Starting Your Business �the Right Way

January 8, 2025

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Kenneth J. Zinghini

kzinghini@martinllp.net

PRESENTER – KEN ZINGHINI

Partner, Business and Corporate Group

Martin LLP

kzinghini@martinllp.net

www.martinllp.net

https://www.linkedin.com/in/ken-zinghini-3449773/

Ken has been a trusted legal and business advisor for over 30 years, counselling clients on the widest variety of complex and day-to-day issues affecting their business and investments -- including starting, financing, operating, growing, selling, buying, and investing in businesses. Ken spent 20 years as a senior in-house lawyer and corporate executive. Ken's experience has given him a deep understanding of what clients care about most and a willingness to help them make the tough decisions that will further their business and personal goals. ��Ken has a strong record of providing practical, commercially-focused advice to business owners and founder, sponsors, executives, investors, and lenders through all stages of business development – from start-up high growth ventures, to mature operating companies, to distress situations, reorganizations and bankruptcy. Ken understands the importance of a client’s business in their life and takes pride in partnering with clients and giving his full attention to their success.

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IMPORTANT DISCLAIMER

The information contained in this webinar has been prepared by for educational purposes only and should not be considered legal advice. The transmission of this information to you is not intended to create a lawyer-client relationship. Participants in the webinar should not act upon this information without seeking professional legal counsel.

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FORMING THE RIGHT BUSINESS ENTITY

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WHAT TYPE OF ENTITY SHOULD I USE FOR MY BUSINESS?

• Sole Proprietorship
• General Partnership
• Corporation
• Limited Liability Company (LLC)
• Limited Partnership

LLC vs. CORPORATION

• Both offer Limited Liability and are well known/accepted
• LLC – more flexible, pass through taxation, less formalities
• Corporation – stricter requirements, potential double taxation, often preferred by institutional investors such as VCs.
• Particular circumstances and goals of the business will drive decision

WHERE AND HOW TO FORM YOUR COMPANY?

• Why is Delaware so popular?
• Formation and Organization of the business entity

ORGANIZING AND OPERATING YOUR NEW BUSINESS

WHO WILL OWN THE BUSINESS?

• Founders
• Investors
• Employees and others

HOW WILL THE COMPANY BE MANAGED?

• Board of Directors or Managers
• Officers
• Executives and other Employees
• Consultants and 1099 Independent Contractors
• Advisory Board

HIRING AND RETAINING MANAGEMENT AND EMPLOYEES

ACQUIRING TALENT

• Identify and hire
• NDA, Non-solicitation, Non-compete, PIAA
• Employment Agreement vs. Offer Letter

COMPENSATION

• Cash and Benefits
• Equity Awards
• Who? How much?
• Sr. execs
• Other employees and 1099 consultants
• Advisors (Advisory Board)
• What form of equity?
• Options, SARs, Rest. Stock, Profits Interests
• What rights to include?
• Non-voting class, Company buyback rights
• Transfer rights?

TERMINATION OF EMPLOYMENT OR OTHER SERVICES

• Want to protect the Company and its equityholders
• Restrictive Covenants
• Return of Equity
• Severance and Release

RAISING CAPITAL FOR YOUR BUSINESS

WHEN? HOW MUCH? WHAT FORM? FROM WHOM?

• One size does not fit all and there is no single playbook

INITIAL CAPITAL

• Sources – Founders, Friends and Family
• Form of Investment
• Founders – Common Equity
• Others – SAFEs, Convertible Notes, Common Equity
• Keep it simple. No voting or other special rights granted to investors

GROWTH CAPITAL (Series Seed/A/B, etc.)

• Sources – Angel Investors, HNW Individuals, Family Offices, VCs
• Form of Investment
• Convertible Preferred Equity, Convertible Notes

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RAISING CAPITAL FOR YOUR BUSINESS

SAFE AGREEMENTS AND CONVERTIBLE NOTES

SAFE (Simple Agreement for Future Equity) – Agreement to issue equity to the SAFE holder at the time of the company’s first meaningful capital raise

• Future equity issued at discount to the price paid by new investors
• SAFE is not ownership of equity so no dividends, liquidation rights, or other special rights
• Execution is easy and inexpensive
• SAFE Agreement is a standard form – limited negotiation
• No company valuation is needed when SAFE is issued

Convertible Note – Loan to the company that converts to equity at the time of the company’s next meaningful capital raise

• Coverts at a discount to the price paid by new investors
• No company valuation is needed at time Note is issued
• Documentation is relatively simple but not as easy as SAFE
• Less attractive to company since the notes are debt on balance sheet
• Conversely, more attractive to investor since right to repayment is senior to founders; though unlikely to matter much in most cases
• No voting or special rights

RAISING CAPITAL FOR YOUR BUSINESS

COMMON EQUITY – Highest risk/highest return

• Last to be paid in event of liquidation
• Entitled to all residual value after payout of debt and preferred equity
• Can be voting or non-voting
• Super-voting Rights

CONVERTIBLE PREFERRED EQUITY – Senior to Common equity; Junior to debt

• Requires valuation of the company prior to issuance
• Valuation drives how much equity company needs to give up for agreed amount of proceeds
• Negotiation between company and lead investor(s)
• Pre- and post- valuations
• Based on fully-diluted capitalization
• Terms of the Preferred
• Preferred return (dividend/distributions)
• Liquidation Preference – 1x. 1.5x, etc.
• Board Seat(s)
• Voting/Veto Rights
• Transfer Rights – Drag Along, ROFR, Buy/Sell
• Beware of multiple classes of Preferred equity issued to different investor groups in different rounds – Try to keep it simple.

RAISING CAPITAL FOR YOUR BUSINESS

THE CAPITAL RAISING PROCESS

HAVE YOUR ACT TOGETHER

• Have a clear, succinct story, mission and plan
• What problem are we solving? What opportunity are we exploiting?
• What’s our plan?
• What’s our advantage?
• How do we plan to get there?
• Can’t have all the answers at the earliest stages, so don’t over-promise (too much)

IDENTIFYING THE BEST INVESTOR TARGETS – Once past friends and family, try to ensure that potential investors make sense for you and your business

• Industry experience and contacts; investment history and philosophy

OFFERED SECURITIES

• Early Rounds are easier – SAFEs, Convertible Notes, NVCA Documents – Little negotiation
• Later rounds are more complex – More investor rights = more negotiations
• May have to consider rights granted to others in previous rounds

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CLOSING THOUGHTS

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Like most things, early preparation is best.

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Give yourself a chance to make decisions without undue pressure. (See #1 above)

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Get experienced help/advisors to avoid early mistakes that could cost a lot later (penny wise/pound foolish), while still focusing on keeping costs as low as possible. (See #1 and 2 above)

- Have a plan and a budget

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