The Right Time to Fundraise in the Silicon Valley

[This post is an excerpt from my presentation entitled Silicon Valley Fundraising Trip: Tips for the Non-U.S. Based Startup Founder.]

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.

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.

Ripe for US Fundraising. 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:

• We raised a small seed round of capital with a local venture capital firm and angels
• We have publicly launched our product in our country
• Our product has gained significant traction in our domestic market
• We are ready to launch our product on the US market
• We are opening an office in the US that will be handling US operations and marketing
• Our management team has already relocated to the US (or is relocating to the US within 3-6 months)
• 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.

Almost There. 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.

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.

More Work to Do at Home. 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.

The Chief Executive Officer. 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.

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.

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!

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.

The Bottom Line. 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.

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).

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!

Disclaimer. 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.

Happy company making!

Inna

Inna Efimchik, a Partner at White Summers Caffee & James LLP, specializes in assisting emerging technology companies in Silicon Valley and beyond, providing incorporation, financing, and licensing services as well as general corporate counseling.

LEGAL DISCLAIMER

Copyright Notice. The copyright for all original content in this post and any linked files is owned by Inna Efimchik. All rights are reserved.

No Attorney-Client Relationship. 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).

Compliance with Laws. 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.

Disclaimer of Liability. 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.

Should Founders’ Shares be Subject to Vesting

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.

Who Should Have Vesting. 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).

Vesting Definition. 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.

Vesting Term. 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.

No Cliff on Founder Shares. 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.

Cliff on Shares by Other Contributors. 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.

Vesting Acceleration. 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.

Why Do We Need Vesting. There are several good reasons why it is a very good idea to impose vesting on the founders’ shares.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

Happy company making!

Inna

Inna Efimchik, a Partner at White Summers Caffee & James LLP, specializes in assisting emerging technology companies in Silicon Valley and beyond, providing incorporation, financing, and licensing services as well as general corporate counseling.

LEGAL DISCLAIMER

Copyright Notice. The copyright for all original content in this post and any linked files is owned by Inna Efimchik. All rights are reserved.

No Attorney-Client Relationship. 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).

Compliance with Laws. 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.

Disclaimer of Liability. 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.

Coming to the Silicon Valley to Raise Money

Recently one of our clients, Ruslan Pichugin, CEO of Yocto Games 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.

 

(1) What were some of your goals in coming to the US? Do you consider the trip a success in light of those goals?

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.

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.

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!

Overall, I gained a good deal of experience, made some great connections, and consider my trip a success.

(2) Where did you stay during your trip (hotel, city)? Are you happy with your choice of the hotel and your geographical location?

I stayed at the Pacific Euro Hotel 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.

This hotel works well for a business trip, as a place to crash at night. But it’s certainly no Ritz Carlton.

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.

(3) Tell us about your cell phone situation during your trip.

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.

(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?

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.

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.

(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?

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.

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.

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.

(6) In hindsight, is there anything you did that you realize was a waste of time that could have been avoided?

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!

(7) What general advice would you give someone coming to Silicon Valley in your footsteps?

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:

• Check out www.meetup.com. This is a great website that allows you to find, and register for, events both in advance of and during your trip.

• 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.

• Get a local phone! Not only will it save you money, it will make it easier to exchange information with new contacts.

• 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).

• Don’t forget to bring with you business cards printed in English.

• Be prepared that prices in the Silicon Valley are roughly equivalent to prices in Moscow, on everything (food, taxi, mobile service).

• The best burgers are at Five Guys! They are better than Carl’s Jr., In-n-Out, McDonalds and Wendy’s!

Lastly, be prepared for new experiences and enjoy!

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: segment 1 and segment 2.

Happy company making!

Inna

Inna Efimchik, a Partner at White Summers Caffee & James LLP, specializes in assisting emerging technology companies in Silicon Valley and beyond, providing incorporation, financing, and licensing services as well as general corporate counseling.

LEGAL DISCLAIMER

Copyright Notice. The copyright for all original content in this post and any linked files is owned by Inna Efimchik. All rights are reserved.

No Attorney-Client Relationship. 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).

Compliance with Laws. 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.

Disclaimer of Liability. 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.

US Incorporation and Flips FAQs

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.

Below are some of the most frequently asked questions in this context and my answers to them.

Do I Have to be a US Citizen or Resident to Form a Company in the US?

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.

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.

How Quickly Can I Form a Company in the US?

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.

On our end, this includes preparation of the following, as necessary and applicable:

• a capitalization table;
• bylaws;
• action by incorporator (appointing directors);
• organizational board consent (authorizing initial stock issuances, among other things);
• stock purchase agreements for founders and early employees;
• assignment of intellectual property to the newly formed company by the founders;
• documentation of investments into the company which precede or are contemporaneous with formation;
• indemnification agreements for officers and directors;
• application for employer identification number (necessary to open a US bank account);
• state qualification to do business; and
• form of confidential information and inventions assignment agreement.

Will You Help Us Open a Bank Account?

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.

What's the Minimum Capitalization Amount for a US Corporation to Meet the Statutory Requirements?

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.

What Are the Annual Corporate Maintenance Obligations Associated with a US Corporation?

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:

• Registered Agent. 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).
• Franchise Tax. Delaware and most of the other states have an annual franchise tax requirement.
• Information Statement. 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.
• Tax Return. 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.
• Annual Meeting of the Board of Directors. 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.
• Survey of Foreign Investment. 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

This list is not exhaustive. And there may be other maintenance obligations with respect to a company in a special regulated industry.

What is the Difference between a Flip and a New Company Formation in the US?

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 flips.)

Happy company making!

Inna

Inna Efimchik at White Summers Caffee & James LLP, specializes in assisting emerging technology companies in Silicon Valley and beyond, providing incorporation, financing, and licensing services as well as general corporate counseling.

LEGAL DISCLAIMER

Copyright Notice. The copyright for all original content in this post and any linked files is owned by Inna Efimchik. All rights are reserved.

No Attorney-Client Relationship. 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).

Compliance with Laws. 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.

Disclaimer of Liability. 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.

Antidilution Protection FAQs

"Dilution" 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 something happens which decreases your piece.

What I think is less understood, are (1) the implications of something happening which results in dilution to existing equity holders, and (2) the rights to protect against the resulting dilution (also known as "antidilution protection").

What Triggers a Dilutive Event.

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.

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.

Example: 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!

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.

Protection Against Antidilution.

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?

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.

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.

Happy company making!

Inna

Inna Efimchik at White Summers Caffee & James LLP, specializes in assisting emerging technology companies in Silicon Valley and beyond, providing incorporation, financing, and licensing services as well as general corporate counseling.

LEGAL DISCLAIMER

Copyright Notice. The copyright for all original content in this post and any linked files is owned by Inna Efimchik. All rights are reserved.

No Attorney-Client Relationship. 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).

Compliance with Laws. 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.

Disclaimer of Liability. 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.

Private Company Board of Directors FAQs

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!

Who makes the final decision on the number of Board members?

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.

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.)

What are the qualifications for Board membership?

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.

What percent ownership of the Company entitles a stakeholder to designate a Board member?

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, cumulative voting applies to election and removal of directors.

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.

How long is the term of a Board member?

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.

What is the process for removing a Board member?

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, cumulative voting applies to election and removal of directors.

How does the Board vote?

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:
• 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.

• 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.

Happy company making!

Inna

Inna Efimchik at White Summers Caffee & James LLP, specializes in assisting emerging technology companies in Silicon Valley and beyond, providing incorporation, financing, and licensing services as well as general corporate counseling.

LEGAL DISCLAIMER

Copyright Notice. The copyright for all original content in this post and any linked files is owned by Inna Efimchik. All rights are reserved.

No Attorney-Client Relationship. 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).

Compliance with Laws. 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.

Disclaimer of Liability. 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.

Negotiating with Investors: How far is too far?

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 should a founder push the envelope with his investors on deal terms? I even posted a question on Quora to get testimonials about some wacky things that founders have tried and succeeded on.

In the meantime, I wanted to share my thoughts on this more generally:

1. Being Reasonable. 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.

   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.

   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.

2. Being Strategic. 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.
   • Price. 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.

   • Control. 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.

     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.

3. Cost. 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.

   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.

   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.

Happy company making!

Inna

Inna Efimchik at White Summers Caffee & James LLP, specializes in assisting emerging technology companies in Silicon Valley and beyond, providing incorporation, financing, and licensing services as well as general corporate counseling.

LEGAL DISCLAIMER

Copyright Notice. The copyright for all original content in this post and any linked files is owned by Inna Efimchik. All rights are reserved.

No Attorney-Client Relationship. 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).

Compliance with Laws. 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.

Disclaimer of Liability. 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.

Startup Hiring - Typical Equity Compensation Ranges for Early-Hires

Very frequently I am asked by my early-stage clients what the "typical" equity compensation percentage is for... [insert the position they are currently trying to fill]. Since this is a topic of interest to many, I thought I would lay out some general rules of thumb.

Before I do so, however, let me preface this with a disclaimer that:

1. all generalizations, rules of thumbs, and industry practices are imperfect and flawed by definition;
   
2. no two companies are the same, so do what's right by your employees and consultants;
   
3. each individual contributor is different and may warrant a different percentage under a special set of circumstances; and
4. the ranges listed are only typical, if at all, for early-stage company (not a company with a $100,000,000 valuation).

So, provided below are merely benchmarks which may prove useful in creating your startup's own compensation scheme:

Chief Executive Officer	–	5-8%
C-Level Executive/VP	–	2-3%
Independent Director	–	1%
Advisory Board Member	–	0.15%/year
Lead Engineer	–	0.5 - 1%
Senior Engineer	–	0.33% - 0.66%
Junior Engineer	–	0.2% - 0.33%

Happy company-making to all!

Inna

Inna Efimchik at White Summers Caffee & James LLP, specializes in assisting emerging technology companies in Silicon Valley and beyond, providing incorporation, financing, and licensing services as well as general corporate counseling.

LEGAL DISCLAIMER

Copyright Notice. The copyright for all original content in this post and any linked files is owned by Inna Efimchik. All rights are reserved.

No Attorney-Client Relationship. 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).

Compliance with Laws. 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.

Disclaimer of Liability. 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.