1. LEGAL ISSUES FOR GAMING
COMPANIES AND THEIR FOUNDERS
Anil Advani
Managing Partner
Inventus Law
2. Life Cycle of a Startup
Licensing and other
Employee Matters
IP Matters
Formation EXIT:
Strategic
ACQUISITION
Debt vs. Equity Partnerships
SMALL BIG BRIDGE
ANGEL ROUND CUSTOMER CUSTOMER ROUND
INITIAL
SERIES A SERIES B SERIES C SERIES D PUBLIC
OFFERING
Founders
Stock
Option Plan Selecting and
The big
Negotiating with VC’s
question:
IP Protection when and
how to
exit????
3. Equity Structure: Founders and Third Parties
Identifying the “Real” Founders
– Need to be fair, not equal, among the founders
– Single Founder versus multiple founders
– Co-Founding with Friends and Relatives
– Founders versus Founding Team
Initial Capital Structure
– Initial Authorized: 10MM shares of Common Stock
• Founder Stock : 7-8 MM
• Option Pool: 2-3 MM
– Terms of Founder Stock /Options:
• Issue stock to Founders early to avoid tax issues ; 83(b) elections: file on time (within 30 days of
purchase)!
• Acceleration: Single Trigger versus Double Trigger; Wrong acceleration terms could hamper
acquisition
• Vesting for Options: Straight 4 year vesting; 1 year “cliff”, with monthly vesting thereafter
4. Financing Options
Seed Financings:
• Founders, Friends, Family, Angels, Early Stage VCs
– Incubators: YC, Idea labs, Citrix Accelerator, Startups500, Tandem, and Alchemist
– Convertible Notes with a “kicker”, either a discount or warrant coverage
• Typically between $250k to $1MM
• debt that converts into preferred equity in the “next qualified financing”
• Avoid any additional rights to seed investors, although institutional investors may require right
to lead the next round, management rights, board seat and protective provisions
• Look out for any issues that may affect future financings.
Venture Capital Financings:
– Valuations
– Preferred Stock
Strategic Transactions:
– Licensing Arrangements
– Revenue Share; Affiliation Agreements; Reseller Agreements
– Mergers and Acquisitions
5. Venture Financing
Three Main Components of Venture Financing Process
– Pricing/Valuation
• Percentage of the Company to be sold (Pre and Post Money)
• Liquidation Preference
– Management/Controls
• Board Rights
• Protective Provisions; Covenants
• Drag-Along Rights
– Liquidity Rights
• Co-Sale/Right of First Refusal
• Registration Rights
• Anti-Dilution Protections
• Redemption Rights
Time, Process and Expense
– Time: 2-3 months from start to finish; Legal fees (both sides), Investor expenses
– Process: IP diligence, Legal diligence, Schedule of Exceptions; Financing Documents
6. Strategic Transactions
Licensing Arrangements
– License Terms:
• Exclusive versus Non-Exclusive
• Geographical Limitations
– Ownership of IP and “Work Product”
– Other Material Provisions: Term, Termination, Assignment, and Indemnification.
Partnerships
– Revenue Share Agreements: Zynga- Facebook Agreements
– Affiliate Agreements
– Reseller Agreements
Mergers and Acquisitions
– Set up right legal structure
– Ownership of IP is critical
– Contract terms play a big role in valuation