Www.brownrudnick.com an international law firm BU TECH COMMERCIALIZATION BOOT CAMP David D. Gammell [email protected] 617-856-8582.

www.brownrudnick.coman international law firm

BU TECH COMMERCIALIZATIONBOOT CAMP

David D. [email protected]

617-856-8582


Starting and Running a Business

Why form an Entity? What type of Entity to Form? How to form an Entity? – Focus on proper incentives How to finance an Entity? What about Intellectual Property? How do I make money?

Make sure you are diligence ready!


Why Form an Entity

1. Reduce potential for personal liability

2. Concentrate intellectual property ownership

3. Structure equity ownership

4. Build brand


What Type of Entity

1. Sole proprietorship – doesn’t satisfy four

factors

2. Partnership – may not satisfy four factors

3. Limited Liability Company

4. Corporation


Considerations When Choosing an Entity

1. Timing

2. Financing trajectory

3. Tax considerations

Also, Consider VISA issues


How to Form an EntityCorporate Governance and Ownership

Board Strategic direction Elected by Stockholder

Executives Tactical operations

Ownership (Stock vs. Options) – Aligning incentives Division of Voting Power Division of Proceeds of Liquidity


How to Form an Entity (cont’d)Founder Equity – Align Incentives

Focus on the Founders first (all other issuances will dilute founders equally)

Divide 100% among Founders Based on expected contribution over vesting period (2-

5 years)

Set current vested portion based on contribution to date, remainder vests over selected period (2-5 years)

Acceleration of vesting Change of control Termination (for cause—not for cause)


How to Form an Entity (cont’d) Incentives - Vesting

Require founders or managers to subject their original shares to vesting and require shares to be sold back to the Company at original cost or some other formula based on termination of relationship with the Company

Issues: Stock vs. Options How much initially vested? What happens to shares if terminated w/o cause or

voluntarily or because of death/disability? Vesting period: annual/quarterly/monthly? Buy-out price?


How to Form an Entity (cont’d)Stockholder’s Agreement

Provides certain control of transfers of company securities and participation in such transfers.

Three types of protection:

Right of First Refusal: Right to purchase any securities proposed to be sold by certain stockholders (usually founders, sometimes other stockholders) on the proposed terms

Tag-along / Co-sale Right: Right to participate in proposed sale by certain stockholders

Drag-along / Take-along Right: Right for certain stockholders to take other security holders along in an exit transaction (typically majority of board and some group of stockholder)


How to Finance an Entity

Sources Boot strap—self fund, customer funded Friends and Family Angel/Venture Capital Strategic Investor

Type of Investment Loan Convertible Loan Common Stock Preferred Stock


How to Finance an Entity (cont’d)Principal Concerns in Financing Transactions

Concern Mechanism

Influence on CompanyComposition of Board of Directors Veto Rights over certain Corporate Actions, Negative and Affirmative Covenants

Control over exit eventsDrag-along Rights, Tag-along Rights, Rights of First Refusal, Registration Rights

Ownership/Dilution

Valuation/CapitalizationAntidilution Protection (economic and structural)Pre-emptive Rights (equity)

Incentives for Mgmt and Employees Vesting—Options, Restricted Stock


How to Finance an Entity (cont’d)Capitalization and Valuation Terminology

Pre-Money Valuation: Value of the company prior to investment by the VC.

Post-Money Valuation: Value of the company after the investment by the VC, i.e., the sum of the pre-money valuation plus the investment.

Fully Diluted Shares: Generally defined as total issued and outstanding securities reported on an as converted to common stock basis. This number usually includes all issued and outstanding preferred stock, issued warrants, and options (often including unissued pool).


Four Types of Intellectual Property

Patent

Trade Secret

Copyright

Trademark

Focus on Competitive Barriers


Patent

Any machine, manufacture, composition of matter, and process (but cannot be law of nature, natural phenomena, or abstract idea)

Must obtain registration from federal government, and can only be registered if proven useful, novel, and unobvious

Provides right to exclude others from making, using, selling, offering to sell, or importing the patented invention

The right lasts from registration until 20 years after filing

Inventors own until they assign


Trade Secret

Any information that derives economic value from being secret and for which reasonable efforts are used to keep it secret

No registration system – just need to use reasonable efforts to maintain secrecy

Secret will remain yours until it is revealed; Could last forever

Trade secret vs. Patent

Owner is the one that develops and maintains the secret


Copyright

Original work of authorship fixed in a tangible medium of

expression

Registration is an option but is not required; copyright notice

also is not required

Bundle of rights – reproduce, prepare derivative works,

distribute, perform/display publicly, etc.

Rights last for the author/creator life plus 70 years after death

Owner is the creator until he/she assigns or unless it is a “work

made for hire”


Trademark

Word, name, symbol, etc. that indicates the source of goods or services

Registration possible and enhances rights, but rights come from use and registration not possible without use

Owner can stop others from using same or confusingly similar mark, and the test is “likelihood of confusion”

Right could last forever, but registrations need to be renewed periodically

Owner is entity that uses mark


Practical Tips Regarding IP

All officers/employees sign employment agreement: assign inventions and copyrightable works

agree not to disclose confidential information

All non-officer/employee contributors sign consulting agreement: assign inventions and copyrightable works

agree not to disclose confidential information


Practical Tips Regarding IP

Follow best practices in product/service development: identify and respect obligations to prior employers know ramifications of including existing material (e.g.,

open source) Have an IP strategy

establish IP policies and procedures educate officers/employees document ideas and progress insert IP checkpoints into product/service development form and use an IP committee


How Do I Make Money

Profit—Operate at a profit

IPO—sale of shares to public

Generally liquidity for insiders only begins 6

months after IPO

Sale—sale of stock or assets for cash or stock

www.brownrudnick.com

Brown Rudnick LLP an international law firm BOSTON NEW YORK HARTFORD PROVIDENCE WASHINGTON, DC LONDON DUBLIN

Www.brownrudnick.com an international law firm BU TECH COMMERCIALIZATION BOOT CAMP David D. Gammell [email protected] 617-856-8582.

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