Home » Legal Advice
October 19 by Jasmine Antonick / 2 Comments
Guest blogger, Ivan Gaviria today walks us through 5 terms founders should focus on when navigating their first term sheet:
1) Option Pool
2) Dividends
3) Liquidation Preference
4) Board Composition
5) Founder Vesting
Ivan is a partner at Gunderson Dettmer’s Silicon Valley office, practicing in the Corporate and Securities Group. He has extensive experience working with startup and emerging growth companies through their entire lifecycle as well as representing venture capital, private equity and other investors. For more great resources, we recommend checking our these docs on DocStoc and VentureHacks.
The Series A Term Sheet: 5 Terms Founders Should Focus On
It turns out that a typical Series A Term Sheet for a private company venture capital financing can be as much as 4,000 words long. Given that for many people 140 characters is plenty these days, that is a lot of verbiage for even the most detail-oriented founder.
To try and make it easier to separate the “boilerplate” from the stuff that really matters, I’ve summarized below what I think are some of the terms that a founder needs to drill down on.
Everyone in the tech business is on information overload; the trick is to apply your limited bandwidth in the right places. Of course, as a lawyer, I would never suggest you skim the fine print. My point is that even after your lawyer, the entrepreneurs in your network, your mentors and whomever else you trust have read the fine print and given you their opinion, there are some key provisions that you have to understand and have your own opinion on.
The following comments are done in the order that the points generally appear in a Series A Term Sheet (and I’m skipping valuation on the theory that if you need math help from your lawyer you’re already in trouble):
Option Pool.
Sometimes tucked into a paragraph on “capitalization,” term sheets will generally define price per share as being based on a pre-money valuation of $X and a cap table that includes a “post-financing option pool of Y%.”
The idea is that if the pre-financing option pool isn’t deemed big enough, the investors worry about being diluted shortly after their investment by a pool increase. Accordingly, the desired pool size is factored into the negotiated valuation such that the founders and other pre-financing stockholders bear the dilution. Certainly you wouldn’t expect a new investor to jump into a company with no option pool and accept inevitable and instant dilution. Nor should founders adopt a giant pool and forever protect investors from dilution that is expected in a growing and healthy company.
The key is being thoughtful about finding the right middle ground – how robust is the team at the time of the investment? Is it an industry or region where equity is more or less important a driver of recruiting/retention? Is the hiring plan tailored to the operating plan? Does the team know up front that a major hire will be needed (e.g., is it obvious that the founder group is missing a CEO), etc.
Spending some time on these issues and coming up with an option pool budget helps you have a reasoned approach to pool size. If you can’t tie the pool discussion to the business plan, then it’s just an extension of the valuation discussion and, for the founder, a less effective way of addressing the issue.
Dividends.
There are generally two schools of thought on dividends – (1) they basically should never be declared in an early stage company and any retained earnings should be used for growth and (2) there should be an annual dividend that at least guarantees some modest return. A hybrid favored by some East Coast investors has dividends accumulate from the time the stock is purchased but provides for them to be paid only upon an exit event.
From a founder’s perspective, the second approach can have a real impact on economics. A typical dividend of that type might be 6 to 8% accruing annually – add that up over several rounds of financing and several years to an exit and it can be a major spiff on top of the liquidation preference. So from a term sheet standpoint, you better know what you’re getting!
School (1) generally includes the phrase “when, as and if declared” – the magic words to say there is no mandatory dividend – only a dividend preference for the Preferred if the Board declares a dividend. School (2) will say “cumulative” or “mandatory” and generally have more extensive verbiage around the accrual period, whether they are paid in cash or stock, and whether they are paid regularly or only at exit.
If you’re not sure what you’ve got you need to ask. And always be cognizant that a later investor will want the same terms so an innocent looking 5% on a $750K seed round could be a big deal down the road.
Liquidation Preference.
The basic concept of a liquidation preference is pretty simple – if you liquidate the company, the preferred stock gets money back before the common stock.
But, in the world of venture financings, a sale of the company or its assets is always deemed “a liquidation.” So we’re not just talking about preference over assets when something craters, this is also about how you divide the money when the company gets sold. Who gets their money first when there isn’t enough to go around and how fairly is it shared when there is lots to go around. The problem is that there are half a dozen ways to structure preferences and several of them have multiple names in the lingo – 1X/no participation; “double dip preferred,” “fully participating,” “participating preferred with a cap,” preference multiples with no participation, etc.
In later stages of investment, you also have to deal with “intramural” issues among investor over whether senior preferred should get paid ahead of junior preferred, etc. It’s a bit much to try and review in detail here, but suffice it to say that these provisions are THE major drivers of economics in an M&A exit, and you need to take care to understand exactly what is being proposed and the economic impact at various valuations.
Board Composition.
Virtually all venture capital financings require that the Company reserve one or more seats on the Board of Directors for the investor(s).
Following a Series A financing, a fairly common structure is an odd numbered board (to avoid deadlock) with an independent director as the “tiebreaker” between the directors designated by holders of preferred stock (the investors) and those designated by the holders of common stock (the founders).
In syndicated rounds with multiple investors, 5 is a very typical post-Series A board consisting of 2 investor seats, 2 common seats and an independent. For smaller rounds with a single investor, one might see a 3 person board with 1 investor seat, 1 common seat and an independent. One subtlety to be aware of from the founder perspective is whether a “common” seat is hard wired to the “then serving CEO.” The term sheet typically phrases this as something like this: “Holders of a majority of the Common Stock shall be entitled to elect _____ member(s), one of whom shall be the Company’s CEO.”
In other words, if the founder is no longer the CEO and is replaced, the board seat goes with the office – which can tilt the balance of a board away from the original founder group. Of course the pros and cons of that approach will often depend on the individual circumstances of any particular team or deal; what’s important for purposes of the term sheet is to understand the issue so you can make a knowledgeable decision. Similarly, the choice of the “independent director” can make a huge difference in the tilt of a Board and the choice should be made with care.
For more perspective on Board composition issues, see the following post at Venturehacks.
Founder Vesting.
Often the Series A term sheet will be used to negotiate founder vesting as part of the overall terms and conditions of the financing. With few notable exceptions, the primary value in a typical start up company is in the people and, not surprisingly, investors want to make sure those key people stick around.
As with everything in this business the basic concept is simple – stock owned by the founders is made subject to a repurchase right, exercisable by the Company if the founder quits or is terminated. The repurchase right “lapses” on a negotiated vesting schedule so that fewer and fewer shares are “at risk” over time.
Again, though, the devil is in the details. What percentage of the founders’ shares will be subject to the repurchase right? Over how many years? Will the vesting accelerate if there is a sale of the company? What about acceleration if the founder is terminated without cause? What sorts of things should constitute cause?
It’s a topic on which several hundred words could be written just walking through the lingo – “good reason,” “double trigger versus single trigger,” “constructive termination,” etc. So let me make just two high level points.
First, this is an area where founders often get their first taste of being a bit conflicted. From an individual perspective, a founder might wish to be as aggressive as the market will bear on vesting schedule, acceleration terms and other founder protections.
As a co-founder or CEO, however, one also has to consider the founder/co-founder dynamic as much as the founders/investors dynamic. I’ve often seen co-founders set up aggressively pro-founder vesting terms only to have a team member break up the band and walk away with a lot more equity than the remaining team would have liked. As a related second point, this is an area where it pays to try and strategize a few moves ahead to build consistency into equity terms on the team. Having a patchwork of different deals can create odd incentives or hurt morale if, as a result of different acceleration terms for example, a deal will produce widely different economics for employees at similar levels. In any event, a founder going into a Series A term sheet negotiation should understand his or her existing stock terms and exactly how the term sheet proposes to alter or amend those terms.
Some Final Disclaimers
Having said all of that, I will make a few final disclaimers. First, this entire discussion assumes a company on its first round of professional financing from a VC or angel investor accustomed to working with startups.
Occasionally startups will have an early engagement with a commercial or strategic partner that yields a financing and those deals can vary greatly from what we generally refer to as “market” terms from a venture capital investor. Also as alluded to above, there are additional degrees of complexity as you layer in additional rounds at different valuations. Reasonable VC’s and founders may of course have legitimate disagreements about how to balance these terms, the important thing is to be as informed and self reliant on the key terms as you can be.
Lastly, thanks to the team at Under the Radar for providing this forum and for all they do to support the startup ecosystem.
October 7 by Jasmine Antonick / No Comments
* Dave McClure (Founders Fund) walks through How to Pitch a VC at The Workshop
Yesterday, 120 startup founders joined VCs, seasoned VC-backed founders and startup attorneys for a one day deep dive into the in’s and out’s of getting funded at Microsoft’s downtown LA office.
From Dan Gould’s opening keynote (notable soundbite = “F@c% you, go away” when translating VC-isms) to Dave McClure’s How to Pitch a VC (slides below) and Kent Goldman’s disdain of “bling” (ie: startup advisers who lend their names but not their time); The Workshop presenters not only put on a good show, but also spent a lot of time answering startups’ questions.
Some of the great startups who attended include:
* Audio Micro
* RideAmigos
* CIE – Seek Your Own Proof
* Handbago
* Sweety High
* PhotoZen
* BakeSpace
* AdventureLink
* and more. Thanks to all who came!
Sessions Included:
* What to Do BEFORE Pitching a VC
* Determining Need vs. Greed (ie: what to raise?)
* Equity Structure (How to Divide the Pie)
* Term Sheet Negotiation (View the term sheets online HERE)
* Team, Board and Adviser Compensation
* …and more. More presentations and term sheets can be found on DocStoc.
HOW TO PITCH A VC: Dave McClure
Thanks to all speakers who lent their time and to all startups who came.
And to our sponsors: KPPB, Strategic Law Partners, Stubbs Alderton & Markiles and Microsoft BizSpark
August 20 by Jasmine Antonick / No Comments
Our friend, Mark Suster (a partner at LA-based GRP Partners) is a successful entrepreneur and VC. I can always count on him for candid advice and feedback; a value he also provides to startups in SoCal and up here in the Valley. After being in a startup with an army of co-founders in my past life, I found Mark’s recent post quite compelling…
Founders, Ownership and Prenuptials
Yesterday I wrote a blog post (here) in which I urged people to not have too many founders.
Best case scenario in my mind is just 1, but at most I recommend 2.
I knew this topic would be controversial because when I tell people this in person it always elicits shock. To be clear – it’s not about being stingy with or hoarding equity – it’s about having a prenuptial agreement.
Let me give you some scenarios that do happen in real life:
You start a company 50/50 with a good friend. If it becomes the next YouTube, you always stay friends. 99.99% of companies do not become the next YouTube.
In fact, most go through tough times at some point. Or maybe it’s not a good friend but you’re a business guy and hooked up with a technical guy you know through the network and you think you’ll work well together or vice-versa.
If you’re not an overnight success or if you do struggle, what happens?
* What if one guy needs to pay bills and takes a full time job somewhere. Should he/she keep 50%?
* What if you have to make really tough calls on cutting costs, biz dev deals, fund raising and you violently disagree on direction? Who prevails?
* What if the person performs OK, but not great and you need to hire above him?
These situations are only compounded if you have 3 or more founders. I know that many people reading this will be in companies with 3+ founders and aren’t having any friction. That’s great. I have even invested in companies like this. I know conflict doesn’t always happen. It’s just that when it does, it usually comes after much time and expense.
Real world story:
A friend of mine used to work at Google. He started a company with 2 others. They agreed to all be co-founders.
Now, nearly 2 years of hard work have been put into the company (not to mention a lot of their savings) and they’ve had to have the discussion about who should be CEO. 2 of the 3 want the job. They each own 33%. There is no mechanism for deciding.
They agreed to let the VC’s decide once an investment comes in. That sucks because VCs will want to know that you have all the difficult stuff worked out before you come to them. You’re just giving the VC one more reason to potentially so “no.”
In many cases these things get worked out and I’m optimistic in my friend’s scenario. But… do you want to risk it AFTER you’ve sunk in years and hard-earned $$$?
Why does someone need to be CEO? In many businesses you end up needing to make tough decisions. Consensus does not always build.
In yesterday’s post; however, I didn’t advocate being greedy. To the contrary. I believe it’s very important to spread the equity. You should have a “partner” or 2 in the company. I believe you should treat them as partners. They should have access to all the same information. They should be involved deciding in all the difficult issues. They should have huge upside in the economic potential of your business.
But if you set up a company by yourself and give a large % in restricted stock or stock options to a partner, and for some reason you fall out of love, you have a pre-nuptial agreement in place.
If they stay 2 years and then leave – great. They only walk with half of their position. This could be achieved with simple vesting schemes, but there’s a rub… What if YOU decide that they need to leave? It’s far better in that case, as you’ll have some leverage that doesn’t end up torpedoing the company. 50/50 partnerships sometimes end with a bang.
There, I’ve said it. I know it’s controversial. But I still think it’s right for many a founder / entrepreneur. Yes, there are exceptions. No, it’s not the end of the world if you’re 50/50 or 33/33/33.
A friend and respected colleague, Bryce Benjamin (of TechCoast Angels) wrote to me after my last post. He was concerned that I had set the impression that founders should hoard their equity or that there were prescribed numbers to hand out. He authorized me to post his comments:
“We’re in sync on so many start-up/entrepreneur issues that I may have knee-jerked a bit too harshly on this one. But it is the “founding team” size and “percentage ownership” advice in this post that I feel you’re being too prescriptive about. After re-reading, I see you have qualified your comments, but one of the things readers really like about your blog is that you give specific, actionable advice in it and your qualifiers will be ignored just as I read right past them last night.
One of the mistakes I see entrepreneurs commonly making is too much focus on their ownership % and not enough recognition of the various core competencies and expertise they’ll actually need to create a successful biz. Generally a founder (or founding team) has strong core competencies in “a” discipline, but lacks the breadth needed to build the business. First time entrepreneurs, especially, tend to need more than one other “key” team member/partner to help them be successful. And to be able to attract the expertise/experience they require, they should be willing to give up pretty sizable chunks of the company. Experienced entrepreneurs who know the ropes won’t need the same kind of support and will be able to build a team by giving up less of the ownership.
In terms of %’s, my advice to entrepreneurs is to focus on value and fairness. I agree that “fairness” doesn’t always mean equal, but sometimes it does. Again, though, the key for the entrepreneur is to focus on what individual(s) is(are) essential to expanding the size of the pie and getting the right people, not specifically on the size of his or her piece.”
I agree 100%. I don’t advocate being stingy. I advocate, to steal Bryce’s words, “fairness and value.”
Many solo founders who’ve spent time with me would confirm that I often tell them, “you need to find a “co-founder” to work with if you want this to be successful. And you need to be prepared to part with 10, 20, 30% of your company or more to make this happen.”
August 14 by Jasmine Antonick / 1 Comment
This week, Ivan Gaviria walks us through the 5 mistakes startups make with their people… A mistake a day.
Ivan is a partner at Gunderson Dettmer’s Silicon Valley office, practicing in the Corporate and Securities Group. He has extensive experience working with startup and emerging growth companies through their entire lifecycle as well as representing venture capital, private equity and other investors.
MISTAKE #5 OF 5:
Ignoring Internal Revenue Code §409A
One last tax code reference – Section 409A.
By now, most in the startup community have heard of this 2004 amendment to the tax code ostensibly designed to address pension plan and deferred compensation abuses post-Enron but chock full of unintended consequences.
It’s a complex set of rules with lengthy regulations. I’ll just point out two key areas to watch out for 409A:
First, 409A imposes some nasty tax penalties on taxpayers who receive discounted options (options with a strike price less than fair market value).
The introduction of this element of 409A has dramatically changed the practices of private start up company boards who historically had priced options using their business judgment and some simple rules of thumb based on discounts from the most recent preferred stock price.
Section 409A recognizes the burden placed on private companies who can’t just look to the ticker to confirm the appropriate stock price and adopted a number of safe harbors that Board’s can rely on in their pricing decisions.
For the startup founder, it’s important to understand the safe harbors and to be mindful of 409A anytime options are being priced.
Second, 409A doesn’t just impact options. The regulations pick up a number of kinds of “deferred compensation” and companies can inadvertently fall into 409A problems when structuring everything from earn outs to severance packages and salary deferrals and carve out plans. As with many of the issues above, seemingly small problems can cause significant cost and delay when they have to be solved under the scrutiny of an acquiring company’s accountants and counsel.
—
MISTAKE #1 OF 5 (posted on Monday): Not understanding obligations to prior employers.
MISTAKE #2 OF 5 (posted on Tuesday): Failing to be informed about employee rights with respect to wages
MISTAKE #3 OF 5 (posted on Wednesday): Employees versus Independent Contractors
MISTAKE #4 OF 5 (posted Thursday): Failing to file those 83(b) elections
ABOUT GUNDERSON DETTMER:
Gunderson Dettmer is a leading law firm for entrepreneurs, emerging growth companies and the venture capital firms that support them. With 125 lawyers in four offices – Silicon Valley, Boston, New York, and San Diego – we represent companies in every stage of development from incorporation through entry into public markets and beyond. We provide counsel on general corporate and securities law, mergers and acquisitions, venture capital services, intellectual property, strategic alliances, and tax matters. We combine our experience, industry relationships and expertise to provide practical, business-oriented advice tailored to the needs of the emerging growth company marketplace.
—-
Information in this post relating to the tax treatment of a taxpayer and/or the tax consequences of one or more transactions (collectively, the “Tax Information”), if any, is not intended to be, and cannot be, used by any direct or indirect recipient of this post to avoid any penalties that may be imposed on such direct or indirect recipient. Additionally, such Tax Information, if any, may have been written to support the promotion or marketing of the transactions addressed in this message. The tax consequences of entering into such transaction(s) will vary depending on the taxpayer’s specific circumstances; accordingly, the direct and indirect recipients of this electronic message should consult their own independent tax advisor with respect to the tax consequences of entering into the transactions discussed herein.
August 13 by Jasmine Antonick / No Comments
This week, Ivan Gaviria walks us through the 5 mistakes startups make with their people… A mistake a day.
Ivan is a partner at Gunderson Dettmer’s Silicon Valley office, practicing in the Corporate and Securities Group. He has extensive experience working with startup and emerging growth companies through their entire lifecycle as well as representing venture capital, private equity and other investors.
MISTAKE #4 OF 5:
Failing to File Those 83(b) Elections
Without getting too deep in the weeds, an 83(b) election refers to a tax code section that allows the taxpayer to make an election on when to pay taxes in connection with the acquisition of certain kinds of stock.
Founders in a typical startup will acquire their stock subject to vesting – if they leave the company, the unvested portion of the stock can be repurchased by the Company at cost, or at the lesser of cost or the then current fair market value of the stock. That repurchase right is the key element for 83(b) purposes.
A founder who makes the 83(b) election is electing to measure the tax consequences of the purchase at the time of the purchase. Failing to make the election means that the tax consequences are measured at every vesting date during the entire vesting period.
Since the tax is on the spread between the fair market value of the stock and the price paid, so long as fair market value is paid at the outset, there will be no spread at the time of the election and no tax on that acquisition (there will of course be tax on the gain when the stock is eventually sold).
The big “gotcha” in failing to make the election is that the fair value is reassessed at each vesting period and it can change dramatically during the typical 4 year vesting period.
When you imagine that a typical startup where founders’ stock that is purchased for fractions of a penny can conceivably go through several rounds of financing and even an exit or IPO during the standard 4 year vesting period, the tax consequences of that ever increasing spread between fair market value and the original purchase price can get really ugly.
83(b) elections have the added issue that the election must be made within thirty days of acquiring the stock or it is missed. There are no second chances or ways around the deadline.
—
MISTAKE #1 OF 5 (posted on Monday): Not understanding obligations to prior employers.
MISTAKE #2 OF 5 (posted on Tuesday): Failing to be informed about employee rights with respect to wages
MISTAKE #3 OF 5 (posted on Wednesday): Employees versus Independent Contractors
ABOUT GUNDERSON DETTMER:
Gunderson Dettmer is a leading law firm for entrepreneurs, emerging growth companies and the venture capital firms that support them. With 125 lawyers in four offices – Silicon Valley, Boston, New York, and San Diego – we represent companies in every stage of development from incorporation through entry into public markets and beyond. We provide counsel on general corporate and securities law, mergers and acquisitions, venture capital services, intellectual property, strategic alliances, and tax matters. We combine our experience, industry relationships and expertise to provide practical, business-oriented advice tailored to the needs of the emerging growth company marketplace.
—-
Information in this post relating to the tax treatment of a taxpayer and/or the tax consequences of one or more transactions (collectively, the “Tax Information”), if any, is not intended to be, and cannot be, used by any direct or indirect recipient of this post to avoid any penalties that may be imposed on such direct or indirect recipient. Additionally, such Tax Information, if any, may have been written to support the promotion or marketing of the transactions addressed in this message. The tax consequences of entering into such transaction(s) will vary depending on the taxpayer’s specific circumstances; accordingly, the direct and indirect recipients of this electronic message should consult their own independent tax advisor with respect to the tax consequences of entering into the transactions discussed herein.
August 12 by Jasmine Antonick / No Comments
This week, Ivan Gaviria walks us through the 5 mistakes startups make with their people… A mistake a day.
Ivan is a partner at Gunderson Dettmer’s Silicon Valley office, practicing in the Corporate and Securities Group. He has extensive experience working with startup and emerging growth companies through their entire lifecycle as well as representing venture capital, private equity and other investors.
MISTAKE #3 OF 5:
Employees versus Independent Contractors
As a related matter to yesterday’s post about employee wages, founders in their new role as an employer need to also be aware of the distinction between employees and independent contractors/consultants.
Often, early stage companies will seek to characterize an individual as a consultant to avoid wage issues. Unfortunately it is not as simple as calling someone a consultant and giving them a consultant agreement.
If the characterization is challenged, the relevant test is highly fact-specific and looks at questions like whether the individual works for multiple firms, sets his/her own schedule, is obligated to comply with company policies, has to personally provide the services, offers his/her services to the general public, etc. In short, if the individual acts like an employee, they may well be an employee.
The risk, of course, is that in characterizing an individual as an independent contractor, the company does not issue a W-2 and does not take income tax withholding or pay the employer portion of taxes like social security and disability.
If the individual is found to have been an employee, the Company will be on the hook for the failure to withhold and there can be late penalties and interest as well.
In addition, you can find yourself right back in the position of having an overhang of potential claims for unpaid wages, overtime and other benefits.
Again, this is an area where startups need to be thoughtful about how they manage the issues. Always keep in mind that the risk averse public companies who may potential buyers may take a sharply different view of what level of audit risk is acceptable. Getting good advice on these matters from professionals who have “seen the movie before” is essential.
—
MISTAKE #1 OF 5 (posted on Monday): Not understanding obligations to prior employers.
MISTAKE #2 OF 5 (posted on Tuesday): Failing to be informed about employee rights with respect to wages
ABOUT GUNDERSON DETTMER:
Gunderson Dettmer is a leading law firm for entrepreneurs, emerging growth companies and the venture capital firms that support them. With 125 lawyers in four offices – Silicon Valley, Boston, New York, and San Diego – we represent companies in every stage of development from incorporation through entry into public markets and beyond. We provide counsel on general corporate and securities law, mergers and acquisitions, venture capital services, intellectual property, strategic alliances, and tax matters. We combine our experience, industry relationships and expertise to provide practical, business-oriented advice tailored to the needs of the emerging growth company marketplace.
August 11 by Jasmine Antonick / 1 Comment
This week, Ivan Gaviria walks us through the 5 mistakes startups make with their people… A mistake a day.
Ivan is a partner at Gunderson Dettmer’s Silicon Valley office, practicing in the Corporate and Securities Group. He has extensive experience working with startup and emerging growth companies through their entire lifecycle as well as representing venture capital, private equity and other investors.
MISTAKE #2 OF 5:
Failing to be informed about employee rights with respect to wages
The same employee-favorable regime that can help entrepreneurs when they are leaving a job, can cut the other way when it comes to a startup founder’s new role as the employer.
Paying your people can be a big challenge in the pre-funding stage and there are not always easy answers.
At a minimum, entrepreneurs need to understand the rules and be educated about the risks they take so they can minimize their exposure.
The bottom line is California requires employees make at least minimum wage (and two times that amount for exempt employees for whom you don’t have to pay overtime). Wages must be paid in cash. More importantly, claims for unpaid wages cannot be released or waived. Once someone has worked without pay, they can bring a claim and the burden of proof is on the employer.
Not surprisingly, the state doesn’t have the resources to actively pursue violations.
Where the risk lies is when a relationship goes south and that co-founder or early team member leaves under acrimonious conditions and decides it’s time to get paid for the time they worked without salary.
Alternatively, you might have a great team that makes it all the way to an exit intact only to find that a public company buyer with a dramatically different risk tolerance doesn’t want to assume material exposure for unpaid wage claims and these matters become a real deal issue.
While there may be periods of time where there simply isn’t cash to pay salaries, companies can manage their exposure and mitigate risks if they get good advice on the rules, including the tax issues, and make educated decisions about how to document and manage these issues.
—
Mistake #1 (posted Monday): Not understanding obligations to prior employers
ABOUT GUNDERSON DETTMER:
Gunderson Dettmer is a leading law firm for entrepreneurs, emerging growth companies and the venture capital firms that support them. With 125 lawyers in four offices – Silicon Valley, Boston, New York, and San Diego – we represent companies in every stage of development from incorporation through entry into public markets and beyond. We provide counsel on general corporate and securities law, mergers and acquisitions, venture capital services, intellectual property, strategic alliances, and tax matters. We combine our experience, industry relationships and expertise to provide practical, business-oriented advice tailored to the needs of the emerging growth company marketplace.
August 10 by Jasmine Antonick / 4 Comments
This week, Ivan Gaviria walks us through the 5 mistakes startups make with their people… A mistake a day.
Ivan is a partner at Gunderson Dettmer’s Silicon Valley office, practicing in the Corporate and Securities Group. He has extensive experience working with startup and emerging growth companies through their entire lifecycle as well as representing venture capital, private equity and other investors.
MISTAKE #1 OF 5: Not understanding obligations to prior employers.
Anyone who has been around the start up business knows that it’s a much smaller community than it initially appears.
Most people in the business will be involved with several startups over the course of a career and top managers like to bring their teams with them to new opportunities.
With all that moving around, there are inevitably issues with former employers that can range from minor irritations to full blown litigation; especially when the ex employee is perceived to be doing something competitive at their new gig.
The key to avoiding problems in this area is all about timing – look at the issues BEFORE you start coding! While California law is relatively favorable to employees when it comes to these matters, employers are not without protection; especially with respect to intellectual property.
If you’re dusting off that invention assignment agreement from your old company to read the fine print AFTER getting the “nastygram” from your prior employer it may be too late for a course correction.
Before you or anyone else starts working on your new company, you should be asking:
* Is he/she still working for someone else?
* Is there any relationship between the business and technology of that former employer and what you propose to do?
* Does that person have any non-solicit or non-compete obligations?
* Has there been an analysis of whether the work the person will be doing will entail their using proprietary information that belongs to a prior employer?
If any of these questions raise red flags, get qualified advice on these issues and be prepared to alter your plans if necessary.
The key is to preserve your ability to make changes or adjustments before you start down a path. The cost of a mistake in this area can be huge as a material dispute over IP ownership can literally render a company unfinanceable.
ABOUT GUNDERSON DETTMER:
Gunderson Dettmer is a leading law firm for entrepreneurs, emerging growth companies and the venture capital firms that support them. With 125 lawyers in four offices – Silicon Valley, Boston, New York, and San Diego – we represent companies in every stage of development from incorporation through entry into public markets and beyond. We provide counsel on general corporate and securities law, mergers and acquisitions, venture capital services, intellectual property, strategic alliances, and tax matters. We combine our experience, industry relationships and expertise to provide practical, business-oriented advice tailored to the needs of the emerging growth company marketplace.
May 4 by Jasmine Antonick / No Comments
Yet another fantastic presentation from Lawrence Lessig. In a presentation about 21st Century “read/write” culture versus 20th Century “read only” copyright laws; Lessig manages yet again to get me riled up about the creativity of the masses online – and how we need to work together to create the “network the world needs” to create, re-mix and share.
Watch and enjoy:
Amusing side note: “The organizers who hosted Lessig when he gave this presentation received a notice that Warner Music had objected to its being posted on copyright grounds. Apparently, YouTube’s content-ID algorithm had found music in the video that they claimed ownership to. The organization is apparently responding by disputing the claim.”
