LEGAL ASPECTS OF START-UPS
Jeffrey C. Robbins, Esq.
Messerli & Kramer P.A.
May 23, 2013
©2013 Messerli & Kramer P.A.
THE IDEAL START-UP OPPORTUNITY
• Unique and protected technology
• Substantial economic value to real
customers
• Experienced management team
• Enough capital
• Alignment of the stars
LAW TO ALIGN YOUR STARS
•
•
•
•
Intellectual Property Protection
Company Formation
Attracting and Retaining Talent
Fundraising
PROTECTING IP
• Patents
– Identify all inventors and their rights, including
those of any research institution or the government
– File before publication or other public disclosure
– New “first to file” rules effective in March 2013
– Accelerated review ($2,400 for
small entities)
– Avoid joint ownership
– Consider foreign protection
– Get license for third-party patents
PROTECTING IP
• Domain Name (pay attention to who owns it)
• Copyrights and Trademarks (federal, state and
common law)
• Trade Secrets
• Confidentiality Agreements
INVENTION ASSIGNMENTS
• Cover both employees and consultants (work for
hire)
• Legal exclusions
• Pay for the assignment
NON-COMPETITION AGREEMENTS
•
•
•
•
Reference in any employment offer letter
Type of employee
Geographic area and time period of restriction
Payment for the agreement (continued
employment is usually inadequate)
• Some states won’t enforce
BUSINESS ENTITY SELECTION
• Use of a Business Entity
– Limited liability
– Facilitates equity ownership
– Tax advantages
• Types of Business Entities
– Corporation – C versus S
– Limited Liability Company
• Timing for Forming a Business Entity
• Where to Form a Business Entity
MANAGEMENT
• Shareholders /Members
• Board of Directors /Managers
– Duties of loyalty and care
• Officers
• Employees
STOCK
• Common Stock – each share has equal economic
and voting rights
• Preferred Stock – contractually defined
economic and voting rights
– Special voting rights
– Dividends
– Liquidation preferences
– Anti-dilution protection
– Redemption rights
• Par value
• Rights set out in Articles of Incorporation
CONVERTIBLE NOTES
• Often used in early rounds when valuation is
uncertain
• Investor typically gets to convert into the next
round security at a price discount
• Mandatory versus option conversion
NEGOTIABLE DEAL POINTS
•
•
•
•
•
•
•
Preemptive rights
Cumulative voting rights
Board/ shareholder action in writing
Tag Along/ Drag Along rights
Rights of First Refusal
Registration Rights
Buy-Sell Agreements
EQUITY INCENTIVES
• Allows employees, consultants and directors to
share in upside of business growth
• Aligns business objectives
• Can act as a “golden handcuff ” to help in
retention of key personnel
• May allow income (and tax) deferral to later
date
• May convert ordinary income into capital gains
(taxed at lower rates)
EQUITY INCENTIVES
• Incentive Stock Options
– Employees only
– Exercise price = fair market value
– $100,000 vesting maximum per year
– Maximum 10-year term
– 90 days to exercise after leaving employment
• Non-Qualified Options
• Cashless Exercise
• Restricted Stock
– Section 83(b) election
FUNDRAISING 101
WHAT IS A SECURITY?
WHAT IS A SECURITY?
WHAT IS A SECURITY?
Investment of Money
Common Enterprise
Expectation of Profits
Efforts of Others
CROWDFUNDING IS HERE!
But What Does That Mean?
CROWDFUNDING V1
CROWDFUNDING V2
THE NEW JOBS ACT
FIVE THINGS TO KNOW
Offering Limit:
$1 million in 12 months
FIVE THINGS TO KNOW
Investor Limits:
Annual income/net worth < $100,000,
limit is greater of $2,000 or 5%
Annual income/net worth ≥ $100,000,
limit is lesser of $100,000 or 10%
FIVE THINGS TO KNOW
Funding Portals:
Companies must sell through a portal
Registered with the SEC
Handles funds for the company
Posts company disclosure information
FIVE THINGS TO KNOW
Company Requirements:
Disclosure, including annual reporting
Financial information:
-- tax return/financials ≤ $100,000
-- reviewed financials ≤ $500,000
-- audited financials > $500,000
Only can direct investors to the portal
FIVE THINGS TO KNOW
Timing:
SEC had 9 months
to issue crowdfunding regulations
CROWDFUNDING IN SUMMARY
Can’t raise much money
Expensive audit and reporting requirements
Too many shareholders
Not Angel Investor or
Entrepreneur Approved
HELLO TO GENERAL SOLICITATION
OF ANGEL INVESTORS
THE CURRENT WORLD
THE ACCREDITED INVESTOR
• Net Worth -- $1MM Excluding Home
• Three-Year Income -- $200,000
• Three-Year Joint Income -- $300,000
THE PRIVATE PLACEMENT
Unlimited Dollar Amount
Unlimited Accredited Investors
Maximum of 35 Non-Accredited Investors
No Public Solicitation of Investors
Potentially No Mandated Disclosure
(but risk factor disclosure is important)
Only a Notice Filing with the SEC
THE JOBS ACT NEW WORLD ORDER
But only for accredited investors
(proposed regulations)
IF EVERYONE KNOWS
IF EVERYONE DOESN’T KNOW
TIMING
Angel Dollars Invested Q3 2012
NETWORKING EVENTS
Presentation may constitute public solicitation
Talk about your business and not about
financing
Follow-up only with investor prospects that are
“accredited” investors
MN ANGEL TAX CREDIT
25% MN individual income tax credit for
Qualified Investments in Qualified Companies
by Qualified Investors or Qualified Funds
Qualifying Is Key!!
MN ANGEL TAX CREDIT
Qualified Investments:
-- Cash only
-- At least $10,000 ($30,000 if a fund) in a
single calendar year
-- Purchase equity or mandatorily convertible
debt
-- Three-year holding period
MN ANGEL TAX CREDIT
Qualified Companies:
-- Headquarters in MN
-- 51% of employees and payroll in MN
-- Under 25 employees
-- Pay minimum qualifying wages
-- Business in qualifying high tech/proprietary fields
-- Not more than 10 years of operations
-- Not more than $4MM of prior equity investments
that qualified for the credit
MN ANGEL TAX CREDIT
Qualified Investors:
-- Must be an individual
-- Must be certified by the State
-- Can be either an “accredited” or “non-accredited”
investor
-- $10,000 minimum investment
MN ANGEL TAX CREDIT
Qualified Funds:
-- Must have at least three members
-- Must be organized as a pass-through entity
-- Must be certified by the State
-- $30,000 minimum investment
MN ANGEL TAX CREDIT
Company Administrative Requirements:
-- Must pre-clear investment
-- Must report investment
-- Must do annual reporting
Failure = Company Giveback of Credit
MAKE SURE
The company is registered
The investor registered
The proposed investment is registered
The actual investment is reported
The company complies and reports annually
TOO LATE FOR 2013
Businesses:
Investors:
Funds:
2010*
2011
certified/invested
certified/invested
certified/invested
certified
112 / 67
75 / 258
5/4
176 / 113
623 / 563
21 / 21
190 / 117
511 / 465
19 / 17
175
362
19
$63.2M
$15.8M
$46.2M
$11.4M
$50.8M
$12.7M
Amount invested: $28M
Credits issued:
$7M
2014:
2012**
$12.0M credits available
* 2010: July launch-Dec
** 2012: January-July 24
*** 2013: January-May 9
2013***
YOUR QUESTIONS?
For further information, contact:
Jeffrey C. Robbins, Esq.
Messerli & Kramer P.A.
100 South Fifth Street, Suite 1400
Minneapolis, Minnesota 55402
(612) 672-3706 office
(612) 940-6660 cell
(612) 672-3777 fax
jrobbins@messerlikramer.com