Startups I: Introduction to Business Law for Entrepreneurs

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Start-ups I Introduction to Business Law for
Entrepreneurs

• Technology Transfer Seminar Series
• Brandeis University
• February 16, 2006

Prepared by Karin Rivard Assistant Director and
Counsel M.I.T. Technology Licensing Office
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Key Questions

• Why do I want to start a company?
• Who will fund the company?
• Who will run the company?
• What are my goals for the company?
• Answers to these questions dictate the structure
  of the company.

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Why Do I Want to Start a Company?

• Technology needs me
• Seize an opportunity
• Challenge of leaving academia
• Get rich
• All of the above

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Who Will Fund the Company?

• Venture Capital
• Angels
• Friends and Relatives
• Self Funded mortgage, credit cards, etc.
• Strategic Alliance (captive to large business
  partner)

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Who Will Run the Company?(and what will my role
be?)

• CEO/President
• Me. How hard can it be?
• Venture Capitalist or Installed Manager
• Friend or other Business Connection
• Chief Scientific Officer
• Me.

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What are My Goals for the Company?

• Build something of lasting value
• Sell out as soon as possible
• Both

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Legal Structure of Start-up

• Corporation
• C Corporation Attractive to VCs
• S Corporation Attractive to individuals
• Limited Liability Company (LLC)
• Tax Benefits to all investors
• Higher Transaction Costs
• Difficult to complete future equity transactions
• Must become Corporation before IPO

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Getting Started (C Corporation)

• Board of Directors
• Stock Issuances and Restrictions
• Founders Stock Common Stock
• Investors Stock Preferred Stock
• Employment Agreements
• Noncompetition Clause
• Nondisclosure Clause
• IP Assignment Clause
• Location, Location, Location

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Corporate Structure

• Confirm Company Name
• Certificate of Incorporation (DE, MA)
• Authorized Shares
• By-Laws
• Board of Directors
• Chairman of the Board
• Principal Officers President, Treasurer and
  Secretary
• Shareholders
• Meeting Minutes
• Votes/Resolutions

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Equity Vocabulary

• Founders Stock v. Preferred Stock
• Restricted Shares v. Registered Shares
• Vesting
• 83(b) Election (Tax Treatment)
• Shareholders Agreements
• Stock Options/Warrants
• Stock Option/Purchase Plan Rule 701
• Dilution

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Employment Agreement Vocabulary

• Noncompetition Clause
• What if still researching at University?
• Other pre-existing or continuing consulting
  arrangements?
• Nondisclosure Clause
• Unacceptable Publication Restrictions?
• IP Assignment Clause
• Severance
• Parachute Gold, Silver or Tin

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Lease Vocabulary

• Default
• Sublease
• Laboratory Ready
• Restrictions on Use of Space
• Restrictions on Growth

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Intellectual Property

• Who owns it?
• DO NOT IGNORE THIS!
• Disclose invention and all research sponsors
• Get a license or ownership waiver
• Be aware of university conflict of interest
  policies!

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Show Me the Money!

• You need money to earn money!
• Banks/Credit Lines (Non-dilutive)
• Equity Investors (Dilutive)
• Convertible Debt Instruments (Depends)
• Strategic Alliances

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So Now You Are

• Organized
• Managed
• Funded
• GET TO WORK!
• (AND HAVE FUN)