Successfully/Legally Transitioning from Moonlighting to Startup | Cooley LLP Partner, Sally Kay J.D.

We're gonna talk a little bit today about kind of formational issues in a company. There's not enough time for me to tell you about every possible legal issue that you're gonna potentially encounter, but we're gonna talk about some important ones. The things that generally get people into trouble. And then secondarily we will talk about raising money and what it looks— what term sheets— term sheet terms are. And we'll kind of go through those at a high level again because we don't have a lot of time, but hopefully I'll give you some resources. If you need more information, and I'm always available if you have questions and you want to talk about them. If anybody needs to use the restroom or take a break, we're going to just go straight through, so please just go ahead and come back, because I'm afraid if I let you all take a break, I'm never going to get you back in the room. Okay, the stuff I have to tell you here. I am not your lawyer. You have not engaged me to be your lawyer, and so I am not dispensing any individual legal advice to any of you as to your specific situation. I'm going to give you some generalities. We're going to talk about some things. I'm going to tell you some more stories. But you can't come back and tell anybody that I have not properly fulfilled my duties as your lawyer, because I'm not your lawyer. So this is educational and a service to the community. All right. Now I can go back to the office without getting in trouble. Okay. Very briefly about my firm. Cooley's been around, it's been about 80 years now. We started in San Francisco. with a very traditional law practice, as you might think about it. 80 years ago, it was airlines and maritime law and kind of typical commercial contractual things. But our firm, in 1959, formed the very first venture fund on Sand Hill Road. And one of those names on that list might be a little familiar to you. Draper, Gaither, and Anderson. And right now, we're doing at least 50%, probably closer to 70% these days, of all the fund formation work in the United States. As well as a really sizable portion of the fund formation work in China now. So we know the VCs. We see lots of deals. We see lots of financings. We see lots of terms. And it's amazing the kind of things that are going on out there where you're gonna have a circumstance where you're saying, oh my God, these— I'm being done to by these people that want to invest. You're not the only one. They're doing it to everybody. I myself, I've been with the firm 16 years. I've done hundreds and hundreds of private financings. I've done IPOs. I've done IPOs for companies that I formed, which is actually the highlight of my career, to be with people where you guys are at day one and take them all the way to public and beyond. So, that's actually really, really fun. And I think one of the things that I find most rewarding about my practice is working with people, particularly first-time founders, to help you kind of navigate the problems that you might get into so we can hopefully avoid them and give you the biggest possible chance of success going forward. Going forward. OK. So I talked about the things that you should worry about as a founder of a company. I mean, there's a million things to worry about, right? In particular, all of a sudden you've taken on the responsibility of being in charge of a company and other people and potentially their success and their income, because many of them are starting with nothing with you and hoping that you're going to bring them to money at some point. It's hard. You're gonna be a boss. You have to be in charge of people. You have to lead them. You have to then take investors. You have to manage your investors. It's a lot of things to be responsible for, but there's a lot of people that can kind of come and make your life miserable. In particular, your co-founders. How many of you have co-founders or expect that you're gonna have co-founders? All right, so very pertinent. We'll talk a little bit about that in detail. Your investors can make You miserable. And you can do a lot of things to really screw stuff up on your own. So lots of ways to, um, to get into trouble. We, um, the expression we use in the office about pigs getting fed and hogs getting slaughtered— when you're negotiating things with your co-founders, with your investors, when you get too greedy, you can get yourself into trouble. So it's about really being balanced and being realistic and being fair. Okay, but we want to try and see what we can do to keep you On track and give you the many tools that you need to be successful. Anybody here still working a regular job? Has a regular employer that's paying them money? Not too many of you. And do they know that you're doing something on the side? No. Okay. So really, really, really important, if you keep your day job, there's things to be really careful of. When do you actually form a legal entity for your company? Something else to consider. And then, who do you need to help you? Because there's a lot of things you can do on your own. The internet is an amazing tool. Lots of things out there to help you do things, but at some point along the road, you're going to need advisors, lawyers, accountants, and those kinds of folks. So, everybody that's still employed, these are really the key things, and this is something to think about as you bring other people into your company, who may still be keeping their day job while they're doing stuff for you, because they need to eat. California law, and this is probably universal for most states in the United States, and I don't know what the rules are internationally, so I can't opine on those. If you're working on something while you're sitting at your desk at your day job, using your work resources and the time that they're paying you, They have a colorable claim to anything that you're working on. So, if you're sitting at your day job at, you know, company XYZ, and you're sending emails back and forth with your co-founder, or you're writing a piece of code, or you're drafting your business plan for your startup, you're doing that on your employer's dime. And your employer can come back and say, we own this. Because we paid you for the time that you were working on this. You, you worked on it, you conceptualized it, you created a piece of it, While you were working for us on our dime on our equipment. So the biggest thing to be thoughtful about is that you want to make sure that if you have a day job or if any of your employees has a day job, they keep things completely and totally separate. No working on the startup while you're at your day job. No using that company's computers. Not using that email address. Not using the work phone. Don't even do it on the premises. You wait till you clock out and you go home and then you can shift to the other thing. If the 2 companies are fairly similar, bigger problem, right? Because it's really hard to say, am I taking something away from my current job and using the knowledge that I learned at my current job to go start this other company? Also a colorable claim there. You should have these forms in your own company, and probably all of you that are working have signed documents that are, they call them different things. employee confidentiality and invention assignment agreements. And you basically sign something that says, well, I work here at this company, everything that I do here belongs to this company, I assign all of my rights and the work that I do here to this company, I don't own it. And I'm not allowed to tell anybody about it, and I'm not allowed to use it anywhere because it belongs to the company. You should be doing that in your own company too. Everybody that comes to work for you, you want them to sign something that says, Every single thing that I do while I am on your clock belongs to you. Not to me personally, but belongs to the company. And you need to sign that, and we'll talk about this when we get to employees, you need to have them sign that before they start working. So, before they work one single hour for you, you want a piece of paper signed that says that all of the work that they do for you belongs to the company, not to them as an individual. If you're using contractors, and we'll talk about that too, You also want something in your agreement with your contractors that says all the work that they do belongs to the company. It doesn't belong to them personally. You want to make sure that the company has a right to that. If you're working at a job that is developing some kind of software thing, and then you're forming your own company that is developing some kind of software thing, that's when you need to start thinking about whether it's time for you to quit your day job. Because if they're really close, You don't— what you don't want is to have your former employer come take your new company away from you, because they've got a lot more money, they've got a lot more resources, and if they think that there's— you have a possibility of success, they may come try and make a claim. So try to keep those things as separate as you can. Once you leave your day job and then you go off and you're in your own company, you need to be a little careful about maybe taking other people from your day job with you. 'Cause you may get letters, 'cause you're raiding their company. You're using information that you learned during the course of your employment to pick, handpick the people that are good and lure them away. And they usually won't send you a letter on the first person, but if you maybe have 2 people or 3 people from your old job come join you at your company, don't be surprised if you get a letter from them saying, you gotta stop taking our people. You used your confidential information of that company to know that these people were good, to understand what they were being paid, and all that kind of stuff, to steal them from us. The way that you avoid that, and I would never suggest that you try to lure people over, but you want to make sure that if that happens, you have very clear documentation that they approached you. There's an email from them saying, hey, I heard you're starting a new company and I'm interested. You know, if they reach out to you, you're not doing anything. You're just responding to a reach out, rather than you saying, hey, I'm starting a new company. Do you want to come join me? That make sense? Yes. Okay. That's kind of how you avoid getting sued. But I think if you're still working, have somebody look at whatever documentation you signed with your current employer. Look at that company. Look at what that company does. Look at what your company that you're founding does. And let's see if there's gray area between, if there's any overlap at all, or there's any reason that they may come after you.