Bill Schreiber is a partner in Fenwick & West’s corporate group. His emphasis is on Start-up Counseling, Venture Capital Financing, Mergers and Acquisitions, and Joint Ventures. Fenwick incorporated Apple, when it was just a startup, and their current client list includes young companies like Twitter and Facebook, as well as bigger companies like Cisco and Symantec.
Bill shared his thoughts and insight on:How to keep from losing your intellectual property. How to structure your pre-VC funding. And how to pick the right legal entity for your business. The complete interview : Law 101 For Startups – with Bill Schreiber of Fenwick & West interview @ Mixergy.
Section 1 – Get It documented
Make sure the company owns the Intellectual property (anyone who provides services in any capacity should sign agreements)Be clear with employees and vendors on relationship.Capitalization: Venture Capitalists want 30-60%, want the owners to own the majority, and want to know who else is involvedConsider vesting stock. If you decide to vest stock, there’s an important form to file with the IRS.
Section 2 – Business Entities and TaxationBill Schreiber recommends S-Corp over LLC. S-Corp advantage is ease of granting stock options. The catch: no foreign investors, single stock type (no preferred stock).Transforming S-Corp and LLC to C-Corp is a tax-free transaction. UNLESS you have negative net assets (more liabilities than you have assets). This is “the only risk”.Advice: Create the business opportunity offshore (parent or subsidiary). All sales generated outside the US, the US will not tax.
Section 3 – StockConvertible notes are the way to go.Touches on typical terms for stock equity rounds. Valuation, liquidation preference, how board is set up, rights of preferred stockholders, etc.Liquidation preference = how much benefit preferred stock gets at the expense of the normal stock.Participating vs. non-participating preferred stock.