Company Formation and Corporate Governance

Class 2 Overview - February 3, 2025

• The agenda includes a Recap of Class 1, Formation and Organizational Matters for Companies, Constituents, Corporate Governance, and a Q&A session.

Setting up a Company

• Forming a corporation involves filing a certificate of incorporation and must be signed by an individual acting as the "incorporator."
• A charter sets the capital structure simply with common stock.
• The sole incorporator appoints the initial board of directors via written consent.
• Initial directors ratify the actions of the incorporator, designate officers, pass bylaws, and approve bank accounts by written consent.
• Ratification can be used for initial stock issuances to company founders.
• Foreign qualifications are required to conduct business in places where the company operates.

Choice of Entity

• Silicon Valley startups typically form as a Delaware corporation.
• Corporations are the chosen vehicle to reinvest profits and aim for either an IPO or sale.
• Some businesses may prefer LLCs for distributing profits.
• Companies in non-Delaware jurisdictions have to reincorporate or re-domesticate their business.
• Institutional investors prefer investing in Delaware entities because they are familiar with the corporate and LLC laws, and they are predictable.
• Certain states mandate a merger is performed to move to another state.

Setting Authorized Capital Stock

• A growth company will typically have common stock at initial formation.
• There is no need for preferred stock until investors set the terms
• As a best practice lots of shares should be authorized, up to 40,000,000
• This can feel better to recipients.
• Designating low par values like $0.001 or $0.0001 per share can be important .
• Delaware determines franchise tax on aggregate par value.

###Initial Issuances of Capital Stock

• Founders typically get common stock at nominal or low prices.
• Founders decide how many shares to issue and plan for future equity issuances, plans for raising capital, and determine the size of the employee equity options when issuing shares.
• Companies can "vest" shares.
• Companies repurchase shares at original cost if recipients separate from service.
• Vesting lets a company repurchase shares, with the repurchase right expiring over time in agreed periods.
• Documentation for each issuance includes a common stock purchase agreement or a restricted stock purchase agreement.
• Each issuance must comply with applicable securities laws.

Employees and Incentive Equity

• Companies are to get an Employer Identification Number (EIN) before beginning to hire.
• Companies often adopt forms such as employee offer letters, confidentiality agreements, and consulting agreements.
• Employee Offer Letters should be tailored as "at-will" for the state where the employee resides.
• Equity incentive plans, typical "long term incentive plans" are similar to a swiss army knife because they cover issuances of options, restricted stock, phantom equity and other forms of equity-linked incentives.
• Stockholders need to approve equity incentive plans.
• Each option grant requires approval by the Board, following the plan terms.
• Option grants must comply with both state and federal laws governing securities.

Intellectual Property Protection

• Maintain a needed separation from prior employers or partners.
• Obtain contribution of IP by Founder(s)
• Execute confidentiality agreements / NDAs
• Write out Inventions Agreements / Proprietary Rights Agreements
• Write assignments for all Patents, Patent Applications, Trademarks, Copyrights and Trade Secrets
• Include Name Trademark protection for the Trademark for Company Name, Logos, Slogans, etc.
• Address Assignments / Licenses from Incubators, Universities, etc.

Constituents

• Constituents include Founders, Investors and Other Shareholders, Advisory Board, Mentors/Confidants/Coaches.
• Other constituents may include Board of Directors, Board Committees, employees, Consultants, Advisors.
• Companies should also consider Strategic and Licensing Partners as consituents.

Introduction to Fiduciary Duties

• Directors must show a Duty of Care, acting with diligence and prudence after gathering and carefully considering information.
• There are two contexts for breach of Duty of Care liability.
• There may be liability for an ill-advised decision or "negligence", or for failure to act when attention could have prevented loss, according to In re Caremark Int'l Inc. Derivative Litig.
• The Duty of Loyalty means prioritizing company interest versus personal gain and avoiding conflicts, states Guth v. Loft.
• Derivative Obligations are fiduciary duties derived by care and loyalty.
• Directors must exercise proper oversight, disclose information to shareholders, and prevent wasting corporate assets, according to TVI Corp. v. Gallagher.

Business Judgement Rules and Entire Fairness

• Delaware uses the Business Judgment Rule (BJR) when evaluating board decisions if directors act with rational business purpose.
• Financial investments and approving Down-Round Financing are BJR examples if the board divests a non-core subsidiary or approves down-round financing under hardship.
• The Entire Fairness Standard applies when there are conflicts-of-interest.
• Directors must prove decisions/transactions are fair through process and pricing.
• Burden Shifting Mechanisms can be a special committee or majority approval of minority stockholders.

Best Practices for Financial Distress

• Duties extend to the entire "community of interests,”, including creditors if the corporation becomes insolvent.
• Once insolvent, creditors can assert claims for breach of fiduciary duties based on Derivative Status.

Best Practices for Managing Financial Distress

• There should be an assumption of insolvency in precarious financial situations.
• Frequent meetings are important, ensuring all decision makers are well informed through Meeting Frequency/Access to Information.
• Special committees and independent directors will avoid self-interest implications through Address Conflicts of Interest
• Focus on protecting employee interests along with taxing authorities, per Prioritize Wage & Hour; Taxes.
• Regularly see advice from financial and legal advisors through Seek Expert Advice.
• An Insurance Assessment can help evaluate D&O insurance and if using contractual exculpation clauses are feasible.

Best Practices: Conflicts of Interest

• Duty of care does not cover conflict-of-interest transactions, as evaluated by business judgement rules, requiring heightened scrutiny for BJR and conflict of interest.
• Abstract arguments of director conflicts are not enough.
• There must be specific allegations and evidence that a director faces a conflict or acts with improper purpose, as stated per Quadrant Structured Prod. Co. v. Vertin.
• Multiple fiduciary roles can exist without conflict, but it only occurs if beneficiary interests are aligned, per Van de Walle v. Unimation, Inc.
• Decisions seeking to maximize entity value, without conferring direct benefits, remain protected by the BJR., states Shandler v. DLJ Merch. Banking, Inc.
• Lender designees on distressed company boards are not unusual so they can protect their investments, per In re SubMicron Sys. Corp.
• "Cleansing" conflicting transactions can be done by a vote from informed directors/stockholders.

Best Practices for Managing Conflicts of Interest

• Meticulous record-keeping is a must.
• Rationale and actions that demonstrate fairness are what the courts want to see per Maintain Detailed Records.
• Fairness opinions from independent advisors can validate the whole company interests, which is Secure Fairness Opinions
• An attorney can ensure all parties have proper representation and fairness to ensure compliance, as per Use of Counsel.
• Gaining financial records means being specific, clear, and tailored to specific transactions, per Limited Scope.

Best Practices for Handling Conflicts of Interest

• Those approving should not benefit personally, so have Director and Stockholder Approvals where appropriate.
• All transactions must be transparent and reviewed with full transparency, according to Transparency.
• Duty needs to be enforced via strict separation, using different committees, per Separation of Roles.
• The establishment of a LPAC (Limited Partner Advisory Committee) governance body may be advisable, which will oversee the funds per Establishment of LPAC.

Best Practices: Treatment of Confidential Information

• Unauthorized information causes a breach to duty of loyalty, so directors need to protect sensitive information, per risks of Sharing Confidential Information.
• Directors disclosing information to use against a portfolio company can breach their duty, for example, per the Treatment of Confidential Information and Breach Scenarios.
• Directors sharing confidential information leading to insider trading not only breaches duties, but generates legal consequences.
• Establish a LPAC to review confidential information, to guard against breaches of duty, per Establishment LPAC.
• The roles for equity and other investments must be closely reviewed per Separation of Sponsor Representatives.
• The team must inform a proper compliance team to establish restrictive walls per Compliance Oversight.

Best Practices: Fiduciary Duty Waivers

• Delaware supports contractual waivers if the parties are specifically tailored/negotiated and there the provisions are clear and valuable, per Corporate Context.
• LLCs can waive these duties entirely in their agreements with greater flexibility, per LLC Flexibility.
• Waivers must be specific, clear, and narrowly to avoid unenforceability per Specificity; Narrowly Tailored.
• Engage lawyers in negotiations to ensure fairness per Use of Counsel.
• Negotiate corporate waivers, such as corporate veil in exchange for consideration, to ensure a bargained agreement per Consideration.
• Limited Scope gives no protection from ill intent or bad faith, even if the corporate form is pierced.

Assignment Fact Pattern

• The board consists of the CEO/Founder, two Series A, one common stockholder, and an independent director comprising 5 seats.
• Decisions require a majority vote.
• The company requires capital.
• The Serie A investors want to invest $5mil in exchange for a new Series B class of preferred stock.
• CEO and common stockholders are to Break-Out Group A, Series A is Break-Out Group B, independent is Break-Out Group C.
• Considerations are needed for determining whether to move forward with the raise as well as procedures that should be adopted as part of the process.

Class 3 Overview - February 10, 2025

• The agenda includes a Recap of Class 1, Formation and Organizational Matters, Co-Founder Relationships, Capitalization, and a Q&A session.

Co-Founder Relationships

• When you are choosing your co-founders it is Good to Great when it matches Mission Statements and Core Values.
• Skillset, Network, and Symbiosis are important when Structuring co-founder partnerships for Founders' Equity and Vesting.
• Zuckerburg/Saverin and Cruise Automation/YCombinator can be looked to for Case study discussions.

Contractual Terms for Co-Founders

• There should be agreed Equity Splits Among Co-Founders
• Founder contracts should use Restricted Stock.
  • A clause can explain Why restricted stock is used instead of stock options.
• Form 83(b) filings, Timing of incorporation, and initial stock issuance are very important.
• Vesting of issued stock should always be considered.
  • The contract should ask, Should founder stock be subject to vesting?
• Vesting schedules, Acceleration and Forfeiture are all key things in a founders contract.

Form Documents

• When executing a document form you should have a Certificate of Incorproatoin and Bylaws, and Founder Employment Agreements.
• When structuring a founders employment contract, include Compensation: Base, Bonus and Equity.
• Add vesting terms, Severance, and Other key items to the contract.
• Proprietary Rights Agreements are critical.

Real-World Examples of founder challenges

• Review Facebook/Zuckerberg and Saverin challenges and how they were overcome.
• Compare to Cruise Automation/Vogt and Guillory's legal battle.

Capitalization Tables

• Capitalization tables are important because they track new issuances of stock and stock equivalents.
• Cap tables help you understand who owns a company so determine who gets paid upon the occurrence of liquidation of deemed events.
• It's important to know who at minimum, you need to be able to know (a) explain who owns a company, (b) discuss the impact of a company and (c) allocate payments.
• You will need basic math for pricing, dilution impact on stocks and how down-round pricing convers outstanding equities.

Capitalization Table Iterations

• The first version of the table should outline initial Founder Stock.
• The second table should add stock options.

Version 1 - Founder Stock

• When assuming all founder stocks at split, there are key considerations.
  • there are assumptions for who the two founders are and if they will have a single class of equity for common stock where the equity is allocated equally.
• There are no option pools available currently.

Version 2 - Founder Stock + Options

• The considerations are still that there are two founders, equity is allocated equally and there is a single class of equity.
  • The option for employees exists and fully allocated the pool for them (20% fully-diluted)

Class 4 Overview - Contract Law

• Legal Requirements for an Enforceable Contract, Preliminary Contracts, Commercial Contracts, and Straegic Contracts.
• The class also looks at Remedies.

Terminology and Ubiquitous Provisions

• Be sure to name your Parties, Preliminary Contract such as an Letter of Indent
• Use a legitimate contract that is legally binding.
• Licenses, Representations and Warranties, and Disclaimers of Warranties are important to know.
• Write out all Promises to Do/Refrain and Compliance with Application Law for covenants.
• Write out all known conditions, indemnifications, limitations of liability.
• Ensure a strong, clear termination.
• Define and address any effect of change of control.
• Be clear about what type of governing law to use per Forum/Jurisdiction vs. Arbitration vs. Mediation (Binding vs. Non-Binding.)

Legal Requirements for an Enforceable Contract

• It must be of Legal Capacity, Mutual Assent (Written vs. Verbal) with a clear "Meeting of the Minds."
• The contract should clearly outline a Valid Offer, valid acceptance and how to handle the Effect of Counter-Offers.
• If must have a clear and well defined Intent to Contract, Consideration (Value Exchange).
• The Authories and their responsibilities should be clearly defined
• A contact should not be too vague that it might have Ambiguity.

Drafting and writing an action plan

• Draft with Specificity Unless Tactically Determined
• Use the Journalistic Approach to ensure everything is well understood
  • Who
  • What
  • Where
  • Why
  • How
  • When

Preliminary Contracts

• Use Non-Disclosure Agreements to explain your Definitions and legal contracts that establish confidentiality obligations.
• The defintion needs well defined obligation outlines for the disclosing party (seller) and receiving party (potential buyer).
• It must Specify the types of information considered confidential and the permissible uses of such information.
• State out the "Scope of Confidential Information" and define what information needs protecting.
  • Examples for protecting intellectual property, data, customer records, etc.
• Ensure exclusions are clearly stated for any in-public domain material.

Letters of Intent

• An LOI (Letters of Intent) is used to write a preliminary outline, it must have defined Parties including involved, Description of the transaction, agreements, and Key conditions (e.g., Confidentiality - economics timeline, & indentifications.
• The intent needs to express a formal agreement.
• The contract may also be known as a"Term Sheet" or "Memorandum of Understanding" for Short-Form communications.

Exclusivity Letters

• The letters serve a clear "Purpose" and enables only dealing with the specific and explicit terms.
• The deal enables set periods to exclusively deal and enable and motivate parties to contribute time and time and money to ensure all goals are met with resources.
• There should be a Binding a legally enforceable agreements included.
• The Key terms of the letters are "Length of time", "Unsolicited in-bound inquiries", etc.

Commercial Contracts

• Common contracts must be specified, clear, and defined.
• Services Contracts (Statement of Work) are common but should follow rules, as well as Master Service Agreements
• End Use Agreement, Enterprise vs. Per Seat, OEM Agreements, Distribution Agreements, and Licensures is all a must to comply with all laws.

Licenses

• Agreements with ownership and permission such as partial rights are usually covered
  • Inbound vs Outbound
  • Unilateral Vs Mutual /CrossLicensures
• Clear and specific to Time , place and applicable intellection property.
  • Maintenance and Support

Other Key Provisions

• Most Favored Nations will cover with Parity.
• Holistic vs. Defined Competitors.

Strategic Contracts

• Partnerships,Joint Ventures,Strategic Alliances.
  • Shareholder Agreements,Incentive Equity, Benefit Plans.
• Finacings,M&A, Agreements are all part of a strategic plan and goals.

Remedies

• Liquidated Damages and Equitable Remedies are an effort to enforce contractual agreements and provide a fair process should an error occur.
• Those attorneys fees must include costs of enforcement.
• Statutes of Limitations, are another.

Class 5 Overview

• Introduction – Emily R. Pidot who is a partner at Paul Hastings LLP where she runs the Employment Law Department and chairs the New York Branch along with recognition by Chambers and Partners, The Legal 500, SuperLawyers regarding her work to educate employers.
• Employment Law 101 which is the agenda.

Employment Law 101 Outline

• The course contains Contracts between employers and employees, with an explanation of the terms used.
• It gives a break-down of EEO, "whistleblower" claims plus Wage and Hour information and a definition of restrictions and Leave laws, and the role of Labor Law.

Regulation on multiple levels

• Laws exist under all different layers from Common law to Federal Law and Concurrent and Federal preemption, laws
• Enforcement agencies can be found at all levels.

Contractual relationships in general

• Considerations are exchanged using "At-will" employee doctrine and "What is a contract?"
• Employee contracts need to be formally written along with statute of fraud and promissory estoppel.
• Contracts use "Written representations" and act as a "claimed-handbook"

Key contract terms

• Employee contacts need to state the Jobs descriptions with fixed hours of work, compensation, benefits including fixed term.
• All termination consequences need to have confidential information stated along with the Inventions, Post-employment restrictions and arbitrations of disputes.

Equal Opportunities

• EEO acts as a statutory that protects against “employee at will” terminations.
  • The laws protect employees from:
  • Discrimination,Disparate,Harassment.

Employment Laws

• Laws enacted in the United States have expanded employees' rights over the better half of two centuries.
• 1866: Civil Rights Act (Section 1981) ,1935: National Labor Relations Act, 1938: Fair Labor Standards Act. 1967: Age Discrimination in Employment Act,1978: Pregnancy Discrimination Act,1990: Americans with Disabilities Act.

Equal Coverage

• There is currently Concurrent Federal State and local coverage.

Anti Discrimination Laws

• Allows recovery from laws damage and relief to make the environment equitable.
• Monetary relieve follows certain statutes, mostly title rules.
• Most states have their state rules that mirror federal statutes.

Unlawful Discriminations

Employment status, credit and caregiver historical is an illegal base for discriminations.

• Pregnancy, national origin, and arrest or conviction record is illegal in most cases.

Illegal Conduct

• It is prohibited to intentionally treat someone differently due to characteristics that protect them otherwise under Disparate treatment.
• Facially impact practices are against the law or practices against a protection class for Disparate impact.
• All Harassments and actions against a protected class is unlawful.
• It is also unlawful Retaliation for employees.

Equal Pay

• Fair and Equal laws are covered. and should be covered per the Labor Laws Section 194.
• New policies can prove intent for not discriminating and prove focus on job qualifications
• Defenses must be made the "a bona fide factor other than status."

Employment and Discrimination

• Affirmative is action is an area in employee law, with self critical analyses.
• Employer driven programs should be responsible for civil rights.
• Risk and compliance plans for DEI goalsettings.

Legal Claims to Disclosure

• Legal federal and state compliance is a function of the state governments.

• Public policies include Federal Statutory claims with False Claims Acts or Sarbanes-Oxley (for fraud)

Wage Laws

• Complicated local and federal wage and hours exist.
• The basics hours pay and overtime are considered in most of the wage laws. There may be complicated rules.

Restriction Laws

• Function and state law are mostly used in function state, which are mostly common laws. Enforcements and remedies need to exist
• All the cases and information need to exist.

Leave Laws

• Time is permitted only through circumstances. Examples can include Family Act, Uniform Services act and state law.