By Louis Lehot
Protective Provisions: Companies should consider the protective provisions to be given to new investors, and understand those held by their current shareholders.
Louis Lehot says, “It’s very important to understand what level of investor approval is required for key actions.” A company’s management will need to be able to work collaboratively with the company’s investors to approve future financings or a sale of the company, but potentially also on a series of corporate actions like hiring, firing, compensation, borrowing and other key business decisions. Among the existing shareholders, the level of approvals required by a protective provision is critical for a founder team to understand.
Economic Rights: It is also paramount to understand the investors’ economic rights: A fundamental theory underlying the preferred stock structure of venture capital investing is that in connection with a sale of the company, the investors will receive their money back before common stockholders receiving anything in exchange for their shares. Louis Lehot advises clients to ask key questions: does a series of preferred stock also have a dividend that accrues? A liquidation preference? Are either compound or cumulative? Do they double-dip by participating? Does the liquidation preference return a multiple of the original issue price? These are all points that could vastly change who gets what upon exit.
Intellectual Property: In all early-stage companies, there must be a transparent chain of title to that IP from origination to ownership. Intellectual property litigation is rampant, says Louis Lehot, and it would be wise to do your diligence and confirm you are not infringing on any third-parties intellectual property.
Contracts: Your agreement doesn’t have to be in writing to be enforceable. However, it would be smart to ensure that all of your material agreements are in writing, contain all essential terms, and are executed by all involved parties. These agreements include vendor and supply agreements, guaranty terms, and employment agreements.
“The golden rule, ask for legal help if you are unsure of what issues the contract raises,” says Louis Lehot.
Regulatory Issues: Regulatory challenges from state and local governments can become show stoppers. Before making an investment, investors will want to ensure that your business plan is not endangered due to regulatory concerns.
“Seeking legal counsel at the onset of your venture, can help to identify any potential regulatory issues and confirm that such regulatory matters will not adversely impact your business model” says Louis Lehot.
Louis Lehot is the founder and managing partner of L2Counsel, P.C., located in the heart of Silicon Valley on California Avenue in Palo Alto. Louis has an extensive global legal career, specializing in working with companies of all stages of development.
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Originally published on PRUnderground.
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