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Common Entrepreneur Mistakes
          Presented by Bart Greenberg
          Haynes and Boone, LLP

          Lloyd Greif ...
The Wrong Business Structure




© 2010 Haynes and Boone, LLP
The “De Facto” Partnership

      What is it?
      Problems:
              • Ownership of IP
              • Vicarious ...
The “Wrong” State of Formation
      California vs. Delaware
              • California is shareholder friendly
         ...
Failing to Make the “S Election”
      Consequences of Subchapter S Election
              • Pass-Through of Income
     ...
Keep it Simple!
      Don’t Over-Build at Start-Up. Avoid the
       Following:
              • Multiple operating compan...
The Wrong Team




© 2010 Haynes and Boone, LLP
Putting off the Inevitable
      Most Start-Ups Tend to Be Too Quick to
       Hire and Too Long to Fire
              • ...
Mishandling the Inevitable
      DON’T Violate California Labor Laws
              • An employee who is discharged must b...
Failing to Protect the IP




© 2010 Haynes and Boone, LLP
Failing to Get IP into Company
      Two Typical Approaches:
              • Contribution for equity
              • Lice...
Creating Clouds on Title to IP
        The “Moonlighting” Founder
               • Under Section 2870 of the California L...
Creating Clouds on Title to IP (cont.)
 Other Employment Related Issues:
        • Get employment agreement in place befo...
Creating Clouds on Title to IP (cont.)
      Issues Relating to “Work for Hire” (i.e.,
       Contractors)
              ...
Treating Stock Like Water




© 2010 Haynes and Boone, LLP
Oral Promises of Equity
      Oral Agreements ARE Enforceable
      The Problems with Oral Agreements are:
             ...
Using Equity as Cheap Currency
      Know What is Market. How Much is
       Too Much?
      Keep an Accurate Capitaliza...
Not Enough Strings Attached
           Use of Restricted Stock and Vesting
           ALWAYS use a probationary period
 ...
Failure to Maintain Corporate
    Formalities




© 2010 Haynes and Boone, LLP
What Corporate Formalities?
        Hold and Properly Document Meetings to
         Authorize All Requisite Corporate Act...
Consequences to So Maintain

      Alter Ego Liability (aka “Piercing of the
       Corporate Veil”) to Third Parties
   ...
Not Leaving Enough Runway




© 2010 Haynes and Boone, LLP
Underestimating Capital Requirements
      Make Sure Your Projections Are Sound
       (Then Double Your Cash Requirement...
Seeking Capital Too Early
      Build the Business First, Then Seek
       Capital
      DON’T Lose Focus and Permit the...
Wasting Time by Spinning Wheels
      GET Educated; Learn What is Market
      Network with Appropriate Referral
       ...
No Contingency Plan in Place

      ALWAYS Have a Back-Up Plan
      Pull the Trigger BEFORE it is Too Late




© 2010 H...
Questions?




© 2010 Haynes and Boone, LLP
Common Entrepreneur Mistakes
                                       Thank you!

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Common Entrepreneur Mistakes

This slide show outlines the more common mistakes made by entrepreneurs in new start-up ventures.

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Common Entrepreneur Mistakes

  1. Common Entrepreneur Mistakes Presented by Bart Greenberg Haynes and Boone, LLP Lloyd Greif Center for Entrepreneurial Studies Marshall School of Business, USC May 25, 2011 © 2010 Haynes and Boone, LLP
  2. The Wrong Business Structure © 2010 Haynes and Boone, LLP
  3. The “De Facto” Partnership  What is it?  Problems: • Ownership of IP • Vicarious Liability © 2010 Haynes and Boone, LLP
  4. The “Wrong” State of Formation  California vs. Delaware • California is shareholder friendly • Delaware is management friendly  Special Case of the So-Called Quasi- California Corporation  Why You DON’T Necessarily Want to Be in Nevada • You will most likely pay taxes • The law is not as well defined © 2010 Haynes and Boone, LLP
  5. Failing to Make the “S Election”  Consequences of Subchapter S Election • Pass-Through of Income • Pass-Through of Losses —Pros —Cons  DON’T Miss Filing Deadline • RU Dead in the water? • Retroactive S Election? © 2010 Haynes and Boone, LLP
  6. Keep it Simple!  Don’t Over-Build at Start-Up. Avoid the Following: • Multiple operating companies or special business units (Subs) • Related party engineering, development or service companies  Restructuring Can Be Expensive and Involve Negative Tax Consequences © 2010 Haynes and Boone, LLP
  7. The Wrong Team © 2010 Haynes and Boone, LLP
  8. Putting off the Inevitable  Most Start-Ups Tend to Be Too Quick to Hire and Too Long to Fire • Don’t hire Just because someone will work for equity or for free • Things will get worse and much more complicated to unwind  Avoid Urge to Hire friends & Family  Avoid Those With “Checkered” Pasts  Recognize Your Own Limitations © 2010 Haynes and Boone, LLP
  9. Mishandling the Inevitable  DON’T Violate California Labor Laws • An employee who is discharged must be paid all wages, including accrued vacation, at time of termination • An employee who quits must be paid all wages, including accrued vacation, within 72 hours of quitting  ALWAYS get releases from liability on separation (even if you have to pay for it!) © 2010 Haynes and Boone, LLP
  10. Failing to Protect the IP © 2010 Haynes and Boone, LLP
  11. Failing to Get IP into Company  Two Typical Approaches: • Contribution for equity • Licensing arrangements  Factors to Consider: • Protection from creditors • Additional “Fields of Use” • Tax considerations © 2010 Haynes and Boone, LLP
  12. Creating Clouds on Title to IP  The “Moonlighting” Founder • Under Section 2870 of the California Labor Code, Employer owns IP unless: —Employee developed entirely on her own time; and —Employee did not use employer's equipment, supplies, facilities or trade secret information • Exception for any of the following IP, that: —Relates at time of conception to employer's business, or actual or demonstrably anticipated research or development of employer; or —Results from any work performed by employee for employer. © 2010 Haynes and Boone, LLP
  13. Creating Clouds on Title to IP (cont.)  Other Employment Related Issues: • Get employment agreement in place before employee starts work —Obligations to execute assignments and to reasonably cooperate —Non-solicitation of employees, customers and vendors • Check for pre-existing duties of confidentiality to former employer • Ask to see employment agreement from former employer © 2010 Haynes and Boone, LLP
  14. Creating Clouds on Title to IP (cont.)  Issues Relating to “Work for Hire” (i.e., Contractors) • GET consulting agreement in place BEFORE consultant starts work • Without a suitable agreement, you may “own” nothing more than a limited license to use what was developed, even though you paid for the work! • Negotiate for ownership UP FRONT, before a deal is pending © 2010 Haynes and Boone, LLP
  15. Treating Stock Like Water © 2010 Haynes and Boone, LLP
  16. Oral Promises of Equity  Oral Agreements ARE Enforceable  The Problems with Oral Agreements are: • Terms are never well defined or fully thought out • Difficult for employer to disprove claimed existence of such an arrangement  “Sleeping Dogs” Tend to Wake Up When Exit is imminent © 2010 Haynes and Boone, LLP
  17. Using Equity as Cheap Currency  Know What is Market. How Much is Too Much?  Keep an Accurate Capitalization Table  Look for Alternative Ways to Finance the Business: Bootstrap!  DON’T Forget About Compliance with Applicable Securities Laws © 2010 Haynes and Boone, LLP
  18. Not Enough Strings Attached  Use of Restricted Stock and Vesting  ALWAYS use a probationary period  Repurchase Rights Upon Termination  All Equity Should Be Made Subject to a Shareholders’ Agreement • Restrictions on Transfer • Rights of First Refusal • Repurchase Rights on Trigger Events • Tags, Drags and Shotguns • Proxies and Voting Agreements © 2010 Haynes and Boone, LLP
  19. Failure to Maintain Corporate Formalities © 2010 Haynes and Boone, LLP
  20. What Corporate Formalities?  Hold and Properly Document Meetings to Authorize All Requisite Corporate Actions  Maintain and Keep Separate: • Minutes Books & Accounting Records • Bank Accounts • Insurance & Licenses • Contracts and Leases • Letterhead and Stationary  Don’t Run Personal Items Through the Company © 2010 Haynes and Boone, LLP
  21. Consequences to So Maintain  Alter Ego Liability (aka “Piercing of the Corporate Veil”) to Third Parties  Contracts May Be Voidable at Option of Third Parties  Liability to Equity Holders for Breach of Fiduciary Duties  The Company May be “Unfundable” © 2010 Haynes and Boone, LLP
  22. Not Leaving Enough Runway © 2010 Haynes and Boone, LLP
  23. Underestimating Capital Requirements  Make Sure Your Projections Are Sound (Then Double Your Cash Requirements!)  Make Sure Your Capital Sources are For Real – Get it in Writing!  Think Long and Hard About Quitting Your Day Job © 2010 Haynes and Boone, LLP
  24. Seeking Capital Too Early  Build the Business First, Then Seek Capital  DON’T Lose Focus and Permit the Business to Suffer While You Seek Capital  Only Seek Capital From Appropriate Sources © 2010 Haynes and Boone, LLP
  25. Wasting Time by Spinning Wheels  GET Educated; Learn What is Market  Network with Appropriate Referral Sources  DON’T Work with Finders Unless You Have a Referral from a Trusted Source • They will gladly take your money • They could waste precious time © 2010 Haynes and Boone, LLP
  26. No Contingency Plan in Place  ALWAYS Have a Back-Up Plan  Pull the Trigger BEFORE it is Too Late © 2010 Haynes and Boone, LLP
  27. Questions? © 2010 Haynes and Boone, LLP
  28. Common Entrepreneur Mistakes Thank you! Presented by Bart Greenberg Haynes and Boone, LLP (949) 202-3037 bart.greenberg@haynesboone.com © 2010 Haynes and Boone, LLP
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This slide show outlines the more common mistakes made by entrepreneurs in new start-up ventures.

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