Carlos W. Ellerbe & TJ Graham (Counsel, WSGR)

1. COMMON LEGAL PITFALLS IN
FORMING A COMPANY
CARLOS W. ELLERBE
CELLERBE@WSGR.COM
TJ GRAHAM
TGRAHAM@WSGR.COM

2. Founders
Employees
Consultants
Investors
Others
START-UP COMPANY ECO-SYSTEM
CustomersProducts Employees
Consultants
Investors
Founders
Others

3. FORMATION DOCUMENTS
• Capitalization Table
• Certificate of Incorporation
• Action by Sole Incorporator
• Bylaws
• Initial Board Consent
• Founder Common Stock
• Equity Incentive Plan
• At-Will Employment Agreement
• Consulting Agreement
• Non-Disclosure Agreement

4. CAPITALIZATION TABLE
• Common Stock
• Stock Option Pool
• No Anti-Dilution

5. CERTIFICATE OF INCORPORATION
• Delaware
• Sole Incorporator
• Authorized Stock
• Par Value of Stock

6. ACTION BY SOLE INCORPORATOR
• Appoint Initial Board
• Adopt Bylaws

7. BYLAWS
• Delaware
• Electronic Board Consent
• Written Stockholder Consent

8. INITIAL BOARD CONSENT
• Ratify Actions of Sole Incorporator
• Affirm Size of Board of Directors
• Appoint Officers
• Issue Founder Stock
• Adopt Equity Incentive Plan

9. FOUNDER STOCK
• Vesting
• Acceleration
• 83(b) Election
• Securities Filing

10. EQUITY INCENTIVE PLAN
• 10% of Fully-Diluted Capitalization?
• Stockholder Approval
• Securities Filing

11. AT-WILL EMPLOYMENT AGREEMENT
• At-Will Relationship
• Invention Assignment
• Confidentiality

12. CONSULTING AGREEMENT
• IP Ownership
• Confidentiality
• Termination for Convenience
• Payment for Service/ Performance

13. NON-DISCLOSURE AGREEMENT
• Confidentiality and Non-Use
• One-way / Mutual
• Feedback Clause
• Residual Clause

14. Founders
Employees
Consultants
Investors
Others
START-UP COMPANY ECO-SYSTEM
CustomersProducts Employees
Consultants
Investors
Founders
Others

15. WHAT IS INTELLECTUAL PROPERTY?
IP
IP Rights
Intangible
Technology
Tangible
Purely Legal
Rights
Trademarks
Patents
Copyrights/Mask Work Rights
Trade Secrets
Costless/Unlimited Copying:
Software, Documents
Expensive/Limited Copying:
Hardware, Equipment, Prototypes

16. IP IN THE CORPORATE LIFE CYCLE
Founders
Spins/Parents/
Universities
EXIT
IPO
Merger/Sale
Acquisitions
Open
Source
Licenses
Internal
Dev
JVs
GROWTHFORMATION

17. IP STRATEGY FOR START-UPS
• Goals: Protect enterprise value & avoid infringement
• Addressing common start-up issues
– Secure IP assignments from founders, employees, and
consultants
– Employees & consultants
– Internal development (build vs. buy)
– Adopt sound practices for protecting confidential
information
– Understand implications of using open source software
– Manage source code carefully
– Limit or avoid material business restrictions
• Good hygiene for IP due diligence

18. FOUNDER IP ASSIGNMENTS
• Tax issues
• Company valuation and assets
• Leverage of founder whose IP is not
assigned

19. EMPLOYEES & CONSULTANTS
• Benefits of employee development
– Employees within scope of employment
– Work for hire doctrine (copyright only)
– Employee agreements
• Risks of employee development
– Non-competes (outside CA)
– Former employer IP issues
• Consultants
– Need formal agreement (work for hire does not apply)

20. BUY/LICENSE VS INTERNAL DEVELOPMENT
• Cost to buy vs build
• Benefits of ownership
• Time to market
• Restrictions on license scope
• Transferability

21. CONFIDENTIAL INFORMATION
• Reasonable efforts to maintain
secrecy of trade secrets
• NDAs
• Employee agreements
• Avoid source code escrows and
springing obligations

22. OPEN SOURCE SOFTWARE
• Copyleft licenses
• Risks of noncompliance
• Policies and procedures for
compliance
• Increasing importance in M&A and
IPO due diligence

23. SOURCE CODE
• Managing disclosure
• Limit disclosures & escrow
arrangements
• Careful approach toward release
conditions

24. MATERIAL BUSINESS RESTRICTIONS
(CHILLING EFFECTS)
• Freedom to assign key contracts
• Trojans
• Triggers on change of control
• Non-competes
• Rights of first refusal/negotiation
• Exclusivity