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Saturday, May 21, 2005

Legal Issues for Growing Companies Part I

So spent $50 on Friday, May 20 and attended the Texas Entrepreneur Initiative event "Legal Issues for Growing Companies - A best practices and networking program" sponsored by Wilson Sonsini Goodrich & Rossi, the law firm probably most associated with technology startups. It was held at the Commons Center at JJ Pickle Research Campus, all in all a pretty nice location for an event like this. My only complaints were that power outlets were few and far in between and $10 for wireless seemed a bit unnecessary for a UT location, but the breakfast burrito was worth the $1.50 :).

This was a pretty good session and definitely worth the $50. Since Baby Girl Choksi decide to stay in the womb another day I was able to attend. The event schedule was what attracted me in the first place. I had a few focused areas that I was interested in but I get so many questions about starting a company that hearing the latest stuff was probably worth my time just to stay up with the latest trends. Anyways, here are my notes from the session.

9:00 - 9:45 Company Organization, Founders & Early Employees
Paul Tobias, Managing Partner, WSGR, Austin
Ellen Wood, President and CEO, vcfo

When should we create a formal entity?
As soon as possible because of three reasons: 1) define ownership, 2) liability concerns, and 3) intellectual property ownership.

Why should we use a Delaware corporation instead of a Texas or Nevada corporation?
Recommended Delaware corporation for several reasons:
- in M&A transactions, other side will be more experts on DE corporations.
- Real world: if you aren't a DE corporation, one lawyer in the audience mentioned that he treated the other side as though they were "not legally sophisticated counterpart."
- if you are going to raise money, the VCs will make you re-incorporate to be a DE corporation
- certainty with lots of case law vs. other states
- lawyer had seen a Nevada corporation only 1 in 1000 times.
Unfortunately, it is more expensive: $300 - $500 fee in Texas but you pay an additional $1100 fee to be a non-Texas entity in Texas.

What does fully diluted mean?
There is no universal definition for fully diluted.
Typically, it is all shares issued + the total size of the option pool.

How many shares should I start with?
10 million shares of stock is standard but is arbitrary.

When considering stock or option grant, the %age of total shares is what counts. Many people are more concerned about the absolute number of shares. That is one reason to have more shares.

What about founder agreements?
Founder agreements include a couple of important sections:
- survivorship
- divorce issues
- typically prevent you from selling to an outsider without first offering to internal people or investors.

Other points:

  • Since founders are given stock, there really isn't vesting but you can have reverse vesting e.g., if the founder leaves before X amount of time, they have to sell back some of their stock at their purchase price.
  • There is no real difference between options and warrants. Typically options are associated with employees and warrants are for non-employees e.g., board members, service providers, etc.
  • It used to be that one of the values of preferred stock was that you could do common stock options for employees with a low strike price. The new laws have changed that somewhat.
  • Make sure your offer letter doesn't specify the percentage and if it does make sure the offer letter indicates that it is a current percentage.
  • A local CEO was quoted as saying. "The board should consist of a odd number of members and 3 is too many."


How much stock is typically given to board members / advisory board?
0.1% - 1.0%. You really don't want to make it vesting because then you have to fire the board member / advisor if they aren't doing anything (these people are usually customers or industry experts). A better way is to grant stock on an annual basis.



9:45 - 10:30 Intellectual Property: Creating & Protecting IP
Chris Ozburn, Partner, WSGR, Corporate
Scott Morris, Associate, WSGR, Patents

I simply wasn't very interested in the above topic mainly because I figured that if I ever needed to patent something I would go to a lawyer.

I unfortunately had to head to another event so I missed the following topics:



11:00 - 12:00 Landing Early Customers and Strategic Partners
Ken Clark, Managing Partner, WSGR, Technology Transactions
Stacey Smotherman, Of Counsel, WSGR, Technology Transactions
Eric Natinsky, Associate, WSGR, IP Technology Transactions



12:00 - 1:30pm Lunch and Keynote
"Shaking The MoneyTree" Venture Capital Trends through Q1 2005
Kirk Walden, MoneyTree Report, National Director of Venture Capital Research, Pricewaterhouse Coopers

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