Venture Capital

Question 1

Creating the Start-Up

Sole Proprietorship

Answer 1

Liability and Tax
* no legal entity involved so we have unlimited liability so your assets are at risk
* you are taxed at your individual tax rate (flow through taxation)
* money goes to your bank account

Financiability
* no ability to obtain 3rd party equity financing

Employee incentives
* no ability for equity participation by employees

Question 2

Partnerships

still not treated as separate entities. Can be formed by accident/default.

Answer 2

GP v. LP
* LP have limited liability (only limited to what they invested) but if they intervene with business management they lose liability shield
* GP managing money, making investment decisions, no limited liability

Taxation
* pass through entity

Financiability
* Limited Partnerships may be financing vehicle but limited by number of participants, transferability

Employee incentives
* limited ability for equity participation by the employees

Flexible
* whatever partners decide, will be how it is ran

General partnership
* all partners are general partners

Limited partnerships
* one or more general partners and one or more limited partners

Question 3

LLC

LLCs act as a separate legal entity in terms of liability protection

Answer 3

Pass through taxation like in partnerships

practically operates like limited partnerships
* liability shield
* owners can be individuals or other companies
* no member count restriction

Disadvantage
* limited abilities to obtain 3rd party financing
* limited abilties to grant employee incentives

If you have a really really profitable business (because of the passthrough tax nature) and you don’t need investment, LLC’s are great!
* but startups are constantly losing money at first

Question 4

S Corporations

Magic little box you check on a tax return form allows you to be taxed as a pass through entity

Answer 4

Advantages
* shareholders are only taxed on their personal income
* no income tax is paid at the corp level
* liability shield

Requirements
* no more than 100 shareholders
* all individuals
* one class of stock (CS)
* failure to meet one of these auto turn into reg corp

the requirements are the downside

Question 5

Corporations

Answer 5

It comes into existence when you file a certificate of incorporation with the secretary of the state (creates separate legal entity) and governed by board
* Remember though, you can screw up and pierce the corporate veil and lose limited liability
* This can happen if you for example do not adhere to the corporate formalities and intermingle your funds and use your own personal expenses…

Double Taxation

Easy to provide equity participation by employees

Flexible cap structure
* multiple series of stock
* issue any number of shares

Question 6

Where to incorporate

Answer 6

Delaware
* Better judges for corp litigation, they’ve seen issues like a million times
* Better developed case law and more predictable
* Allows having 1 director on the board
* DE only requires majority of all voting stock

California
* Weaker Corporate legal precedent
* Lower cost of incorporation
* Allows at minimum 3 directors on the board
* CA requires majority of each class of voting stock which can be problematic

Question 7

Start-up documents

Incorporation Docs

Answer 7

Cerificate of incorporation (“birth certificate”)
* name of the company, how many authorized stocks
* Bylaws (internal rulebook)
* Organizational minutes and resolutions

Question 8

Start-up documents

Founder Documents and employee docs

Answer 8

Restricted stock purchase agreement
* transaction of IP for stocks

CIIAA
* legal document used to assign all (IP) and other proprietary rights created by an employee during the course of their employment to the employer

Question 9

Corporate Organizational Matters

Issuing stock to founders