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LEGAL ASPECTS OF START-UPS
Jeffrey C. Robbins, Esq.Messerli & Kramer P.A.
May 23, 2013
©2013 Messerli & Kramer P.A.
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THE IDEAL START-UP OPPORTUNITY
• Unique and protected technology• Substantial economic value to
real customers• Experienced management
team • Enough capital• Alignment of the stars
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LAW TO ALIGN YOUR STARS
• Intellectual Property Protection• Company Formation• Attracting and Retaining Talent• Fundraising
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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 forsmall entities)
– Avoid joint ownership– Consider foreign protection– Get license for third-party patents
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PROTECTING IP
• Domain Name (pay attention to who owns it)
• Copyrights and Trademarks (federal, state and common law)
• Trade Secrets• Confidentiality Agreements
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INVENTION ASSIGNMENTS
• Cover both employees and consultants (work for hire)
• Legal exclusions• Pay for the assignment
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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
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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
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MANAGEMENT
• Shareholders /Members• Board of Directors /Managers– Duties of loyalty and care
• Officers• Employees
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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
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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
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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
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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)
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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
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FUNDRAISING 101WHAT IS A SECURITY?
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WHAT IS A SECURITY?
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WHAT IS A SECURITY?
Investment of MoneyCommon Enterprise
Expectation of ProfitsEfforts of Others
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CROWDFUNDING IS HERE!
But What Does That Mean?
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CROWDFUNDING V1
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CROWDFUNDING V2THE NEW JOBS ACT
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FIVE THINGS TO KNOW
Offering Limit:
$1 million in 12 months
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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%
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FIVE THINGS TO KNOW
Funding Portals:
Companies must sell through a portalRegistered with the SECHandles funds for the companyPosts company disclosure information
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FIVE THINGS TO KNOW
Company Requirements:
Disclosure, including annual reportingFinancial information:-- tax return/financials ≤ $100,000-- reviewed financials ≤ $500,000-- audited financials > $500,000Only can direct investors to the portal
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FIVE THINGS TO KNOW
Timing:
SEC had 9 monthsto issue crowdfunding
regulations
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CROWDFUNDING IN SUMMARY
Can’t raise much moneyExpensive audit and reporting requirements
Too many shareholders
Not Angel Investor orEntrepreneur Approved
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HELLO TO GENERAL SOLICITATIONOF ANGEL INVESTORS
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THE CURRENT WORLD
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THE ACCREDITED INVESTOR
• Net Worth -- $1MM Excluding Home• Three-Year Income -- $200,000• Three-Year Joint Income -- $300,000
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THE PRIVATE PLACEMENT
Unlimited Dollar AmountUnlimited Accredited InvestorsMaximum of 35 Non-Accredited InvestorsNo Public Solicitation of InvestorsPotentially No Mandated Disclosure
(but risk factor disclosure is important)Only a Notice Filing with the SEC
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THE JOBS ACT NEW WORLD ORDER
But only for accredited investors(proposed regulations)
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IF EVERYONE KNOWS
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IF EVERYONE DOESN’T KNOW
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TIMING
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Angel Dollars Invested Q3 2012
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Presentation may constitute public solicitationTalk about your business and not about financingFollow-up only with investor prospects that are “accredited” investors
NETWORKING EVENTS
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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!!
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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
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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
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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
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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
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MN ANGEL TAX CREDIT
Company Administrative Requirements:
-- Must pre-clear investment-- Must report investment-- Must do annual reporting
Failure = Company Giveback of Credit
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MAKE SUREThe company is registered
The investor registeredThe proposed investment is registered
The actual investment is reportedThe company complies and reports
annually
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TOO LATE FOR 2013 2010* 2011 2012** 2013*** certified/invested certified/invested certified/invested
certified
Businesses: 112 / 67 176 / 113 190 / 117 175
Investors: 75 / 258 623 / 563 511 / 465 362
Funds: 5 / 4 21 / 21 19 / 17 19
Amount invested: $28M $63.2M $46.2M$50.8M
Credits issued: $7M $15.8M $11.4M $12.7M
2014: $12.0M credits available* 2010: July launch-Dec** 2012: January-July 24*** 2013: January-May 9
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YOUR QUESTIONS?
For further information, contact:
Jeffrey C. Robbins, Esq.Messerli & Kramer P.A.
100 South Fifth Street, Suite 1400Minneapolis, Minnesota 55402
(612) 672-3706 office(612) 940-6660 cell(612) 672-3777 fax