A Framework For

Managing

Year 1 In A Startup:

The practical steps of keeping

control

Wayne Willis Wayne@NodalPartners.com

willis.wayne@gmail.com

Entrepreneur / Co-Founder•Hyatt Legal Services (legal)•Global Currency Advisors (finance)•Vidtel (video conferencing)•ILLUMAI (shampoo/conditioner)

Chairman or Board Director •26 companies, mostly tech•Many different roles

Investor•≈50 companies

CEO of VC backed companies•Voice-Tel ($216m exit)•Healthscribe ($90m exit)•Ditto.com ($23m exit)•Cyracom (5 years on Inc 5000)

Other•Managing Partner – Nodal Partners•Business & Law degrees from Yale

“Startup

Legal”A Framework For Managing

Year 1 In A Startup

Agenda

• Corporate Records - A Framework For Control• The First Year – A Greyline Tour• Standard Documents• DIY Contracting & Liability Limiting Language • Financings and Options• Next Steps• Q&A

What’s A Corporate Record?

CompanySuppliers Customers

EmployeesIndependent

Contractors

Service Providers

Board, Stockholders

Property: Patents,

etc.

Purchase Orders

Sales Orders; Terms of Service;

Stock Purchase; Board Resolutions, Options, etc.

Employment ; Independent ContractorsLicense, Lease

Embrace E-records• Print doc’s to pdf to petrify; file .doc, xls, ppt• Scan paper to pdf; throw paper away**• Print key emails to pdf• Use e-signature service to sign to pdf• Use fax-to-email service if needed; to pdf** Paper records have two uses

– Litigation – “Scanned – Date” to pdf and keep paper in central place by date. Use pdf until trial.

– Temporary stuff that will be tossed (e.g., meeting agenda)

Make E-Records Easy To Find & Use

• Naming conventions for filenames– Unsigned, signed – Filed, confirmed– Dates, parties

• Foldering and filing conventions• Full text search (OCR scan when possible)• BACKUP!!! Frequently, redundantly, offsite too

Elects Board; Approval of Big Changes

Manages All Aspects of Company

Executes Orders

A Corporation Is A Legal “Person”• It’s an independent entity – not you • Multiple relationships – shareholder, board director, officer or employee• “A group of contracts flying in close formation”

State Statutes

Articles Of Incorporation

Bylaws

Shareholders

Board

Officers

Defines Entity and its “Constitution”

A corporation is like the OSI model of networking – distinct layers doing different things

Corporate Records In Context

• “Filing Cabinet” metaphor – Corp Records are mostly fixed and final content; not great for workflow

• “To Do” or Project Management – Workflowy, Basecamp • “Whiteboard” – Google Docs• “Policy and Procedure” (Personnel, Admin)• “Documents Under Development”

– Drafts – naming conventions, mark to show changes, doc management systems, google docs for collaborative drafting/commenting, etc.

– Github (and others) for version control – Can use Box or Dropbox, but keep separate from “Filing Cabinet” for

permanent records

Corporate Records ≠ Financial Records

• But embrace e-records there, too!• Use Expensify to track charges, cash and mileage. Invoice the

Company and have them pay you.• Download e-bank records• E-file taxes • Use Quickbooks at first; QBO for off-site support• Boundary conditions – contracts with vendors and customers

– sometimes managed with corporate records, sometimes with accounting records

Agenda

• Corporate Records - A Framework For Control• The First Year – A Greyline Tour• Standard Documents• DIY Contracting With Liability Limiting Language

• Financings and Options• Next Steps• Q&A

Where/When Does Legal Fit?

1. Satisfice (Don’t Optimize) Legal Requirements– Too much or too early is a waste of time or money– Too little or too late is very expensive … and sometimes lethal

2. My recommendation– Establish a FRAMEWORK for compliance and control - DIY– Rely on lawyer for standard dox, financings and big deals only– All other stuff done DIY, preferably in writing, using “liability

limiting language”

Incorporation Seed Funding Service Providers Options Series A Series B

www.NodalPartners.com/fico

Hypotheses Problem – Solution Fit

Product – Market FitLean canvas

ScalingUp

Agenda

• Corporate Records - A Framework For Control• The First Year – A Greyline Tour• Standard Documents• DIY Contracting With Liability Limiting Language

• Financings and Options• Next Steps• Q&A

Standard Documents

• Board– Sample Minutes– Sample Unanimous

Written Consent– Common resolutions

• Options approval• Election of officer(s)• Approval of deal that is

not “usual/customary” or “in the ordinary course”

• Shareholder– Sample Minutes– (Restricted) Stock

Purchase Agreement

• Options– Plan (and related)– Standard Grant /

Options Agreements

• Employee– Offer Letter– I-9, W-4, inventions

assignments, non-disclosure, non-solicitation, etc.

– Termination letter (or memo to file)

• Advisory– Advisor Agreement

(NDA, Inventions Assignment, Advisory Agreement )

– Standard Grant / Options Agreements

• Contractors– Consulting

Agreement

• Strategics– Non-disclosure

Agreement

Agenda

• Corporate Records - A Framework For Control• The First Year – A Greyline Tour• Standard Documents• DIY Contracting & Liability Limiting Language • Financings and Options• Next Steps• Q&A

Liability Limiting Language (1)• Generic Contract – offer, acceptance, consideration

– Parties– Deliverables by each, terms

• Who, what, when, where, how good, how fast and how much?

– Conditions, before and after (optional)– Term and termination; renewal– “Reps and warranties” (optional from here on)– Breach, Damages, Indemnification; limits of liability– Boilerplate

• Agreement formed … and enforced – can be oral– Partial performance– Accepted by action

Liability Limiting Language (2)• Generic Contract – offer, acceptance, consideration – “Discussion Draft”; “Non-

binding term outline”; “not binding … definitive legal agreements”– Parties – deal only with honorable people; observed/enforced; dogs and fleas– Deliverables by each, terms

• Be super clear; don’t waffle. Better to say “no” than get sued.• Limit your risks – small amounts at first; inspection/rejection; option; negotiate!

– Term and termination; renewal• This is the most overlooked “gotcha” and best door out. Termination on X days, either way;

no auto-renewal for long periods.– Breach, Damages, Indemnification; limits of liability

• Limit liability to the amount paid;– Boilerplate

• Use a Rider “Notwithstanding anything in the main agreement to the contrary, the parties agree that X, Y, Z….

• Agreement formed … and enforced – can be oral– Partial performance – use email to confirm and be sure there’s a “meeting of the minds”

before proceeding. – Accepted by action – make clear than only written documentation

Agenda

• Corporate Records - A Framework For Control• The First Year – A Greyline Tour• Standard Documents• DIY Contracting With Liability Limiting Language

• Financings and Options• Next Steps• Q&A

Financing

Pitch and Fundraising

Term Sheets; Commitments Closing

• Executive Summary

• PowerPoint Deck

• Forecast & Budget

• “Business Plan”

• Term Sheet (you)

• Term Sheet (them)• Private Placement

Memorandum

• Stock Purchase Agmt

• Convertible Note Purchase Agmt

• $ Investment

• The security issued

Options

“Plan” Created and Approved

Board GrantsOption

Expiration or Exercise

• Board & Shareholder approval

• Reserves shares to be sold when options exercised

• Board approves “grant”

• “Grant” is a contract where option holder has right but not obligation to buy shares at X price during Y period

• Vesting

• Acceleration

• Board resolution

• Agreement prepared and signed by holder and company

• Expiration -- earlier of:

• 10 years

• X days after term-ination of service

• Exercise

• Sign the form and submit a check

• X days after term-ination of service

Agenda

• Corporate Records - A Framework For Control• The First Year – A Greyline Tour• Standard Documents• DIY Contracting With Liability Limiting Language

• Financings and Options• Next Steps• Q&A

What Do You Do Next?• Find a good lawyer; negotiate deferred fee arrangement• Ask for a simple incorporation and “standard” agreements

– Restricted Stock Agreements (and 83(b) election) for co-founders– Employee and IC agreements (NDAs, inventions assignments, work-for-hire, etc.)– NDA– Maybe customer or channel contracts

• Set Up YOUR Framework – Dropbox* or Box• Learn to use the standard agreements and drive them to final, signed documents,

filed inside the framework.• Use Google to research other documents; avoid chit-chat with lawyer• CYA with “liability limiting language” • Buy your attorney lunch once a quarter (off the meter)• Engage your attorney for funding and thereafter.

* make sure to back it up!!