Startup Legal Documents Redux

Save the date! Tuesday, July 29, 2014 from 6:00 PM to 9:00 PM (PDT)

Impact Hub, Kirkland Washington

If you missed last month’s startup legal documents webinar you have a second chance.  Carter has been asked to repeat the lecture for Seattle Angel Conference.  This will be a live lecture so space will be limited.  Registration information at this link.  

This will be a nuts and bolts discussion for recent founders or potential founders.  Our discussion will cover:

  • Articles of Incorporation and Bylaws (with brief discussion of when an LLC might be preferred to c-corporation or s-corporation)
  • Stock Ledger, Capitalization Table, Stock Certificates, and their related function.
  • Shareholder Agreement (including discussion of voting agreements, rights of first refusal, co-sale agreements, drag-along, and other provisions often recommended for startups)
  • Founder Restricted Stock, Stock Option Plans, warrants, and other methods for granting equity
  • Founder and Employee Intellectual Property Agreements and Confidentiality Agreements
  • Non-disclosure Agreements (used for potential business partners and investors)
  • Consulting/Independent Contractor Agreements
  • Convertible Notes and other seed round financing instruments such as Y Combinator SAFE (simple agreement for equity) 

Startup Up Legal Documentation Webinar

Save the date! June 19, 2014, 5:00-6:00 pm.

What legal documentation do you need to start a company?  On Thursday, June 19, 2014, Carter will host a webinar reviewing the legal documentation that every startup needs to limit its liability to creditors, allocate ownership among founders, offer stock options to employees, protect intellectual property, and prepare to raise working capital.  During the webinar, Carter will show the documents, explain their function, and take questions.  This will be a nuts and bolts discussion for recent founders or potential founders.  Our discussion will cover:

  • Articles of Incorporation and Bylaws (with brief discussion of when an LLC might be preferred to c-corporation or s-corporation)
  • Stock Ledger, Capitalization Table, Stock Certificates, and their related function.
  • Shareholder Agreement (including discussion of voting agreements, rights of first refusal, co-sale agreements, drag-along, and other provisions often recommended for startups)
  • Founder Restricted Stock, Stock Option Plans, warrants, and other methods for granting equity
  • Founder and Employee Intellectual Property Agreements and Confidentiality Agreements
  • Non-disclosure Agreements (used for potential business partners and investors)
  • Consulting/Independent Contractor Agreements
  • Convertible Notes and other seed round financing instruments such as Y Combinator SAFE (simple agreement for equity) 

Registration fee is $5.00.  Webinar log-in information will be emailed to participants.  Feel free to email questions in advance.

REGISTER FOR JUNE 19th SEMINAR: 

[EVR_SINGLE event_id=”9″]

Keiretsu Forum Academy – Top Legal Pitfalls

On May 20, 2014 Carter will be presenting on Top Legal Pitfalls at the Keiretsu Forum Academy in Seattle.  The Building a Fundable Company program is four days and covers all the bases of creating a business that meets the requirements of angel investors.  

Register for the Forum Academy here or contact
Bryan Brewer, Keiretsu Forum Academy Executive Director 
(206) 527-3168, [email protected]

Seed and Angel Round Legal Documents Primer – Nov. 11th

What is the difference between common stock, participating preferred stock, non-participating preferred stock, bridge notes, and convertible notes with valuation caps?  

We will be explaining these startup financing instruments and more at our next Startup Law Talk Workshop at East Side Incubator on November 11th.

Founders need to understand these documents to raise funds from friends and family, angel investors, or venture capital firms.   We will give a brief overview of the fundraising process, then focus on the contractual and supporting legal documentation involved when you sell stock or other types of equity to investors.  Our overview will cover preparation of the Term Sheet, the Cap Table and the Purchase Agreement.  We will also cover the federal and state securities laws that regulate these types of private placements and what it takes to comply.  Lastly, we will give a brief update on what is happening with the JOBS Act and crowd funding.

East Side Incubator is located at 2711 152nd Ave NE – Building 6, Redmond, WA.

Networking Starts at 5:30.  Lecture and Discussion from 6:00 to 7:30.

Workshop is free, but register through Meetup.com.  

Startup Legal Topics Open Q&A

Our next Startup Law Talk workshop (Monday, October 14th at Eastside Incubator) will be an open Question and Answer session with Carter, Deniz and Tahmina.  Bring your burning questions relating to formation documents, equity compensation, fund raising, tax, or immigration.  If you want to give us a head start let us know via the comment section which topics/issues you would like to discuss.

 Lecture and discussion from 6 to 7:30.

Participation fee is $10.  Register through Eastside Incubator.

East Side Incubator is located at 2711 152nd Ave NE – Building 6, Redmond, WA.

Collaborating before you incorporate – risks and benefits

At our Startup Law Talk workshop on September 9, 2013 we discussed the issued raised when founders work together on their startup before actually incorporating a legal entity. 

Before a tech startup is officially incorporated there is almost always an exploratory phase where one or more founders are writing code, producing business plans, and validating concepts and markets.  When more than one person is involved, the ownership status of code and other IP created during this phase is often ambiguous and misunderstandings are frequent.  Well-advised founders will have sorted out these issues with appropriate legal documentation upon formation of the company, but it doesn’t always make sense to form a company before certain fundamental questions about the proposed business are vetted.

The  following issues were covered:

  • When does it make sense to incorporate?  (How long should the exploratory period last?)
  • Ownership status of code, business plans, and other IP created by founders, volunteers, and others before incorporation.
  • What happens if the founders part ways before a company is formed.
  • We will present attendees with a basic partnership agreement that can be used as a preliminary step before incorporating and discuss the ramifications of using it.

 

East Side Incubator is located at 2711 152nd Ave NE – Building 6, Redmond, WA.

Hiring Your First Employee – Basics that every founder should know.

Employees are essential to growing a healthy business, but poor human resource management or failure to comply with regulatory requirements can be one of the most significant expenses dragging your startup down.

At our August 12th workshop, Janelle Milodragovich, formerly with the Foster Pepper employment law group, presented on employment law basics for startups.

Janelle covered the following topics, which every founder should be familiar with:

• Independent contractor v. employee 
• At-will employment 
• Employment agreements (including intellectual property provisions) 
• Payroll laws and best practices 
• Performance management 
• Termination procedures 

 

 

How to negotiate your first office lease.

By Katrin Gist  K

Reaching the point where your business is ready to move from your home office into more traditional office space, or moving your office to a larger space is an exciting time.  Your business is growing and your new space represents a new chapter in your company’s development.  Although the office space market has been recovering in the last few years, tenants still have significant leverage, and there are several strategies you should consider when searching for office space and negotiating your lease:

1.    Determine your requirements before office shopping.

Before shopping for office space, you should decide what kind of working area you want, the number of offices, arrangements for your employees, seating types, and amenities you will need (lunch/break rooms, conference facilities, etc.).  You should also consider whether your business needs traditional office space or “creative” space.” Creative space generally offers a more open work environment, can improve employee communication, and often has a more modern feel.  Employee cubicles are a cost-effective option, but if your business provides services involving significant customer interaction, privacy requirements might determine the space design.

2.    Expansion option.

One of the common characteristics of start-up companies is the potential for rapid growth.  The last thing you want is to have executed an office lease for a set amount of space and time, and then to experience rapid growth without the potential to expand within your building or get out of your lease. There are several buildings and landlords out there that will allow the kind of flexibility that you might need.

 3.    Lease Term.

When you are starting your business, you may not want to commit to a very long lease term. This could significantly decrease your options for office space since many landlords will only sign multi-year leases.  There are, however, still plenty of landlords who specialize in providing short-term space. One downside is that you might not get as much negotiating leverage in the lease terms, or get the kind of tenant improvements (office customization) covered by the landlord in the lease rate that you hoped for due to the short term.  But, the benefit is that you are not locked into a multi-year lease term when the future (growth or otherwise) is uncertain.  On the other hand, if you are in a position where your company has already experienced growth and has exemplified staying power, you might be ready for a more long-term commitment.  And, the longer the lease term, the more negotiating leverage there is for the tenant.

4.    Ask for concessions.

Don’t take the asking price or proposed lease at face value.  There is generally always room for negotiating the price per square foot and other lease terms. One strategy for getting a lower effective rate per square foot is to ask for some period of time worth of free rent.  This allows you to effectively be paying a lower price per square foot, while allowing the landlord to tell others that they leasing at the higher rate per square foot.  In this market it is not uncommon for a tenant to obtain several months’ worth of “free” rent for multi-year lease terms.

As mentioned above, obtaining tenant improvements can be tricky for start-ups that need shorter term space.  However, if it makes sense for you to commit to a longer term, a landlord should be willing to provide you a certain allowance for build-out/space customization as part of the deal.  This “TI” is valued as a price per square foot, and might range from a few dollars per square foot to well over fifty dollars per square foot for longer term leases.

5.    Learn your market.

It is important for tenants to be educated.  You should view several options before you make a decision in order to get the best deal and find the space that is optimal for you. The best way to achieve this is to work with a commercial real estate professional.  Small business owners often feel that they can find space and negotiate a lease on their own, but there are several nuances, such as escalator clauses, renewals, free rent, tenant improvement allowances, expansions and possible termination rights, that can be favorable to you if you know how to ask and what market comps are in your area.  Since a tenant’s broker is paid by the landlord and not the tenant, tenants have a great opportunity to take advantage of being represented by their own commercial real estate professional and obtain the best possible deal.

Katrin Gist is a commercial real estate broker with CBRE – Brokerage Services.  Katrin can be reached at 206-947-1399 or [email protected] for assistance with your office space.

Equity Compensation Basics for Startups

Our workshop equity compensation basics was on February 11, 2013 at Eastside Incubator in Redmond, our regular venue.  We had a full house with 40 people in attendance.  The following topics were discussed:

  • What is the difference between founder restricted stock and employee stock options?
  • Why is it so important to issue founder restricted stock as early as possible?
  • How much company stock should be reserved for stock options?
  • Why do companies that give equity compensation need to understand IRS Rule 409A?
  • Can LLCs grant stock options?

What is the difference between an Employee Proprietary Information Agreement and a Confidentiality and Inventions Assignment Agreement?

Trick question.  They are the same thing.  These agreements that protect the companies confidential information and ownership of intellectual property go by several names.  Here are a few names for the same type of agreement:

  • Employee Confidentiality and Inventions Assignment Agreement
  • Proprietary Information Agreement
  • Employee Intellectual Property Assignment Agreement
  • Protection of Company Interests Agreement.

Startup companies should require all employees and contractors to sign a proprietary information agreement that, at a minimum:

  • puts the worker under covenant to keep the employer’s proprietary information confidential and use it only in furtherance of the company’s interests
  • provides that all intellectual property created during the employment is “work-for-hire”
  • assigns to the company all inventions created under the employment relationship.

Other provisions frequently found in worker proprietary information agreements include

  •  a covenant not to solicit company employees and consultants upon termination,
  • recitation of the at-will nature of the relationship,
  • a covenant to return of company materials upon termination,  
  • recitation of company ownership of (and lack of privacy) in emails and other digital communications,

Problems with the Preexisting Inventions List

Most of these agreements have a provision that requires the worker to list personal inventions that shouldn’t come within the scope of the assignment of inventions.  Some of these agreements overreach, in my view, and put an unfair burden on the employee to list all of their inventions, even if they were before the employment with the current employer or unrelated to the current employer’s business.   There is inevitable tension here, because many workers do in fact pick up ideas from the work they are doing. 

Here are three examples:

Example A:  I represent that all matters which I have created or otherwise developed prior to my Relationship with the Company or my signing this Agreement, which may lawfully be excluded from my obligations to the Company under this Agreement, are listed in Schedule 2(a) attached hereto.  If no items are listed in Schedule 2(a), I represent that there are no such matters to be excluded.

Example B:  I am not obligated to assign any Company Invention that qualifies fully under the provisions of the Revised Code of Washington Section 49.44.140 (“RCW 49.44.140”), which is included below.  In addition, I will advise the Company promptly in writing of any Inventions that I believe meet the criteria in RCW 49.44.140 and are not otherwise disclosed on Exhibit A.

Example C: I have attached hereto, as Exhibit A, a complete list describing with particularity all Inventions (as defined below) that, as of the Effective Date, belong solely to me or belong to me jointly with others, and that relate in any way to any of the Company’s proposed businesses, products or research and development, and which are not assigned to the Company hereunder; or, if no such list is attached, I represent that there are no such Inventions at the time of signing this Agreement.

All of these examples have been used by major law firms.  Examples A and B, while protective of the Company, overreach in my view.  Example A probably isn’t enforceable.  It overreaches because everything the Employee has ever created in the past — everything the employee has written, illustrated, coded, snapped with a camera – everything would have to be listed to be eligible to be excluded.  Clearly the employee is not going to list everything they have created in the past, so Example A requires the employee to make a false representation: “If no items are listed in Schedule 2(a), I represent that there are no such matters to be excluded.”

Example B is better, but still problematic.  (For reference see RCW 49.44.140 below.)  Example B has the employee promising to list any Inventions that meet the criteria for exclusion.  All of the employee’s writings, drawings, photos, etc.  not related to the Company’s business and created on the employees own time fit the exception.  (Inventions is always defined broadly to pick up any copyrightable work.)  So Example B has the employee promising to do something they will not realistically do.

Example C is best in my view.  It is fair to the employee and sufficiently protective of the Company.  It requires the employee to list only creative works that related to the Company’s business, products or research.  It’s fair to ask the employee to identify those works and to represent that there are none if not listed. 

Both Companies offering up these documents and employees asked to sign them should review the pre-existing inventions listing requirement carefully for fairness and the employee’s realistic ability to do what is asked or required.

RCW 49.44.140 of the Revised Code of Washington is as follows:

(1)        A provision in an employment agreement which provides that an employee shall assign or offer to assign any of the employee’s rights in an invention to the employer does not apply to an invention for which no equipment, supplies, facilities, or trade secret information of the employer was used and which was developed entirely on the employee’s own time, unless (a) the invention relates (i) directly to the business of the employer, or (ii) to the employer’s actual or demonstrably anticipated research or development, or (b) the invention results from any work performed by the employee for the employer. Any provision which purports to apply to such an invention is to that extent against the public policy of this state and is to that extent void and unenforceable.

(2)        An employer shall not require a provision made void and unenforceable by subsection (1) of this section as a condition of employment or continuing employment.

(3)        If an employment agreement entered into after September 1, 1979, contains a provision requiring the employee to assign any of the employee’s rights in any invention to the employer, the employer must also, at the time the agreement is made, provide a written notification to the employee that the agreement does not apply to an invention for which no equipment, supplies, facility, or trade secret information of the employer was used and which was developed entirely on the employee’s own time, unless (a) the invention relates (i) directly to the business of the employer, or (ii) to the employer’s actual or demonstrably anticipated research or development, or (b) the invention results from any work performed by the employee for the employer.