Presentation of Anil Advani at Startup Istanbul 2016, 6-10 October, Istanbul, Turkey

2. 1
LEGAL ISSUES FOR STARTUPS
Etohum – Istanbul
October 7, 2016
Anil Advani
Managing Partner
anil@inventuslaw.com
PRESENTS

3. 2
Agenda
PART I: STRUCTURING U.S. OPERATIONS
• Reincorporate Foreign Company as a U.S. Parent Company
• Incorporate a U.S. Subsidiary of the Foreign Company
• Incorporate an entirely independent U.S. Company
PART II: LEGAL ISSUES RELATING TO A STARTUP COMPANY
Incorporation Process
Employment Issues; IP Ownership Issues
Equity Structure
Financing Options
Strategic Transactions

4. 3
PART I: STRUCTURING U.S. OPERATIONS
• Option 1: Reincorporate Foreign Company as a U.S. Parent Company
• Option 2: Incorporate a U.S. Subsidiary
• Option 3: Incorporate an Independent U.S. Company
INVESTORS U.S. Parent
Foreign Sub
Investment
100%
INVESTORS Foreign Parent
U.S. Company
Founder Stock
Investment
100%
Founder Stock
Option Plan
Option Plan
U.S.
Company
Ownership,
Investment
and
Management
will be
unclear

5. 4
Reincorporate Foreign Company as a U.S. Parent company:
• Only viable option where the investors and/or potential exit and/or most strategic customers
and/or partners located in the U.S.
• Tax issues need to be handled carefully; valuation of Foreign company shares needed
• All IP, founder stock, Option Pool, Investors, Customers and Revenues will be held in the
U.S. Company
• Need to carefully structure management, Board and Shareholding
• IP can be licensed to Foreign company for sale in India, or directly to Foreign customers
through website
• Transfer Pricing Issues; Immigration related issues
Incorporate a U.S. Subsidiary Company:
• Good option where the purpose of U.S. company is limited. For example, for collections
from, or marketing and managing, U.S. customers of the Foreign company
• Easy to set up and operate
Incorporation a completely independent company:
• Easy to set up and operate
• Not a good option if need to restructure for U.S. financing, licensing
and/or potential exit
SETTING UP U.S. OPERATIONS (CONTD.)

6. 5
Part II: Life Cycle of a Startup
EXIT:
ACQUISITION
BRIDGE
ROUND
INITIAL
PUBLIC
OFFERING
SERIES CSERIES BSERIES A
BIG
CUSTOMER
SMALL
CUSTOMERANGEL ROUND
SERIES D
Incorporation
Founders Stock
Stock Incentive Plans Selecting and Negotiating with VCs
Debt vs. Equity
Employee Matters
IP Protection
Licensing and other IP Matters
Strategic Partnerships
The big
question: when
and how to
exit????

7. 6
Equity Structure
Initial Capital Structure
• Total Authorized: 10MM shares of Common Stock
• Difference between Authorized, Issued, and Outstanding Capital
• Founder Stock: 8-9 MM
• Issue stock early to avoid tax issues
• Vesting (look back period for vesting)
• Acceleration: Single Trigger versus Double Trigger
• 83(b) elections: file on time (within 30 days of purchase)!
• Option Pool: 1-2MM
• Vesting: Straight 4 year vesting, 1 year “cliff”, with monthly vesting thereafter
• Acceleration: Could hamper acquisition
• Outside Investors: Preferred Stock

8. 7
Seed Financings:
• Founders, Friends, Family, Angels, Early Stage VCs
• Incubators: YC, Idea labs, Citrix Accelerator, 500 Startups, 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
Financing Options

9. 8
Venture Financing - Term Sheet
Three Main Purposes of Term Sheet
• Pricing/Valuation
• Percentage of the Company to be sold (Pre and Post Money)
• Liquidation Preferences
• Dividends
• Anti-Dilution Protections
• Management/Controls
• Board Rights
• Protective Provisions
• Covenants
• Liquidity Rights
• Co-Sale/Right of First Refusal
• Registration Rights
• Drag-Along Rights
• Redemption Rights

10. 9
Venture Financing (cont’d.)
Valuation
• Methodology for valuation:
• Discounted Cash Flow
• Multiple of Revenues/Sales, Multiple of Earnings
• Customers, Revenues, Management Team, Patent Strategy, Competition, Size of the market,
other precedents
• Getting multiple term sheets always helps, but be careful how you play your horses!
• Watch out for milestone based investments
• Not the only issue to think about
Time, Process, and Expense
• Time: 2-3 months from start to finish
• Process: IP diligence, Legal diligence, Schedule of Exceptions, Financing Documents
• Expenses: Legal fees (both sides), Investor expenses

11. 10
Privileges of Preferred Stock
• Voting (Board) rights
• Protective Provisions
• Dividends: Cumulative versus non-cumulative; should be non-cumulative and discretionary, i.e.,
“when, as and if declared by the Board”
• Conversion Rights: Right to convert into Common Stock; Upon requisite preferred holders’
consent or upon a “qualified” IPO
• Anti-dilution Protection: Full Ratchet is bad; Broad-based weighted average is good and standard
• Redemption: Watch out, not a good sign; right should be at least 5 years out and spread over a
period of time
• Registration rights: standard registration rights OK, nothing to fight over
• Information Rights: standard information rights OK, nothing to fight over; limit to “Major Investors”
• Right of First Offer: maintain their pro rata ownership; right to “gobble up”; limit to “Major
Investors”
• Right of First Refusal and Co-Sale Agreement: OK, but understand how it works
• Board Observer Rights: OK, but need to be careful as VCs don’t like
the distraction of too many observers
Venture Financing (cont’d.)

12. 11
Strategic Transactions
Licensing Arrangements
• License Terms:
• Exclusive versus Non-Exclusive
• Geographical Limitations
• Ownership of IP and “Work Product”
• Other Material Provisions: Fee Structure, Term, Termination, Assignment, and Indemnification.
Partnerships
• 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

13. 12
Terms of Use and Privacy Policy
Why are these policies important?
• Contract with Users
• Subject Users to terms and conditions
• Key Terms: Registration requirements (Restrict use of site or app to users of a certain age),
IP Ownership, Define fee structure, Limit Company’s liability, Define publicity rights,
Indemnification, Assignment, Jurisdiction, Customer Support and Questions
• Content License:
• Limited license for use of your site and content to users
• Users assign their content ownership rights to the company
• Compliance with Digital Millennium Copyright Act
• Restrict User Activity
• Don’t post hate speech
• No spam
• No harassment of other users
• Data Security
• Ensure compliance with the terms you’ve set
• Inform users of the data the Company collects: Personally Identifiable Information (PII)
versus Non-PII
• Inform users of the Company’s use of their data
• Provide users with the opportunity to Opt-Out of use of Cookies

14. 13
Terms of Use and Privacy Policy
Risks if you don’t have these policies in place?
• Unchecked liability
• Collecting User Data without consent
• No restrictions on User activity
• Lost value
• Unclear ownership of content/contributions
• Copyright, patent, and trademark implications
Challenges with these policies?
• Acceptance of the policies by users
• Should ‘Manifest Consent’
• Evolving Rules
• EU new standards on cookies differ from other countries
• Global Enforcement issues

15. 14
Q&A
Thank you!