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Elc, prenup presentation, 04202013

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The document summarizes key considerations and strategies for founders of a startup company, NetConnectionZ, in drafting a founders agreement. It outlines common problems that can arise between founders like ownership disputes, competing interests, lack of commitment etc. and presents solutions like vesting schedules, arbitration clauses, IP assignment to address these issues. The experts provide advice on different vesting approaches, the importance of tying vesting to company milestones achieved, determining founder equity allocation based on relative contributions, and flexibility to change with the company's evolution. They emphasize having the right legal documentation is crucial to protect the company from future disputes and ensure its long term success.

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Elc, prenup presentation, 04202013
Elc, prenup presentation, 04202013
Mel Baiada Founder of BaseCamp Ventures, BaseCamp Business, and Bluestone, Inc. Founding Donor of The Baiada Institute for Entrepreneurship Trustee of Drexel University
Our objective is to tell a formation story Introduce the Problems Present A Number of Solutions Solicit Expert Feedback You determine the ending
NetConnectionZ.com Technology start-up Mission: to connect computers online Objective: to grow rapidly and make a lot of money
NetConnectionZ.com Three Core Founders Bobby Biz Dev Brett Tech Taylor Design Former classmates Began at StartUp Weekend
Characteristics of Our Founders: Committed to long term success Invested more sweat equity than cash Awarded equity for services rendered Able to defer cash payment until necessary
Characteristics of Consultants: Provide services on a limited basis No ongoing management responsibilities Would prefer cash, but may accept deferred compensation, e.g., a convertible note, equity, warrants, or other means
Characteristics of Employees Hired to perform a service Require cash compensation (with limited deferment), but may accept equity incentives May, or may not, be committed to the long- term success of the company
At this moment, our Founders are planning for a flawless launch of...
They dont have time for legal, but thats ok because they have gotten to know each other pretty well.
Change happens
Change happens
The Forgotten Founder
Problem: company does not own its IP Solution: IP assignment Prevents ownership claims from long-lost founders Absent a written agreement, the author, creator or inventor is the owner of the IP Even if you pay for the creation of IP!!! Ensures that the Company can build asset value
The Backstabber
Problem: arming the competition Solution: IP assignment, non-compete & non-disclosure Ensures all IP belongs to the company Prevents a former team member from using your IP to start a competing venture Creates leverage, especially if bad blood
The Underachiever
Problem: lack of motivation Solution: compensation plans Create short-term reward system Provide team members with an opportunity to share in the profits or earn additional equity Clarify manner in which the team will be compensated (cash/equity) to avoid confusion
The Beacher
Problem: dead weight Solution: vesting provisions Founders must earn equity over time Flexible vesting schedule based on value of input Permits company to reclaim unearned equity by Terminating the Beacher Recapturing vested and vested equity Ensures that the team thinks long-term
The Fighter
Problem: internal friction Solution: decision making provisions Deadlock resolution Structure for fairly and efficiently making tough decisions Ability to align decision making power with relative contributions of equity or talent
The Quitter
Problem: grinding to a halt Solution: break-up provisions, transfer restrictions & vesting Reclaim vested and unvested equity Pre-negotiated buy-out process Block unwanted transfers
So how to plan for change?
Make the time to draft and negotiate a Founders Agreement
What would happen to NetConnectionZ if our Founders skipped that step?
Lack of certainty amongst Founders Increased risk of in-fighting and/or failure Delays in product development Future liability From forgotten founders, backstabbers, investors, or other unknowns
Harder to raise investment capital Why invest in a product you dont own? Demonstrated lack of sophistication Lower valuations Cost of resolving internal squabbles Stability equals value
BOTTOM LINE: your legal bills are not part of the problem.
Elc, prenup presentation, 04202013
The peace of mind that comes from knowing that your business can handle change.
The opportunity to spend more time developing your business and less time fighting with your co-founders.
The Who, Why, When, What and How of Founders Agreements
Who should be signing a Founders Agreement? All founding members who are committed to the long-term success of the Company, but not most consultants or employees. Why is a Founders Agreement necessary?
Timing Issues What if we havent talked yet? What if theres too much up in the air? What if we change? The initial Founders Agreement need not be final or comprehensive!
What should you consider including in a Founders Agreement agreement? IP Assignment Vesting Deadlock Decision-making Break-Up Provisions Transfer Restrictions Non-compete Confidentiality
How should the process work? Identify the concerns you want to address Review the agreement as a whole to ensure it makes sense. Who else should be involved? Other entrepreneurs who have gone through it? Outside mediators?
Lets Hear From the Experts
Chris McDemus Partner, Baer Crossey Corporate, transactional & securities law
Chris Miller Partner, Pepper Hamilton Corporate and Securities Group
Jeffrey Bodle Partner, Morgan Lewis Emerging Business and Technology Practice
Recently saw an excellent presentation on Founders Agreements at Philly Tech Week Have decided that vesting is important But have conflicting ideas about the best way Actively preparing to meet with their legal counsel to discuss the best approach
Form of Dynamic Vesting Focus on milestones/events/triggers, rather than time or hours Setting Milestones Consider important moments that move company toward greater viability Business Side: Sales, Revenues, Fundraising, customers Technology Side: Development of Product
Sample Vesting Schedule Founder Milestone 1 Milestone 2 Milestone 3 Total Bobby Revenue > $5k 33 1/3% Revenue > $20k 33 1/3% Revenue > $50k 33 1/3% 100% Brett Prototype 33 1/3% Beta Testing 33 1/3% Full Initial Version 33 1/3% 100% Taylor Initial Design 33 1/3% Layout and Upgraded UI 33 1/3% Final Design Features 33 1/3% 100%
Straight-line vesting over four years Four year vesting with a one year cliff Right to repurchase all shares Both vested and unvested
Relative Value Instead of pre-determining the equity pie, determine the relative value of each contributors slice based on pre-determined ingredients
Ingredients: 1. Time (grunt/consultant/cash employee) 2. Money (cash contribution/credit/loan to company) 3. Supplies/facilities 4. Intellectual property/ideas 5. Professional relationships
Relative value (% of pie) = individual contribution / total contribution Avoid having to assign equity before we know the value of each Founders contribution
Equity Split based on variety of factors Create Milestones Based on the Companys goals Founder Vesting upon the meeting of those goals Vesting based on time served No problem if company changes direction, Departing founders cant control without contributing Relative Value based on contribution Attributes understood value to each ingredient Allows for flexibility and for fair compensation Live Q&A: Text us @ 22333, include 30273 in your question Submit 30273 and your question to http://PollEv.com Tweet us with hashtag #trepprenup
Elc, prenup presentation, 04202013
Live Results
Elc, prenup presentation, 04202013
Please complete a survey on our program at: ph.ly/prenupsurvey Also complete a survey on Philly Tech Week at: ph.ly/ptw2013survey For additional information about how the ELC can help your business, contact: Steven Rosard, Director srosard@drexel.edu www.earlemacklaw.drexel.edu/ELC

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Elc, prenup presentation, 04202013

  • 3. Mel Baiada Founder of BaseCamp Ventures, BaseCamp Business, and Bluestone, Inc. Founding Donor of The Baiada Institute for Entrepreneurship Trustee of Drexel University
  • 4. Our objective is to tell a formation story Introduce the Problems Present A Number of Solutions Solicit Expert Feedback You determine the ending
  • 5. NetConnectionZ.com Technology start-up Mission: to connect computers online Objective: to grow rapidly and make a lot of money
  • 6. NetConnectionZ.com Three Core Founders Bobby Biz Dev Brett Tech Taylor Design Former classmates Began at StartUp Weekend
  • 7. Characteristics of Our Founders: Committed to long term success Invested more sweat equity than cash Awarded equity for services rendered Able to defer cash payment until necessary
  • 8. Characteristics of Consultants: Provide services on a limited basis No ongoing management responsibilities Would prefer cash, but may accept deferred compensation, e.g., a convertible note, equity, warrants, or other means
  • 9. Characteristics of Employees Hired to perform a service Require cash compensation (with limited deferment), but may accept equity incentives May, or may not, be committed to the long- term success of the company
  • 10. At this moment, our Founders are planning for a flawless launch of...
  • 11. They dont have time for legal, but thats ok because they have gotten to know each other pretty well.
  • 15. Problem: company does not own its IP Solution: IP assignment Prevents ownership claims from long-lost founders Absent a written agreement, the author, creator or inventor is the owner of the IP Even if you pay for the creation of IP!!! Ensures that the Company can build asset value
  • 17. Problem: arming the competition Solution: IP assignment, non-compete & non-disclosure Ensures all IP belongs to the company Prevents a former team member from using your IP to start a competing venture Creates leverage, especially if bad blood
  • 19. Problem: lack of motivation Solution: compensation plans Create short-term reward system Provide team members with an opportunity to share in the profits or earn additional equity Clarify manner in which the team will be compensated (cash/equity) to avoid confusion
  • 21. Problem: dead weight Solution: vesting provisions Founders must earn equity over time Flexible vesting schedule based on value of input Permits company to reclaim unearned equity by Terminating the Beacher Recapturing vested and vested equity Ensures that the team thinks long-term
  • 23. Problem: internal friction Solution: decision making provisions Deadlock resolution Structure for fairly and efficiently making tough decisions Ability to align decision making power with relative contributions of equity or talent
  • 25. Problem: grinding to a halt Solution: break-up provisions, transfer restrictions & vesting Reclaim vested and unvested equity Pre-negotiated buy-out process Block unwanted transfers
  • 26. So how to plan for change?
  • 27. Make the time to draft and negotiate a Founders Agreement
  • 28. What would happen to NetConnectionZ if our Founders skipped that step?
  • 29. Lack of certainty amongst Founders Increased risk of in-fighting and/or failure Delays in product development Future liability From forgotten founders, backstabbers, investors, or other unknowns
  • 30. Harder to raise investment capital Why invest in a product you dont own? Demonstrated lack of sophistication Lower valuations Cost of resolving internal squabbles Stability equals value
  • 31. BOTTOM LINE: your legal bills are not part of the problem.
  • 33. The peace of mind that comes from knowing that your business can handle change.
  • 34. The opportunity to spend more time developing your business and less time fighting with your co-founders.
  • 35. The Who, Why, When, What and How of Founders Agreements
  • 36. Who should be signing a Founders Agreement? All founding members who are committed to the long-term success of the Company, but not most consultants or employees. Why is a Founders Agreement necessary?
  • 37. Timing Issues What if we havent talked yet? What if theres too much up in the air? What if we change? The initial Founders Agreement need not be final or comprehensive!
  • 38. What should you consider including in a Founders Agreement agreement? IP Assignment Vesting Deadlock Decision-making Break-Up Provisions Transfer Restrictions Non-compete Confidentiality
  • 39. How should the process work? Identify the concerns you want to address Review the agreement as a whole to ensure it makes sense. Who else should be involved? Other entrepreneurs who have gone through it? Outside mediators?
  • 40. Lets Hear From the Experts
  • 41. Chris McDemus Partner, Baer Crossey Corporate, transactional & securities law
  • 42. Chris Miller Partner, Pepper Hamilton Corporate and Securities Group
  • 43. Jeffrey Bodle Partner, Morgan Lewis Emerging Business and Technology Practice
  • 44. Recently saw an excellent presentation on Founders Agreements at Philly Tech Week Have decided that vesting is important But have conflicting ideas about the best way Actively preparing to meet with their legal counsel to discuss the best approach
  • 45. Form of Dynamic Vesting Focus on milestones/events/triggers, rather than time or hours Setting Milestones Consider important moments that move company toward greater viability Business Side: Sales, Revenues, Fundraising, customers Technology Side: Development of Product
  • 46. Sample Vesting Schedule Founder Milestone 1 Milestone 2 Milestone 3 Total Bobby Revenue > $5k 33 1/3% Revenue > $20k 33 1/3% Revenue > $50k 33 1/3% 100% Brett Prototype 33 1/3% Beta Testing 33 1/3% Full Initial Version 33 1/3% 100% Taylor Initial Design 33 1/3% Layout and Upgraded UI 33 1/3% Final Design Features 33 1/3% 100%
  • 47. Straight-line vesting over four years Four year vesting with a one year cliff Right to repurchase all shares Both vested and unvested
  • 48. Relative Value Instead of pre-determining the equity pie, determine the relative value of each contributors slice based on pre-determined ingredients
  • 49. Ingredients: 1. Time (grunt/consultant/cash employee) 2. Money (cash contribution/credit/loan to company) 3. Supplies/facilities 4. Intellectual property/ideas 5. Professional relationships
  • 50. Relative value (% of pie) = individual contribution / total contribution Avoid having to assign equity before we know the value of each Founders contribution
  • 51. Equity Split based on variety of factors Create Milestones Based on the Companys goals Founder Vesting upon the meeting of those goals Vesting based on time served No problem if company changes direction, Departing founders cant control without contributing Relative Value based on contribution Attributes understood value to each ingredient Allows for flexibility and for fair compensation Live Q&A: Text us @ 22333, include 30273 in your question Submit 30273 and your question to http://PollEv.com Tweet us with hashtag #trepprenup
  • 55. Please complete a survey on our program at: ph.ly/prenupsurvey Also complete a survey on Philly Tech Week at: ph.ly/ptw2013survey For additional information about how the ELC can help your business, contact: Steven Rosard, Director srosard@drexel.edu www.earlemacklaw.drexel.edu/ELC

Editor's Notes

  • #54: <?xml version="1.0" encoding="ISO-8859-1" ?><poll url="http://www.polleverywhere.com/multiple_choice_polls/qUpluOCVVTxoEbY"> <!-- This snippet was inserted via the Poll Everywhere Mac Presenter --> <!-- The presence of this snippet is used to indicate that a poll will be shown during the slideshow --> <!-- TIP: You can draw a solid, filled rectangle on your slide and the Mac Presenter will automatically display your poll in that area. --> <!-- The Mac Presenter application must also be running and logged in for this to work. --> <!-- To remove this, simply delete it from the notes yourself or use the Mac Presenter to remove it for you. --> <title>Which option would you choose?</title></poll>