Notes from Startup School - "The Great Value of Avoided Mistakes"

Mark J. Macenka, Goodwin Procter LLP

Law firm specializing in helping out startups, thought he would give advice based upon past experience

Beginning:

• Business side - really important to study market, competition, know users (and their pain).
  
• Imperitive to stay focused, and love what you do.
  
• entrepreneurs get caught up in trying to keep control of company - can be to the detriment of getting the business going. needs to be all about making products, solving needs, making money. Encourage entrepreneurs to get money through the door, and give up chunk of business.
  
• Value of board of directors is independent people - not just your friends/family (you'll get their advice anyway).
  
• network - people that you know who have done startups before - network is invaluable. get strategic/tactical advice.
  

Capital Structure

• Keep it simple - makes it easier when you involve other investors, lawyers, etc.
  
• Choice of entity - partnership vs. LLC vs. corporation (tax differences). Some make it harder to give stock options to employees, take on VC money, etc. C-corp is what most people do, etc. Important to stand the consequences 12 months down the line, and exit strategies.
  
• Importance of proper documentation - to identify who owns company, who owns IP, etc.
  

Recurring problems - IP - do you own it?

• Rights of former employers
  
  • IP ownership rights
    
  • NDAs
    
  • Non-compete agreements - not enforceable in CA unless sale of business involved.
    
  • Non-solicitation agreements - to stop you from going after customers
    
  
  
• Basically, the contract that you signed with your current employer owns almost everything.
  
• Don't use your corporate e-mail, laptop, internet, etc. for your own IP.
  
• Rights of consultants in developed technology - need to have them sign the IP over to you.
  
• Rights of sponsors of non-commercial research, such as universities.
  
• Joint ownership isn't the solution - can lead to a lot of problems.
  
• Third party claims of infringement - proprietary code, open source. Buyers might be allergic to open source - using open source in the "wrong way" (i.e. GPL violation - proprietary code might have to be put out under open source license).
  
• Lack of adequate trade secret protection, absence of confidentiality agreement with employees, licensees, etc. Have to be consistent in protecting IP.
  

Founders Issues

• Who owns what? Get it in writing, so no mis-understandings down the line. While the company is worthless, important to get this stuff down.
  
• Who's on the board - succession and voting. Investors what board seats - don't want to see in-fighting about who is going to leave the board. Only 1 or 2 founders (at most) will stay on the board.
  
• Noncompetition agreements - among founders.
  
• breaking up is hard to do. Vesting - so if somebody leaves during vesting period, all of that stock can remain with the company.
  
• Transfer restrictions - right of refusal, drag-along, right of co-sale, IPO lock-up
  
• Internal Revenue Code Section 83(b) - IRS views vesting stock as taxable when it vests, not when it is granted - can get whacked since it starts low but value grows by vesting time.
  
• Loans usually a bad idea.
  
• Do it right, early, keep it simple - do it on paper.
  

Be Prepared

• Start organized, stay organized
  
• Do it right the first time with advisors who know what they're doing (lawyers, etc.)
  
• Someone in the company has to be compulsive about this!
  
• Give corporate legal records the same respect that you would the other things that you love (code, etc.).