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Swipe Right to Issue Equity
- 1. SWIPE RIGHT TO ISSUE EQUITY The Importance of Choosing the Right Co- Founder & Proactive Measures to Help in Case You Don’t A Drexel Entrepreneurial Law Clinic Seminar Travis Aldous Brian Paul Bozzo Zachary Blake Schaeffer Jeremy Sichel
- 2. INTRODUCTION
- 3. TRAVIS ALDOUS MEET THE FALL 2017 ELC TEAM ZACHARY B. SCHAEFFER BRIAN P. BOZZO JEREMY SICHEL STEVEN ROSARD
- 4. OVERVIEW 1. Introduction 2. Cofounder Selection Exercise 3. Legal Issues - Equity Splits - Vesting - Roles and Responsibilities - Immigration Issues - Deadlock - Firing a Co-Founder - Reclaiming Equity - Intellectual Property Assignments - Buy/Sell Agreements 4. Revisiting our Cofounders 5. Questions & Answers
- 5. THE RISE OF CO-FOUNDER MATCHMAKING SITES • International matching in the U.S., Finland, Spain and Germany • Users create a profile providing preferences of location, skill set, time commitment, former projects and background in fundraising. • Entrepreneur hits submit, list of possible co-founder suitors is provided • Entrepreneurs post ideas and also rank and comment other ideas provided by various entrepreneurs. - CoFoundersLab.com - FounderDating.com - TechCofounder.com - Founder2be.com
- 6. NEW MANIFESTATION OF AN OLD PROBLEM • Founder drama happens even in situations where you wouldn’t expect it to crop up. Success will cover up many sins • When things are going up and to the right, things might be going wrong underneath and you won’t be aware of it. It’s the black ice of startups • Every startup will hit the skids sooner or later. You can’t count on good times forever — winter is coming • Conflicts are exacerbated when closer, more established relationships are in play and at stake • Families, friends and colleagues can Don’t Let Your Business/Family Get This Complicated!
- 8. WUPHF.COM: A GREAT NEW BUSINESS IDEA You are a recent graduate from the Wharton School, excited to start applying all of the things you’ve learned about entrepreneurship. You’ve just wrapped up your capstone project: a pitch for a social network for pet-owners that leverages profiles for the animals, instead of their owners. You have committed to developing a means of communicating through all of these channels at once, with WUPHF: a membership based, integrated communication platform. Although you are prepared to run the company’s marketing, you lack the managerial, technical, logistical and financial skills the company will require to succeed. Your friend told you about Co-founder Tinder (CoFinder) and you’ve decided to give it a swipe.
- 9. CO-FOUNDER #1 Match PendingMichael, 46 • MBA from the Wharton School, Specialization in Technical Management, Class of ‘07 • Currently manages a multi-disciplinary team at Dulloyt, a well reputed consulting firm, where he delivers executive training and tools to a variety of clients, including promising start ups and behemoth powerhouses • Is willing to contribute up to $10,000 in the beta to facilitate the a faster launch date • A close friend of your family, is willing to bring his skillsets to WUPFH as a favor to your parents THE WORLD’S BEST BOSS
- 10. CO-FOUNDER #2 • BSSE, MSSE Software Engineer from Drexel University, Class of ‘15 • Proficient in Object Oriented C, Java and C++ • Ten years experience at MoonGuard, a powerhouse software firm with a specialization in cloud computing and global networking • Has previously conceived of a comparable integration algorithm, which will give your team a tremendous headstart towards bringing WUPHF to market • Brings an extensive network of third party contractors and developers to help bring his wireframe concepts to life Match Pending THE TECHIE Ryan, 25
- 11. CO-FOUNDER #3 Match PendingDwight, 32 THE LOGISTICS GURU • Did not attend college, but immediately began driving trucks for FedOx, a popular shipping company after graduating from Jenkintown High School in 2003 • In 2006, was promoted into corporate, due to his extensive knowledge of FedOx’s logistic operations and ability to map more efficient routes based on improved communications between drivers • In 2009, left FedOx to develop OxCall, a new way for driver’s to communicate with each other without having to rely on CB radios • Has an extensive network of investors from his previous venture • Exited OxCall in 2015, after selling his ownership to FedOx • From Canada
- 12. Congratulations, you’re in business! I guess none of you look completely incompetent… State your color karate belt I don’t play karate, but have a reversible belt, black & brown. Will text when back from Sandals. 01001000 01101001 00100001 You all seem really exciting and talented! What could possibly go wrong?!
- 13. LEGAL ISSUES
- 14. OVERVIEW OF LEGAL ISSUES 1. Equity Splits 2. Vesting 3. Immigration Issues 4. Roles and Responsibilities 5. Intellectual Property Assignments 6. Deadlock 7. Buy/Sell Agreements 8. Firing a Co-Founder 9. Reclaiming Equity Vetting Co-Founders Structuring the Company Setting Expectations Dispute Resolution Restoring the Company
- 15. EQUITY SPLITS
- 16. EQUITY SPLITS Who get’s what?
- 17. WHEN TO SPLIT Split Earlier ● Attract key players who need equity incentive ● If already worked extensively with cofounders in another startup ● Negotiate calmly before you’re under pressure to split Split Later ● Learn about cofounders’ contributions ● Solidify startup’s strategy and business model ● Solidify roles ● Learn about cofounders’ commitment; strengthen incentives ● Avoid continual renegotiations as things change CAUTION: There are also tax consequences to waiting to split the equity, including having a higher “basis” for the stock and a later start for the long-term capital gains tax clock.
- 18. FACTORS FOR EQUITY SPLIT • Past contributions • Opportunity Cost • Future Contributions • Founder Motivations and preferences “Remember, when the pie is split, 95% of the work required for success remains in the future.”
- 19. EQUAL VERSUS UNEQUAL EQUITY SPLITS • A threshold of psychological pain versus financial gain • Showing unity (we’re a team) • Quick handshakes versus thoughtful equal splits
- 20. STATIC VERSUS DYNAMIC SPLITS
- 21. VESTING
- 22. VESTING • What is Vesting? - Each founder agrees to a certain amount of equity - The company retains a right to re- purchase “unvested” equity - “Vested” shares or units are unencumbered by such a “Re-Purchase Right” • So, what do I technically own? - What you agreed to upon executing the Agreement and capitalization table - An obligation to understand, and comply with the vesting schedule
- 23. BENEFITS OF VESTING • Protects the Company - Employees have a reason to stay with the company long-term - Co-Founders may earn unencumbered rights to their equity after a predetermined number of years - Vesting may also be tied to the completion of specific performance milestones or objectives - If a Co-Founder leaves the Company prior to their shares vesting, the Company can recover those shares at a favorable price
- 24. STANDARD VESTING PROVISIONS • Four Years and a Cliff - Vesting will occur based on the following schedule: - Until and through [FIRST VESTING DATE], neither Founder’s shares will vest - On and not before [FIRST VESTING DATE]– [25% ] of each Founder’s shares will vest - On and not before the 1st of every month thereafter, an additional [1/48TH] of the total options package will vest - Thus, on [END DATE] (the "Full Vesting Date"), each Founder will be
- 25. PERFORMANCE BASED VESTING PROVISIONS • Performance Based Vesting - Except as otherwise provided in Section 6(a) or Section 2(b) of this Agreement, the number of Options designated as Performance Options specified on the signature page hereof (the Performance Options) shall become vested upon satisfaction of the fiscal year performance goals set forth on Schedule A to this Agreement. - Vesting is subject to the continuous employment of the Employee with the Company until the last day of the applicable fiscal year. - In the event that the Employees employment terminates (other than for Cause) following the end of a fiscal year but prior to the determination by the Board as to whether the applicable fiscal year performance goal has been met, the vesting and forfeiture of the related Performance Options, and any applicable post-termination exercise period, will be tolled until the date of such determination, and, if any portion of the Performance Options vest based on such determination, the post-termination exercise period applicable to such portion of the Performance Option will commence as of the date of such
- 26. UNCONVENTIONAL VESTING PROVISIONS • Voting/Performance Based Vesting - First year “cliff” - Founding Members convene to vote on each Member’s “Performance Milestones” - Uninterested Founding Members vote on whether the achievement of the Performance Milestones - Unanimous vote vests that Period’s equity CAUTION: The further away from a standard, the more risk the company assumes!
- 27. CASE STUDY: SNAP, INC. • Founding members were friends at Stanford, worked on an app then known as “Picaboo” • One member came up with the idea of “disappearing” photos • A disagreement erupted, that member was ousted from the Company • In 2013, Snap was sued by the ousted member for breach of a joint venture • Settled for $158M on the verge of a $3B IPO… they got off easy! • Could vesting have helped? Become this?!How can this….
- 28. THINGS TO CONSIDER • There are Different Types of Equity • Ensure Members/Employees file an 83B • As a Co-Founder, Know Your Terms for Claiming Your Vested Shares
- 30. IMMIGRATION ISSUES • Relatively common to have immigrant co-founders in start-up companies • Common in tech and engineering companies • Many successful US companies have immigrant co-founders • ISSUES • Limited options • Immigration reform? • Costly
- 31. ISSUES CONCERNING EMPLOYMENT-BASED NONIMMIGRANT VISAS • Temporary Visas • H-1B Visa • F: Student Visa • Not an option for foreign entrepreneurs itself UNLESS used with OPT • Optional Practical Training • Tied to F Visa
- 32. CURRENT STATE OF IMMIGRATION • Startup Visa Program • Existing type of visa in other developed countries • International Entrepreneur Rule • Temporary stay for foreign entrepreneurs • H1-B Visa • “Buy American, Hire American” • Future of H1-B visa?
- 33. ADDRESSING AND SOLVING IMMIGRATION ISSUES • Be aware of your co-founders immigration status • Address it immediately • Weigh risk v. reward • Explore the viability of certain options and/or workarounds • Global Entrepreneur-in-Residence Program • Availability of other types of visas • Seek the help of an immigration attorney
- 35. ROLES AND RESPONSIBILITIES OF CO-FOUNDERS “Entrepreneurial success rarely comes from the idea. Instead, it comes from the founding team’s never-say-die attitude and relentless execution.” – Salim Ismail • Roles vs. Responsibilities • Defining Roles • Prior relationships?
- 36. IMPORTANCE OF DISTINCT ROLES AND RESPONSIBILITIES • Decision Making • Deadlock • Vesting • Milestone/goal based • Equity Split • Miscellaneous Provisions in an Operating/Founders’ Agreement • Devotion of Time • Tax Matters Member • Meetings • Intangibles • Productivity/Efficiency
- 38. INTELLECTUAL PROPERTY ASSIGNMENTS • What is Intellectual Property? - An innovative concept, design or invention - A new way of doing business - Your company name or logo • Why is Intellectual Property Important? - Create questions of ownership - Requires well constructed, enforceable contractual forms for employees, contractors and members - Could effect venture capital
- 39. STRATEGIES FOR ASSIGNING INTELLECTUAL PROPERTY Famous Trade SecretsFamous TrademarksFamous Patents
- 40. POTENTIAL INTELLECTUAL PROPERTY ISSUES • Inventor vs. Owner • Prior Ventures • Current Employment Obligations • Protecting Trademarks
- 41. STRATEGIES FOR PROPER MANAGEMENT OF INTELLECTUAL PROPERTY • Separate employment from your new idea • Protect and Leverage Your Contributions • Assign IP to the Company • Take care in using open source software • Be careful in hiring new employees
- 42. DEADLOCK
- 43. DEADLOCK Co-founders are the best of friends and can agree on everything….right?
- 44. DEADLOCK WRONG
- 45. DEADLOCK • What is Deadlock? - Deadlock means that the founders cannot seem to agree on making some decision or matter - The consequences of deadlock may be minor if the debated matter is minor in nature - However, a Fundamental Issue subject to deadlock could halt business or even cause a complete falling out
- 46. FUNDAMENTAL ISSUES • So, what are Fundamental Issues? - Fundamental Issues are traditionally such decisions that greatly impact the company and sometimes requires, by law, for unanimous approval - Adopting or amending the Company's business plans and budgets - Choosing whether to raise capital - Engaging in an M&A transaction - Initiating an IPO - Dissolving the Company - Initiating or settling any legal claim or action
- 47. RESOLVING DEADLOCK • Majority Approval - Pros: Simple means of passing or denying a decision without antagonizing co-founders - Cons: Skewed majority may exist where one or more founders will always be a minority - Founder A – 60% - Founder B – 30% - Founder C – 10%
- 48. RESOLVING DEADLOCK • Appointed Tie-Breakers - Pros: Always have an ultimate decision maker - Cons: - Decision maker may not be familiar with the issue at hand - Decides based on self-interest and not in best interest of the Company - May be biased • Chance Games - Pros: A decision can be made - Cons: Leaving a Fundamental Issue to chance is NOT likely considered acting in good faith or making a sound business decision
- 49. RESOLVING DEADLOCK • Cooling Off - Pros: - Enables more time to the consider issue and discuss without the immediate pressure of deciding - Allows for status quo until decided - Cons: - Decision may be time sensitive - Still requires agreement
- 50. RESOLVING DEADLOCK • Mediation - Pros: - Helps to facilitate good faith negotiation - Removes emotional aspect - Cons: - Usually costly and time consuming, - Mediator may not have Company inside knowledge - Founders ultimately still need to agree
- 53. RUSSIAN ROULETTE • Departing founder names a buy-sell price - The departing founder sends notice of his intent to either buy OR sell his ownership to the other founders • Other founders decide to buy or sell - After receiving the departing founder’s price, the other founders decide: - SELL their ownership at the departing founder’s price and thus leave the Company OR - BUY the departing founder’s ownership at the stated price and continue on with the Company
- 54. TEXAS SHOOT-OUT • Founders name their HIGHEST BUY price - The founders submits a sealed bid containing the highest price offer each one is willing to pay for the other founders’ share of the company • Highest bidder BUYS the other founders’ ownership interest - The founder that submitted the highest price must then buy the shares of the other founders at that price. - Founder A - $2.00/share - Founder B - $1.00/share - *A buys B at $2.00/share
- 55. DUTCH AUCTION • Founders name their LOWEST SELL price - The founders submits a sealed bid containing the lowest price offer each one is willing to accept if they were to sell their ownership interest • Lowest bidder SELLS its ownership interest to the other founders - The founder that submitted the highest price must then buy the shares of the other founders at that price. - Founder A - $2.00/share - Founder B - $1.00/share - *A buys B at $1.00/share
- 56. DETERRENCE APPROACH • Appraiser is brought in to determine the company’s Fair Market Value (FMV) - The appraiser determines the value of the ownership interests of the founders that did not invoke the buy-sell clause • Invoking Founder decides to buy OR sell - BUY (PREMIUM) – Invoking founder will buy the other founders’ ownership interest at a premium (i.e. 125%) OR - SELL (DISCOUNT) – Invoking founder will sell its ownership interest to the other founders at an equivalent discount (i.e. 75%)
- 59. POSSIBLE SITUATIONS • The forgotten founder • The backstabber • The underachiever • The beacher • The fighter • The quitter
- 60. FIRE A COFOUNDER? • Should you be able to fire a cofounder? • YES! • WHY? • Protect your equity • Vesting • Roles and responsibilities
- 61. HOW TO FIRE A COFOUNDER
- 62. FOUNDERS AGREEMENT: PREEMPTIVE SOLUTIONS ● Break-up (Termination) Provisions: Define the process ● Vote by majority of shareholders? ● Failure to perform defined duty? ● Resignation? ● Transfer Restrictions ● Block unwanted transfers ● Repurchase Rights ● Pre-negotiated buyout process
- 64. RECLAIMING EQUITY – REPURCHASE RIGHTS • Repurchase Rights - Allow for the company or remaining founders to purchase any vested units upon a founder’s termination - Repurchase rights can apply to various forms of termination - For Cause - Without Cause - Voluntary Resignation - Death or Disability • Establish Valuation Mechanism - Founders should establish the rules by which a terminated founder’s ownership interest is valued for the repurchase rights - Good faith negotiation of the fair market value - Hire an appraiser or arbitrator to make determination
- 66. Match Pending Michael, 46 CO-FOUNDER #1 Problems Encountered • How to compensate for $10k contribution? • Relationship pressure and impact on measuring performance Lessons Learned • Evaluate granting equity v. a loan to the company • Specify the terms of either choice • Define clear roles and responsibilities, including consequences of failing to perform THE WORLD’S BEST BOSS
- 67. Match Pending Ryan, 25 CO-FOUNDER #2 THE TECHIE Problems Encountered • Potentially infringed previous employer’s IP • Exited WUPHF without assigning new IP to the company Lessons Learned • Clearly distinguish new IP from prior employment IP • Draft and execute IP assignments
- 68. Match Pending Dwight, 32 CO-FOUNDER #3 THE LOGISTICS GURU Problems Encountered • Very stubborn; cannot agree with cofounders • Canadian citizen with a temporary work visa Lessons Learned • Define roles to assist with decision making • Create Deadlock provisions • Seek assistance of counsel and inquire about the Global Entrepreneurship-in- Residence Program
- 69. CONCLUSIONS Know Your Co-Founders • Finding the right skillsets is great • Establish procedures early in Founder’s Agreement • Understand previous obligations Founder’s Agreements • Give it the attention it deserves
- 70. THANK YOU TO OUR GUEST EXPERT Geoff Weber Weber Law weberbusinesslaw.com
- 71. THANK YOU TO OUR AUDIENCE Apply to be a client at www.drexel.edu/law/ELC
Notas del editor
- Jeremey’s slide
- Zach’s slide
- Travis’ Slide
- Travis’ slide
- Brian’s slide
- Jeremy’s slide
- Brian’s slide. “As we go forward, consider these issues…” Review the co-founder bios on the back of this sheet. What do you believe this co-founders strengths will be? Can you foresee any potential pitfalls to working with this particular individual? Think about how you will divide/approach the following management issues: How are you going to make decisions moving forward? How will you split the work between co-founders? Who has authority to act on behalf of the company? What happens if someone decides to leave? Decide how you will split equity between co-founders. Now that your team is formed and you’re ready to start working, WUPHF was lucky enough to be accepted by Drexel Law’s Entrepreneurial Law Clinic. Make a list of what you think are your team’s top three legal issues are for getting started.
- What is Vesting? Vesting means that each founder gets his or her full package of stocks upon founding. As Travis discussed, this can occur at the outset of the Company’s founding, or later on as the Company grows,, upon the execution of a Founder’s (or Operating) Agreement with a negotiated Capitalization Table. Each Co-Founder is still entitled to their “agreed to piece of the pie.” However, the company retains a right to purchase “unvested” equity if the founder’s equity at a previously agreed price if they don’t comply with conditions in the vesting schedule. Assuming each Co-Founder complies with the terms of the Vesting Schedule, their shares will “vest,” and be unencumbered by such a Repurchase Right. So, what do I technically own? You own what you agreed to own, but you are also obligated to comply with the company’s vesting provisions prior to realizing the full benefit of your ownership Thus, it is extremely important to fully understand the obligations set forth in the Operating Agreement, including both the Vesting Schedule and Re-Purchase Option, retained by the Company In other words, you are still entitled to your piece of the pie, but you need to wait, or earn, for your right to eat it
- Protects the Company Vesting creates an incentive for the founding members to work in accordance with the terms of the Operating Agreement If they do not comply, the Company has a remedy, in that it can recoup unvested (or unearned) equity at an undamaging price Vesting schedules can be customized Each founding member can earn their shares by actively participating in the business for the specified periods of time Alternatively, vesting schedules can be milestone based, that is, tailored to vest equity grants upon the completion of pre-determined goals Thus the Company is assured that its Co-Founders will perform, or it can recover their ownership which would otherwise be lost Consider the following hypothetical… Your partner walks away a couple of months after founding Without vesting, she would be able to claim the full value of her interest and rights in the company because the Company legally assigned her those interests upon executing an Operating Agreement that did not include a vesting schedule However, had you included a well drafted vesting provision in the Operating Agreement, the Company would have retained the right to re-purchase her interests upon resignation at a nominal price instead of fair market value In essence, vesting protects the Company from the unforeseeable behavior of its founders and aligns each founder’s incentives with those of the Company: to diligently work towards building a successful business, in accordance with agreed to terms All parties can move forward with an increased confidence in their partners, clear expectations and an understanding that non-compliance to the Operating Agreement may subject them to penalties that most founders agreed to A quick note about resignations… they can either be “actual” or “constructive” Actual resignations are unambiguous, and easily documented. Constructive resignations are a bit trickier and necessitate a case to be made regarding lack of communication, participation and apathetic behavior that does not comply with the obligations set forth in the Operating Agreement. Now let’s review a few vesting schedules available to start-up companies…
- Four Years & a Cliff This is a standard, simple vesting schedule that was extracted from a form Operating Agreement As you can see, a typical options vesting package spans four years with a one year cliff. A one year cliff means that you will not get any shares vested until the first anniversary of your start date. At the one year anniversary, you will have 25% of your shares vested. After that, vesting occurs monthly (or annually, or by a period of any duration agreed to by the Co-Founders). So, if I’m a startup engineer granted 4,800 shares in my options package, at the one year mark, I get 1,200 shares vested (if I quit or am fired before that date, the Company can repurchase my shares at a fraction of the FMV). After the one year mark, each month I stay with the company, I get another 100 shares vested (1/48th of the total options package). So… What is this? Many startup founders hate the one year cliff, because it seems unfair VCs like it since they think employees will work really hard to make sure that they reach the cliff date. Employees, on the other hand may worry that management will let them go just before they reach the cliff. The sad thing is that, in a relatively short time, we have seen several clients with great, growing businesses suffer because they did not incorporate such provisions Ultimately, such startups find themselves in a worse situation, stretching to create ways to recover their lost equity
- An alternative approach to founder vesting, which creates a increased correlation between the vesting level and value creation, would be to define a set of value milestones, each of which unlocks an additional part of the founders’ equity. Moving from one milestone to another may be faster or slower depending on how the venture performs, so Founders should consider rolling missed equity over to the next period. Milestone-based vesting is a very effective way to make sure that if a co-founder voluntarily quits the venture, he does not walk away with too much equity. However, the case in which a co-founder is forced out of the venture is quite different. In that case, the founder can no longer be held responsible for value creation and may be compensated as if all or most of the value has already been created. This could be achieved using accelerators that take effect in such scenarios and accelerate the vesting level of the founder to a higher level. This mechanism is very similar to the very common upon-exit acceleration clauses usually found in the employment agreement of founders.
- Voting/Performance Based Vesting Retained the first year “cliff” However, at that point, the Founding Members convene to vote on each Member’s “Performance Milestones” for the forthcoming “Vesting Period” Each uninterested Founding Member votes as to whether the next successfully accomplished their Performance Milestones and a unanimous vote vests that Period’s equity In the case of a split vote, 50% of the equity at stake vests, and the remaining 50% is withheld as “Roll Over Equity” for one additional Vesting Period.
- You may not be familiar with the mobile application “Picaboo” But you have likely heard of Snap Chat… Reggie Brown, went to Stanford with Evan Spiegel and Bobby Murphy where they were friends, and Kappa Sig brothers. They worked on an app then known as “Picaboo” Reggie came up with the core idea of disappearing photos. Drama ensued, regarding ownership and the order in which their names appeared on the patent and Reggie was locked out of all company systems In 2013, Reggie sued Snap for breach of a joint venture, and settled for $158M on the verge of a $3B IPO. So what do you think, could vesting have helped?
- There are Different Types of Equity The type of equity that is issued, granted and vested may effect your vesting schedule. Are your issued shares Preferred or Common? Are the units Voting, or Non-Voting? The type of equity granted to Co-Founders, even if unvested, could affect the way your Company operates For example, do you want non-Founders voting on performance milestones? If not, tailor the schedule for Founding Members, not Voting Members Include an Adjustment Clause for the Repurchase Price A well-constructed anti-dilution provision increases the Co-Founder units pro-rata (proportionately) Without an adjustment provision, exercising the company’s repurchase right on a 20% Co-Founder at a non-adjustable Repurchase Price of $1/unit could cost the company $200,000 An example of this “adjustable price”… The company originally issued 100 units, and the repurchase right originally specified a price of $1 per unit The company then grows, and issues a total of 1,000,000 units Your well-constructed anti-dilution provision increases the Co-Founder units proportionately Without an adjustment provision, exercising the company’s repurchase right on a 20% Co-Founder could otherwise cost the company $200,000 Ensure Members/Employees file an 83B Unvested shares could be taxed as compensation, at the higher wage tax rate based on their value at the time they vest However, this equity is granted at a time when it is valued at its lowest, when the company is young. The 83B entitles Founders to be taxed on the equity’s lower value, at the time of grant, even though it is taxed later at the time of vesting Startups Have Higher Turnover Rates, Prepare for Termination Most Company’s have a narrow window for an exiting Co-Founder to purchase or claim their vested shares, typically 30 to 90 days in length As a Co-Founder, do not forget about these windows, because the Company is not obligated to remind you when you leave — they usually only tell you in your option agreement when you first join.
- What is Intellectual Property? IP is broadly defined, but generally comprises “intangible” assets IP is often the most valuable asset of a technology startup Protecting IP can be essential to obtaining venture capital funding or preventing competitors from unfairly competing Why is Intellectual Property Important? IP issues often are among the most important considerations that a technology startup will encounter Startups may face IP issues when developing a product, hiring qualified employees, raising capital, and more. It is essential, though not inherently simple, to ensure your company owns the fruits of its labor
- Trade Secrets Inexpensive, and are protected for as long as the company makes a reasonable attempt to keep it secret Not limited to a fixed term Trademarks Relatively inexpensive, protects words, tag-lines, logos, trade dress and more for particular classes of goods Intended to be source identifying for the benefit of the consumer Patents Expensive, granted through lengthy prosecution at the USPTO Can protect a novel, non-obvious product, method, design or patent Grants patentee a 20 year term of exclusive manufacture, use and sale in the U.S., from the date of filing Are not invincible, can be held invalid post-grant
- Inventor vs. Owner Just because an individual invents a novel process or product does not mean that they are the outright owner of that property Prior Ventures If a Co-Founder intends on leveraging or extending work that was developed for a previous entity, their new efforts may be infringing that prior employer’s IP or in violation of a non-compete Current Employment Obligations Be cautious of Co-Founders that are currently employed full-time and moonlighting on your venture Protecting Trademarks Descriptive trademarks are more difficult to protect and thus, more susceptible for dilution by exiting Co-Founders
- Keep your employment work separate from your new idea Distinguish the technology you develop for your startup from the work you perform for an employer by architecture, application and implementation Don’t let other people claim ownership of your IP or your company Keep records of development meetings, and leverage your ideas and contributions into increased equity percentages Ensure roles and responsibilities accurately reflect the skillsets of each Co-Founder Have contributors assign their IP to the company Intellectual Property created pre-incorporation should be transferred to the company via a written agreement All employees should sign Confidentiality and Invention Assignment agreements requiring assignment of intellectual property as a condition of employment Consultants/independent contractors should sign agreements clearly stating their obligation to assign intellectual property they develop to the company Evaluate core assets and decide on the type of IP protection you need Protecting Intellectual Property often seems cost-prohibitive Some simple and cost-effective techniques can minimize the anxiety yet help protect core assets such as critically evaluate the value of intellectual property assets to raise funds to protect core assets. Take care in using open source software Use of open source software is generally free and may often expedite development However, open source licenses must be read carefully If you use the code in an unapproved manner (commercially) you may be liable for breach Be careful in hiring new employees Be extremely careful in hiring new employees, especially from competitors Avoid use of confidential or proprietary information of the prior employer, make sure the employee isn’t subject to a relevant binding non-compete agreement. Require the new employee to represent that they aren’t bringing over any confidential or proprietary information or files of the prior employer. Complete reference checks on the new employer before hiring.
- Early stage companies deal almost on a daily basis with substantial, high-pressure decisions that need to be made. Such decisions could be regarding which product manufacturer should be selected to produce a prototype, whether or not to issue an advisor equity, or even deciding how to allocate which tasks and duties to founders. When the founders, members, or managers cannot agree on something, we get what is called a deadlock. Despite how friendly or close founders are with each other, there is always a risk of deadlock. Although some deadlock may pertain to minor issues, others can be quite paramount to the progress of the company, and if not resolved, may ultimately force the founders to dissolve the company because they could not simply see eye-to-eye.
- (a) adopting or amending the Company's business plans and budgets (b) making a capital call or request for additional contributions to the Company; (c) entering into a consolidation, reorganization, merger or sale of substantially all of the assets of the Company or any other similar transaction; (d) acquiring an interest in another Person, firm or business; (e) initiating an initial public offering of the Company; (f) dissolving the Company; or (g) initiating or settling any litigation or arbitration proceeding involving the Company
- One simple way to reduce risk of deadlock is to make sure your founding team has an odd number of members. That way, if each founder is entitled to one vote, then a decision will be made or dispute resolved by simple majority vote. However, the company may not have an odd number of managers or members to allow a majority decision if the issue is a true 50/50 split.
- One such tie-breaker could include appointing some member, manager, advisor, or an independent individual to decide on a split decision. However, such solutions often prove problematic because either the appointed person is likely biased to one side of the decision for some subjective reason or the person is not informed enough on the business matters at hand to make a well-informed decision on the matter.
- One such tie-breaker could include appointing some member, manager, advisor, or an independent individual to decide on a split decision. However, such solutions often prove problematic because either the appointed person is likely biased to one side of the decision for some subjective reason or the person is not informed enough on the business matters at hand to make a well-informed decision on the matter. Chance (Coin Toss) – Another simple tie-breaker is leaving the issue to be decided by chance. This could include flipping a coin, drawing straws, etc. This may be useful for simple disputes, such as choosing between steel or wood work desks, but should not be used for more substantial matters
- If the issue requires greater attention than simply between what material the work desks should be, then the founders may want to utilize a form of mediation. Mediation, as previously mentioned could involve using an insider to resolve the issue, but to eliminate bias, the founders should agree to elect an independent mediator(s) and take the time to present their cases for why a certain decision should or should not be made. Mediation may be costly to the founders if business professionals or legal counsel needs to be brought in to help resolve the matter.
- For such situations where the decision is rather substantial to the company, and the founders had tried other means of resolving the issue, then perhaps it is best for one or more of the founders to leave the company and allow the remaining founders to carry on the business. In such situations, the departing founders will sell and the remaining founders will buy the departing founders’ ownership interest. This is known as a Buy-Sell Agreement.
- One founder serves notice to the other founder(s) stating the notifying founder's perceived value of the company. The member receiving the notice must then either sell her percentage interest to the other founder at that price or purchase all of the other founder's percentage interest at that price.
- Each founder submits a sealed bid containing her perceived value per percentage interest in the company. The founder with the higher bid buys the other member out.
- Each founder submits a sealed bid containing the lowest price at which she would sell her percentage interest. The member with the higher price buys the other founder's percentage interest at the lower price submitted.
- An expert or auditor determines the “fair market value” of the percentage interest. Once determined, the member triggering the buy-sell provision will either buy the other percentage interest at a premium (i.e. 15%) or sell her percentage interest to the other member at an equivalent discount. Issue here is that the deadlock may not ultimately be resolved, and if founders are paid from the company’s cash flow, the business could be hindered.
- MBA from the Wharton School, Specialization in Technical Management, Class of ‘07 Currently manages a multi-disciplinary team at Dulloyt, a well reputed consulting firm, where he delivers executive training and tools to a variety of clients, including promising start ups and behemoth powerhouses Is willing to contribute up to $10,000 in the beta to facilitate the a faster launch date A close friend of your family, is willing to bring his skillsets to WUPFH as a favor to your parents
- BSSE, MSSE Software Engineer from Drexel University, Class of ‘15 Proficient in Object Oriented C, Java and C++ Ten years experience at MoonGuard, a powerhouse software firm with a specialization in cloud computing and global networking Has previously conceived of a comparable integration algorithm, which will give your team a tremendous headstart towards bringing WUPHF to market Brings an extensive network of third party contractors and developers to help bring his wireframe concepts to life
- Did not attend college, but immediately began driving trucks for FedOx, a popular shipping company after graduating from Jenkintown High School in 2003 In 2006, was promoted into corporate, due to his extensive knowledge of FedOx’s logistic operations and ability to map more efficient routes based on improved communications between drivers In 2009, left FedOx to develop OxCall, a new way for driver’s to communicate with each other without having to rely on CB radios Has an extensive network of investors from his previous venture Exited OxCall in 2015, after selling his ownership to FedOx From Canada
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