Legal Stuff, Explained

Startup Equity 201: Stock Options

allvelvetmornings — Mon, 20 May 2013 13:31:33 -0400

This class is for entrepreneurs, who want to retain and incentivize the most important engine of company growth — their people. And for employees of high-growth, early-stage companies, who receive stock options as part of their compensation package. Students will learn the nuts and bolts of Employee Incentive Plan that best serves the interests of founders, investors, and employees. We’ll start by reviewing the basics – some of the fundamentals we learned in 101 such as dilution, vesting, and 83B election for restricted stock grants – then delve a bit deeper into the alphabet soup of stock option plans: ISOs (Incentive Stock Options), NSOs (Non-statutory Stock Options), FMV (Fair Market Value), et cetera. We’ll discuss: Distinction between employee stock option plans and stock grants Employee stock option plan best and worst practices Distinction between Incentive Stock Options (ISOs) and Non-Statutory Stock Options (NSOs) Tax strategies for ISOs and NSOs Fair Market Valuation (FMV) of company stock Negotiation best and worst practices for founders and employees Secondary markets Exit strategies for option holders The legal stuff will be explained by Zeke Vermillion, partner at Adler Vermillion & Skocilich. This class will be ideal for you: If you are a founder who’s planning to incentivize your hires with company stock options If you are an employee who received stock options and is wondering what this entails and what taxes you might have to pay If you don’t know what the difference between ISO’s and NSO’s is If you want to know how to best go about negotiating your employee equity compensation If you have particular questions to ask a startup lawyer about your employment contract, taxes, or something else If Startup Equity 101 left you wishing for more…! Here is Zeke’s bio: Zeke acts as a general corporate legal adviser to entrepreneurial companies and individuals. Recent engagements include capital-raising transactions, employee equity incentive grants, copyright and trademark licensing, business development partnerships, and small business acquisitions. Zeke was previously at White & Case, where he worked on a wide variety of M&A, securities, project and asset finance deals, and the largest IPO in history. He uses his broad experience and industry connections to solve clients’ legal problems efficiently. This class is a continuation of Startup Equity 101 Primer, which I taught several times since June 2012. Here are what past attendees and students have had to say about the class: Thanks Jamie for teaching the Startup Equity Primer. Certainly a difficult and complex topic that takes more than a day to teach but I think you gave a great overview of the topic to get the wheel rolling on planning equity structure. - EN Jamie’s talk was excellent—and just what I was seeking. She was very professional, well versed on the topic and was well prepared. She covered a great deal of material clearly and efficiently. The class was made up of smart, knowledgable founders who asked great questions. She was succinct in her answers and made sure she was clear enough so that everyone understood. -PS She offered great information and made sure that we understood the material and had our questions answered. She was very well-prepared with slides, handout, and pre-populated spreadsheet that explained the process. I’d recommend this class to founders and to those who are interested in going to work for a startup. -MN The image is from Long Term Incentive and the Black Box of Employee Stock Options (a great read!)

The Docracy Blog: Guest post: Should you incorporate as a Benefit Corporation?

allvelvetmornings — Fri, 10 May 2013 16:29:42 -0400

The Docracy Blog: Guest post: Should you incorporate as a Benefit Corporation? :

docracy:

A Benefit Corporation is a new type of corporate entity available to businesses choosing to incorporate in California. Inder Comar, a Docracy contributor who represents small businesses and startups there, recently published his sample Articles of Incorporation and the following useful…

Developer Contracts in the Real World

allvelvetmornings — Fri, 19 Apr 2013 13:53:53 -0400

Developer Contracts in the Real World:

docracy:

A handy list of popular contracts for developers, as featured on SitePoint

The Docracy Blog: How to Register a Trademark

allvelvetmornings — Fri, 05 Apr 2013 17:03:19 -0400

The Docracy Blog: How to Register a Trademark:

docracy:

First thing, you have to figure out if it makes sense for you to register a trademark, and what is trademarkable.

According to the US Patent and Trademark Office’s Trademarks (USPTO), a trademark is “a word, phrase, symbol or design, or combination thereof, that identifies and distinguishes…

The Docracy Blog: A legal primer on trademarks: interviewing Jacob Tingen

allvelvetmornings — Fri, 22 Mar 2013 11:09:47 -0400

The Docracy Blog: A legal primer on trademarks: interviewing Jacob Tingen:

docracy:

This week we’re diving into the world of trademarks thanks to one of our latest lawyer contributors: Jacob Tingen.

Jacob is a solo practitioner from Virginia with a very innovative approach to lawyering: his practice is entirely online-based, he self-publishes useful ebooks, and has the …

Docracy’s Term Sheet Guide

allvelvetmornings — Fri, 15 Mar 2013 14:36:38 -0400

Docracy’s Term Sheet Guide:

docracy:

We published a really special topic page today: the Term Sheet Guide.

We have many publicly available term sheets on Docracy, including forms from Series Seed, Techstars and Foundry Group. The thing is, a term sheet is a fairly complicated legal affair, and we felt like there was a need for some comprehensive, entrepreneur-friendly explanation. Therefore, we put together this rich, clear and detailed guide to term sheets and venture capital funding, from the point of view of the entrepreneur.

It features an in-depth look at the main provisions, with sample language and links to the best blog posts on the topic. It includes useful definitions of technical terms, and a “checklist” to go through to make sure your term sheet is a fair deal. It’s a pretty long document, so you might want to download it in PDF form and study it via your device of choice, for free.

We believe this is a great, highly-needed resource for the startup community. We promise to keep it updated, with your help as well: share comments and suggestion in the comments!

The Docracy Blog: Dear App Developers, Time to Get a Privacy Policy

allvelvetmornings — Sat, 16 Feb 2013 00:30:48 -0500

The Docracy Blog: Dear App Developers, Time to Get a Privacy Policy:

docracy:

Big news for privacy last week: the FTC (Federal Trade Commission) fined Path $800,000 for privacy violations (Path settled the fine after a long FTC investigation started from a post on Hacker News). At the same time they issued a long set of guidelines for pretty much everybody in the…

teachingaway: Espresso Machine Patent, 1951

allvelvetmornings — Sun, 06 Jan 2013 15:24:56 -0500

teachingaway:

Espresso Machine Patent, 1951

The Docracy Blog: What's a Model Release?

allvelvetmornings — Fri, 14 Dec 2012 11:19:53 -0500

The Docracy Blog: What's a Model Release?:

docracy:

Do you take photos? Do you want to sell, publish, and/or use photos? Model releases are useful little documents that allow photographers, publishers and photo users to have more freedom in using or publishing photos. Essentially, if there is a recognizable person in the image, a model…

newyorker: Cartoon by Robert Leighton. For...

allvelvetmornings — Fri, 07 Dec 2012 12:29:46 -0500

newyorker:

Cartoon by Robert Leighton. For more: http://nyr.kr/TCbM1G

The Docracy Blog: Everything you need to know about licensing a design

allvelvetmornings — Fri, 26 Oct 2012 10:00:37 -0400

The Docracy Blog: Everything you need to know about licensing a design:

docracy:

Let’s welcome our latest lawyer contributor, the awesome Dave Ugelow! Dave is an expert in Intellectual Property Law and just open-sourced two interesting templates on Docracy: an Independent Contractor Agreement and an Artist/Design License Agreement.

We took a particular…

Recapping Legal Stuff Explained 2.4: Equity Crowdfunding

boyantoshkoff — Wed, 24 Oct 2012 10:01:01 -0400

Thanks to everyone who joined us yesterday for our fourth Legal Stuff Explained session of the year. Bill Carleton, Larry Baker, and David Rose took questions from the audience and spoke on a number of issues in equity crowdfunding and the JOBS Act. It was a very dense and in-depth talk, so we definitely recommend watching the whole thing. Recap and highlights from the panel follow below, but if you are interested in the full transcript of the event, consider joining this crowdfunding effort.

Crowdfunding State of the Art:

Crowdfunding comes in two types: equity and non-equity.

Equity crowdfunding: putting money into a project in order to make money (i.e., a return on your investment). Public equity crowdfunding doesn’t exist right now outside of regulated stock markets.
Non-equity crowdfunding: putting money into a project for other reasons, normally as a donation or subsidized support (i.e., a t-shirt or a thank-you note; e.g., Kickstarter).

The SEC, the entity that regulates public markets, prohibits “general solicitation” and general advertising of sales of securities, meaning that you can’t go online and tell everyone that you’re raising money for your startup and that in exchange for investment you’ll give out equity. This rule applies to both accredited investors (very wealthy people and angels) and non-accredited investors (everyone else).
Current crowdfunding platforms function as ways to broaden investor networks or to get funding from pre-existing investor networks. There is no public marketplace, and all offerings are private.

Angels find out about and participate in private offerings through their individual networks and through platforms like Gust or AngelList.
BOLSTR provides a platform for selling private securities to both accredited and non-accredited investors, particularly within local communities, but it has to comply with SEC Rule 504 and each state’s “blue sky” rules on non-accredited investors, and again, offerings are private.

The JOBS Act:

President Obama signed the JOBS Act into law on April 5th, 2012, and the SEC has been given until 2014 to spell out the specific rules of crowdfunding.
Its biggest impact will be to change general solicitation rules and allow companies to seek funding from the general public. Based on the guidelines the SEC has issued so far proposing an amendment to rule 506 of Regulation D, companies will be able to generally solicit and generally advertise so long as they only sell securities to accredited investors. If selling to non-accredited investors, companies cannot generally advertise, but can place “notices which direct investors to the funding portal or broker” (JOBS Act Title III; awaiting SEC clarification).
Two notable sections of the JOBS Act involve equity crowdfunding: Title II and Title III.

Title II applies to accredited investors and allows them to buy equity in generally-solicited private companies.

If selling to only accredited investors, crowdfunding platforms don’t have to register with the SEC as broker/dealers, as long as they meet certain conditions.
Platforms have to take reasonable steps to verify that purchasers are accredited investors (details).
Since the SEC has not given specific factors constituting “reasonable steps” (i.e., examining level of income, tax returns, other investments…), caution remains the general attitude among companies and platforms.
Additionally, since investor information must remain private, how platforms are to obtain information about investors’ investments for verification is an issue that needs SEC clarification.
The SEC has yet to propose rules governing the content and manner of advertising and solicitations.

Title III applies to non-accredited investors and allows them to buy shares in private companies in small amounts, subject to limits that are proportional to investor income. The rules for non-accredited investors are much more extensive (platforms have to register with the SEC as a broker or funding portal; companies cannot generally advertise the terms of the offering, “except for notices which direct investors to the funding portal or broker”) and will place a heavier burden on platforms that sell to non-accredited investors.

The SEC has not yet issued its own guidelines for sales of securities to unaccredited investors. How unaccredited investors will be treated and what kind of access they will have (what amounts they will be able to invest, what income requirements will be imposed, and how funding platforms will be able to advertise to them) will play a significant role in how crowdfunding will play out and whether it will become truly democratic.

In general, increasing access for accredited investors will likely increase the number of angels, simply because investing will take less work.
David Rose pointed out that giving equity and accompanying voting rights to unaccredited investors is very unattractive to professional angel investors. An alternative funding instrument for unaccredited investors is the revenue-backed note, which would allow them to invest and obtain a return, while keeping them out of cap tables and allowing angels to buy out unaccredited investors if they want.

We hope we cleared up some confusion! In case you missed it, we have a streaming video of the entire event here!

Live Stream of Equity Crowdfunding Dissected - starting at 6:30pm

allvelvetmornings — Thu, 18 Oct 2012 17:31:24 -0400

Missed LSE 2.2 “Legal Issues of Mobile...

christine-docracy — Mon, 15 Oct 2012 16:45:02 -0400

Missed LSE 2.2 “Legal Issues of Mobile Development”? Watch the video!

Featuring @BusinessLawPost!

docracy: Founding a company is super exciting but there are...

allvelvetmornings — Fri, 12 Oct 2012 11:51:14 -0400

docracy:

Founding a company is super exciting but there are lots of pitfalls, especially for technical founders. In this video we talk about our experiences all the way from starting at a hackathon to raising money to running a company.

We’re also happy to answer questions or talk about something in more detail. Just post a comment or send us a message and we’ll try to cover it next time.

LSE 2.3 Event: Equity Compensation Hacks (for founders and...

christine-docracy — Tue, 09 Oct 2012 16:13:00 -0400

LSE 2.3 Event: Equity Compensation Hacks (for founders and startup employees) Recap

Thanks to everyone who joined us yesterday for our 3rd Legal Stuff Explained session and our first panel. It was a super successful, sold-out event! Charlie O’Donnell, Jamie Lee, and Zeke Vermillion took questions from the audience on a range of equity compensation issues from both a founder and an employee’s perspective. Highlights from the panel are below:

On investors:

It is easier to have investors that have been involved in a lot of startups. Experienced investors are better than 1st timers.
Fundraising takes time and is a distraction. But don’t stop fundraising too early. You don’t want that one investor to be your only option. The greatest leverage you can have is having many investors interested. Don’t stop creating a market for your company because one investor is interested.
The difference between getting investors here in NY versus Silicon Valley is that over there, every investor has invested in tech companies a few times, so they know how things are done. Here, because there are so many different industries, your investors may have different expectations. For example, a private equity investor would be used to 50% ownership of a company. Whereas, a tech company would only expect investors to take maybe 15%.
In dealing with investors, keep in mind that it is always best to do things that are the norm. If an investor is suggesting something that is different from how things are usually done, it will slow you down and it should also cause concern.

On employees:

It’s important to find peer businesses and see what offers they’re giving to their CTOs, front end developers etc. because the people you are considering hiring are doing the exact same thing.
When considering accepting equity as compensation it can be valuable to do your research. There are websites that list what percentage of the company a hired CEO (non-founder) typically gets, a VP, or a more junior employee depending on the company’s funding stage. These are textbook examples that may change depending on how likely it is there will be a liquidity event.
Some people may want to be paid only in equity, depending on their circumstances. But consider if that person is someone you absolutely need to have.
In examples where founders had an employee that was compensated partially in equity and an employee that was compensated fully in cash, the one that chose equity turned out to be a better fit for the company. Sometimes people work better and are more invested in their work if they have equity compensation.
Remember Vesting! It takes 4 years to earn equity! And you have to reach 1 year to start earning a proportion of your shares (i.e., ¼ at 1 year, ½ at 2 years). So if you give equity to employee X and 3 months in you realize that employee X’s work isn’t good, its fine. You can part ways at 3 months and they don’t walk away with any part of the company.
A company that gave a chunk of equity to their CTO was comfortable with their decision because they reasoned that if he worked out, he would totally be worth that, but if he didn’t? They would be able to tell soon enough (in less time than a year) and it still wouldn’t be a problem.
When giving equity to advisors, keep in mind that usually these shares vest faster. A way to keep advisors accountable and performing is to write down an agreement where the advisor agrees to do specific things and set up a vesting schedule accordingly.

On founders:

When giving out equity consider if you are making a smaller business or a big business. If you think you’re going to have a big $ business, like a $250 million idea, it is probably ok to have less of the pie, because it is a smaller slice of a big pie!
A big mistake that early stage entrepreneurs (people who have a good idea but don’t know how the market will receive it) make is giving out a lot of equity. They want to give out equity to friends who have helped them, people who have given advice etc. But unless someone is doing substantive work on your company, you shouldn’t give them equity. Because everyone’s percentage will be diluted as time goes on. So save equity for the core team.
A mistake an entrepreneur can make is being so concerned about giving away parts of the company that they don’t raise enough capital. Don’t let the fear of dilution keep you from raising enough to meet your goals.
The legal documents that are the most essential and cheap (or free! on Docracy) are the by-laws, restricted stock purchase agreement for vested stock, and the tech assignments.
You can also have a not legally binding term sheet. Make sure to write “Not Legally Binding” on the top. Some founders write these agreements on napkins, when everyone is working in good faith and fix things later, legally when they have the money.

In case you missed it, we have a streaming video of the entire event here!

Missed “Equity Compensation Hacks”? Watch the...

allvelvetmornings — Fri, 05 Oct 2012 11:50:29 -0400

Missed “Equity Compensation Hacks”? Watch the video! Featuring @ceonyc @jiEunJamie @zmillion

Lots of questions from the audience!

Legal Issues of Mobile Development Recap

boyantoshkoff — Fri, 28 Sep 2012 17:18:00 -0400

Thank you to all who were able to join us for yesterday’s Legal Stuff Explained. Arina Shulga presented on a range of legal issues surrounding mobile app development, including corporate, employment, and intellectual property law, as well as government regulations. We’re currently preparing a video of Arina’s presentation and we’ll post that soon! Meanwhile, check out the main takeaways below:

Corporate Considerations:

Incorporating is not necessary for selling an app, but it has its advantages, including limiting personal liability, raising your credibility, protecting your business name, and providing easier access to capital.
A dual corporation structure may be preferable, where one corporation owns the intellectual property and licenses it out to a second that sells apps.
If you are a team of co-founders, vesting is essential for creating a clear incentive structure and aligning founder interests.

Employment Considerations:

Be clear about the status of each person working for you, whether they are an employee or independent contractor, and carefully spell out how any intellectual property they create will be treated in their contract or through a Work-for-hire provision or Master Services Agreement.
Make sure that you keep a repository of all source code anyone creates for you so you easily have it if they leave.
Someone may be contractually defined as an independent contractor, but if you exhibit a high level of supervision, direction, and control over them, the law may treat them as an employee.

Intellectual Property Considerations:

Make sure to secure any trade secrets through security measures, good corporate policies, and Non-Disclosure Agreements.
File your copyrights with the US Copyright Office to ensure that your ownership of the copyright is clear and easily enforceable.
If your app uses user content, familiarize yourself with the DMCA and how to stay within the bounds of its safe harbor provision.

Government Regulations:

FTC Truth-in-Advertising laws require that all information about the
app be truthful, complete and any objective statements are backed with
evidence. Once the developer starts selling the app, the developer
becomes an advertiser.
Privacy regulations – make sure you follow your privacy policies, keep them up to date to accurately reflect your actual practices, and let users know of any changes.
Children’s Online Privacy Protection Act of 1998 (COPPA) applies, if
your app is directed to children or the developer has actual knowledge
that the app will be used by kids.

The powerpoint Arina used during her presentation is available here.

FTC Guidance on Marketing Apps

allvelvetmornings — Thu, 27 Sep 2012 12:48:08 -0400

FTC Guidance on Marketing Apps:

Almost full house today for LSE 2.2: Legal Issues of Mobile Apps! Get in the mood with this blog post by our speaker Arina Shulga!

Registration open for LSE 2.3! Equity Compensation Hacks

allvelvetmornings — Thu, 20 Sep 2012 15:33:07 -0400

Online Ticketing for Legal Stuff Explained 2.3: Equity Compensation Hacks (for founders and startup employees) powered by Eventbrite