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Getting Started - Corporate Formation, Founder and Funding Considerations By: Gordon Empey, Special Counsel Cooley Godwa

Getting Started - Corporate Formation, Founder and Funding Considerations By: Gordon Empey, Special Counsel Cooley Godward Kronish LLP. From Invention to Start-Up :. Legal Entity. Considerations are: Taxation Stockholder liability Raising investment funds C Corporation:

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Getting Started - Corporate Formation, Founder and Funding Considerations By: Gordon Empey, Special Counsel Cooley Godwa

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  1. Getting Started - Corporate Formation, Founder and Funding ConsiderationsBy: Gordon Empey, Special CounselCooley Godward Kronish LLP From Invention to Start-Up:

  2. Legal Entity • Considerations are: • Taxation • Stockholder liability • Raising investment funds • C Corporation: • Subject to double-taxation • Can usually only pierce the corporate veil in case of bad faith • Most common structure for venture capital (VC) investors • Limited Liability Company (LLC), S Corporation, and Partnerships: • LLCs – avoid double taxation, complex operating agreements, higher maintenance costs (accounting, tax, etc.), members hold units • S Corp – file as a C Corp, but make election within 3.5 months, Same tax pass-through as an LLC, High restrictions – 75 shareholders, only individuals, one class of stock, but easy to convert to C Corp

  3. State of Incorporation • Delaware • Well-developed body of law – historically favorable to company, directors and management team • More expensive franchise fees • Favored by many investors • Washington • Less clarity on certain corporate issues because less developed body of law • Some arcane features – originals for filings, appraisal rights • Less expensive

  4. Roles in the Company • Board of Directors • Ultimate power and duty to manage this business of the company • Fiduciary duties (care and loyalty) • Committees (Audit, Compensation, Special) • Tasks and functions delegated by Board of Directors • Management • Day-to-day responsibility for running the Company • Ultimately responsible to the Board of Directors • Stockholders • Responsible for final decision of key corporate events • Advisory Board • For benefit of management

  5. Typical Organizational Documents • Appointment of Directors and Officers • Bylaws • Powers & responsibilities of officers and directors • Meeting procedures • Indemnification obligations of the Company • Certificate of Incorporation • Number and class of stock authorized • Stock Plan • Proprietary Information and Invention Assignment Agreement (PIIA)

  6. Licensing in the Technology • Option to license prior to Series A funding. • Key terms of Option: • Option Fee • Term of Option • Exclusivity • Territory • Fields of Use • Up-Front Consideration • Annual Maintenance Fee • Equity • Royalty (both for products and services) • Minimum Annual Royalty $$ Amount • Sublicensing Consideration • Performance Milestones • Financial Milestones (filing IND, first dosing in Phase II, NDA, FDA approval, Other county approval) • Patent Prosecution reimbursement

  7. Founders Stock Issuances • Common Stock Purchase Agreement • Stock subject to vesting – 4 years typical • Restrictions on Transfer • Drag-Along Rights

  8. Employment Agreement Terms • Usually entered in connection with funding • Salary • Stock Subject to Vesting • At-Will • Protect Equity – Termination or Change of Control • Severance • Venture Capital Mentality

  9. Issuing Stock or Debt • Should be approved by the Board of Directors – written record • Fully-executed document • Securities laws compliance – need exemption from registration • Accredited investors • Finders/Brokers • Issuing options to employees – written valuations (409A) • Don’t promise equity to anyone

  10. Sample Capitalization TablePre-Series A

  11. Bridge Financings • Convertible Notes • Convert in Next Equity Financing • Interest • Warrants • Percentage Coverage, Exercise Price • Avoids Valuation, Gets Seed Money

  12. Valuation for Financings • Pre vs. Post-Money • Sample Cap Table - $7M Pre-money = $0.70 per share • Milestones/Tranches for Large Investments

  13. Sample Capitalization TablePost-Series A: $7M Pre-Money, Raise $5M

  14. Terms of Series A Preferred Stock • Liquidation Preference • Money off the top • Participation • Cap on participation • Anti-Dilution • Redemption • Protective Voting Provisions • Board Seats • Pro Rata Rights • Information Rights • Registration Rights

  15. Series A Process • 4-6 weeks from signed term sheet • Draft and negotiate key agreements • Series A Purchase Agreement • Amend and Restate the Certificate of Incorporation • Investor Rights Agreement • Voting Agreement • Registration Rights Agreement • Due Diligence (IP, capitalization, materials agreements, founder deals, corporate formalities) • Obtain board and shareholder approvals • Third Party consents

  16. Summary • The Three F’s: • Formation • Founders • Funding

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