Über die Autorin bzw. den Autor

EDWIN L. MILLER JR. is a partner with the law firm of Sullivan & Worcester LLP. He has practiced corporate and securities law for over thirty-five years. He has extensive experience in both the public and private markets representing emerging and established technology companies in their financing, technology transfer, and acquisition activities. He has been featured in The Best Lawyers in America and is the author of Mergers and Acquisitions: A Step-by-Step Legal and Practical Guide, also published by Wiley.

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Founding and nurturing a technology startup through its growth to a successful IPO or sale requires an understanding of the business terms, customary contractual provisions, legal background, tax issues, and "how-to's" applicable to each stage. Legal and business issues are intertwined, and mistakes are costly. Part legal primer, part business primer, Lifecycle of a Technology Company provides comprehensive and understandable advice about the key legal and business issues that arise over the life of an emerging growth company.

This guide is full of practical, hands-on advice for:

• Entrepreneurs and executives who want an in-depth understanding of the legal milieu in which they operate
• Venture capital and other investment professionals who want to better understand the legal rationale behind their investment deals with portfolio companies, as well as key legal issues facing these portfolio companies
• Lawyers who would like to know, or need a refresher on, what they should be discussing with technology companies and other startup clients seeking advice on critical transactions
• International lawyers, entrepreneurs, and investors who want insight into the legal and business aspects of the U.S. technology revolution
• Law students who want to get a jump on real-world business law practice
• Business school students who want to level the playing field for their first encounters with business lawyers

Lifecycle of a Technology Company covers issues relating to:

• Choice of entity
• Arrangements among the founders concerning equity compensation
• Tricks and traps in venture financings and debt financings
• Basics of intellectual property protection and license agreements
• How to conduct a private placement
• How to prepare for an IPO
• Fundamentals of public company regulation
• The acquisition process and key negotiating points for buyers and sellers

Appendices include model or sample documents for a number of common transactions, as well as additional materials.

A must-read for anyone associated with a technology company, from entrepreneurs and CEOs and CFOs to venture capitalists, as well as their legal and professional advisors, Lifecycle of a Technology Company will guide readers through the many challenges, opportunities, and legal and business pitfalls that arise at every stage of their business.

Aus dem Klappentext

Founding and nurturing a technology startup through its growth to a successful IPO or sale requires an understanding of the business terms, customary contractual provisions, legal background, tax issues, and "how-to's" applicable to each stage. Legal and business issues are intertwined, and mistakes are costly. Part legal primer, part business primer, Lifecycle of a Technology Company provides comprehensive and understandable advice about the key legal and business issues that arise over the life of an emerging growth company.

This guide is full of practical, hands-on advice for:

• Entrepreneurs and executives who want an in-depth understanding of the legal milieu in which they operate
• Venture capital and other investment professionals who want to better understand the legal rationale behind their investment deals with portfolio companies, as well as key legal issues facing these portfolio companies
• Lawyers who would like to know, or need a refresher on, what they should be discussing with technology companies and other startup clients seeking advice on critical transactions
• International lawyers, entrepreneurs, and investors who want insight into the legal and business aspects of the U.S. technology revolution
• Law students who want to get a jump on real-world business law practice
• Business school students who want to level the playing field for their first encounters with business lawyers

Lifecycle of a Technology Company covers issues relating to:

• Choice of entity
• Arrangements among the founders concerning equity compensation
• Tricks and traps in venture financings and debt financings
• Basics of intellectual property protection and license agreements
• How to conduct a private placement
• How to prepare for an IPO
• Fundamentals of public company regulation
• The acquisition process and key negotiating points for buyers and sellers

Appendices include model or sample documents for a number of common transactions, as well as additional materials.

A must-read for anyone associated with a technology company, from entrepreneurs and CEOs and CFOs to venture capitalists, as well as their legal and professional advisors, Lifecycle of a Technology Company will guide readers through the many challenges, pportunities, and legal and business pitfalls that arise at every stage of their business.

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Lifecycle of a Technology Company

John Wiley & Sons

Chapter One

FOUNDERS' CONTRACTUAL ARRANGEMENTS AND MECHANICS OF THE INCORPORATION PROCESS

Entrepreneurs who want to start a business are extremely diverse. They range from college dropouts (e.g., Bill Gates) to so-called serial entrepreneurs or those who have started multiple businesses in the past and always seem to want to do so again (e.g., Steve Jobs), even though many are wealthy beyond imagination. The issues surrounding the organization of start-ups differ little in these cases and do not really depend very much on the type of technology or business.

Lawyers are sometimes asked by those intending to start a business when to hire a lawyer. I like to compare the situation to when you should see a doctor. Many people dread the idea and want to put it off (particularly as they get older). But the conventional wisdom in both cases is that going early may be a bit painful, but going too late can be deadly. If the entrepreneurial idea is just coming together and the founders are short of funds, it is probably not necessary to hire a lawyer at that point. If the founders are beginning to get serious about starting the business and are beginning to devote substantial time to their idea, then going to a lawyer is essential. Believe it or not, it is not unprecedented for five founders to come in for a first interview with a lawyer thinking each is getting 50 percent of the equity.

The fundamental deal among the founders of a business is that the business entity itself owns the business idea and the associated intellectual property (IP)-trade secrets, patents, copyrights, and the like. This point is crucial. The overriding concept here is that the company is like a hub, and the spokes are all of the contributors of time, talent, energy, IP, and capital by the founders, investors, employees, and others. Those constituencies benefit from the increasing value of the hub, which is dependent on it's ownership of all relevant assets.

Notwithstanding the hub-and-spoke concept, all of the IP need not necessarily be transferred irrevocably to the business at the outset. The scientific genius among the founders may want to defer transferring ownership of the brilliant idea until the company becomes real (i.e., gets funded) or some other milestone is achieved. In that case, it is always advisable to avoid a future change of heart to put an IP license and transfer agreement in place at the outset where the transfer irrevocably becomes effective on the occurrence of one or more specified events.

What is the role of the company's lawyer? Once the entity is formed, all parties should understand that their lawyer's real role and duty at that stage is to the entity, not to the individuals. The lawyer customarily counsels the founders as to the business and legal decisions they must make and what is typical in the situation, but he or she should not decide these issues for the client. To a certain extent, the goals of each founder are adverse to those of the other founders and to those of the business. If, however, every founder of every business hired his or her own lawyer at the outset of the business, the start-up industry would be in serious trouble.

It is ultimately in each founder's interest to make decisions that are the best for the enterprise as a whole. The money to be made by each founder is as much dependent on the ultimate success of the enterprise as it is on the individual founder's deal. For example, one or more of the founders may well be fired from the business or quit before an initial public offering (IPO) or other liquidity event. A mechanism must be put in place, if possible, to permit termination of a founder by the other founders. This mechanism is a voting agreement that specifies a board of directors composition consisting of multiple founders. Under this mechanism, a majority of the board can terminate one founder. The ability to terminate a non-performing founder is crucial to the success of the enterprise. Conversely, not permitting an unproductive founder to be fired is not in the interest of the business. Each founder should be willing to put this voting mechanism in place not knowing which end of the stick he or she is ultimately going to get: He or she may be among the board members firing another founder or may be the founder who is being fired by the board. Without an effective power structure, the business may fail simply because the founders' time and energies are focused on dispute resolution and not on the business.

In an initial meeting between the prospective founders and their lawyer, what are the most important issues? There are several fundamental questions to be answered:

Who gets what percentage of the equity (founders' stock) of the business?

What are the vesting terms of the stock - what do you need to do going forward to earn the right to keep all of your stock? Surely, it is not fair if one founder quits the business the day after it is founded and keeps all of his or her stock, and the other founders have to sweat it out for years with long hours and low pay in order to earn their equity (hence the term "sweat equity").

When are the business idea and the related IP to be transferred to the enterprise: at the outset, upon funding, or upon funding from outsiders? In other words, the business has to own its IP in order to get funded and in order for the founders or others to risk working for the company. However, if the business fails before it gets funded, it is not inappropriate for a mechanism to be set up for the IP to be transferred to the founder who created it. This arrangement can be accomplished by an irrevocable license for the start-up exclusively to use the IP for some period of time and that provides for automatic transfer of the IP to the start-up on the occurrence of specified favorable events.

Who is to hold what office; who is to perform what function; and when should some or all of the founders be required to quit their jobs and join the new business full time? What happens if the business gets funded and a founder decides not to join the new company: Does that founder lose a portion of his or her founders' stock?

How do the founders legally extract themselves from their current employment without being sued by their current employers? What are the danger areas? How do you minimize the risk of a suit by current employers for theft of trade secrets or a breach of a noncompetition covenant? What is an employee of one business permitted to do to get a new business going while he or she is employed by another company? Does a founder's business idea really belong to his or her (former) employer?

What is the budget for the initial phase of the business, and where is the money to come from?

These issues are discussed in more detail later in this chapter.

INTRODUCTION. This section provides an overview of the main corporate and business considerations in organizing an emerging business entity. The discussion begins chronologically by addressing the question of when to incorporate. Following this is an overview of the basics regarding initial capitalization and equity allocation among founders. Next is a focused discussion of the most prevalent form of legal entity, the...