Having taken stock of the main legal documents and actions involved in forming and operating a new startup, let’s crack open the “case” (disregarding the warnings about voiding your warranty) and examine a few of the steps, documents and key decisions to be made in getting a new startup ready for business.
Most startup lawyers have checklists (at least in their heads) and will interview a new client to gather a wide range of relevant information before moving forward with business entity formation, documentation and so forth. Sometimes this is done in the form of a questionnaire. I prefer a hybrid approach because founders come from all kinds of backgrounds, and while some may have a strong point of view on every question in the startup questionnaire, others want or need more guidance in answering the questions that call for decisions to be made. Read more
In Part I, I gave a quick summary of the who, when and why of forming and documenting a new startup company. This week we’ll delve into what, exactly, is necessary or desirable to lay a solid legal foundation for a startup to build upon. Read more
What is a startup really? When meeting with early stage entrepreneurs for the first time, after reviewing a demo or hearing their pitch, I often ask them to articulate what they’re most focused on building. In most cases, the answers are (1) an outstanding product or technology; (2) a successful growth business built around that product; and (3) a top-notch team to build and execute the business. Read more
Talented entrepreneurs are nothing if not resilient in the face of change: Market forces, competitive threats, technological shifts, you name it. In recent years, government regulation has emerged as another such force to be reckoned with in the technology industry. Startups and founders need to come to terms with the stark reality that the rules of the game may be changed mid-play. Read more
Entrepreneurs and investors who have spent any time dealing with convertible debt seed financing transactions are likely to have encountered the subject of valuation caps. In brief, a cap acts to place a limit on the conversion price of a convertible note such that investors are guaranteed a minimum number of shares for their bridge loans if the startup does a priced equity round at a high pre-money valuation – “high” meaning above the cap, which is often a heavily negotiated term. (The cap is irrelevant if the next equity financing is at a valuation below the cap amount.) Rather than reinvent the wheel, I would point readers to Martin Kleppmann’s useful blog post with graphs illustrating the effects of a valuation cap on entrepreneurs, seed investors and later-round (typically VC) investors. Read more
As we conclude our convertible note financing series, there are assorted terms commonly seen in term sheets and deal documents that are worth touching on briefly. What seem like boilerplate provisions can be meaningful in some situations. As I’ve noted before, readers joining this series in progress may find it helpful to download the sample term sheet from my firm’s website and review the earlier posts covering the basics. Having made it almost to the end of our sample term sheet: Read more
This week we move on to something near and dear to the hearts of entrepreneurs and investors alike: The exit, more formally known as a “liquidity event.” For convertible notes, the only liquidity event we need be concerned with is an acquisition of the startup in the near future, before the maturity date; otherwise, the notes will convert to equity of one kind or another, and the eventual sale of that equity (in a public offering, acquisition, or private sale) is a different subject for another day. Readers joining this series in progress may find it helpful to download the sample term sheet from my firm’s website and review the earlier posts covering the basics. Read more