of the exemption for failure to timely file, will hamper widespread use of general solicitation as a means of raising capital;
<li><i>Publicity:</i> whether the public disclosures which would be made in the solicitation materials and the associated loss of stealth-mode advantage will have a chilling effect on early-stage companies;
<li><i>Involvement by Sophisticated Investors:</i> whether sophisticated investors, such as VCs and super-angels, will engage in, or be deterred from, participating as investors in offerings through open solicitation;
<li><i>Later Stage Follow On Rounds:</i> whether successful later-stage startups will consider this an appealing alternative to additional rounds of venture capital or institutional investment;
<li><i>New Investments Instruments and Goals:</i> whether access to different types of investors than typical market players will allow previously "unfundable" companies to raise capital - e.g. LLCs, companies with solid revenues, but no exit opportunity, etc.;
<li><i>Higher Valuations:</i> whether increased competition for companies that stand-out in the open fundraising process will drive valuations, such that this will be the preferred means of raising capital even for companies that have access to venture capital money; and
<li><i>Crowdfunding: </i> whether the successes of crowd-funding platforms like <a href="http://www.kickstarter.com/">Kickstarter</a> and <a href="http://www.indiegogo.com/">Indiegogo</a> will be repeated on a larger scale with equity investment in the mix.</ul><p>
The rule amendments become effective on September 23, 2013 (60 days after <a href="https://s3.amazonaws.com/public-inspection.federalregister.gov/2013-16883.pdf">publication in the Federal Register</a>).<p>
Happy company making!<p>
Inna</font>
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<br />
<br />
<table><tbody>
<tr><td><a href="http://www.efimchik.com/"><img alt="White Summers" border="0" height="80" src="http://www.efimchik.com/WS-logo-1.jpg" /></a></td><td> </td><td valign="middle"><span style="font-family: Georgia; font-size: xx-small;"><a href="http://www.efimchik.com/">Inna Efimchik</a>, a Partner at <a href="http://www.white-summers.com/">White Summers Caffee & James LLP</a>, specializes in assisting emerging technology companies in Silicon Valley and beyond, providing incorporation, financing, and licensing services as well as general corporate counseling.</span></td></tr>
</tbody></table>
<span style="font-size: xx-small;"><a href="http://www.blogger.com/blogger.g?blogID=3306261804404551280" name="disclaimer"><b>LEGAL DISCLAIMER</b></a></span><br /><p>
<span style="font-size: xx-small;"><b>Copyright Notice.</b> The copyright for all original content in this post and any linked files is owned by Inna Efimchik. All rights are reserved.</span><br /><p>
<span style="font-size: xx-small;"><b>No Attorney-Client Relationship.</b> This post has been prepared by Inna Efimchik of White Summers for general informational purposes only. The information provided herein does not constitute advertising, a solicitation or legal advice. Neither the availability, transmission, receipt nor use of any information included herein is intended to create, or constitutes formation of, an attorney-client relationship or any other special relationship or privilege. You should not rely upon this post for any purpose without seeking legal advice from licensed attorneys in the relevant state(s).</span><br /><p>
<span style="font-size: xx-small;"><b>Compliance with Laws.</b> You agree to use the information provided herein in compliance with all applicable laws, including applicable securities laws, and you agree to indemnify and hold Inna Efimchik and White Summers Caffee & James LLP harmless from and against any and all claims, damages, losses or obligations arising from your failure to comply.</span><br /><p>
<span style="font-size: xx-small;"><b>Disclaimer of Liability.</b> ALL INFORMATION IS PROVIDED AS-IS WITH NO REPRESENTATIONS OR WARRANTIES, EITHER EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE AND NONINFRINGEMENT. YOU ASSUME COMPLETE RESPONSIBILITY AND RISK FOR USE OF THE INFORMATION IN THIS POST.</span><br /><p>
<span style="font-size: xx-small;">Inna Efimchik expressly disclaims all liability, loss or risk incurred as a direct or indirect consequence of the use of any information provided herein. By using any information in this post, you waive any rights or claims you may have against Inna Efimchik and White Summers Caffee & James LLP in connection therewith. </span><br />
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<br />Startup Voicehttp://www.blogger.com/profile/01289381273991991152noreply@blogger.com0tag:blogger.com,1999:blog-3306261804404551280.post-37384965565743693352013-07-01T12:09:00.000-07:002013-07-01T12:09:40.894-07:00Expertorama Interview - Commonly Asked Startup Questions Answered<font face="Georgia" size="3">In April, when I was in Kiev for iForum, I gave <a href="http://expertorama.com/inna_efimchik1/">an interview (in Russian) to Expertorama</a>. Many of the questions that we covered in the interview, are questions that I answer all the time for new clients. For those who don’t read Russian and might find this material interesting, I am posting a translation of the interview, slightly reworked and reorganized.</font><p>
<font face="Calibri"><font size="3"><b>ABOUT WHITE SUMMERS AND WORKING WITH LEGAL COUNSEL</b><p>
<b>Please tell me a little bit about yourself, your background, and what you do now?</b></font><br>
<font size="2">I am a corporate and securities attorney based in Silicon Valley, California, specializing in representing startups and startup investors.<p>
I obtained my JD from Berkeley Law in 2005 (it was then still called Boalt Hall). After law school I joined the Venture Law Group at Heller Ehrman, where I focused on documenting venture capital investments and working with startups. Heller Ehrman imploded in 2008, and my group joined the emerging companies group at Cooley. After Cooley, I worked briefly for Electronics for Imaging. However, I realized that in-house counsel work – only supporting one client, is not for me. I enjoy working with a number of clients at the same time. I hung out my own shingle, but quickly realized that solo practice did not provide the kind of scale that was needed to support my practice. To get better clients, I needed a bigger platform. Two years ago, I took my practice to <a href="http://www.white-summers.com">White Summers</a>, a boutique corporate and transactional law firm, with 10 attorneys. White Summers has offices in the Silicon Valley (Redwood City, California) and in the Pacific Northwest (Portland, Oregon) and specializes on structuring and formation of legal entities, financings, mergers and acquisitions, and commercial contracts.</font><p>
<font size="3"><b>Do you represent only U.S.-based startups?</b></font><br>
<font size="2">The majority, though not all of our clients, are incorporated in the United States. Where they are physically located, however, is another matter. About half of my clients are headquartered in the CIS countries. One of my partners, Mark White, represents clients from Spain, and throughout Europe. An attorney is joining us, who will be developing the firm’s China practice. Even though many of our clients are located outside of the United States, they all inevitably have some to the U.S. jurisdiction – either they are incorporated in the United States, or they are raising money here, or their products and services target the U.S. market. A common characteristic among our clients is that they must face questions which require answers from a U.S. attorney.<p></font>
<font size="3"><b>When is the right time for a startup to engage legal counsel?</b><br></font>
<font size="2">The best time to seek legal counsel is when the startup begins interacting with the outside world. There are four primary entry points:<p>
<i>Incorporation.</i> When a startup consists of a single founder programming away in his proverbial garage without involving others, it can wait to talk to an attorney. But at a certain point, as the sole founder attracts team members and starts to actually do business, it becomes beneficial to form an entity with limited liability (usually a corporation). Of course, It is possible, even easy, to incorporate without working with a startup attorney, but will it be done right, in a manner most beneficial to the startup given its long- and short-term goals? At the point when a company is ready to form an entity for doing business, it is best to speak to an attorney to get advice on the best jurisdiction and time to incorporate as well as to get the other formation in place, such as stock issuance and transfer of intellectual property.<p>
<i>Commercial Agreements.</i> Another time to seek legal counsel is when the startup is negotiating and about to enter into a commercial relationship. Whether this is a license of technology to or from the startup, a bank loan, or even an agreement with a consultant, it is best to consult a professional, who can review the contract terms, explain the risks associated with the particular agreement, and help to negotiate the best terms for the startup.<p>
<i>Term Sheet.</i> Very frequently I am engaged by a startup that has been presented with a term sheet from an interested investor and needs advice on how to proceed. I provide an analysis of the term sheet and offer a negotiation strategy. My role is to identify the terms that do not conform to best practices in a way detrimental to the startup or the founder, and to review those with the startup. In most of these cases, the founders did not work with legal counsel previously, and are missing important documents. In those situations, I will do corporate cleanup, in other words, generate proper documentation that the investors’ legal counsel will require when they conduct diligence review.<p>
<i>Financing.</i> Finally, sometimes I am engaged at a stage when the term sheet with investors has been signed and the company needs representation for documenting the financing itself.<p></font>
<font size="3"><b>INCORPORATION<p>
What is the best jurisdiction for a startup to incorporate?</b><br></font>
<font size="2">The answer to this question will vary significantly depending on the startup and on its particular plans.
If a startup is planning on looking for funding in the United States, it will need, at the very least, to register a holding company in the United States because by and large American investors will not risk investing in a company registered in Russia or another foreign jurisdiction. They might, nonetheless, invest in a foreign business, but that business must be owned by a company incorporated in United States (and not in the Caymans or in BVI).<p>
That said, not every startup intends to raise funding in the United States. A startup based outside the United States may look to investors locally or in other jurisdictions, such as Europe or Asia, where investors’ jurisdictional requirements are very different from those of U.S. investors.<p>
If there is a desire to enter the American market or to work with American investors, then at least one of the companies in the family of companies that constitutes the business must be incorporated in the United States, preferably in Delaware. In fact, the vast majority of startups that are incorporated in the United States, are incorporated in Delaware.<p></font>
<font size="3"><b>Why Delaware specifically?</b><br></font>
<font size="2">The United States legal system is based on precedent. So the more that cases of a certain type are adjudicated in a jurisdiction, the more established and clear the law is relating to those kinds of cases in that jurisdiction. Historically, Delaware was the state of choice for large corporations and remains the state of choice for publicly-trading companies in the United States. Perhaps this was because of the business-oriented administrative system in place, or because Delaware has a separate court, the Chancery Court, that specializes in corporate and securities matters. Regardless of the original causes, the fact remains that over many years Delaware has acquired a very established body of corporate law and a judicial system that is competent in these matters and reasonably predictable.<p>
But that’s history. Bottom line is that investors are familiar with Delaware. They understand how the Delaware laws affect their rights are shareholders. For investors who have large portfolios, investments in 30 to 50 companies or more, it would be an impossible task, having to track their rights across 15 or 20 jurisdictions. Delaware is the industry-standard, and while you don’t have to always adhere to the industry-standard, if you don’t, you should have a very good reason for swimming against the current.
Are there any benefits to incorporating in a local jurisdiction (outside the U.S.)? <p>
When we are talking about global business, we have to talk about families of companies. Thus, having a legal entity in the jurisdiction where a company is actually located can be very convenient for its operations. For example, it is easier for a company incorporated locally to enter into contracts with employees or to obtain a lease for office space.<p>
For foreign startups that are targeting the U.S. for investment, the local company will typically be a wholly-owned subsidiary of a U.S. corporation. For startups that are looking to U.S. as a market for its products or services, the U.S. company may be a subsidiary or a sister-company. In either case, the relationships between the family of companies that constitute a business can (and should) be documented by commercial agreements.<p></font>
<font size="3"><b>Is it true that one should put off incorporating a venture until it begins generating revenue?</b></font><br>
<font size="2">I would say that waiting to incorporate until a business generates revenue is waiting too long and exposing the founders to too many risks and potential liability. Many startups don’t begin generating revenue for one to two years, or even longer. During that time, they have developers working on valuable intellectual property, officers are meeting with prospective customers, and presumably there is investment being made into the company that is supporting its operations.<p>
If a startup has not incorporated and does not have a corporate bank account, how is it going to take money from investors? It is, of course, always possible to shake hands and accept a suitcase full of cash under the table. However, this is not a good business practice. If something goes very wrong, the founders will be subject to personal liability because they will be found to have been operating as a common law partnership. To minimize liability and make it easier to conduct business, ventures should be incorporated when they business outgrow the embryonic state and begin to have relationships with the outside world, whether it’s taking investment, uploading a mobile application to the AppStore, or hiring engineers.<p>
As I mentioned in the discussion about engaging counsel, if a startup consists of a single founder, that founder can exist for quite a while on his own, without incorporating. However, if there are multiple founders involved and the company is not incorporated, the company structure becomes volatile.<p>
By way of example, let’s say that five founders are working together on a startup without documenting their relationship. By the time an investor enters the scene, only three founders are still working on the project and the remaining founders incorporate the business.<p>
But what about the two founders who left? Because of the lack of proper documentation, we are faced with many questions the answers to which depend on who you ask. Do the founders who left own a share of the company? If so, is it clear what their share is? Is it proportionate to their contribution? Is intellectual property that they created being used by the company? If so, does the company actually have the right to use it? Do the founders have the right to use it as well in a competing venture?<p>
More often than not, an investor will not want to get involved in this type of situation because the risks are too high. Investors require that the cap table and IP ownership be clear and unambiguous. And this kind of a situation is exactly the type of issue that investors worry about uncovering when they conduct legal due diligence of a company.<p>
This is why, the more people that are involved in a project, the more important it is to structure and document everything correctly and in a timely manner. Then, if something does not go according to plan, which is often the case, it’s a minor hiccup that does not derail the entire venture.</font><p>
<font size="3"><b>GETTING READY TO TAKE INVESTMENT<p>
What types of documents should an entrepreneur have in place before talking to investors?</font></b><br>
<font size="2">Technically, you don’t need anything to talk. It is always possible that the investor will be so excited about the investment opportunity that he will offer you a term sheet even when the startup is not incorporated or does not have all the right documents in place.<p>
That can happen even when we are talking about savvy investors. For example, about six months ago we closed a deal in which our client received funding from Khosla Ventures, a top-tier venture fund. Vinod Khosla met the founder at a conference and he believed in the team and the technology. At that time, the company was formed as an LLC. There was nothing else done; it was an empty shell company. The client received a term sheet and we prepared the proper formation and financing documents.<p>
In other words, there is no minimum set of documents that a startup is required to have to engage with investors, if there is a sufficiently high level of interest from the investors. But some investors might see a complete lack of corporate documentation as evidence of a lack of commitment by the founders. After all, if the founders have not been willing to invest even the small amount of their own funds necessary to properly set up the company, they must not have a lot of faith in the success of the project. But, ultimately, the importance that is placed on proper corporate documentation pre- first investment is going to be individual to the investor and to his interest in the company.<p>
If you were to do things “by the book” so to speak, you would form a Delaware corporation, distribute Common Stock to the founding team, impose vesting on the shares, transfer all technology and other intellectual property created by the founders pre-incorporation to the corporation, and enter into agreements with everyone generating intellectual property for the company that make this intellectual property the property of the corporation from the time of creation. That’s the basics. Of course, if the company has any operations, you would properly document those as well.<p></font>
<font size="3"><b>Are investors to be trusted? Or will they include terms in a term sheet that take away the founders’ rights in some sneaky way that founders will likely miss without the help of an attorney?</b><br></font>
<font size="2">It depends on how familiar the founder is with the terminology. I would say that on the whole, investors aren’t trying to purposefully mislead the founders or hide something unpalatable in the term sheet. Investors will include those terms and conditions in the term sheet that are important to them. Founders are expected to understand each term (whether on their own or with the help of an attorney). It is not enough to look at the company valuation, though that is certainly an important term. If a founder is experienced, understands common industry practices and terminology, and has already sold three companies, he can probably handle negotiations with the investor himself. But these types of founders are the exception.</font><p>
<font size="3"><b>Legal services can come with a hefty price tag. If the investors are performing due diligence, who pays the bill?</b></font><br>
<font size="2">Often in an investment transaction, the startup pays not only for its own attorney, but also for counsel for the investors. This is a very standard practice in the U.S. Sometimes if the investment amount is fairly small ($25,000-$100,000) both parties will agree to pay for their own counsel, or more likely, the investor will not engage counsel in the first place.<p>
Of course, if we are talking about a very small investment amount, we work with the company to create minimalistic (yet sufficient) documentation, where the legal fees will make sense in the context of the transaction. Usually, a small investment can be documented as a bridge financing using a convertible promissory note that we’ll prepare for the company, based on the investment terms that it would like to offer to its investors. (For more information about convertible promissory notes, see my <a href="http://startupvoice.blogspot.com/2011/12/annotated-convertible-promissory-note.html">blog post</a> on the topic.)<p>
On the other hand, if we are talking about a financing in excess of $500,000, U.S. investors will expect the startup to pay their legal fees. Depending on the transaction, the cost of services of an attorney from the investor side is usually limited to $10,000 -$35,000. Since the attorney for the startup performs the majority of the work in an investment transaction, the cost for company counsel’s fees averages 1.5 to 2 times the cost of legal services for the investor (assuming comparable law firms with comparable rates on both sides of the transaction). </font><p>
<font size="3"><b>LEGAL PITFALLS<p>
What are some legal difficulties that a startup might face at different stages of its life?</b></font><p>
<font size="2">Legal difficulties often arise when something that needs to be documented is put off for later. Then suddenly it becomes too late, and it’s no longer an item at the bottom of a long to-do list, but a mistake which carries a cost and needs to be fixed. Some mistakes can be fixed afterwards, but it is typically more expensive than doing it right the first time.<p>
Misunderstandings between counterparties also potentially create legal difficulties. If an agreement was rushed, it is possible that it was not thought through fully. After the fact, it may turn out that one party had meant one thing, and the other something else. Sometimes, when documentation wasn’t sufficiently well thought through, the plain text of the contract may not be enough to provide guidance on a point of contention.<p>
Bottom line, good communication between the parties about their expectations with respect to their relationship will help to minimize many potential conflicts and legal difficulties.<p> </font>
<font size="3"><b>Are there issues with startups being sued, for patent infringement among other things?<br></b></font>
<font size="2">We do not run into this problem very frequently. In my practice, I have yet to see a single contract that I’ve drafted litigated. Generally speaking, the documents that we generate are meant to set expectations between counterparties. Even if things don’t go according to plan and one of the parties is dissatisfied with the performance of the other, it does not make a lot of sense to go to court for resolution. Litigation is both a very expensive endeavor and a disruptive one for business. The majority of my clients are not yet at a stage where it makes sense for someone to sue them or where they have the resources to sue someone.
Fortunately, patent infringement claims have not been brought against my clients either. Possibly for the same reasons listed above, but also because, even if their technology potentially infringes a patent, the patent holder simply wouldn’t know about it. Since my clients’ products and services aren’t household names quite yet, someone has to look pretty hard to find them. And then again, there are no deep pockets, so what will a lawsuit, even a successful one, get them? The company will shut down and everyone loses.<p>
What we do see sometimes are trademark disputes. Here’s how that usually goes:<p>
These days, it can be difficult to invent a relevant and interesting company name for which a domain name is still available. But entrepreneurs are creative people, and eventually find a name and a domain. During the name selection process, they will usually run a Google search for their desired name to see if it’s already being used. If the search does not produce relevant hits, or if the only relevant hit is a chicken farm in New Zealand, they proceed with the name. <p>
The problem is that trademark infringement is broader than using the exact name that another company is using in the same space. The test is “likelihood of confusion” so a company with a similar, not identical name, may have a legitimate claim against a newcomer. Without conducting a thorough trademark search, it is hard to catch those similar but not identical names.<p>
Proceeding with our example, sometimes it turns out that there is, in fact, another company, with a similar but not identical name, that has the resources to do trademark policing. This company will start a cease and desist letter campaign against what they perceive as a violator of their trademark. <p>
The first letter is generally from the company that owns the trademark, and reads something like, “We’ve invested a lot of money in our trademark and you are violating our rights! Stop it, immediately.” Then the “offending” company has to go to their attorney and the attorney will write a response explaining how there is actually no trademark violation and that the marks are sufficiently dissimilar that there could be no likelihood of confusion. <p>
The next letter will typically come from a heavy-hitter law firm hired by the trademark holder. It will say something like “You are violating the rights of our client. Stop immediately or we will sue you.” <p>
Whether there truly is infringement, is largely a matter of opinion and interpretation, and any question of opinion or interpretation can be resolved in court – that’s what courts do. But that’s a very expensive way to get an answer. If the dispute is between a small startup and an established company with a budget allocated specifically towards IP rights enforcement, the startup will have a difficult decision to make. One option is for the startup to change its name. But that means they would have to come up with another, non-infringing name that’s just as good, find a domain name that’s available, and wave goodbye to the time and money spent on developing this brand. Another option is to continue the letter exchange and hope that the other company is bluffing when they say they’ll sue. That’s a big risk, calling their bluff!<p>
To reduce the risk of facing this situation, prior to definitively committing to a name, (1) have your attorneys conduct a thorough trademark search for it, and, if it comes back clear (2) register a trademark for it. <p></font>
<font size="3"><b>GENERAL ADVICE<p>
What advice can you give to new/novice entrepreneurs?</b></font><br>
<font size="2">The most important piece of advice that I can give is to do what you love! The right motivation to become an entrepreneur is that you cannot do anything else, not because you don’t have the skills, but because you have identified an important problem, and have a solution to that problem that is far superior to what’s out there now. Being an entrepreneur, running a startup, you’ll work harder than you ever have in your life. It's certainly not for everyone, and if you’re going to take the plunge and go for it, be sure you are ready and that this is right for you.<p>
Second, you need to be running a continuous assessment of what you bring to the venture. You have to keep track of the components you need for success and be honest about what’s missing. Sometimes, entrepreneurs will start a project on their own and develop a strong personal attachment to it. It is theirs and theirs alone. They don’t want to bring on additional founding team members because they don’t want to share the equity or have to listen to other opinions. That kind of an approach can work for some founders, but it can backfire as well. Two heads are better than one and it is good to be challenged, even if it’s not as comfortable as being king in your own little kingdom. Working alone results in a skewed, one-sided vision.<p>
Founders should seek out other talented like-minded people who will also become obsessed with the project. The more people that are excited about your idea, the more chances you have of persuading clients, customers, investors and business partners to be excited about it as well.<p>
Don’t be paranoid that someone will steal your idea. Don’t be reluctant to seek advice from experts or to issue an equity stake to your partners. Running a startup is a collaborative process. All successful companies are developed by a team. No matter how brilliant an entrepreneur is, he cannot run a successful startup without a team. There will inevitably be gaps, and a strong team can fill those gaps. Every successful entrepreneur I have talked to has said “hire people smarter than yourself to be on your team”!
Lastly, I would say, constantly check and recheck whether the project you are working on is relevant! Does it provide a solution to a real problem? Solving a fictional problem is truly a thankless task.<p>
Happy company making!<p>
Inna</font></font>
<br />
<br />
<br />
<table><tbody>
<tr><td><a href="http://www.efimchik.com/"><img alt="White Summers" border="0" height="80" src="http://www.efimchik.com/WS-logo-1.jpg" /></a></td><td> </td><td valign="middle"><span style="font-family: Georgia; font-size: xx-small;"><a href="http://www.efimchik.com/">Inna Efimchik</a>, a Partner at <a href="http://www.white-summers.com/">White Summers Caffee & James LLP</a>, specializes in assisting emerging technology companies in Silicon Valley and beyond, providing incorporation, financing, and licensing services as well as general corporate counseling.</span></td></tr>
</tbody></table>
<span style="font-size: xx-small;"><a href="http://www.blogger.com/blogger.g?blogID=3306261804404551280" name="disclaimer"><b>LEGAL DISCLAIMER</b></a></span><br /><p>
<span style="font-size: xx-small;"><b>Copyright Notice.</b> The copyright for all original content in this post and any linked files is owned by Inna Efimchik. All rights are reserved.</span><br /><p>
<span style="font-size: xx-small;"><b>No Attorney-Client Relationship.</b> This post has been prepared by Inna Efimchik of White Summers for general informational purposes only. The information provided herein does not constitute advertising, a solicitation or legal advice. Neither the availability, transmission, receipt nor use of any information included herein is intended to create, or constitutes formation of, an attorney-client relationship or any other special relationship or privilege. You should not rely upon this post for any purpose without seeking legal advice from licensed attorneys in the relevant state(s).</span><br /><p>
<span style="font-size: xx-small;"><b>Compliance with Laws.</b> You agree to use the information provided herein in compliance with all applicable laws, including applicable securities laws, and you agree to indemnify and hold Inna Efimchik and White Summers Caffee & James LLP harmless from and against any and all claims, damages, losses or obligations arising from your failure to comply.</span><br /><p>
<span style="font-size: xx-small;"><b>Disclaimer of Liability.</b> ALL INFORMATION IS PROVIDED AS-IS WITH NO REPRESENTATIONS OR WARRANTIES, EITHER EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE AND NONINFRINGEMENT. YOU ASSUME COMPLETE RESPONSIBILITY AND RISK FOR USE OF THE INFORMATION IN THIS POST.</span><br /><p>
<span style="font-size: xx-small;">Inna Efimchik expressly disclaims all liability, loss or risk incurred as a direct or indirect consequence of the use of any information provided herein. By using any information in this post, you waive any rights or claims you may have against Inna Efimchik and White Summers Caffee & James LLP in connection therewith. </span><br />
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<br />Startup Voicehttp://www.blogger.com/profile/01289381273991991152noreply@blogger.com4tag:blogger.com,1999:blog-3306261804404551280.post-76476033664134188612013-06-28T17:26:00.001-07:002013-06-28T17:33:59.088-07:00Getting to a Reasonable Cap Table: How Many Shares to Authorize Initially? What Classes of Shares to Authorize? How Many Shares to Issue to Founders?<font face="Georgia" size="3">A new corporation is formed when a <a href="http://corp.delaware.gov/incstk09.pdf"><b>Certificate of Incorporation</b></a> in Delaware (or <a href="http://www.sos.ca.gov/business/corp/pdf/articles/arts-gs.pdf"><b>Articles of Incorporation</b></a> in California and most other states) are filed with the Secretary of State. The Certificate of Incorporation must specify the total number of shares of each class that the corporation is <i>authorized</i> to issue. The Certificate of Incorporation <i>does not</i> specify how many shares the corporation has <i>issued</i> or who the stockholders are.</font><p>
<font face="Calibri">
<font size="3"><b>What does it mean for shares to be <i>authorized</i>?</b></font><br>
<font size="2">Vocabulary is important here. The <i>authorized</i> number of shares that goes in the Certificate of Incorporation is the number of shares that <i>the Board of Directors may issue without amending the Certificate of Incorporation</i>. By contrast to <i>authorized</i> shares, <i>issued</i> shares are shares that have actually been sold and are outstanding.<p>
Amending the Certificate of Incorporation to increase the authorized number of shares requires a vote of the stockholders of the corporation. It also requires a state filing and associated fees. This is somewhat tedious. When thinking about the number of shares that you need to authorize, plan so that number of shares initially authorized is sufficient for your purposes for the foreseeable future, until a significant event in the life of the corporation, such as a financing, for example, when you will go through the trouble of amending the Certificate of Incorporation.<p></font>
<font size="3"><b>What classes of shares should be authorized initially?</b></font><br>
<font size="2">Generally speaking, unless the company is being incorporated concurrently with taking an investment, only Common Stock needs to be authorized.<p>
While online searches for sample Certificates of Incorporation may return some Certificates of Incorporation with "blank check" Preferred Stock, the best practice for a startup is not to include it. Investors keep a close eye on the company's authorized and unissued shares of each class and series, allowing only a very small cushion.<p>
This is because a stockholder's share in a company is calculated as such stockholder's shares divided by the sum of all issued and outstanding shares of the company and the shares reserved under the company's stock plan. Note that a stockholder's share is <i>not</i> based on the company's authorized shares. Therefore, if a significant cushion exists, an investor's share can be easily diluted by the company issuing shares from the pool of authorized shares, without seeking the investor's consent.<p>
While most investors expect to be diluted at some future time, for example, in connection with the next investment into the company, they try to structure their investment in a way to delay the dilution to a time when the value of the company has increased as well. To better understand dilution, read my <a href="http://startupvoice.blogspot.com/search/label/dilution">blog post on dilution</a>.<p></font>
<font size="3"><b>How many shares should be authorized initially?</b></font><br>
<font size="2">For my startup clients, I typically recommend that 10,000,000 shares of Common Stock be initially authorized. There is no magic to this number, but it tends to result in a Series A price per share that is of a familiar/standard magnitude.<p>
Typically, at a Series A stage, a startup is going to be valued between $2M and $12MM, broadly speaking. At the time of investment, the Series A price will be calculated as pre-money valuation divided by the total number of then issued and outstanding shares, plus the shares reserved under the company's stock plan (including an increase to the stock plan reserve for the Series A round). Simplistically, a $10MM pre-money valuation, divided by $10MM shares (which include shares already issued to the founding team and the unissued shares reserved under the stock plan), equals a Series A price of $1.00. Individual numbers will vary of course, but it makes it easy and convenient to stick to conventions, so that the Series A price per share isn't 1/100 of a dollar nor hundreds of dollars.<p>
There is an additional consideration. When a startup is recruiting, optically, it is better to be offering 15K, 30K, or 75K shares to employees than 15, 30, or 75 shares. It requires an additional conversation with the recruits about the company's capital structure, about the number of shares that are authorized, and about why that is the case. Most likely, a company that starts out with a very small number of shares will end up doing a stock split at a future point. It's not particularly difficult, but it complicates matters. If you can authorize the "correct" number of shares from the start, the number that will make your life easier, why wouldn't you?<p>
I recently heard from a company that was incorporated by their CPA, that they were advised to authorize no more than 5,000 shares. The logic behind this suggestion was to save the company money on <a href="http://corp.delaware.gov/frtaxcalc.shtml">Delaware franchise taxes</a>. It is true that using the "authorized shares method" a company's franchise tax liability can be as low as $75.00 per year for so long as the company does not authorize more than 5,000 shares. And for a regular small business (not a startup), that's a perfectly acceptable logic to follow. But startups need room to grow. No VC will understand the logic behind keeping the authorized share number extremely low to save a couple hundred bucks. It will seem very short-sighted to them, not smart and frugal. A typical startup uses the "assumed par value capital" method to calculate its Delaware franchise tax liability. The minimum tax that may be owed under the assumed par value capital method of calculation is $350.00. The actual formula to calculate franchise tax liability using this method can be simplified to the following:
<ul><i><b>Total Gross Assets</b></i> (as reported on the U.S. Form 1120, Schedule L) X (<i><b>Authorized Shares</b></i> / <i><b>Issued Shares</b></i>) X <i><b>$0.00035</b></i>.</ul><p>
<font size="3"><b>How many shares then should the founders <i>issue</i> to themselves initially?</b></font><br>
<font size="2">Founders have a very natural inclination to want to issue amongst themselves all the shares that they authorize in the initial Certificate of Incorporation. However, if the company plans to use equity in the near-term to incentivize its consultants and employees, then a reserve of authorized but unissued shares should be left for this purpose. A typical reserve, even without a formal stock plan, is 10-30% depending on the company's hiring plans. So, in our typical scenario, the founder or the founders would be issued, in the aggregate between 7M and 9M shares of Common Stock, with 1M to 3M authorized and unissued shares remaining available for future issuance.<p>
Note that the share reserve needs to be sufficient for the company's hiring needs until the next time that the Certificate of Incorporation is amended, and as we've said before, a natural time for the Certificate of Incorporation to be amended is in connection with an equity financing.<p>
Finally, just a reminder that for founder shares to be properly issued, the following formalities should be observed:
<ul><li>there needs to be board authorization (either at a meeting or by written consent) for the issuance,
<li>there should be a stock purchase agreement (preferably with vesting) documenting the sale and issuance of the shares,
<li>there must be consideration in some form paid for the shares (by assignment of technology is very common),
<li>stock certificates should be prepared and signed to evidence ownership of the shares (but kept in escrow by company secretary, and not distributed to the stockholder, if the shares are subject to vesting),
<li>the sale should be made in compliance with both a federal and a state securities exemption (which sometimes require a filing, like the <a href="http://www.corp.ca.gov/LOEN/pdf/25102f.pdf">Section 25102(f) filing in California</a>), and
<li>there may need to be a 83(b) filing made as well, if shares are being issued subject to vesting.<p></ul></font>
Happy company making!<p>
Inna</font>
<br />
<br />
<br />
<table><tbody>
<tr><td><a href="http://www.efimchik.com/"><img alt="White Summers" border="0" height="80" src="http://www.efimchik.com/WS-logo-1.jpg" /></a></td><td> </td><td valign="middle"><span style="font-family: Georgia; font-size: xx-small;"><a href="http://www.efimchik.com/">Inna Efimchik</a>, a Partner at <a href="http://www.white-summers.com/">White Summers Caffee & James LLP</a>, specializes in assisting emerging technology companies in Silicon Valley and beyond, providing incorporation, financing, and licensing services as well as general corporate counseling.</span></td></tr>
</tbody></table>
<span style="font-size: xx-small;"><a href="http://www.blogger.com/blogger.g?blogID=3306261804404551280" name="disclaimer"><b>LEGAL DISCLAIMER</b></a></span><br /><p>
<span style="font-size: xx-small;"><b>Copyright Notice.</b> The copyright for all original content in this post and any linked files is owned by Inna Efimchik. All rights are reserved.</span><br /><p>
<span style="font-size: xx-small;"><b>No Attorney-Client Relationship.</b> This post has been prepared by Inna Efimchik of White Summers for general informational purposes only. The information provided herein does not constitute advertising, a solicitation or legal advice. Neither the availability, transmission, receipt nor use of any information included herein is intended to create, or constitutes formation of, an attorney-client relationship or any other special relationship or privilege. You should not rely upon this post for any purpose without seeking legal advice from licensed attorneys in the relevant state(s).</span><br /><p>
<span style="font-size: xx-small;"><b>Compliance with Laws.</b> You agree to use the information provided herein in compliance with all applicable laws, including applicable securities laws, and you agree to indemnify and hold Inna Efimchik and White Summers Caffee & James LLP harmless from and against any and all claims, damages, losses or obligations arising from your failure to comply.</span><br /><p>
<span style="font-size: xx-small;"><b>Disclaimer of Liability.</b> ALL INFORMATION IS PROVIDED AS-IS WITH NO REPRESENTATIONS OR WARRANTIES, EITHER EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE AND NONINFRINGEMENT. YOU ASSUME COMPLETE RESPONSIBILITY AND RISK FOR USE OF THE INFORMATION IN THIS POST.</span><br /><p>
<span style="font-size: xx-small;">Inna Efimchik expressly disclaims all liability, loss or risk incurred as a direct or indirect consequence of the use of any information provided herein. By using any information in this post, you waive any rights or claims you may have against Inna Efimchik and White Summers Caffee & James LLP in connection therewith. </span><br />
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Startup Voicehttp://www.blogger.com/profile/01289381273991991152noreply@blogger.com4tag:blogger.com,1999:blog-3306261804404551280.post-25793263590736202812013-05-20T19:29:00.000-07:002013-05-20T19:29:03.214-07:00Coming to the Silicon Valley to Raise Money<font face="Georgia" size="3">Recently one of our clients, Ruslan Pichugin, CEO of <a href="http://www.yoctogames.com/">Yocto Games</a> based in Moscow, Russia, came to the Silicon Valley for a short exploratory trip. We thought Mr. Pichugin’s experience may be interesting to other startuppers out there, who are contemplating a trip to the Silicon Valley to raise money, network, or both, and Mr. Pichugin kindly agreed to answer a few questions for us.</font><br><p>
<p>
<font face="Calibri" size="2"><b>(1) What were some of your goals in coming to the US? Do you consider the trip a success in light of those goals?</b><p>
I had multiple goals for this trip. The most important goal was to incorporate my company, Yocto Games, in Delaware. In parallel, I wanted to learn as much as I could about the legal and financial aspects of forming and funding a corporation in the US. I am happy to say that I accomplished this goal.<p>
My second goal in order of importance was to find investors interested in my company. I realized that in two to three weeks (17 days in total) it would be next to impossible to find funding, but I wanted to at least start that process. I met several people potentially interested in investing in my company, but our discussions are still at an early stage and it may take some time for us to reach final agreement on terms. So I consider this goal 50% achieved, but taking into account the fact that I did not know anyone in Silicon Valley when I arrived and was only here for a few weeks, I feel that this is not a bad result.<p>
There was a third goal, and that was to see American life. I was able to meet with people from many different walks to life – businessmen, computer programmers, lawyers, chefs, doctors, and athletes. I was happy to discover that life in America is not too different from what I had seen on TV!<p>
Overall, I gained a good deal of experience, made some great connections, and consider my trip a success.<p>
<b>(2) Where did you stay during your trip (hotel, city)? Are you happy with your choice of the hotel and your geographical location?</b><p>
I stayed at the <a href="http://www.pacificeurohotel.com/">Pacific Euro Hotel</a> on Main Street in Redwood City. The cost for a room without a shower (yes, those kinds of rooms exist!) is $65 per night, but I stayed in a room with amenities, which cost me $80 per night.<p>
This hotel works well for a business trip, as a place to crash at night. But it’s certainly no Ritz Carlton.<p>
My hotel was centrally located, only a five-minute leisurely walk to the Redwood City CalTrain station. And since both San Francisco and San Jose are only a 40-minute train ride away from the Redwood City station, I thought geographically I was in a great spot. <p>
<b>(3) Tell us about your cell phone situation during your trip.</b><p>
Initially I used my Moscow Beeline (Билайн) phone. It worked well here, but because of roaming I ended up spending something like $250 in just a few days. After that, I stopped using it and bought a local phone. I settled on a $35 “dumb” phone from AT&T. As a result, calls home became one-third of the price I was paying previously, and local calls barely cost anything at all. Over my stay, I spent about $60 on this service.<p>
<b>(4) I know you used public transportation and taxi to get around and did not rent a car. In retrospect, would you do anything differently? </b><p>
I think that for a first visit to the U.S., it is beneficial to walk and to try to use public transportation. It’s harder, but since I wanted to get a feeling for how people live here, it turned out not to be so hard after all. In Moscow, I am behind the wheel almost the entire day when I have to go somewhere, and it takes a remarkable amount of time and energy. Next time, I will definitely rent a car, but without knowing the local roads, I would have been anxious to rent a car on my first trip here.<p>
Although I must say, local driving brings a smile to my face. I am certain that anyone who is used to driving in Moscow would feel in the Silicon Valley not unlike a world champion in swimming would feel competing at a YMCA against their juniors’ team.<p>
<b>(5) What were some of the most useful events that you attended in the Silicon Valley? What would you recommend to entrepreneurs coming to Silicon Valley with an exploratory mission like your own – where and how should they look for useful activities?</b><p>
The best events are ones where you can meet interesting people and useful contacts. Where to find them? I think you can find them at any startup event. The most important thing is to attend as many events as possible and to be open to meeting people. Of course, the group organizing the event and the event “topic” is important too, but you can meet very interesting people at a not-so-interesting event.<p>
For example, I attended an event where technology companies were recruiting software engineers, a kind of specialized job fair. So in truth, I had no business being there. But I spent a half an hour talking to an entrepreneur from Berlin, who told me about the startup scene in Europe (which turned out to be very useful information subsequently in meetings with other people). Then I met a doctor, maybe in her 60s, who is working hard on her healthcare startup. I learned a lot about the healthcare industry from her, and made an interesting new contact. Finally, I met some people from a large gaming company, one of whom may be interested in investing in my project.<p>
So you can never know ahead of time what the best meetups or events will be. The best approach is to be open to the opportunities all around you, and to meet as many people as possible.<p>
<b>(6) In hindsight, is there anything you did that you realize was a waste of time that could have been avoided?</b><p>
My approach is that any experience can be useful (so long as it’s not harmful to your health). And often it will take some time to know what the value of a particular experience really was, so I never rush to dismiss an experience as a waste of time. Time will tell! <p>
<b>(7) What general advice would you give someone coming to Silicon Valley in your footsteps?</b><p>
The most important piece of advice I have to offer is to have a contact person who can offer advice and assistance. I met with Inna Efimchik, and she was able to help me find many different startup conferences and events to attend, as well as incorporate my company in Delaware. Other than that:<p>
<ul><li>Check out <a href="http://www.meetup.com/">www.meetup.com</a>. This is a great website that allows you to find, and register for, events both in advance of and during your trip.<p>
<li>Be prepared to step outside your comfort zone and actively approach people that you want to talk to at events. Talk to everyone (almost everyone) that you meet.<p>
<li>Get a local phone! Not only will it save you money, it will make it easier to exchange information with new contacts.<p>
<li>Everyone in the Silicon Valley uses LinkedIn, so before your trip, make sure that you have a LinkedIn profile (and it’s up-to-date).<p>
<li>Don’t forget to bring with you business cards printed in English.<p>
<li>Be prepared that prices in the Silicon Valley are roughly equivalent to prices in Moscow, on everything (food, taxi, mobile service).<p>
<li>The best burgers are at Five Guys! They are better than Carl’s Jr., In-n-Out, McDonalds and Wendy’s!</ul><p>
Lastly, be prepared for new experiences and enjoy!<p>
Thank you, Ruslan! If you'd like to hear more from Ruslan, he also gave an interview to Silicon Valley Voice (in Russian) which can be viewed here: <a href="http://www.youtube.com/watch?v=twdsxDTM7mE">segment 1</a> and <a href="http://www.youtube.com/watch?v=tpjc6mJ5UfU">segment 2</a>.<p>
Happy company making!<p>
Inna
<br />
<br />
<br />
<table><tbody>
<tr><td><a href="http://www.efimchik.com/"><img alt="White Summers" border="0" height="80" src="http://www.efimchik.com/WS-logo-1.jpg" /></a></td><td> </td><td valign="middle"><span style="font-family: Georgia; font-size: xx-small;"><a href="http://www.efimchik.com/">Inna Efimchik</a>, a Partner at <a href="http://www.white-summers.com/">White Summers Caffee & James LLP</a>, specializes in assisting emerging technology companies in Silicon Valley and beyond, providing incorporation, financing, and licensing services as well as general corporate counseling.</span></td></tr>
</tbody></table>
<span style="font-size: xx-small;"><a href="http://www.blogger.com/blogger.g?blogID=3306261804404551280" name="disclaimer"><b>LEGAL DISCLAIMER</b></a></span><br /><p>
<span style="font-size: xx-small;"><b>Copyright Notice.</b> The copyright for all original content in this post and any linked files is owned by Inna Efimchik. All rights are reserved.</span><br /><p>
<span style="font-size: xx-small;"><b>No Attorney-Client Relationship.</b> This post has been prepared by Inna Efimchik of White Summers for general informational purposes only. The information provided herein does not constitute advertising, a solicitation or legal advice. Neither the availability, transmission, receipt nor use of any information included herein is intended to create, or constitutes formation of, an attorney-client relationship or any other special relationship or privilege. You should not rely upon this post for any purpose without seeking legal advice from licensed attorneys in the relevant state(s).</span><br /><p>
<span style="font-size: xx-small;"><b>Compliance with Laws.</b> You agree to use the information provided herein in compliance with all applicable laws, including applicable securities laws, and you agree to indemnify and hold Inna Efimchik and White Summers Caffee & James LLP harmless from and against any and all claims, damages, losses or obligations arising from your failure to comply.</span><br /><p>
<span style="font-size: xx-small;"><b>Disclaimer of Liability.</b> ALL INFORMATION IS PROVIDED AS-IS WITH NO REPRESENTATIONS OR WARRANTIES, EITHER EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE AND NONINFRINGEMENT. YOU ASSUME COMPLETE RESPONSIBILITY AND RISK FOR USE OF THE INFORMATION IN THIS POST.</span><br /><p>
<span style="font-size: xx-small;">Inna Efimchik expressly disclaims all liability, loss or risk incurred as a direct or indirect consequence of the use of any information provided herein. By using any information in this post, you waive any rights or claims you may have against Inna Efimchik and White Summers Caffee & James LLP in connection therewith. </span><br />
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</font>Startup Voicehttp://www.blogger.com/profile/01289381273991991152noreply@blogger.com2tag:blogger.com,1999:blog-3306261804404551280.post-9350300909114582462013-04-28T23:50:00.000-07:002013-04-28T23:50:47.743-07:00FLIP IT! A Guide to Flipping Your Company to the U.S.<font size="2" face="Georgia"><b>What is a Flip?</b> A flip (the “Flip”) is a legal mechanism by which all of the equity interests of one company (the “Foreign Co”) are transferred to another company (the “US Corp”) and all of the former equity interest holders in the Foreign Co receive proportionate equity interests in the US Corp instead. As a result of a Flip, the Foreign Co becomes a wholly-owned subsidiary of the US Corp. The Foreign Co continues to exist and often continues its operations. The only difference is that it now has a single owner, the US Corp. <p>
<b>How Does It Work?</b> Let’s see how a Flip works using a fictional company, Mobilka Rus Ltd.<p>
<u>Background</u>. Mobilka Rus is a limited liability company formed under the laws of the Russian Federation. It has created and owns intellectual property and released a mobile app. It has raised seed capital from an investor in Russia, and has hired a few employees in Russia as well. Mobilka Rus is owned by its two founders, Dima and Sergey, who each hold 40% of Mobilka Rus, and by their investor, Dengami Investments, which owns 20%.<p>
<u>Step 1</u>. The first step to performing a Flip is to incorporate a brand new corporation in the U.S. Our friends at Mobilka Rus incorporate Mobilka US Corporation in Delaware. Mobilka US gets a set of bylaws, a board of directors that Dima, Sergey and Dengami Investments all agree on (composed of 3 members, one for each of Mobilka’s owners) and is ready to go.<p>
<u>Step 2</u>. Next, Dima, Sergey and Dengami Investments enter into a Share Exchange Agreement with Mobilka US, pursuant to which they transfer their entire ownership interest in Mobilka Rus to Mobilka US, such that Mobilka US becomes the 100% owner of Mobilka Rus. In exchange, Mobilka US issues shares of its stock to Dima, Sergey, and Dengami Investments based on their ownership interest in Mobilka Rus. Therefore, Dima and Sergey get 4,000,000 shares of Common Stock of Mobilka US each, and Dengami Investments gets 2,000,000 shares of Series Seed Preferred Stock. The ownership percentages are preserved, only now, instead of sharing ownership of Mobilka Rus, Dima, Sergey and Dengami Investments are holders of 100% of the issued shares of Mobilka US, which, in turn, is the holder of 100% of the ownership interest in Mobilka Rus.<p>
<u>Step 3</u>. Then the ownership of Mobilka Rus must be changed on the official share register of Mobilka Rus, which requires several administrative steps.<p>
<u>Step 4</u>. Having completed the Flip, Mobilka US approaches VCs in the US to raise money. The investment will be into the “business” of Mobilka Rus, since Mobilka US doesn’t have any operational business, but they will make the investment by purchasing Preferred Stock in Mobilka US, which is a Delaware corporation with a familiar structure and feel.<p>
<b>Why Do Companies Flip?</b> Companies interested in orchestrating a Flip generally share the following characteristics:
<ul>
<li>they are organized in a foreign jurisdiction;
<li>they are operational and may already have raised capital, created intellectual property, hired employees, and/or begun selling products; and
<li>they are interested in creating a U.S. presence that will allow them to (a) raise capital in the U.S. and/or (b) to move some of the operations to the U.S.</ul><p>
Following a Flip, the Foreign Co will continue its operations in the foreign jurisdiction without interruption, while the US Corp will either become a fully-operational U.S. headquarters or merely a holding company, depending on the Foreign Co, its business, and plans.<p>
In our example above, Mobilka Rus can continue to operate in Russia, hire more Russian employees, and continue to develop intellectual property by building out its existing app or creating new ones. The only difference is that Mobilka Rus is now owned by Mobilka US. This enables U.S. investors, who are conservative and usually reluctant to invest in a Russian (or almost any other foreign) company directly, to invest in Mobilka US, which is a U.S. corporation, and to have the comfort that they are investing in the business of Mobilka Rus.<p>
Happy company making!<p>
Inna
<br />
<br />
<br />
<table><tbody>
<tr><td><a href="http://www.efimchik.com/"><img alt="White Summers" border="0" height="80" src="http://www.efimchik.com/WS-logo-1.jpg" /></a></td><td> </td><td valign="middle"><span style="font-family: Georgia; font-size: xx-small;"><a href="http://www.efimchik.com/">Inna Efimchik</a>, a Partner at <a href="http://www.white-summers.com/">White Summers Caffee & James LLP</a>, specializes in assisting emerging technology companies in Silicon Valley and beyond, providing incorporation, financing, and licensing services as well as general corporate counseling.</span></td></tr>
</tbody></table>
<span style="font-size: xx-small;"><a href="http://www.blogger.com/blogger.g?blogID=3306261804404551280" name="disclaimer"><b>LEGAL DISCLAIMER</b></a></span><br /><p>
<span style="font-size: xx-small;"><b>Copyright Notice.</b> The copyright for all original content in this post and any linked files is owned by Inna Efimchik. All rights are reserved.</span><br /><p>
<span style="font-size: xx-small;"><b>No Attorney-Client Relationship.</b> This post has been prepared by Inna Efimchik of White Summers for general informational purposes only. The information provided herein does not constitute advertising, a solicitation or legal advice. Neither the availability, transmission, receipt nor use of any information included herein is intended to create, or constitutes formation of, an attorney-client relationship or any other special relationship or privilege. You should not rely upon this post for any purpose without seeking legal advice from licensed attorneys in the relevant state(s).</span><br /><p>
<span style="font-size: xx-small;"><b>Compliance with Laws.</b> You agree to use the information provided herein in compliance with all applicable laws, including applicable securities laws, and you agree to indemnify and hold Inna Efimchik and White Summers Caffee & James LLP harmless from and against any and all claims, damages, losses or obligations arising from your failure to comply.</span><br /><p>
<span style="font-size: xx-small;"><b>Disclaimer of Liability.</b> ALL INFORMATION IS PROVIDED AS-IS WITH NO REPRESENTATIONS OR WARRANTIES, EITHER EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE AND NONINFRINGEMENT. YOU ASSUME COMPLETE RESPONSIBILITY AND RISK FOR USE OF THE INFORMATION IN THIS POST.</span><br /><p>
<span style="font-size: xx-small;">Inna Efimchik expressly disclaims all liability, loss or risk incurred as a direct or indirect consequence of the use of any information provided herein. By using any information in this post, you waive any rights or claims you may have against Inna Efimchik and White Summers Caffee & James LLP in connection therewith. </span><br />
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</font>Startup Voicehttp://www.blogger.com/profile/01289381273991991152noreply@blogger.com7tag:blogger.com,1999:blog-3306261804404551280.post-25275886224650034482013-01-20T23:51:00.001-08:002013-04-28T23:48:41.572-07:00Roadmap to Finding Venture Capital Investors <font face="Georgia" size="2">Many of our clients begin working with us when they are raising capital. Often they have raised some initial capital from angel investors in their country and are now looking to raise their next round from institutional investors in the United States.<p>
And while some of the companies we work with are founded by very savvy business people, who could teach all of us a few things about raising capital, others are started by brilliant engineers with ground-breaking technology, but who don’t know how to approach the search for investment capital, in a new country in some cases.
If you think you might be in that second category, here’s a roadmap that we’ve seen work well. <p>
<b>Build First.</b> You should build as much as you can, and go as far as you can go with your company, using bootstrap funds or angel investment before you try to raise venture capital.
<ul><li><i>Likelihood of Success.</i> If you have a product and some initial traction, you will have a far better story to tell the investors than if you just have a great idea or you are several months into developing a prototype. As you may have heard, there are many great ideas, some of them very similar even, and what makes a difference is execution. The better that you are able to demonstrate the ability of your team to execute, the more likely it is that you will get venture funding. Also, if you have skin in the game (bootstrap funds) and have attracted angel funding (friend and family), there is a greater chance that the investors will take you seriously than someone who can’t even convince those close to him to invest and who isn’t willing to risk any of his own money.<p>
<li><i>Valuation.</i> The earlier that an entrepreneur brings in outside investment, the lower a valuation he can expect to receive, and therefore, the higher a percentage of his company he will have to give up for the same investment amount. Certainly a founder shouldn’t get obsessive about his ownership stake in the company in a way that will impede his ability to attract a strong team or investors. And certainly it is better to have a smaller percent of a larger (more valuable) pie than a greater percentage of a smaller pie. But if the founder has the resources to get more done prior to going out for capital, it is the smart thing to do in term of maximizing both control and ownership.</ul><p>
<b>Get Organized.</b> In preparation for raising capital, you should get your corporate house in order.
<ul><li><i>Why?</i> Being organized will show the investors that you are serious about your venture and you understand the rules of engagement. It will avoid conflicts about ownership of intellectual property and equity, which can destroy a young company and the prospects of getting funding. Finally, it will streamline the investment process and the investors’ due diligence review when you do find those willing investors, because you won’t have to do last minute corporate clean-up, scrambling to organize at the last minute.<p>
<li><i>What to Do.</i> If you haven’t already done so, you should (1) incorporate your company, (2) distribute equity interests in accordance with promises you made to your existing team and early investors, and (3) make sure that all intellectual property belongs to the company (and not individually to members of the team). An attorney experienced in working with startups will be able to walk you through everything that you need.</ul><p>
<b>Research & Presentation Materials.</b> To secure VC meetings and to succeed in them you have to be prepared. If a VC knows more about your space than you do, he will never invest. So make sure you do the research.
<ul><li><i>What should I research?</i> For sure, know the size of your market. Know who the players are, both as far as your competition goes and your potential strategic partners. Know what market share your competitors hold, exits your competitors have had, what funding they have raised, and at what valuations. Know your monetization model (even if you pivot later as many companies do). And finally, know the investors in your space, their strengths, their specializations, their reputation, and the stage at which they like to invest. When you meet with investors, they will invariably ask why you are interested in getting funded by their fund, and you had better have a good, very specific answer!<p>
<li><i>Materials.</i> Once your research is done, prepare an executive summary, a slide deck to take into meetings, and if you have the resources, a short video that demos your product. The video is to send together with your executive summary to investors. In this day and age of information overload, it will be hard to get an investor to read any materials you send with any amount of attention. Videos have a way of engaging the viewer and elicit an emotional response. Once thus engaged, there is a good chance that your executive summary will get a more thorough review.</ul><p>
<b>Introductions.</b> To get meetings with VCs, try to obtain warm introductions to the investors who invest in your space and in companies at your stage from your network. If your network doesn’t have the right contacts, don’t be shy and grow your network. Go to industry events. Read articles by industry savants and try to engage with them by commenting on their posts or sending them emails. Perhaps you will even be able to bring a few of them on as advisors. Talk to your lawyers, your accountants, your bankers. Utilize tools available to you, like alumni network groups, LinkedIn, or Facebook. Sometimes cold emails to a fund work, but that is the exception rather than the rule. Note that the best-regarded and most effective intros are from entrepreneurs that the VC has already funded. VCs are very busy people with a lot of noise being directed their way. So do what you can to make sure your executive summary gets placed at the top of the pile to the folks that you want to see it.<p>
<b>Relationship.</b> Once you have had an initial meeting with a VC, don’t expect him to send you a term sheet. Remember that investors are in it for the long-haul. Would you expect a woman to decide to marry you after your first date? Before an investor commits millions of dollars to your venture and before he commits to supporting your company over the next 6, 8, or 10 years, he will want to get to know you as a person. You should want this as well! So treat each meeting as adding valuable connections to your network, connections that you should be willing to work to maintain. Don’t just ask for money. Ask for advice. Even if a VC does not invest in your company in your initial financing round, maintaining a relationship can pay dividends down the road when he invests in the second round or makes a valuable introduction because you’ve been keeping him updated on your progress.<p>
A final note, to keep in mind that only a very, very small number of companies, generally believed to be between 0.1% and 0.2% of the companies that look for VC funding, actually secure an investment. So do the best you can, but have a contingency plan in case it does not pan out. Remember, that many highly successful companies were considered “unfundable” by the venture capital community!<p>
Happy company making!<p>
Inna
<br />
<br />
<br />
<table><tbody>
<tr><td><a href="http://www.efimchik.com/"><img alt="White Summers" border="0" height="80" src="http://www.efimchik.com/WS-logo-1.jpg" /></a></td><td> </td><td valign="middle"><span style="font-family: Georgia; font-size: xx-small;"><a href="http://www.efimchik.com/">Inna Efimchik</a>, a Partner at <a href="http://www.white-summers.com/">White Summers Caffee & James LLP</a>, specializes in assisting emerging technology companies in Silicon Valley and beyond, providing incorporation, financing, and licensing services as well as general corporate counseling.</span></td></tr>
</tbody></table>
<span style="font-size: xx-small;"><a href="http://www.blogger.com/blogger.g?blogID=3306261804404551280" name="disclaimer"><b>LEGAL DISCLAIMER</b></a></span><br /><p>
<span style="font-size: xx-small;"><b>Copyright Notice.</b> The copyright for all original content in this post and any linked files is owned by Inna Efimchik. All rights are reserved.</span><br /><p>
<span style="font-size: xx-small;"><b>No Attorney-Client Relationship.</b> This post has been prepared by Inna Efimchik of White Summers for general informational purposes only. The information provided herein does not constitute advertising, a solicitation or legal advice. Neither the availability, transmission, receipt nor use of any information included herein is intended to create, or constitutes formation of, an attorney-client relationship or any other special relationship or privilege. You should not rely upon this post for any purpose without seeking legal advice from licensed attorneys in the relevant state(s).</span><br /><p>
<span style="font-size: xx-small;"><b>Compliance with Laws.</b> You agree to use the information provided herein in compliance with all applicable laws, including applicable securities laws, and you agree to indemnify and hold Inna Efimchik and White Summers Caffee & James LLP harmless from and against any and all claims, damages, losses or obligations arising from your failure to comply.</span><br /><p>
<span style="font-size: xx-small;"><b>Disclaimer of Liability.</b> ALL INFORMATION IS PROVIDED AS-IS WITH NO REPRESENTATIONS OR WARRANTIES, EITHER EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE AND NONINFRINGEMENT. YOU ASSUME COMPLETE RESPONSIBILITY AND RISK FOR USE OF THE INFORMATION IN THIS POST.</span><br /><p>
<span style="font-size: xx-small;">Inna Efimchik expressly disclaims all liability, loss or risk incurred as a direct or indirect consequence of the use of any information provided herein. By using any information in this post, you waive any rights or claims you may have against Inna Efimchik and White Summers Caffee & James LLP in connection therewith. </span><br />
<br />
<br />
<br />
<br />
</font>Startup Voicehttp://www.blogger.com/profile/01289381273991991152noreply@blogger.com3tag:blogger.com,1999:blog-3306261804404551280.post-68234536859354662012012-12-11T17:52:00.000-08:002012-12-11T17:52:12.103-08:00US Incorporation and Flips FAQs<font face="Georgia" size="2"><div align="left"><img align="left" alt="American Flag" src="http://asokoloff.smugmug.com/photos/i-S8s8bzg/0/X3/i-S8s8bzg-X3.jpg" style="margin-right: 10px;" width="200" />I am frequently speaking with foreign-based businesses about forming their company in the United States. They see the U.S. as a major market for their products or services and as a hub for investment capital, and they typically fall into one of two categories: (1) already seed-funded by angel or venture investors in their home countries or (2) no formal form of organization in their country, and interested in forming the entity directly in the United States.</div><p>
Below are some of the most frequently asked questions in this context and my answers to them.<p>
<b>Do I Have to be a US Citizen or Resident to Form a Company in the US?</b><p>
There are no nationality or residency requirements in the United States for either the members of the board of directors of a company or for its shareholders. This is a major advantage to incorporating in the United States, as it avoids the hassle of having to engage resident nominee directors as may be required in certain other jurisdictions.<p>
However, the issue of ownership, or control, of a US corporation is not to be confused with the question of who can be employed by such a corporation in the United States. All employees a US corporation who will be employed in the United States must be work-authorized - in other words, they must be citizens, permanent residents, or have a visa which permits their employment by any employer or this employer in particular. Offshore employees may be employed directly by the US corporation or by a foreign-based subsidiary of such corporation, the latter being more typical.<p>
<b>How Quickly Can I Form a Company in the US?</b><p>
If you are ready to go--in other words, if you have filled out our formation questionnaire, signed our engagement letter, and sent in a retainer--and assuming that we are forming a Delaware corporation, we can usually get a company formed for you within 24 hours. After the certificate of incorporation is filed in Delaware, it will take another one to two weeks, depending on whether there is urgency, to prepare the other documentation necessary to set up the company for operations.<p>
On our end, this includes preparation of the following, as necessary and applicable:<ul>
<li>a capitalization table;
<li>bylaws;
<li>action by incorporator (appointing directors);
<li>organizational board consent (authorizing initial stock issuances, among other things);
<li>stock purchase agreements for founders and early employees;
<li>assignment of intellectual property to the newly formed company by the founders;
<li>documentation of investments into the company which precede or are contemporaneous with formation;
<li>indemnification agreements for officers and directors;
<li>application for employer identification number (necessary to open a US bank account);
<li>state qualification to do business; and
<li>form of confidential information and inventions assignment agreement.</ul><p>
<b>Will You Help Us Open a Bank Account?</b><p>
We work with several startup-friendly local banks, and will be happy to assist with opening your business checking account. Note, however, that to open a bank account, someone from your company will need to come here to meet with a bank representative in person, and while we can assist, we cannot open the account on your behalf.<p>
<b>What's the Minimum Capitalization Amount for a US Corporation to Meet the Statutory Requirements?</b><p>
There is no statutory minimum for investment into or capitalization of the newly formed company. However, you should plan to provide sufficient capital for startup expenses, taxes, etc. to maintain the company in good standing under federal and state laws. Note also that your bank may impose a minimum monthly balance that it requires you to keep in the account to waive fees.<p>
<b>What Are the Annual Corporate Maintenance Obligations Associated with a US Corporation?</b><p>
If a company has no physical presence in the United States, the following are the annual maintenance obligations of which it needs to be aware:<ul>
<li><u>Registered Agent</u>. A US corporation must have a registered agent for service of process in the state of its incorporation. This is an annual subscription service, which receives "official" mail on behalf of the corporation and forwards it to its real address (in another US state or abroad, as specified).
<li><u>Franchise Tax</u>. Delaware and most of the other states have an annual franchise tax requirement.
<li><u>Information Statement</u>. Delaware and most of the other states have an annual information statement requirement. In some states this is combined with the franchise tax payment and in others it is separate.
<li><u>Tax Return</u>. As a separate legal entity for IRS purposes, a US corporation must file federal and state tax returns. For this, it is advisable to retain a CPA or a tax accountant, who can streamline the process.
<li><u>Annual Meeting of the Board of Directors</u>. To maintain the limited liability protection offered by the corporate form, it is advisable for a corporation to hold a meeting of the board of directors at least once annually (though for an operating company the practice is quarterly meetings). These meetings should be documented with board meetings prepared either by the company's secretary or your attorneys.
<li><u>Survey of Foreign Investment</u>. Bureau of Economic Analysis requires all U.S. businesses that are owned 10% or more by foreign persons (individuals or corporations) to file a Survey of Foreign Direct Investment in the United States</ul><p>
This list is not exhaustive. And there may be other maintenance obligations with respect to a company in a special regulated industry.<p>
<b>What is the Difference between a Flip and a New Company Formation in the US?</b><p>
If you look back to the first paragraph of this post, companies in category (1) that are looking to create a US parent company to their preexisting foreign-formed company need to "flip" their foreign company to the United States. Conversely, companies in category (2) of that paragraph will typically need a simple US company formation. Flips, as you can imagine, are more complex animals, as they involve structuring inter-company relationships that affect revenue flow, IP creation and ownership, and customer relationships in addition to simple US company formation. Generally, we see flips arise in the context of a significant financing round from a US venture fund that requires the company to be a US corporation. (More information on <a target="new" href="http://www.efimchik.com/USFlips.html">flips</a>.)<p>
Happy company making!<p>
Inna</font>
<br />
<br />
<br />
<table><tbody>
<tr><td><a href="http://www.efimchik.com/"><img alt="White Summers" border="0" height="80" src="http://www.efimchik.com/WS-logo-1.jpg" /></a></td><td> </td><td valign="middle"><span style="font-family: Georgia; font-size: xx-small;"><a href="http://www.efimchik.com/">Inna Efimchik</a> at <a href="http://www.white-summers.com/">White Summers Caffee & James LLP</a>, specializes in assisting emerging technology companies in Silicon Valley and beyond, providing incorporation, financing, and licensing services as well as general corporate counseling.</span></td></tr>
</tbody></table>
<span style="font-size: xx-small;"><a href="http://www.blogger.com/blogger.g?blogID=3306261804404551280" name="disclaimer"><b>LEGAL DISCLAIMER</b></a></span><br /><p>
<span style="font-size: xx-small;"><b>Copyright Notice.</b> The copyright for all original content in this post and any linked files is owned by Inna Efimchik. All rights are reserved.</span><br /><p>
<span style="font-size: xx-small;"><b>No Attorney-Client Relationship.</b> This post has been prepared by Inna Efimchik of White Summers for general informational purposes only. The information provided herein does not constitute advertising, a solicitation or legal advice. Neither the availability, transmission, receipt nor use of any information included herein is intended to create, or constitutes formation of, an attorney-client relationship or any other special relationship or privilege. You should not rely upon this post for any purpose without seeking legal advice from licensed attorneys in the relevant state(s).</span><br /><p>
<span style="font-size: xx-small;"><b>Compliance with Laws.</b> You agree to use the information provided herein in compliance with all applicable laws, including applicable securities laws, and you agree to indemnify and hold Inna Efimchik and White Summers Caffee & James LLP harmless from and against any and all claims, damages, losses or obligations arising from your failure to comply.</span><br /><p>
<span style="font-size: xx-small;"><b>Disclaimer of Liability.</b> ALL INFORMATION IS PROVIDED AS-IS WITH NO REPRESENTATIONS OR WARRANTIES, EITHER EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE AND NONINFRINGEMENT. YOU ASSUME COMPLETE RESPONSIBILITY AND RISK FOR USE OF THE INFORMATION IN THIS POST.</span><br /><p>
<span style="font-size: xx-small;">Inna Efimchik expressly disclaims all liability, loss or risk incurred as a direct or indirect consequence of the use of any information provided herein. By using any information in this post, you waive any rights or claims you may have against Inna Efimchik and White Summers Caffee & James LLP in connection therewith. </span><br />
<br />
<br />
<br />
<br />Startup Voicehttp://www.blogger.com/profile/01289381273991991152noreply@blogger.com1tag:blogger.com,1999:blog-3306261804404551280.post-81210733556271442112012-11-12T21:31:00.000-08:002012-11-12T23:04:52.513-08:00Antidilution Protection FAQs<font face="Georgia" size="2">"<a href="http://en.wikipedia.org/wiki/Stock_dilution" target="new">Dilution</a>" is a very frequently heard word in startup circles. And I think most people have a pretty good general sense of what dilution is--it's when you have a piece of the pie and <i>something happens</i> which decreases your piece.<p>
What I think is less understood, are (1) the implications of <i>something happening</i> which results in dilution to existing equity holders, and (2) the rights to protect against the resulting dilution (also known as "antidilution protection").<p>
<b>What Triggers a Dilutive Event.</b><p> So what has to happen to decrease your piece? Let's run through the simple algebraic analysis first. You (the founder or the investor) have x shares and the company has a total of y shares outstanding. So your piece is x/y. Then the company issues more shares so that it has y+n total shares outstanding, but you still have only x shares. x/y > x/(y+n), so you had a higher percentage of the company before the dilutive issuance.<p>
But now let's see what's happening from a business perspective. Why is the company issuing more shares? Not every dilutive issuance is equal in its impact on the company. If the issuance serves to increase the value of the company, your smaller piece of the pie might in fact have a higher value than the bigger piece of the smaller pie that you had before.<p>
<ul><i><u>Example</u>: Suppose you are a 10% equity holder in a company valued at $5,000,000. The company subsequently raises another $5,000,000 at a $15,000,000 pre-money valuation--a dilutive event. Prior to the financing you have 10% of $5,000,000, which is $500,000, and post financing you have 7.5% of a $20,000,000 company, which is $1,500,000. Your stake decreased, and your percent ownership was diluted, but you are doing ok!</i></ul><p>
The example above demonstrates that what you should watch out for is not securities issuances which dilute your percentage interest, but securities issuances that decrease your total value. The latter are the instances where equity is being issued without a corresponding increase in the value of the company. Examples of those might be (a) warrants with a low exercise price that are issued as part of a loan transaction, (b) shares issued to investors at a discount or a price lower than the company's last valuation, or (c) shares issued to employees.<p>
<b>Protection Against Antidilution.</b><p>
Now that we know how to distinguish between different kinds of dilution, how do we protect against the bad kind, the kind that dectracts from your value?<p>
As disappointing as this may be for founders and other holders of common stock to hear, really the only equity holders who ever get antidilution protection are the investors (holders of preferred stock). I am sure there are exceptions to this rule, in the way that there are exceptions to every rule. But 99.99% of the time this holds true.<p>
It may not seem fair to someone who has earned his sweat equity with... well, sweat and hard work. But investors are the ones that pay the full market price for their shares (usually 3x or more the price of Common Stock), and they are the ones who are more typically able to successfully negotiate some protection for themselves. Note, however, that even their protection does not lock their initially purchased percentage for perpetuity. Generally speaking, with each new sale of securities, their percentage, too, will be effected. However, they will get an adjustment (the conversion rate at which they Preferred Stock converts into Common Stock will increase, such that the same number of Preferred shares will be convertible into more shares of Common Stock) for issuances made at a price below their entry point, with certain exceptions. The list of exceptions to investors' antidilution protection is frequently the subject to heavy negotiation between company and investors' counsel.<p>
Happy company making!<p>
Inna</font>
<br />
<br />
<br />
<table><tbody>
<tr><td><a href="http://www.efimchik.com/"><img alt="White Summers" border="0" height="80" src="http://www.efimchik.com/WS-logo-1.jpg" /></a></td><td> </td><td valign="middle"><span style="font-family: Georgia; font-size: xx-small;"><a href="http://www.efimchik.com/">Inna Efimchik</a> at <a href="http://www.white-summers.com/">White Summers Caffee & James LLP</a>, specializes in assisting emerging technology companies in Silicon Valley and beyond, providing incorporation, financing, and licensing services as well as general corporate counseling.</span></td></tr>
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<span style="font-size: xx-small;"><a href="http://www.blogger.com/blogger.g?blogID=3306261804404551280" name="disclaimer"><b>LEGAL DISCLAIMER</b></a></span><br /><p>
<span style="font-size: xx-small;"><b>Copyright Notice.</b> The copyright for all original content in this post and any linked files is owned by Inna Efimchik. All rights are reserved.</span><br /><p>
<span style="font-size: xx-small;"><b>No Attorney-Client Relationship.</b> This post has been prepared by Inna Efimchik of White Summers for general informational purposes only. The information provided herein does not constitute advertising, a solicitation or legal advice. Neither the availability, transmission, receipt nor use of any information included herein is intended to create, or constitutes formation of, an attorney-client relationship or any other special relationship or privilege. You should not rely upon this post for any purpose without seeking legal advice from licensed attorneys in the relevant state(s).</span><br /><p>
<span style="font-size: xx-small;"><b>Compliance with Laws.</b> You agree to use the information provided herein in compliance with all applicable laws, including applicable securities laws, and you agree to indemnify and hold Inna Efimchik and White Summers Caffee & James LLP harmless from and against any and all claims, damages, losses or obligations arising from your failure to comply.</span><br /><p>
<span style="font-size: xx-small;"><b>Disclaimer of Liability.</b> ALL INFORMATION IS PROVIDED AS-IS WITH NO REPRESENTATIONS OR WARRANTIES, EITHER EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE AND NONINFRINGEMENT. YOU ASSUME COMPLETE RESPONSIBILITY AND RISK FOR USE OF THE INFORMATION IN THIS POST.</span><br /><p>
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<br />Startup Voicehttp://www.blogger.com/profile/01289381273991991152noreply@blogger.com1tag:blogger.com,1999:blog-3306261804404551280.post-58515458882606865162012-11-08T14:49:00.000-08:002012-11-08T14:49:09.828-08:00Private Company Board of Directors FAQs<font face="Georgia" size="2">Inevitably, the best topics for my posts come from questions I get from my clients. Hot off the press, these questions (and answers) came up on a seed round financing that I am working on this week!<p>
<b><li> Who makes the final decision on the number of Board members?</b>
<ul>
In Delaware, a Company's bylaws will typically allow the Board of Directors to fix the total number of directors, provided that any decrease in the total authorized number of directors will not remove from office any incumbent director. The bylaws may also fix a specific number of directors or specify a range (e.g., like in California), such that changing the number of directors from such specific number or to a number outside the range will require amendment of the bylaws.<p>
In financings, the total number of directors that constitute the entire board will be negotiated with the investors, who will often insist that the number of directors may not be changed without their consent. (For those who like the technical details, in equity financings you will usually find this in the protective provisions of the certificate of incorporation and in debt financings, in the negative covenants.)</ul><p>
<b><li>What are the qualifications for Board membership?</b>
<ul>
There are no special requirements as to who can be a Board member, so long as it’s an individual (and not a corporation). A Board member may, but does not have to be, a stakeholder of the Company.</ul><p>
<b><li>What percent ownership of the Company entitles a stakeholder to designate a Board member?</b>
<ul>
Unlike certain foreign jurisdictions, in the US, there is no statutory right based on (a minority) percent ownership to nominate a Board member. Practically speaking, a majority stockholder will, in the absence of a voting agreement, be able to put his own designees on the Board. In certain states, like California, <a target="new" href="http://en.wikipedia.org/wiki/Cumulative_voting">cumulative voting</a> applies to election and removal of directors.<p>
Normally, whether an investor gets a Board seat is negotiated at the term sheet stage and subsequently built into the charter (certificate/articles of incorporation) and voting agreement. The right to nominate an investor will usually be conditional on such investor maintaining some number or percent of shares initially purchased by such investor.</ul><p>
<b><li>How long is the term of a Board member?</b>
<ul>
Normally, directors are elected to the Board to serve until they resign or are replaced by another director. It is possible to elect directors for a set term, e.g., for 3 years, but that is not usually done in small privately-held companies.</ul><p>
<b><li>What is the process for removing a Board member?</b>
<ul>
A board member who does not voluntarily resign may be removed by the stockholders who had the right to appoint such Board member in the first place. In the absence of special provisions, a majority of the outstanding shares will be able to remove a director. If special rights have been negotiated, such that the preferred stock holders designate a director, the vote of the preferred stock holders will be required to remove the director designated by them. In certain states, like California, <a target="new" href="http://en.wikipedia.org/wiki/Cumulative_voting">cumulative voting</a> applies to election and removal of directors.</ul><p>
<b><li>How does the Board vote?</b>
<ul>The Board can vote (1) at a meeting, or (2) by unanimous written consent. There are no special rules about which type of vote needs to be obtained for which type of action. This is at the discretion of the Company. But there are some differences in the mechanics:
<ul>
<li>Meetings of the Board can be held by teleconference, so everyone does not have to be in the same room. At a meeting, assuming notice requirements have been met, a majority of directors will usually constitute quorum (which means that it’s enough to start the meeting and vote on matters before the Board), unless a higher threshold is set in the bylaws. A majority of the directors present at the meeting (in person or otherwise) is required to pass a resolution. So, technically, in a board of 5 members, if 3 members attend and only 2 vote on a particular matter, that will be sufficient, though less than the actual majority of the whole Board. Practically, however, Boards that are not dysfunctional try to vote on matters unanimously, and if 2 of 5 directors can’t make it, they will probably reschedule the meeting.<p>
<li>Actions by written consent have to be signed by every director. When the Board is small--one or two co-founders--written consents are the typical way to approve matters, so that there is a written record of Board action.</ul></ul><p>
Happy company making!<p>
Inna</font>
<br />
<br />
<br />
<table><tbody>
<tr><td><a href="http://www.efimchik.com/"><img alt="White Summers" border="0" height="80" src="http://www.efimchik.com/WS-logo-1.jpg" /></a></td><td> </td><td valign="middle"><span style="font-family: Georgia; font-size: xx-small;"><a href="http://www.efimchik.com/">Inna Efimchik</a> at <a href="http://www.white-summers.com/">White Summers Caffee & James LLP</a>, specializes in assisting emerging technology companies in Silicon Valley and beyond, providing incorporation, financing, and licensing services as well as general corporate counseling.</span></td></tr>
</tbody></table>
<span style="font-size: xx-small;"><a href="http://www.blogger.com/blogger.g?blogID=3306261804404551280" name="disclaimer"><b>LEGAL DISCLAIMER</b></a></span><br /><p>
<span style="font-size: xx-small;"><b>Copyright Notice.</b> The copyright for all original content in this post and any linked files is owned by Inna Efimchik. All rights are reserved.</span><br /><p>
<span style="font-size: xx-small;"><b>No Attorney-Client Relationship.</b> This post has been prepared by Inna Efimchik of White Summers for general informational purposes only. The information provided herein does not constitute advertising, a solicitation or legal advice. Neither the availability, transmission, receipt nor use of any information included herein is intended to create, or constitutes formation of, an attorney-client relationship or any other special relationship or privilege. You should not rely upon this post for any purpose without seeking legal advice from licensed attorneys in the relevant state(s).</span><br /><p>
<span style="font-size: xx-small;"><b>Compliance with Laws.</b> You agree to use the information provided herein in compliance with all applicable laws, including applicable securities laws, and you agree to indemnify and hold Inna Efimchik and White Summers Caffee & James LLP harmless from and against any and all claims, damages, losses or obligations arising from your failure to comply.</span><br /><p>
<span style="font-size: xx-small;"><b>Disclaimer of Liability.</b> ALL INFORMATION IS PROVIDED AS-IS WITH NO REPRESENTATIONS OR WARRANTIES, EITHER EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE AND NONINFRINGEMENT. YOU ASSUME COMPLETE RESPONSIBILITY AND RISK FOR USE OF THE INFORMATION IN THIS POST.</span><br /><p>
<span style="font-size: xx-small;">Inna Efimchik expressly disclaims all liability, loss or risk incurred as a direct or indirect consequence of the use of any information provided herein. By using any information in this post, you waive any rights or claims you may have against Inna Efimchik and White Summers Caffee & James LLP in connection therewith. </span><br />
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Startup Voicehttp://www.blogger.com/profile/01289381273991991152noreply@blogger.com2tag:blogger.com,1999:blog-3306261804404551280.post-15817853150212070642012-10-25T22:13:00.000-07:002012-11-12T15:34:12.742-08:00Negotiating with Investors: How far is too far?<font face="Georgia" size="2">When an investor presents a company with a term sheet we enter the exciting realm of negotiation. Much can be, and I am sure has been, written on this topic. But perhaps not in our context. How far <i>should</i> a founder push the envelope with his investors on deal terms? I even posted a <a href="https://www.quora.com/Venture-Capital/Venture-Capital-How-far-can-you-push-an-investor-on-deal-terms">question on Quora</a> to get testimonials about some wacky things that founders have tried and succeeded on.<p>
In the meantime, I wanted to share my thoughts on this more generally:
<ol><li><b>Being Reasonable.</b> During the term sheet negotiation process, the investors are watching the founder. After all, an investment into a company is the beginning of a long road. The investors will have much interaction with the founder over the years after they invest, so at a basic level they have to like the founder enough to look forward to that interaction. And they must believe that the founder is someone capable of succeeding in making them a lot of money. Someone who is unreasonable, irrational, and who handles negotiation like a selfish five year old, is generally not likely to pass that test and get to a signed term sheet, though I am sure there are some exceptions.<p>
What is reasonable and rational, of course, varies by culture and context. But I would posit that being reasonable in a term sheet negotiation means picking one or two terms that are deal-breakers, and arguing calmly and persuasively for those terms, in a substantiated and thoughtful manner. If there are other terms that are more investor-friendly than is the market practice, a founder may use them as leverage, trading chips, to get the terms important to the founder. Investors respect an entrepreneur who has a solid grasp of the deal terms, who can evaluate the relative importance of those terms, and who is willing to engage in a give and take process during negotiation.<p>
Attorneys can actually be helpful here--a startup attorney who sees a lot of term sheets can work with an entrepreneur to help him assess which of the terms offered are "market" and which are not. Knowing industry standards, even when one is arguing for structuring deal terms differently, goes a long way to sounding reasonable in a negotiation.<p>
<li><b>Being Strategic.</b> If you have to pick only one or two terms to really focus on, which ones would you pick? Frankly, there are only two important concepts in a financing -- price and control -- though these are expressed in a number of ways through a number of different terms.<p>
<ul><li><u>Price</u>. You could argue over price. For instance, you could try for something trite, like asking for a higher valuation than originally offered or for a smaller option pool reserve, which effectively gets you a higher price (less dilution for the founders). Or you could get creative. As an example, to bridge a wide gap in valuation you could set milestones and provide for warrant coverage to the investor in the event the milestones are not met. Or you could play with the conversion price of the Preferred Stock to overcome valuation differences. But frankly, unless you have a lot of leverage (e.g., competing term sheets and investors falling over themselves to invest in your hot company), there is unlikely to be much give here from the investors.<p>
<li><u>Control</u>. Control is more promising. It can't be measured in dollars, so it is easier for the investors to give this, if they like and trust the founder. There are many control terms. I have seen a deal, for instance, where angel investors gave the founders a proxy to vote their Preferred shares. That's an outlier, but some of the more typical control terms that do get negotiated are (a) board control -- who the board seats are allocated to between the founders and the investors; and (b) stockholder control -- what blocking rights an investor, either alone or in concert with other investors, has on specific actions by the company.<p>
Since control and voting are intimately tied, a lot of thought (and negotiation) goes into whether voting will be done by class or by series and what the percentage threshold will be per such class or series. While the number of shares held by an investor or a group of investors is tied to the price, the law allows flexibility for unequal voting by different classes of shares. These mechanisms are not frequently invoked beyond protective provisions that run into several pages in length, but can be, and sometimes are, under the right circumstances.</ul>
<li><b>Cost</b>. Legal innovation is expensive. A road well-traveled, otherwise known as "market terms", is going to come with the lowest legal price tag because there will be established forms which need little customization and not a lot of negotiation. Your attorney will not need to conduct legal research to tell you the ramifications of a particular provision because they will be well-known to him or her.<p>
Conversely, be prepared that innovative legal solutions will be expensive. They will require more time to prepare and analyze by your attorney. They may require specialists (like tax or executive compensation attorneys) or senior partners to get involved, which will increase your legal bill. You will get pushback and arguments from the attorneys on the other side of the table, and your lawyers will have to convince the lawyers on the other side that your solution works. Negotiations, too, will add to your legal bill.<p>
It may be that your proposed terms, which require the innovation, will ultimately result in a significant financial benefit to you, to the tune of millions of dollars. It has certainly happened before. So by no means do I wish to discourage you--for me as an attorney it is a lot of fun to work on innovative solutions. But I do want to set your expectations--custom solutions come with a higher price tag, that's all.
</ol><p>
Happy company making!<p>
Inna</font>
<br />
<br />
<br />
<table><tbody>
<tr><td><a href="http://www.efimchik.com/"><img alt="White Summers" border="0" height="80" src="http://www.efimchik.com/WS-logo-1.jpg" /></a></td><td> </td><td valign="middle"><span style="font-family: Georgia; font-size: xx-small;"><a href="http://www.efimchik.com/">Inna Efimchik</a> at <a href="http://www.white-summers.com/">White Summers Caffee & James LLP</a>, specializes in assisting emerging technology companies in Silicon Valley and beyond, providing incorporation, financing, and licensing services as well as general corporate counseling.</span></td></tr>
</tbody></table>
<span style="font-size: xx-small;"><a href="http://www.blogger.com/blogger.g?blogID=3306261804404551280" name="disclaimer"><b>LEGAL DISCLAIMER</b></a></span><br /><p>
<span style="font-size: xx-small;"><b>Copyright Notice.</b> The copyright for all original content in this post and any linked files is owned by Inna Efimchik. All rights are reserved.</span><br /><p>
<span style="font-size: xx-small;"><b>No Attorney-Client Relationship.</b> This post has been prepared by Inna Efimchik of White Summers for general informational purposes only. The information provided herein does not constitute advertising, a solicitation or legal advice. Neither the availability, transmission, receipt nor use of any information included herein is intended to create, or constitutes formation of, an attorney-client relationship or any other special relationship or privilege. You should not rely upon this post for any purpose without seeking legal advice from licensed attorneys in the relevant state(s).</span><br /><p>
<span style="font-size: xx-small;"><b>Compliance with Laws.</b> You agree to use the information provided herein in compliance with all applicable laws, including applicable securities laws, and you agree to indemnify and hold Inna Efimchik and White Summers Caffee & James LLP harmless from and against any and all claims, damages, losses or obligations arising from your failure to comply.</span><br /><p>
<span style="font-size: xx-small;"><b>Disclaimer of Liability.</b> ALL INFORMATION IS PROVIDED AS-IS WITH NO REPRESENTATIONS OR WARRANTIES, EITHER EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE AND NONINFRINGEMENT. YOU ASSUME COMPLETE RESPONSIBILITY AND RISK FOR USE OF THE INFORMATION IN THIS POST.</span><br /><p>
<span style="font-size: xx-small;">Inna Efimchik expressly disclaims all liability, loss or risk incurred as a direct or indirect consequence of the use of any information provided herein. By using any information in this post, you waive any rights or claims you may have against Inna Efimchik and White Summers Caffee & James LLP in connection therewith. </span><br />
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<br />Startup Voicehttp://www.blogger.com/profile/01289381273991991152noreply@blogger.com2tag:blogger.com,1999:blog-3306261804404551280.post-81089542791350360122012-10-19T16:52:00.001-07:002012-10-19T16:52:50.568-07:00Startups: Choosing between an LLC and a Corporation<font face="Georgia" size="2">The first question that startup founders often ask a lawyer is "what is the right type of entity for my company." If you Google the subject, which you have probably already done bringing you here, you will see that there are a plethora of opinions. Most advice will be split into two campus: arguing in favor of either a corporation or a limited liability company (an LLC).<p>
Almost everyone knows the core difference between a C-corporation and an LLC from a tax perspective -- LLCs get pass-through treatment (unless otherwise elected), such that all gains and losses of the LLC are recognized on the US tax returns of its owners (known as members). By contrast, C-corporations are treated as separate legal entities for tax purposes. Owners in corporations (known as shareholders) are not taxed on the corporation's gains and losses, though they are taxed individually if they receive a distribution (e.g., a dividend). <p>
Very likely, you are reading this and thinking, "Yes, I know, but so what? I still don't know whether to form a corporation or an LLC." So let's see what this means for us.<p>
I would posit that if you are a true startup (not a small business), the following will be very important to you: (a) being cost-efficient, and (b) obtaining funding from investors. If you agree with the premise and find yourself in that boat, read on.<p>
<b>Investors.</b> Institutional investors (funds) will almost always require a company in which they are investing to be a C-corporation. There are several reasons for this:
<ul><li><u>Administrative Burden</u>. Investment funds are generally pass-through entities themselves, so their limited partners would be burdened with K-1 forms (the tax form which is issued to members in an LLC which allocates LLC's gains or losses to such member) for each investment by each investment fund in which such limited partner is participating.<p>
<li><u>Tax Exempt Status</u>. Some investment funds can't invest in LLCs because of their tax-exempt status or the tax exempt status of their limited partners.<p>
<li><u>U.S. Tax Obligations for Foreign Funds</u>. LLCs create a problem for foreign investors who may not otherwise be subject to US taxation or to US tax filing requirements.<p>
<li><u>Structure</u>. Investors like corporations because of the rigid time-tested structure that they provide. Corporations are owned by shareholders who vote for and elect a board of directors. The board of directors votes on important company decisions and, in turn, elects officers, who run the corporation day-to-day. The shareholders (among them the investors) have clear rights, among them, to remove the existing board and elect a new slate of directors if they feel that the corporation is getting derailed. LLCs are known for being more flexible. Rigidity can be built into them, at an extra cost, but is not inherent to this entity form.</ul><p>
<b>Efficiency.</b> In an LLC, the entirety of the understandings between the members as well as the ownership, management, and tax structures, are contained in a single agreement - the limited liability company operating agreement. This is a complex, difficult to understand, tax-heavy document, which requires much customization and deep tax expertise. This translates into many attorney hours and expensive tax counsel. On the other hand, corporate formation and financing use several smaller agreements, forms of which have become largely standardized over the years such that these agreements are actually faster and simpler to draft than the LLC operating agreement. Each corporate document has a narrow purpose, and because the corporation is a stand-alone legal entity, tax analysis for the members does not come in like it does in the LLC operating agreement. Faster, simpler, and no tax review all spell "cost-efficient".<p>
<b>Conclusion.</b> For a typical startup that plans on raising capital, I think it's not worth spending a lot of time debating the pros and cons of different entity types. Bottom line is, forming a corporation will save you a lot of unpleasant discussions with investors down the road and, ultimately, the cost of converting your LLC to a corporation.<p>
It goes without saying that there are exceptions to every rule. For instance, the founders may plan to bootstrap for several years and the LLC form would allow them to write-off operating losses during those years against their ordinary income from other sources. Or, a startup's capital may come from an angel investor who really likes the pass-through losses that he can take through his investment in an LLC. Or, friends and family investors may be providing capital with the idea of getting regular dividends, without double-taxation eating into the profits.<p>
The above scenarios, however, are not <i>typical</i> startup issues, which is why <i>typically</i>, the right choice is to incorporate. But if you are in doubt or there is something unusual about your situation, you should consult a tax and/or legal advisor.<p>
Happy company making!<p>
Inna</font>
<br />
<br />
<br />
<table><tbody>
<tr><td><a href="http://www.efimchik.com/"><img alt="White Summers" border="0" height="80" src="http://www.efimchik.com/WS-logo-1.jpg" /></a></td><td> </td><td valign="middle"><span style="font-family: Georgia; font-size: xx-small;"><a href="http://www.efimchik.com/">Inna Efimchik</a> at <a href="http://www.white-summers.com/">White Summers Caffee & James LLP</a>, specializes in assisting emerging technology companies in Silicon Valley and beyond, providing incorporation, financing, and licensing services as well as general corporate counseling.</span></td></tr>
</tbody></table>
<span style="font-size: xx-small;"><a href="http://www.blogger.com/blogger.g?blogID=3306261804404551280" name="disclaimer"><b>LEGAL DISCLAIMER</b></a></span><br /><p>
<span style="font-size: xx-small;"><b>Copyright Notice.</b> The copyright for all original content in this post and any linked files is owned by Inna Efimchik. All rights are reserved.</span><br /><p>
<span style="font-size: xx-small;"><b>No Attorney-Client Relationship.</b> This post has been prepared by Inna Efimchik of White Summers for general informational purposes only. The information provided herein does not constitute advertising, a solicitation or legal advice. Neither the availability, transmission, receipt nor use of any information included herein is intended to create, or constitutes formation of, an attorney-client relationship or any other special relationship or privilege. You should not rely upon this post for any purpose without seeking legal advice from licensed attorneys in the relevant state(s).</span><br /><p>
<span style="font-size: xx-small;"><b>Compliance with Laws.</b> You agree to use the information provided herein in compliance with all applicable laws, including applicable securities laws, and you agree to indemnify and hold Inna Efimchik and White Summers Caffee & James LLP harmless from and against any and all claims, damages, losses or obligations arising from your failure to comply.</span><br /><p>
<span style="font-size: xx-small;"><b>Disclaimer of Liability.</b> ALL INFORMATION IS PROVIDED AS-IS WITH NO REPRESENTATIONS OR WARRANTIES, EITHER EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE AND NONINFRINGEMENT. YOU ASSUME COMPLETE RESPONSIBILITY AND RISK FOR USE OF THE INFORMATION IN THIS POST.</span><br /><p>
<span style="font-size: xx-small;">Inna Efimchik expressly disclaims all liability, loss or risk incurred as a direct or indirect consequence of the use of any information provided herein. By using any information in this post, you waive any rights or claims you may have against Inna Efimchik and White Summers Caffee & James LLP in connection therewith. </span><br />
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<br />
<br />Startup Voicehttp://www.blogger.com/profile/01289381273991991152noreply@blogger.com8tag:blogger.com,1999:blog-3306261804404551280.post-40267524709173100512012-08-30T01:11:00.000-07:002012-08-30T01:11:37.597-07:00Convertible Promissory Notes: Investor’s Perspective<font face="Georgia" size="2">Unlike venture capitalists, who commonly dictate their own terms and present their own term sheet, angel investors are typically on the receiving end of a term sheet from the company in which they have expressed an interest. Sometimes even, there is no term sheet and the angel investor is presented directly with transaction document(s) (e.g., a convertible promissory note or a convertible promissory note and note purchase agreement).<p>
Of course, as you will hear me repeat again and again, I would discourage anyone from making an investment without the help of legal counsel in navigating the negotiation and review of the documentation for it. Attorneys that specialize in financing work will be able to point out underwater rocks and provide invaluable negotiation advice.
In this post, we’ll discuss five points that you should pay attention to in your transaction documents:
<ul><li><b>Preferred Preferences and Privileges.</b> When purchasing a note, you are postponing the negotiation of the rights, preferences and privileges of the shares of preferred stock into which your note will convert and deferring it to investors who come after you. This saves everyone time and money and allows a bridge financing to be completed in short order using just a few short documents. However, that also means that you, as a bridge investor, have to be comfortable that you are leaving the negotiation of your rights in good hands. The typical way to control this is by setting the amount which must be raised by the company in its “Qualified Financing” high enough that the investors in such Qualified Financing will be serious market players, most likely venture capitalists. On the other hand, the threshold should not be so high, that your note never converts. Striking a healthy balance is key. (Mechanics of <a href=http://startupvoice.blogspot.com/2011/12/annotated-convertible-promissory-note.html>note conversion</a> are covered in detail in another post.)<p>
<li><b>Maturity.</b> As a debt instrument, a note should always specify a maturity date—in other words, a final date by which the note must be repaid. The probability is high that, if there has not been a Qualified Financing forcing conversion of the note prior to the maturity date, on maturity the company will not have the necessary funds to repay the note. I recommend a contingency plan, which provides that if there has not been a Qualified Financing prior to maturity, on maturity the note converts into [fill in the blank] based on a [fill in the blank] formula. For instance, the note can convert into common stock, such that the note holder holds 55% of all common stock and takes over the company. That’s aggressive and really only works with one larger investor, but I’ve seen it done (by east coast investors). Or, more typically, the note can convert into preferred stock with a pre-negotiated (and likely punitive) valuation. The conversion can be automatic or at the discretion of the investor. There are many ways that a contingency plan can be structured, but I do believe it wise to negotiate this up-front, rather than waiting for the note to mature and for the company to default on repayment.<p>
<li><b>Amendment of the Note.</b> You should know and care about who can amend the terms of your note. Will your consent be required, or will a “majority-in-interest” of the notes (which you may not control) be able to approve amendments? If only a majority-in-interest is required, is there a provision that protects you as a minority holder against changes which impact you in an adverse and disparate manner from the other note holders? Relatedly, what other decisions can be made by a majority-in-interest? Finally, are you able to determine, based on the information provided to you, whether you will control a majority-in-interest vote and if not, which investors or what combination of investors will control it?<p>
<li><b>Prepayment.</b> You should also pay attention to whether your note be prepaid without your consent. Seems like a minor point, but it can be very important. You may have negotiated the best conversion terms or the most lucrative multiplier in the event of a change of control, but if your note can be prepaid without your express approval, you stand to lose your negotiated upside and have to settle for accrued interest instead, which is certainly not why you entered this high risk game in the first place.<p>
<li><b>Negative Covenants; Notice Rights.</b> Do you have the right to weigh in on or veto certain acts of the company? For instance, if the company raises money at a low valuation or a small amount that does not trigger conversion, will you have a vote? What about if the company wants to acquire assets of another company (thus spending a lot of the cash it raised in the bridge financing)? Whether you should be entitled to consent rights depends on your investment amount. If you can’t negotiate for negative covenants, you may at least wish to ask to be notified prior to an action being taken. At least you will not be left out of the loop entirely. Unlike a company’s shareholders, note holders are not entitled to statutory notice rights. Therefore, bridge investors have to negotiate for their own notice rights, if those are important to them.</ul><p>
Of course, what we’ve covered here just brushes the tip of the iceberg, but I do hope you find it helpful.<p>
Happy investing!</font><p>
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<table><tbody>
<tr><td><a href="http://www.efimchik.com/"><img alt="White Summers" border="0" height="80" src="http://www.efimchik.com/WS-logo-1.jpg" /></a></td><td> </td><td valign="middle"><span style="font-family: Georgia; font-size: xx-small;"><a href="http://www.efimchik.com/">Inna Efimchik</a>, a Partner at <a href="http://www.white-summers.com/">White Summers Caffee & James LLP</a>, specializes in assisting emerging technology companies in Silicon Valley and beyond, providing incorporation, financing, and licensing services as well as general corporate counseling.</span></td></tr>
</tbody></table>
<span style="font-size: xx-small;"><a href="http://www.blogger.com/null" name="disclaimer"><b>LEGAL DISCLAIMER</b></a></span><p>
<span style="font-size: xx-small;"><b>Copyright Notice.</b> The copyright for all original content in this post and any linked files is owned by Inna Efimchik. All rights are reserved.<p>
<b>No Attorney-Client Relationship.</b> This post has been prepared by Inna Efimchik of White Summers for general informational purposes only. The information provided herein does not constitute advertising, a solicitation or legal advice. Neither the availability, transmission, receipt nor use of any information included herein is intended to create, or constitutes formation of, an attorney-client relationship or any other special relationship or privilege. You should not rely upon this post for any purpose without seeking legal advice from licensed attorneys in the relevant state(s).<p>
<b>Compliance with Laws.</b> You agree to use the information provided herein in compliance with all applicable laws, including applicable securities laws, and you agree to indemnify and hold Inna Efimchik and White Summers Caffee & James LLP harmless from and against any and all claims, damages, losses or obligations arising from your failure to comply.<b>Disclaimer of Liability.</b> ALL INFORMATION IS PROVIDED AS-IS WITH NO REPRESENTATIONS OR WARRANTIES, EITHER EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE AND NONINFRINGEMENT. YOU ASSUME COMPLETE RESPONSIBILITY AND RISK FOR USE OF THE INFORMATION IN THIS POST.Inna Efimchik expressly disclaims all liability, loss or risk incurred as a direct or indirect consequence of the use of any information provided herein. By using any information in this post, you waive any rights or claims you may have against Inna Efimchik and White Summers Caffee & James LLP in connection therewith. <br />
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<br /></span><br />Startup Voicehttp://www.blogger.com/profile/01289381273991991152noreply@blogger.com4tag:blogger.com,1999:blog-3306261804404551280.post-34299171959392231042012-08-28T23:52:00.000-07:002012-08-28T23:52:00.047-07:00Legal Due Diligence: Investor’s Perspective<font face="Georgia" size="2">In the perfect world, anyone making an investment should retain highly qualified and specialized legal counsel to assist with the transaction. Attorneys that work on financings every day will know exactly how to approach the legal due diligence process and will be invaluable guides, scouring the company’s legal documents to protect the investor’s rights and pointing out to the investor any red flags and fixes.<p>
However, we do not live in the perfect world, and some angel investors out there will consider their investment amount too small to engage legal counsel, and will venture out on their own.<p>
If you are in that boat, you should at least conduct your own due diligence. At a bare minimum, there are 3 things you should request from the company in which you are investing, before you sign on the dotted line and before you initiate the wire (or write that check):
<ul><li><b>Charter Documents.</b> A company’s charter documents are, depending on its jurisdiction of incorporation, its articles or certificate of incorporation and its bylaws. It is important to see charter documents to make sure that you are investing in a real corporation, not a corporation that the founders are planning on forming, and not in a general partnership or a limited liability company.
<li><b>Cap Table.</b> The cap table that you request should contain, in addition to the obvious, founder vesting schedules and all other convertible notes (or other convertible securities) of the company. (I’ve written about <a href=” http://startupvoice.blogspot.com/2012/03/cap-tables-for-startups.html”>cap tables</a> more extensively in a prior post.) If you are not sure how your convertible note converts into shares of the company’s stock and what percent of the company you stand to own, I would urge you even more strongly to consult an attorney.
<li><b>IP Assignment.</b> There are two types of inventions assignment agreements to looks for: one for pre- and one for post- formation.
<ul><li>Most founders will begin generating intellectual property for their company before it is incorporated. Unless there is an agreement assigning all their inventions to the company, the inventions belong to the founders personally. Therefore, the first type of IP assignment agreement to look for is one assigning pre-formation IP to the company. Relatedly, if the company claims to have any patents and trademarks, check to see that they are registered in the name of the company. Many founders will forget to effectuate the transfer with the patent and trademark office, and this is something that should be done before your money goes in.
<li>Once a corporation is formed, there should be in place an inventions assignment agreement with each founder which covers all inventions developed by such founder during the life of the company. Usually, this is an agreement that goes with a consulting agreement or an offer letter, but because many companies are unfunded at the time of incorporation and the founders do not enter into consulting agreements or offer letters with themselves, at the very least a free-standing inventions assignment agreement should be in place.</ul></ul><p>
Beyond the documents mentioned above, if the amount that you are investing is upwards of $100,000, I would strongly recommend having your counsel conduct full legal diligence review.<p>
Happy investing!<p>
</font>
<br />
<table><tbody>
<tr><td><a href="http://www.efimchik.com/"><img alt="White Summers" border="0" height="80" src="http://www.efimchik.com/WS-logo-1.jpg" /></a></td><td> </td><td valign="middle"><span style="font-family: Georgia; font-size: xx-small;"><a href="http://www.efimchik.com/">Inna Efimchik</a>, a Partner at <a href="http://www.white-summers.com/">White Summers Caffee & James LLP</a>, specializes in assisting emerging technology companies in Silicon Valley and beyond, providing incorporation, financing, and licensing services as well as general corporate counseling.</span></td></tr>
</tbody></table>
<span style="font-size: xx-small;"><a href="http://www.blogger.com/null" name="disclaimer"><b>LEGAL DISCLAIMER</b></a></span><p>
<span style="font-size: xx-small;"><b>Copyright Notice.</b> The copyright for all original content in this post and any linked files is owned by Inna Efimchik. All rights are reserved.<p>
<b>No Attorney-Client Relationship.</b> This post has been prepared by Inna Efimchik of White Summers for general informational purposes only. The information provided herein does not constitute advertising, a solicitation or legal advice. Neither the availability, transmission, receipt nor use of any information included herein is intended to create, or constitutes formation of, an attorney-client relationship or any other special relationship or privilege. You should not rely upon this post for any purpose without seeking legal advice from licensed attorneys in the relevant state(s).<p>
<b>Compliance with Laws.</b> You agree to use the information provided herein in compliance with all applicable laws, including applicable securities laws, and you agree to indemnify and hold Inna Efimchik and White Summers Caffee & James LLP harmless from and against any and all claims, damages, losses or obligations arising from your failure to comply.<b>Disclaimer of Liability.</b> ALL INFORMATION IS PROVIDED AS-IS WITH NO REPRESENTATIONS OR WARRANTIES, EITHER EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE AND NONINFRINGEMENT. YOU ASSUME COMPLETE RESPONSIBILITY AND RISK FOR USE OF THE INFORMATION IN THIS POST.Inna Efimchik expressly disclaims all liability, loss or risk incurred as a direct or indirect consequence of the use of any information provided herein. By using any information in this post, you waive any rights or claims you may have against Inna Efimchik and White Summers Caffee & James LLP in connection therewith. <br />
<br />
<br /></span><br />Startup Voicehttp://www.blogger.com/profile/01289381273991991152noreply@blogger.com7tag:blogger.com,1999:blog-3306261804404551280.post-22585903549048578182012-08-26T20:13:00.000-07:002012-08-30T01:12:08.211-07:00Seed Financing: Equity or Debt?<font face="Georgia" size="2">Many early-stage companies that have succeeded in finding one or more interested seed investors are faced with a pleasant dilemma: should they document the initial investment as a bridge financing (or sale of convertible debt) or as an equity financing (or sale of shares in the company)? Let’s discuss some important factors to consider in making this decision. For more information about promissory notes, read my <a href="http://startupvoice.blogspot.com/2011/12/annotated-convertible-promissory-note.html">post</a> dedicated to this topic.<p>
<b>Cost and Timing.</b> The cost of documenting a middle-of-the-road bridge financing is generally going to be significantly lower than the cost of documenting a middle-of-the road equity financing.<p>
The reason is that bridge financings, as the name suggests, are designed to tide a company over until it raises an equity round, and therefore, it leaves much of the negotiation and documentation of material terms to be done at the time of such equity round.<p>
A very simple note financing (for $10,000 to $50,000) might entail just one document – a promissory note. On the other hand, in a preferred stock equity financing, at the very least an amended and restated certificate of incorporation is required, as well as a stock purchase agreement, and usually a shareholders agreement (or some combination of investors rights agreement, right of first refusal and co-sale agreement, and voting agreement). <p>
A financing that requires less negotiation and fewer documents, can be completed on a shorter timeline. Therefore, on average, a bridge financing allows a company to take in money faster than an equity financing.<p>
<b>Control.</b> Depending on the investor and the amount of the investment, a company may have to give up a measure of control when taking in capital. Control comes in several forms: control by equity holders and control at the board of directors level.
A venture capitalist purchasing a significant stake in a company will usually require both, a board seat and special protective provisions that give him veto power as a shareholder over important company decisions. Even if special protective provisions are not negotiated, by law shareholders must approve certain decisions, which adds an administrative burden on the company.<p>
A bridge financing for a small investment amount will generally allow a company to keep the most control. The founders will continue to control the entire board of directors, without having to add the bridge investor to the board. In addition, because a promissory note does not constitute a direct equity ownership and the holders of a promissory note do not become shareholders until the note converts, a company does not have to submit matters which require shareholder approval to the note holders.<p>
Note, however, that a more sophisticated bridge financing, might include negative covenants, which would specify company acts or decisions which expressly require approval of the bridge investors irrespective of the fact that they are not shareholders. Bridge financings with a lower investment amount (< $100,000) will usually not include negative covenants. <p>
<b>Dilution.</b> Before the first outside investment, founders amongst themselves own 100% of the company. With investment comes dilution—by issuing shares to the investors the founders’ share in the company decreases.<p>
In the best-case scenario, using promissory notes will result in less dilution to the founders long-term than selling equity. In the worst, it will be the same.
The determining factor, of course, is the company valuation. External factors like market conditions aside, and speaking for companies in the first several years from their formation, the later that a company is valued, the higher generally its valuation will be. In an equity financing, investors purchase shares based on a company’s valuation at the time of their investment. If the company isn’t very far along, doesn’t yet have a product, or has a product in beta and has not demonstrated traction, chances are its valuation will be low ($1,000,000 to $2,000,000) and even a small investment will significantly dilute the founders.<p>
On the other hand, bridge investors are not purchasing shares at the time of their investment, and the number of shares that their investment will convert into will be determined based on the formula specified in the note. If a company can negotiate for the note principal and interest to convert into shares of the company’s preferred stock at a discount (of 15%-30%) of the price for such stock in the company’s next equity round, that will result in the least dilution for the company.<p>
Many investors, however, will ask to cap the maximum valuation at which their notes will convert. In other words, even if a company’s first preferred stock financing is at a valuation of $10,000,000, if the bridge investors negotiated a valuation cap of $5,000,000 in their notes, their notes will convert into the number of shares equal to the (a) principal and accrued interest on the note, divided by (b) a price per share determined as (i) $5,000,000, divided by (ii) all of the shares of the Company outstanding at the time of the conversion.<p>
The conversion cap has become an industry standard for even the smallest bridge financings. However, in my experience, the conversion cap does not generally reflect a company’s valuation at the time of the financing, but rather a valuation that’s somewhere midway between the valuation today and the expected valuation at the next equity financing. Therefore, even a promissory note with cap is frequently less dilutive than a priced seed equity round.<p>
Is it any wonder that given how all these factors play out, convertible notes have become the standard investment tool for low-value seed-stage investments?!
</font>
<br />
<table><tbody>
<tr><td><a href="http://www.efimchik.com/"><img alt="White Summers" border="0" height="80" src="http://www.efimchik.com/WS-logo-1.jpg" /></a></td><td> </td><td valign="middle"><span style="font-family: Georgia; font-size: xx-small;"><a href="http://www.efimchik.com/">Inna Efimchik</a>, a Partner at <a href="http://www.white-summers.com/">White Summers Caffee & James LLP</a>, specializes in assisting emerging technology companies in Silicon Valley and beyond, providing incorporation, financing, and licensing services as well as general corporate counseling.</span></td></tr>
</tbody></table>
<span style="font-size: xx-small;"><a href="http://www.blogger.com/null" name="disclaimer"><b>LEGAL DISCLAIMER</b></a></span><p>
<span style="font-size: xx-small;"><b>Copyright Notice.</b> The copyright for all original content in this post and any linked files is owned by Inna Efimchik. All rights are reserved.<p>
<b>No Attorney-Client Relationship.</b> This post has been prepared by Inna Efimchik of White Summers for general informational purposes only. The information provided herein does not constitute advertising, a solicitation or legal advice. Neither the availability, transmission, receipt nor use of any information included herein is intended to create, or constitutes formation of, an attorney-client relationship or any other special relationship or privilege. You should not rely upon this post for any purpose without seeking legal advice from licensed attorneys in the relevant state(s).<p>
<b>Compliance with Laws.</b> You agree to use the information provided herein in compliance with all applicable laws, including applicable securities laws, and you agree to indemnify and hold Inna Efimchik and White Summers Caffee & James LLP harmless from and against any and all claims, damages, losses or obligations arising from your failure to comply.<b>Disclaimer of Liability.</b> ALL INFORMATION IS PROVIDED AS-IS WITH NO REPRESENTATIONS OR WARRANTIES, EITHER EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE AND NONINFRINGEMENT. YOU ASSUME COMPLETE RESPONSIBILITY AND RISK FOR USE OF THE INFORMATION IN THIS POST.Inna Efimchik expressly disclaims all liability, loss or risk incurred as a direct or indirect consequence of the use of any information provided herein. By using any information in this post, you waive any rights or claims you may have against Inna Efimchik and White Summers Caffee & James LLP in connection therewith. <br />
<br />
<br /></span><br />Startup Voicehttp://www.blogger.com/profile/01289381273991991152noreply@blogger.com1