befi 11 september startup legal and ip: stefan kimmel

8/11/2019 BEFI 11 September Startup Legal and IP: Stefan Kimmel

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Founder Institute

Stefan Kimmel

11 September 2014

Startup Legal 101



2© 2014 KPMG AG Wirtschaftsprüfungsgesellschaft, a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG

International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.

KPMG Law – Some Facts

KPMG-Law – The Facts

● KPMG is one of the largest professional services companies inthe world and one of the Big Four auditors

● KPMG-Law is a full service law firm with more than 200 lawyers

across Germany

● KPMG-Law is associated with KPMG AG Wirtschaftsprüfungs-

gesellschaft, a member of the KPMG-Networks of independent

member firms

● We offer full service, inter alia in the areas M&A and Corporate,

Intellectual Property, Media- und Technology, Data Protection,

Labour Law, Cartel Law, Tax and Compliance

● In Europe: More than 25 KPMG national Law firms

● Rest of World: Cooperation with KPMG Law Firms or well-known

national Law Firms based on a best friend concept

Hamburg

Bremen

Hannover

Bielefeld

Essen

Düsseldorf

Köln

Frankfurt

Mannheim

Stuttgart

München

Nürnberg

Leipzig

Berlin

Dresden





Typical legal questions of founders

What do I have to do to secure

my investment from a legal

perspective?

How to avoid common

legal mistakes (e.g.

data/consumer

protection)?

What does an investment

agreement mean for my life?

How to form acompany?

What do I have to

consider to adequatelyprotect my Intellectual

Property?

When should I

involve legal

advisors?





Growth stages of STARTUP COMPANY

Stage overview

1. Founding

The business idea of STARTUP

COMPANY has moved into a legally

existing company

■ Choosing the legal form that is suited

best

■ Considering the set-up from an

employment side (own staff/

subcontracts/ leased workers

■ Choosing the right type of

employment contract

■ Setting up a tax efficient corporate

structure (i.e. regarding a future exit)

■ Tax optimized contribution of existingassets (e.g. IP) in the startup

company

3. Exit

The business idea of STARTUP

COMPANY has moved into a legally

existing company

2. Development

STARTUP COMPANY has gained

higher market share and needs to

expand its personnel to cope with the

growth

■ Search for investors

■ Negotiate investment agreements

■ Working Time restrictions

■ Handling disputes with employees

■ Implementation of employee

participation programs

■ Employees vs. freelancer

■ Internationalization of the business

model (tax aspects)■ Tax compliance





Legal Entities

AG

Verein

Kapital-

gesell-

schaften

Personen-

gesell-

schaften

BGB-

Gesell-

schaft

OHG

Körper-

schaften

KG

GmbH &

Co. KG

Zusammen-schlüsse

von

Personen

Personen-

handels-

gesell-

schaften

Publikums-

gesell-

schaft

Genossen-

schaft

GmbH





Venture Capital – The deal process

First

ScreeningDD

Deal

Structuring

Closing and

Integration

Analyse the pitch

Research on competition

Research on team

Use the product/ services

Meet the founders

TAX DD

Legal DD

Financial DD

Technology DD

Team DD

Term sheet submission

Price negotiations

SPA

Staff questions

Capital call

Support growth

Integrate in an incubator

Start EXIT preparation





Growth

Typical Clauses in Investment Agreements

Vesting1

Tag along2

Drag along3

Duty to Sell/Right of first Refusal4

Liquidation Preference5

Audit Obligations6

Non-Compete Obligations

7Employee Participation Programs8





Vesting

Vesting

(“We want You (to stay)“)

■ Vesting means: In case the founders leave, they need to

sell (part of) their participation.

■ The vested part usually diminishes with a certain lapse of

time.

■ There might be different scenarios (good leaver/bad leaver)

IMPLEMENTATION

■ The investors want the „brain“ (i.e. the founders) to stay as

long as possible.

BACKGROUND





Tag Along Rights

Tag along Right for Investors

(“Sell my shares also“)

■ In case of a sale of a participation, the investors can

demand that (part of) their shares are sold as well at the

same conditions as the selling founder.

■ Management is under a duty to report any offers to theother shareholders.

IMPLEMENTATION

■ The Investors want to safeguard that they can participate in

exit-scenarios.

■ Therefore, they need to have the opportunity to (partly) sell

their shares when the founders want to sell their shares.

■ Also, in case of a minority participation of the investors,

they want to safeguard that the new majority shareholder is

acceptable to them.

BACKGROUND





Drag Along Rights

Drag along Right for Investors

(“We want to sell all shares, including yours“)

■ Implementation of a drag along right for the investors.

■ Means: The investors have a right to drag along all other

shares in the company.

■ For the founders this means that they are under an

obligation to sell all their shares at the same conditions as

the investors.

IMPLEMENTATION

■ Economic aim of the investors is the (profitable) exit.

■ Chances of a higher profit if the investors are in a position

to sell all shares in the company.

■ Often times, the sale/acquisition of all shares is a

prerequisite for the potential purchaser.

BACKGROUND





Duty to Sell/ Right of First Refusal

Duty to Sell to Other Shareholders/Right of First Refusal

(“Never change a winning (Shareholder -)Team“)

■ The potential seller is under an obligation to first offer his

shares to the other shareholders.

■ The offer needs to be at the same conditions as with the

potential purchaser.

■ The remaining shareholders may then purchase the shares

of the selling shareholder at the ratio of their current

shareholdings in the Company.

■ Any remaining shares (not purchased by the current

shareholders) may then be acquired by the other

shareholders.

■ Any remaining shares after that may be acquired by thepotential purchaser.

IMPLEMENTATION

■ Investors would like to have a word as to who becomes

shareholder of the company.

■ Investors want to avoid that the company is owned by

competitors or persons unwilling/unable to invest.

■ Protection of know-how and investments.

BACKGROUND





Liquidation Preference

Liquidation Preference

(“We give the Cash, we get the Cash“)

■ The investors are granted a preference when the

liquidation proceeds are distributed, meaning he gets a

higher share.

■ He will receive at least his earlier investment prior to anyfurther distributions.

■ Sometimes, further preferences are agreed upon such as

– interest on the investment or

– multiple of the investment.

IMPLEMENTATION

■ The investors provide more cash to the company then the

founders.

■ Sometimes a liquidation is necessary or economically more

sensible.

■ In case of a liquidations the investors need a protection of

their investment.

■ The interest of the investors is the same in case all shares

are sold at a value below the initial evaluation.

BACKGROUND





Audit Obligations

Audit Obligations

(“We need to control what you are doing there“)

■ The company is obliged

– to prepare the annual accounts in line with certain

criteria and

– to have them audited.

■ Regardless of the existence of any legal necessity (e.g.

under Section 316 HGB).

IMPLEMENTATION

■ The investors want to safeguard that they have the full

picture of the operational business.

■ Also, they need to safeguard that the annual accounts are

in line with statutory requirements.

BACKGROUND





Non-Compete Obligations

Non-Compete Obligations of the Founders

(“We paid for the idea so it needs to stay”)

■ Clauses on non-compete for the time while the founder is

working for the company and afterwards.

■ Often combined with contractual penalty.

IMPLEMENTATION

■ The investors want the founders to stay in the company

and not transfer their ideas to a new entity.

■ The non-compete shall remain effective

– for the time the founders are in the company and

– for a certain period afterwards.

BACKGROUND





Employee participation

■ Employee stock options

■ GmbH-Shares (regularly in

trust structures)

■ Options

■ Silent Partnership

■ Participation rights

(Genussrechte)

■ Employee loans

■ Convertible bonds

■ Virtual programs (Phantom

Stocks, Stock Appreciation

Rights)

EQUITY PARTICIPATION MEZZANINE CAPITAL DEBT PARTICIPATION

Participation in the success of the company for certain employees

(“We want to make everybody happy – in the end”)





Questions?





KPMG's team for successfully starting start-ups

KPMG@Factory

Follow us to the factory showroom

Brunnenstraße 142, 10115 BerlinStefan KimmelRechtsanwalt

Tel. +49 30 530199-139

Mobile +49 174 3025389

[email protected]

KPMG Rechtsanwaltsgesellschaft mbH



© 2014 KPMG AG Wirtschaftsprüfungsgesellschaft, a subsidiary of

KPMG Europe LLP and a member firm of the KPMG network of

independent member firms affiliated with KPMG International

Cooperative ("KPMG International"), a Swiss entity. All rights

reserved.

Der Name KPMG, das Logo und „cutting through complexity“ sind

eingetragene Markenzeichen von KPMG International Cooperative

(„KPMG International“).

befi 11 september startup legal and ip: stefan kimmel

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