What it Means to Be Fundable

What it Means to Be Fundable

What it Means to Be Fundable

Presented by Bart GreenbergManatt, Phelps & Phillips, LLP

American Institute of Aeronautics and AstronauticsJuly 22, 2008


American Institute of Aeronautics and AstronauticsJuly 22, 2008

You Have the “Right” Business Structure

You Have the “Right” Business Structure

3

You Avoided the De Facto PartnershipYou Avoided the De Facto Partnership

What is it? Problems:

• Ownership of IP• Vicarious Liability

What is it? Problems:

• Ownership of IP• Vicarious Liability

4

You Avoided “Wrong” State of FormationYou Avoided “Wrong” State of Formation

California vs. Delaware• California is shareholder friendly• Delaware is management friendly

Special Case of the So-Called Quasi-California Corporation

Why You DON’T Necessarily Want to Be in Nevada• You will most likely pay taxes• The law is not as well defined

California vs. Delaware• California is shareholder friendly• Delaware is management friendly

Special Case of the So-Called Quasi-California Corporation

Why You DON’T Necessarily Want to Be in Nevada• You will most likely pay taxes• The law is not as well defined

5

You Kept it Simple!You Kept it Simple!

Don’t Over-Build at Start-Up. Avoid the Following:• Multiple operating companies or

special business units (Subs)• Related party engineering,

development or service companies

Restructuring Can Be Expensive and Involve Negative Tax Consequences

Don’t Over-Build at Start-Up. Avoid the Following:• Multiple operating companies or

special business units (Subs)• Related party engineering,

development or service companies

Restructuring Can Be Expensive and Involve Negative Tax Consequences

You Have the Right TeamYou Have the Right Team

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You Didn’t Put off the InevitableYou Didn’t Put off the Inevitable Most Start-Ups Tend to Be Too

Quick to Hire and Too Long to Fire• Don’t hire Just because someone will

work for equity or for free• Things will get worse and much

more complicated to unwind Avoid Urge to Hire friends & Family Avoid Those With “Checkered”

Pasts Recognize Your Own Limitations

Most Start-Ups Tend to Be Too Quick to Hire and Too Long to Fire• Don’t hire Just because someone will

work for equity or for free• Things will get worse and much

more complicated to unwind Avoid Urge to Hire friends & Family Avoid Those With “Checkered”

Pasts Recognize Your Own Limitations

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You Properly Handled the InevitableYou Properly Handled the Inevitable

DON’T Violate California Labor Laws• An employee who is discharged must

be paid all wages, including accrued vacation, at time of termination

• An employee who quits must be paid all wages, including accrued vacation, within 72 hours of quitting

ALWAYS get releases from liability on separation (even if you have to pay for it!)

DON’T Violate California Labor Laws• An employee who is discharged must

be paid all wages, including accrued vacation, at time of termination

• An employee who quits must be paid all wages, including accrued vacation, within 72 hours of quitting

ALWAYS get releases from liability on separation (even if you have to pay for it!)

You Protected Your IPYou Protected Your IP

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You Transferred IP into the CompanyYou Transferred IP into the Company

Two Typical Approaches:• Contribution for equity• Licensing arrangements

Factors to Consider:• Protection from creditors• Additional “Fields of Use”• Tax considerations

Two Typical Approaches:• Contribution for equity• Licensing arrangements

Factors to Consider:• Protection from creditors• Additional “Fields of Use”• Tax considerations

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You Have Clear Title to the IPYou Have Clear Title to the IP The “Moonlighting” Founder

• Under Section 2870 of the California Labor Code, Employer owns IP unless:

―Employee developed entirely on her own time; and

―Employee did not use employer's equipment, supplies, facilities or trade secret information

• Exception for any of the following IP, that:

―Relates at time of conception to employer's business, or actual or demonstrably anticipated research or development of employer; or

―Results from any work performed by employee for employer.

The “Moonlighting” Founder• Under Section 2870 of the California

Labor Code, Employer owns IP unless:―Employee developed entirely on her own time;

and―Employee did not use employer's equipment,

supplies, facilities or trade secret information

• Exception for any of the following IP, that:

―Relates at time of conception to employer's business, or actual or demonstrably anticipated research or development of employer; or

―Results from any work performed by employee for employer.

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You Have Clear Title to the IP (cont.)You Have Clear Title to the IP (cont.) Other Employment Related Issues:

• Get employment agreement in place before employee starts work―Obligations to execute assignments and to

reasonably cooperate―Non-solicitation of employees, customers

and vendors

• Check for pre-existing duties of confidentiality to former employer

• Ask to see employment agreement from former employer

Other Employment Related Issues:• Get employment agreement in

place before employee starts work―Obligations to execute assignments and to

reasonably cooperate―Non-solicitation of employees, customers

and vendors

• Check for pre-existing duties of confidentiality to former employer

• Ask to see employment agreement from former employer

13

You Have Clear Title to the IP (cont.)You Have Clear Title to the IP (cont.) Issues Relating to “Work for Hire”

(i.e., Contractors)• GET consulting agreement in place

BEFORE consultant starts work• Without a suitable agreement, you

may “own” nothing more than a limited license to use what was developed, even though you paid for the work!

• Negotiate for ownership UP FRONT, before a deal is pending

Issues Relating to “Work for Hire” (i.e., Contractors)• GET consulting agreement in place

BEFORE consultant starts work• Without a suitable agreement, you

may “own” nothing more than a limited license to use what was developed, even though you paid for the work!

• Negotiate for ownership UP FRONT, before a deal is pending

You Used Equity SparinglyYou Used Equity Sparingly

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You Avoided Oral Promises of EquityYou Avoided Oral Promises of Equity

Oral Agreements ARE Enforceable

The Problems with Oral Agreements are:• Terms are never well defined or fully

thought out• Difficult for employer to disprove

claimed existence of such an arrangement

“Sleeping Dogs” Tend to Wake Up When Exit is imminent

Oral Agreements ARE Enforceable

The Problems with Oral Agreements are:• Terms are never well defined or fully

thought out• Difficult for employer to disprove

claimed existence of such an arrangement

“Sleeping Dogs” Tend to Wake Up When Exit is imminent

16

You Avoided Using Equity as CurrencyYou Avoided Using Equity as Currency

Know What is Market. How Much is Too Much?

Keep an Accurate Capitalization Table

Look for Alternative Ways to Finance the Business: Bootstrap!

DON’T Forget About Compliance with Applicable Securities Laws

Know What is Market. How Much is Too Much?

Keep an Accurate Capitalization Table

Look for Alternative Ways to Finance the Business: Bootstrap!

DON’T Forget About Compliance with Applicable Securities Laws

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You Made Sure Strings Were AttachedYou Made Sure Strings Were Attached

Use of Restricted Stock and Vesting ALWAYS use a probationary period Repurchase Rights Upon

Termination All Equity Should Be Made Subject

to a Shareholders’ Agreement• Restrictions on Transfer• Rights of First Refusal• Repurchase Rights on Trigger Events• Tags, Drags and Shotguns• Proxies and Voting Agreements

Use of Restricted Stock and Vesting ALWAYS use a probationary period Repurchase Rights Upon

Termination All Equity Should Be Made Subject

to a Shareholders’ Agreement• Restrictions on Transfer• Rights of First Refusal• Repurchase Rights on Trigger Events• Tags, Drags and Shotguns• Proxies and Voting Agreements

You Maintained Corporate FormalitiesYou Maintained Corporate Formalities

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You Treated Company as Separate EntityYou Treated Company as Separate Entity

Hold and Properly Document Meetings to Authorize All Requisite Corporate Actions

Maintain and Keep Separate:• Minutes Books & Accounting Records• Bank Accounts• Insurance & Licenses• Contracts and Leases• Letterhead and Stationary

Don’t Run Personal Items Through the Company

Hold and Properly Document Meetings to Authorize All Requisite Corporate Actions

Maintain and Keep Separate:• Minutes Books & Accounting Records• Bank Accounts• Insurance & Licenses• Contracts and Leases• Letterhead and Stationary

Don’t Run Personal Items Through the Company

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If So, You Avoided the Following:If So, You Avoided the Following: Alter Ego Liability (aka “Piercing

of the Corporate Veil”) to Third Parties

Contracts May Be Voidable at Option of Third Parties

Liability to Equity Holders for Breach of Fiduciary Duties

Alter Ego Liability (aka “Piercing of the Corporate Veil”) to Third Parties

Contracts May Be Voidable at Option of Third Parties

Liability to Equity Holders for Breach of Fiduciary Duties

The Opportunity is ExceptionalThe Opportunity is Exceptional

22

Products & ServicesProducts & Services

The Product has Real Benefits (Rather than Just Nifty Features)

The Product/Service Addresses a Real PAIN in the Market

The Product has Real Benefits (Rather than Just Nifty Features)

The Product/Service Addresses a Real PAIN in the Market

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Target MarketTarget Market

There is a Well-Defined Target Market that you Can Serve

You Meet the Needs of the Target Market

You Can Then Leverage and Scale to Other Target Markets

There is a Well-Defined Target Market that you Can Serve

You Meet the Needs of the Target Market

You Can Then Leverage and Scale to Other Target Markets

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Marketing/Sales PlanMarketing/Sales Plan

Your Target Market is Not Defined Too Widely• Attack the Target Market First• Then Seek to Fill Demand in Other

Markets You Have Researched and Not

Just Made Assumptions about Your Target Market

Your Target Market is Not Defined Too Widely• Attack the Target Market First• Then Seek to Fill Demand in Other

Markets You Have Researched and Not

Just Made Assumptions about Your Target Market

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Marketing/Sales Plan (cont.)Marketing/Sales Plan (cont.) You Understand and have

Identified the Mediums You Will Use to Advertise and Promote your Product

You Understand and have Identified the Mediums You Will Use to Advertise and Promote your Product

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Competitive AnalysisCompetitive Analysis

You DO Have Competition (and That is a GOOD Thing)! • A business does not operate in a

vacuum• Management must comprehend

external factors that can impact the business

Do Not Underestimate the Strength of Competitors

You DO Have Competition (and That is a GOOD Thing)! • A business does not operate in a

vacuum• Management must comprehend

external factors that can impact the business

Do Not Underestimate the Strength of Competitors

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Management TeamManagement Team

Do Not Assume that Previous Success in Other Industries Applies to Your Current Industry

Attract and Assemble an ACTIVE and Knowledgeable Board of Advisors

Make Sure Founders and Senior Management Have “Skin in the Game”

Do Not Assume that Previous Success in Other Industries Applies to Your Current Industry

Attract and Assemble an ACTIVE and Knowledgeable Board of Advisors

Make Sure Founders and Senior Management Have “Skin in the Game”

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Operational PlanOperational Plan

Understand the Process by which You Manufacture, Distribute and Sell Your Product or Service

Account for all Production Costs (Direct and Indirect)

Foresee and Plan for Contingencies to Meet Production and Staffing Challenges

Understand the Process by which You Manufacture, Distribute and Sell Your Product or Service

Account for all Production Costs (Direct and Indirect)

Foresee and Plan for Contingencies to Meet Production and Staffing Challenges

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Financial ProjectionsFinancial Projections

Present Sales and Profit Projections that Are Realistic (i.e., no “hockey stick”)

Understand and Be Able to Articulate Financial Assumptions

Do Not Underestimate Expenses and Budget for Unexpected Costs

Present Sales and Profit Projections that Are Realistic (i.e., no “hockey stick”)

Understand and Be Able to Articulate Financial Assumptions

Do Not Underestimate Expenses and Budget for Unexpected Costs

30

Exit StrategyExit Strategy

Don’t Just Assume You Have a Business with the Potential to Go Public

Research and Explain how Your Investor will Specifically Recoup their Investment and a Sufficient Return

Don’t Just Assume You Have a Business with the Potential to Go Public

Research and Explain how Your Investor will Specifically Recoup their Investment and a Sufficient Return

Questions?Questions?

What it Means to Be FundableWhat it Means to Be Fundable

Thank you!


(714) [email protected]

Thank you!


(714) [email protected]