Tag Archives: startup documents

Up Up Down Down Left Right Left Right B A Start

If you recognize this post’s title, then you are always welcome at my table. For those of you in the dark, the title of this post is the secret code from the video game Contra. The Contra secret code let the video game player begin Contra with 30 lives.

30 lives on Contra was virtual invincibility. Enter the secret code, you will beat the game. (Presuming of course, you have an ounce of video game skills.)

Unfortunately, there is no 30 lives cheat code that can be woven into your startup legal documents. Whether you got your documents on the cheap from LegalZoom or you paid top dollar for a large law firm to draft them, your legal docs are not a shield of invincibility. Your startup can have the prettiest set of legal documents ever drafted and your startup still may not beat the game.

Instead, startup legal documents are a safety net.

What if a co-founder decides to bolt? Good startup legal documents make sure your startup doesn’t free fall to the ground (i.e., vesting schedule and company repurchase option). What if your startup’s rockstar developer claims ownership of the startup’s IP? Good startup legal documents make sure your startup doesn’t go down in flames (i.e., inventions assignment agreement).

Legal documents assist your startup along its path, but they don’t guarantee your startup will be successful. I’m a startup lawyer and earn my living drafting documents for startups. But I never have–and never will–draft a legal document containing anything equivalent to the Contra 30 lives secret code.

Start-Up Tool Kit From Orrick

Forgot to mention that Orrick released a Start-Up Tool Kit over the summer.

From Orrick’s site:

Orrick’s Start-Up Tool Kit is a comprehensive set of resources designed to aid start-ups and their founders on the journey from the “garage” to the global marketplace.

The Start-Up Tool Kit includes a Term Sheet Creator (hope you have Internet Explorer!) and a Start-Up Forms Library. Just like the recently released sample startup documents by TheFunded.com, the sample legal documents in the Start-Up Forms library seem to be for a California-based Delaware corporation.

Startup Docs from TheFunded.com

TheFunded.com has just released a “Complete Set of Founder Friendly Legal Docs” via its website. (Hat tip to @bradleyjoyce at the Fort Worth Startup Blog)

The sample startup documents, located at docstoc.com, include:

Bylaws
Certificate of Incorporation
Initial Stockholder Consent
Invention Assignment Agreement
Restricted Stock Purchase Agreement
Indemnification Agreement
Initial Board Consent
Action by Incorporator
Plain Preferred Term Sheet

My 3 quick caveats regarding the docs:

(1) Looks like they are set up for a California-based Delaware corporation.
(2) Don’t forget to send in your 83(b) election form in the Restricted Stock Purchase Agreement.
(3) Consider whether you have to file a 25102(f) notice if your startup has ties to California.

The Funded Founder Institute Posts “Class F” Startup Documents

I got a tip from @Pietari that another set of startup documents were released today. The Funded Founder Institute just released a very founder-favorable set of startup documents centered around “Class F Common Stock.”

The Class F Common offers founders various protective provisions such as:

-2 to 1 Board votes per founder relative to non-founder board members
-10 to 1 share votes relative to regular common shares
-Monthly vesting with no cliff
-Approval rights on new investments, liquidity events, increases to Board size, etc.

Why did the Institute create Class F? They answer this question on their website (www.founderinstitute.com):

Since the internet bubble burst, a number of enhanced protective provisions have been introduced into preferred stock. As an example, “participating preferred” has become commonplace since the last crash. Meanwhile, there have been comparatively few advances to protect founders, who are forced to accept historically bad investment terms and being terminated from their companies by investors in the current economic environment.

They also go on to claim:

Class F is [the] most founder-centric shares created to date, including more generous than the infamous founder agreements of Larry and Sergey at Google. Companies in the Institute also have a warrant that requires permission from the Institute when a founder is removed from the Board of Directors, or the company will suffer a financial penalty.

The set of startup documents include the Certificate of Incorporation and the Stock Purchase Agreement, along with Institute-specific Founders Agreement and Warrant. Check them out here.

7 Legal Documents for Your Tech Startup

When launching a startup, you want to make and keep your startup as valuable as possible. But in order to do that, your tech startup needs to ensure that (a) the intellectual property is owned by the startup, and (b) the co-founders who own the startup have proper incentives and rules to handle inevitable contingencies. Thus, your tech startup should have the following 7 legal documents:

Charter

File a charter with the secretary of state and get your startup incorporated. There’s nothing sexy about this document (for now), except that you authorize the amount of your corporation’s shares and set par value. Yet the charter is important because it creates the entity that will hold the IP your team is developing. Additionally, it’s difficult to make big-boy corporate maneuvers like issuing stock options and raising capital without incorporating.

Bylaws

Who gets to vote? How are board resolutions passed? How are officers elected? The bylaws determine the corporate governance of your startup, as they are the rules and regulations for the corporation’s internal administration and management. Startups often fail to draft bylaws, as bylaws aren’t submitted to the secretary of state. Don’t be one of these startups, unless you are 100% certain that your startup will never have any corporate governance issues. (I’m 100% certain that no one should be 100% certain of that.)

Shareholders Agreement

The shareholders agreement governs the relationship between the shareholders of the company and touches upon issues like a shareholder’s right to transfer his or her shares, rights of first refusal, redemptions upon death or disability, etc. This is another often overlooked startup document which can be invaluable in the event a co-founder leaves your startup.

Stock Purchase Agreement

A stock purchase agreement is made between each shareholder and the corporation, which regulates the transfer and sale of the corporation’s stock to the shareholder. It determines how much stock will be purchased, the price of the stock, and how the payment will be made (cash, IP, or another form or combination of consideration). A shareholder will typically make investment representations in this document, such as that he or she is acquiring the shares for investment purposes only and not for distribution.

Stock purchase agreements come in two forms: Non-restricted and Restricted. Non-restricted stock purchase are the normal stock purchase agreements: You pay for your shares, they are yours. Restricted stock purchase agreements are used when a co-founder’s shares will vest over time. I wrote a blog post about why your startup should consider vesting its stock.

Technology Assignment Agreement

The technology assignment agreement is made between the shareholder and the corporation, where the shareholder assigns (sells, transfers, conveys, etc.) intellectual property to the corporation. A typical technology assignment agreement will list the IP to be assigned to the corporation on an exhibit to the agreement, with the shareholder representing he or she is the sole owner of the IP. Additionally, the shareholder will agree to execute all necessary documents to effectuate the IP transfer (e.g. documents with the USPTO).

The technology assignment agreement is usually referred to in the stock purchase agreement, as an IP transfer to the corporation can be consideration (full or partial) for the stock purchased by the shareholder. Keep in mind that technology assignment agreements deal with IP that was created by the IP owner before the owner became a shareholder of the corporation (such as IP created by founders pre-incorporation).

Invention Assignment Agreement

While the technology transfer agreement takes care of pre-incorporation IP, the invention assignment agreement works to assign IP created by founders post-incorporation over to the corporation. The shareholder acknowledges in this agreement that all IP developed solely or jointly with the other co-founders is the property of the corporation–not the property of the individual shareholder. This document can also be used to list all “prior inventions” that relate to the startup’s business in which the shareholder wishes to retain ownership.

Other sections or clauses typically found with the invention assignment agreement are: confidential information clauses, at-will employment clauses, and arbitration agreements.

Employment Letter

An employment letter is made between the shareholder and corporation. Many startups overlook this document, but it can be useful to put the terms of each co-founder’s employment in writing. It can help set the tone and manage expectations of each co-founder.

Conclusion

These 7 legal documents, together or individually, won’t make your tech startup valuable. Your team creates the value. But these 7 legal documents will help ensure your tech startup retains its value and that your team’s hard work doesn’t go to waste.

Initial Thoughts on the Y Combinator Angel Investor Documents

I wanted to give my initial thoughts on the Y Combinator Series AA Angel Investor Legal Documents that were officially released late last week. I plan to write a document-by-document breakdown in the coming week:

Term Sheet – August 29th
Stock Purchase Agreement – August 30th
Board Consent – August 31st
Stockholder Consent – September 1st
Amended and Restated Certificate of Incorporation – September 2nd
Investors’ Rights Agreement – September 3rd

But until then, the following are my general comments about the documents and are geared towards those readers thinking of using the Y Combinator documents on their own:

“Neutral” is all about perspective. Entrepreneurs are often worried about being taken to the cleaners by their investors. Thus neutral legal documents appeal to the startup entrepreneur. But in order for an entrepreneur to be taken to the cleaners by an investor, the investor or investor’s counsel must be sophisticated regarding these deals. That isn’t always the case. (I have experienced situations where both investor and investor’s counsel were unsophisticated about these types of financings…and no I don’t have their contact information for you.) So keep in mind that you could be giving away terms instead of getting better terms by using these documents.

Delaware corporation and not [Insert state and type of legal entity here]. There’s a reason why the documents have a Delaware corporation as the default entity. A Delaware corporation is really the only option if you want to do these types of financings and move on to venture capital. I have written a few posts about “Why Incorporate in Delaware?” and “Why a Corporation for Venture Capital?” explaining the subject. Of course, the Series AA documents aren’t for venture capital financings, but the underlying reasons for using a corporation exist in an angel round.

Read between the disclaimer’s (many) lines The lawyers at WSGR didn’t add the legal disclaimer at the top of each document just to run up Paul Graham’s legal bill. Sure, WSGR doesn’t want to get sued. But implied by WSGR not wanting to get sued is that people will take these documents and royally screw up.

And don’t think only those that do large amounts of editing to the sample documents will screw up. Legal documents must reflect the deal. You could be in a bad situation if you sell (or believe you have sold) your investor one thing and the documents reflect something different.

No legal document is dispute-proof. Don’t assume that you are immune from disputes because you used “neutral” document or “boilerplate” provisions. If I created a dispute-proof legal document, I’d be (a) the first lawyer in the history of the world to accomplish that, and therefore (b) be on my way to Boracay for a 12-month sabbatical.

And finally, I think you should take a look at this article at the Startup Company Lawyer. It is written by Yokum Taku, a partner at WSGR (the law firm that wrote the Y Combinator documents), and therefore he will have fantastic insight regarding these documents.

Next – The Y Combinator Term Sheet

Y Combinator Series AA Equity Financing Docs Back Up

Y Combinator and Wilson Sonsini Goodrich & Rosati are happy to announce the Series AA Equity Financing Documents.

The Y Combinator documents are back up again–grab them while you can.

At first glance, it looks like they added a term sheet. And now each document comes with a fancy new header:

This [document] and all of the Series AA financing documents on this website have been prepared by Wilson Sonsini Goodrich & Rosati for informational purposes only and do not constitute advertising, a solicitation, or legal advice. Transmission of such materials and information contained herein is not intended to create, and receipt thereof does not constitute formation of, an attorney-client relationship. Internet subscribers and online readers should not rely upon this information for any purpose without seeking legal advice from a licensed attorney in the reader’s state. The information contained in this website is provided only as general information and may or may not reflect the most current legal developments; accordingly, information on this website is not promised or guaranteed to be correct or complete. Wilson Sonsini Goodrich & Rosati expressly disclaims all liability in respect to actions taken or not taken based on any or all the contents of this website. Further, Wilson Sonsini Goodrich & Rosati does not necessarily endorse, and is not responsible for, any third-party content that may be accessed through this website.

So don’t forget to delete the headers when you customize your legal documents…