First Steps to Create and Protect Value for the

Emerging Technology Company

First Steps:

• Decide on form of entity• Issue equity for:

• Cash• Debt• IP• Other assets• Service

• Determine equity split among founders • Protect IP:

• Get assignments for IP transferred for stock or cash• Get assignments for IP to be developed for services• Get confidentiality from service providers

Form of entity:

• LLC or Corporation?• LLC avoids double-taxation• Only C Corps file for IPOs

• If expect to need institutional venture capital, C Corp is preferred entity

• VCs prefer C Corps• Angel or seed investors less biased, so LLC’s should be

okay• If don’t expect to need VCs, go with LLC

• Choose appropriate form of entity now to avoid complications later

Allocate and Issue Equity:

• First determine relative values of current contributions:• The business idea• Cash invested• Transfer of property (IP, equipment, etc.)

• The sum of these values is the pre-money enterprise valuation• Example: Assume total value is $250,000 and issue

250,000 shares• Pre-money valuation is $1.00 per share

• 100,000 for IP or business idea• 50,000 for $50,000 cash• 100,000 for future services

• Require equity for future services to vest over time• 3 or 4 years; some can vest immediately (say 10-

25%)• Document the issuances with subscription agreements

Protect IP:

• IP protection is essential for future sale of company• Not just patents, but also trade secrets/confidentiality• Investors/buyers want assurance that trade secrets

are protected• IP due diligence to determine that all employees/third parties

• are under confidentiality• have assigned inventions to company

Methods of Protection• CDAs/NDAs• Employee/Consultant Agreements• Material Transfer Agreements• Sensitive Information Programs• Label Everything!

Use of Employee Agreements• Essential features:

• Assignment of all inventions to company• Confidentiality obligation• List of prior inventions to be excluded• Other terms:

• Noncompete• Nonsolicitation of employees or customers

• Get signed at start date• Later could jeopardize enforceability

Agreements with Third Parties

• Confidential Disclosure Agreements/Nondisclosure Agreements• Essential for every contact where confidential information to be

shared

Noncompetition Agreements

• Unconstitutional in OK in context of employment• Use of other forms of restrictions:

• non-solicitation of customers, employees