BU TECH COMMERCIALIZATION
BOOT CAMP
David D. Gammell
dgammell@brownrudnick.com
617-856-8582
an international law firm
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Starting and Running a Business
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Why form an Entity?
What type of Entity to Form?
How to form an Entity? – Focus on proper incentives
How to finance an Entity?
What about Intellectual Property?
How do I make money?
Make sure you are diligence ready!
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Why Form an Entity
1. Reduce potential for personal liability
2. Concentrate intellectual property ownership
3. Structure equity ownership
4. Build brand
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What Type of Entity
1. Sole proprietorship – doesn’t satisfy four
factors
2. Partnership – may not satisfy four factors
3. Limited Liability Company
4. Corporation
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Considerations When Choosing an Entity
1. Timing
2. Financing trajectory
3. Tax considerations
Also, Consider VISA issues
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How to Form an Entity
Corporate Governance and Ownership
 Board
 Strategic direction
 Elected by Stockholder
 Executives
 Tactical operations
 Ownership (Stock vs. Options) – Aligning incentives
 Division of Voting Power
 Division of Proceeds of Liquidity
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How to Form an Entity (cont’d)
Founder Equity – Align Incentives
 Focus on the Founders first (all other issuances will
dilute founders equally)
 Divide 100% among Founders
 Based on expected contribution over vesting period (25 years)
 Set current vested portion based on contribution to
date, remainder vests over selected period (2-5
years)
 Acceleration of vesting
 Change of control
 Termination (for cause—not for cause)
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How to Form an Entity (cont’d)
Incentives - Vesting
 Require founders or managers to subject their original
shares to vesting and require shares to be sold back to
the Company at original cost or some other formula
based on termination of relationship with the Company
 Issues:
 Stock vs. Options
 How much initially vested?
 What happens to shares if terminated w/o cause or
voluntarily or because of death/disability?
 Vesting period: annual/quarterly/monthly?
 Buy-out price?
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How to Form an Entity (cont’d)
Stockholder’s Agreement
Provides certain control of transfers of company
securities and participation in such transfers.
Three types of protection:
 Right of First Refusal: Right to purchase any securities
proposed to be sold by certain stockholders (usually founders,
sometimes other stockholders) on the proposed terms
 Tag-along / Co-sale Right: Right to participate in proposed
sale by certain stockholders
 Drag-along / Take-along Right: Right for certain stockholders
to take other security holders along in an exit transaction
(typically majority of board and some group of stockholder)
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How to Finance an Entity
Sources
 Boot strap—self fund, customer funded
 Friends and Family
 Angel/Venture Capital
 Strategic Investor
Type of Investment
 Loan
 Convertible Loan
 Common Stock
 Preferred Stock
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How to Finance an Entity (cont’d)
Principal Concerns in Financing Transactions
Concern
Influence on Company
Control over exit events
Ownership/Dilution
Incentives for Mgmt and
Employees
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Mechanism
Composition of Board of Directors
Veto Rights over certain Corporate
Actions, Negative and Affirmative
Covenants
Drag-along Rights, Tag-along Rights,
Rights of First Refusal, Registration
Rights
Valuation/Capitalization
Antidilution Protection
(economic and structural)
Pre-emptive Rights (equity)
Vesting—Options, Restricted Stock
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How to Finance an Entity (cont’d)
Capitalization and Valuation Terminology
Pre-Money Valuation:
Value of the company prior to investment
by the VC.
Post-Money Valuation: Value of the company after the
investment by the VC, i.e., the sum of the
pre-money valuation plus the investment.
Fully Diluted Shares:
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Generally defined as total issued and
outstanding securities reported on an as
converted to common stock basis. This
number usually includes all issued and
outstanding preferred stock, issued
warrants, and options (often including
unissued pool).
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Four Types of Intellectual Property
 Patent
 Trade Secret
 Copyright
 Trademark
Focus on Competitive Barriers
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Patent
 Any machine, manufacture, composition of matter, and
process (but cannot be law of nature, natural phenomena,
or abstract idea)
 Must obtain registration from federal government, and can
only be registered if proven useful, novel, and unobvious
 Provides right to exclude others from making, using, selling,
offering to sell, or importing the patented invention
 The right lasts from registration until 20 years after filing
 Inventors own until they assign
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Trade Secret
 Any information that derives economic value from being
secret and for which reasonable efforts are used to keep
it secret
 No registration system – just need to use reasonable
efforts to maintain secrecy
 Secret will remain yours until it is revealed; Could last
forever
 Trade secret vs. Patent
 Owner is the one that develops and maintains the secret
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Copyright
 Original work of authorship fixed in a tangible medium of
expression
 Registration is an option but is not required; copyright notice
also is not required
 Bundle of rights – reproduce, prepare derivative works,
distribute, perform/display publicly, etc.
 Rights last for the author/creator life plus 70 years after death
 Owner is the creator until he/she assigns or unless it is a “work
made for hire”
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Trademark
 Word, name, symbol, etc. that indicates the source of goods or
services
 Registration possible and enhances rights, but rights come
from use and registration not possible without use
 Owner can stop others from using same or confusingly similar
mark, and the test is “likelihood of confusion”
 Right could last forever, but registrations need to be renewed
periodically
 Owner is entity that uses mark
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Practical Tips Regarding IP
 All officers/employees sign employment agreement:
 assign inventions and copyrightable works
 agree not to disclose confidential information
 All non-officer/employee contributors sign consulting
agreement:
 assign inventions and copyrightable works
 agree not to disclose confidential information
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Practical Tips Regarding IP
 Follow best practices in product/service development:
 identify and respect obligations to prior employers
 know ramifications of including existing material (e.g.,
open source)
 Have an IP strategy
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establish IP policies and procedures
educate officers/employees
document ideas and progress
insert IP checkpoints into product/service development
form and use an IP committee
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How Do I Make Money
 Profit—Operate at a profit
 IPO—sale of shares to public
 Generally liquidity for insiders only begins 6
months after IPO
 Sale—sale of stock or assets for cash or stock
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