CHINESE INFORMATION AND NETWORKING ASSOCIATION

(CINA)FOUNDERS AND STARTUP

WORKSHOP

May 15, 2004

Fred Gregurasfgreguras@fenwick.com(650) 335-7241

Andrew Luhaluh@fenwick.com(650) 335-7964

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FORMATION MATTERS

Choice of entity LLC Delaware or California corporation Offshore corporation

Appoint Board of Directors and Officers Observe corporate formalities

Organizational board minutes Properly sell and issue shares

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CONVENTIONAL CAPITAL STRUCTURE

Keep it simple “1X” pattern Fully diluted concept: outstanding shares +

outstanding options + option reserve

Authorized Outstanding

Founding Common Stock

10M 3-5M Founders

1-2M Equity Incentive Plan

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FOUNDERS SHARES ALLOCATION

3-5M shares of Common Stock Number depends on number of founders Common Stock at a nominal price

Timing Tax issues

Payment is by cash, assignment of technology or other property

Vesting Right of first refusal until IPO Federal and state securities laws

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FOUNDERS VESTING ISSUES

What is stock vesting? Right to repurchase shares, at original purchase price, on

termination, that lapses over time Right is exercisable if founder stops providing services to

the company

83(b) filing/consequences

Why impose vesting pre-financing? Provides incentive for founder to continue to provide

services to the company

Avoids “free-rider” problem if a founder leaves

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FOUNDERS VESTING ISSUES (continued)

How much vesting up front for founders?

Work done in past Value of IP/other contributions Stickiness

Time vesting 3 or 4 years Cliff, no cliff Monthly after the cliff

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FOUNDERS VESTING ISSUES (continued)

Vesting acceleration – when addressed?

Trigger events Acquisition of the company with “double

trigger” on acquisition - stickiness Upon termination without “cause” or for

“good reason” (outside of an acquisition)

What is a “double trigger”? Trigger One - Company acquired Trigger Two – Termination within 12

months (or other period)

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EQUITY INCENTIVE PLAN

Adopt at incorporation to have available under securities laws – 25102(o) filing in California

Single plan can enable options (ISOs and NQs) and share sales

Number of shares – 20-30%

Eligibility requirements – employee or service provider

Acquisition consequences No acceleration on acquisition unless

acquiror doesn’t assume – valuation requires stickiness

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EQUITY INCENTIVE PLANSTOCK OPTIONS

Key differences between ISOs and NQs

Non-qualified stock options Available to employees and other service

providers Ordinary income on spread at time of

exercise Taxed again at time of sale on spread

between sale price and tax basis (short or long term gain)

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EQUITY INCENTIVE PLANINCENTIVE STOCK OPTIONS

Available to employees only (numerous other requirements)

No ordinary income at time of exercise – taxed on sale of stock on spread between exercise price and sale price (short or long term gain)

Disqualifying disposition – sale of stock less than one year from the date of exercise and two years from the date of grant

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First visible aspects of your business and first legal exposure

Coordinate all types of protection Secretary of State – both California and

Delaware Domain Name – need for business Trademark Scan –strongest form of

protection

Better to switch than fight at startup time

COMPANY TRADE NAME, TRADEMARK AND DOMAIN NAME

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California Labor Code 2870

“Any provision in an employment agreement

which provides that an employee shall assign, or

offer to assign, any of his or her rights in an

invention to his or her employer shall NOT apply

to an invention that the employee developed

entirely on his or her own time without using the

employer’s equipment, supplies, facilities, or

trade secret information EXCEPT for those

inventions that either:

CLEAN BREAK FROM A PRIOR EMPLOYER

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California Labor Code 2870 (continued)

1. Relate at the time of conception or reduction to practice of the invention to the employer’s business, or actual or demonstrably anticipated research or development of the employer; or

2. Result from any work performed by the employee for the employer.”

CLEAN BREAK FROM A PRIOR EMPLOYER (continued)

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Working completely outside an employer’s premises and not using and employer’s resources may not be enough

“Moonlighting” by founder or others Duties to previous employer Solicitation, hiring of employees

CLEAN BREAK FROM A PRIOR EMPLOYER (continued)

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ADVANCES/SALARY DEFERRALSDURING STARTUP

1432519

Loans to company Salary deferrals Document Reflect in financial statements