Legal Issues for Start-ups: Opportunities & Pitfalls

Latham

The E&I Club kicked off this year’s speaker series with a great overview of legal issues for start-ups by Michael Bookman and Alex Lazar of Latham & Watkins. At Latham, Michael and Alex specialize in early-stage companies, so their advice was exceptionally relevant. They covered issues including protecting IP assets, building the team, seeking financing, dealing with VCs, and, of course, working with lawyers. The presentation highlighted key legal issues that help entrepreneurs protect themselves and preserve the value of the company both in good times and in bad.

Most notably, Alex walked the audience through different equity negotiation scenarios including equity splits and vesting options. He discussed the pros and cons of time-based versus performance-based vesting, lock-ups, and repurchase rights. The most valuable takeaway from this all was said with a succinct piece of advice, “have the uncomfortable conversation early, rather than have a headache later.”

Additionally, Michael and Alex then discussed how to fund a start-up by walking through various forms of financing including cash loans, common stock issuances, preferred stock issuances, and convertible debt. For each type of financing, the duo discussed the motivations of the equity providers and what that means for the entrepreneurs. When discussing common stock issuances, they warned that while simple, this action can often be the kiss of death for raising future rounds. Selling common stock at the early stage sets a value for the company, which may make it difficult to issue incentive based compensation cheaply to employees and service providers. This could potentially cause a psychological effect on the price paid by institutional investors in the Company’s first (and future) rounds of funding. Rather, Alex and Michael typically recommend “super easy, super fast, super cheap” convertible debt for very early-stage companies and preferred stock issuances once the company has reached a level of traction that can be valued by VCs.

Given this mindful advice, Sloan entrepreneurs will be well-equipped while starting companies. For more information on Latham & Watkins, please visit: http://www.lw.com/