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Start-Up Law: Research Problems

Research Problem 1


Albert walks into your office and tells you he has a wonderful idea for a start-up. He has invented a new monitor which can create smells based on transmitted information. Therefore, movies, advertisements, and games could involve more of users's senses. He thinks that there is a nationwide market for this technology and his company will grow rapidly once it is started. Albert plans on getting large amounts of capital to produce the technology large-scale and hopes to sell out of the company eventually and retire early or start another company. Albert does not know where he will manufacture the hardware, but he developed the technology in California.

What form of business entity is most appropriate and what steps are necessary for Albert to form it?


Albert is asking for help forming a company. First, Mary goes to the Shared Secondary Sources tab and finds Representing Start-Up Companies and Modern Corporate Checklists.  Mary has Westlaw access so she goes to the sections explaining how to chose a business entity. After reading these sections Mary thinks that a corporation may be best for Albert because he may need venture capital. However, Modern Corporate Checklists raises several questions Mary may need to clarify with her client regarding taxes.

Because incorporation varies by state law, Mary next wonders where Albert should incorporate his company. Both of the above secondary sources have a section on which state to incorporate in later in the chapter about formation. Mary decides that Albert should probably incorporate in Delaware to avoid limiting future financing options. Of course, the many issues raised in each of these treatises may cause Mary to seek further information from Albert and change this answer depending on his responses. Further, the treatises have keyed you into the fact that Mary needs to check Albert's chosen name to see if a Delaware Corporation with that name already exists. The link to the search of current Delaware corporations is on the Formation tab.

Once Mary has decided Delaware law governs the incorporation process, Mary goes to the Delaware Division of Corporations website (listed under Secondary Sources) to find out what documents are required. Once Mary knows what documents are required, she consults the Sample Documents sub-page of this guide for links directly to fillable PDF filing documents and sample bylaws in easy-to-edit Microsoft Word documents. Mary checks the forms against the statutes to make sure she has included all relevant information -- the Delaware Dvision of Corporations website alerted her that some information is required to be on articles of incorporation by statute. Links to the statutes are on the Primary Sources sub-page.

With the help of the Secondary Sources sub-page Mary decided on a business entity, state of incorporation, and found the Delaware procedure for forming a corporation. Mary made sure she was familiar with the underlying law through the Primary Sources sub-page. Finally, the Sample Documents sub-page gave her sample documents which were easy to edit and explained how to fill them out. Of course, because of the number of useful sources on this guide, this problem could have been solved in many different ways.

Research Problem 2


Albert is back has been successfully incorporated and is ready to obtain funding so he can start manufacturing the hardware. Selecting a manufacturing location and designing a mass production process may take one or two years, so the company will not be making a profit during those years. However, the prototype works well. Albert does not want to sell the company yet so he approached some venture capitalists firms.  His pitch was successful, but now he needs to know whether to raise money through a convertible note or selling series A stock.

How should he proceed with financing his company?


New practitioner Mary Nebee is still Ablert's lawyer and has no idea what types of financing are available. She just wants a quick and free way to see what options are available, so she goes to the Secondary Sources sub-tab under Financing and looks finds the free article "How to Fund a Start-up" and visits the Startup Company Lawyer blog.  In the Startup Company Lawyer blog Mary finds the article, "Should a startup company raise its seed round using a convertible note or Series A Preferred Stock?" After a great overview, Mary wants a deeper understanding, so she also visits one of the start-up specific treatises like Representing Start-Up Companies. If Mary wanted to continue to use free resources she could also visit Stanford's Entrepreneurship Corner and watch the videos about financing. A link to this source is available on Financing's Secondary Sources sub-page.

Mary decides Albert should probably use a convertible note. She goes under Sample Documents and Online Tools and picks a free term sheet draft, and uses the online calculators to help her negotiate evaluations and shares. 

Research Problem 3


Albert's company has done well and Mary Nebee is helping Albert's company merge with BigCorp. The merger is structured so that BigCorp will create a subsidiary, and that subsidiary will merge with Albert's company. After the transaction, the subsidiary will remain. Albert has been worrying about all of the details of this transaction, and this morning he asked Mary how the transaction was going to be taxed.

What general explanation should Mary give Albert?


If Mary does not recognize the merger as a forward triangular merger she should go to the Bloomberg Law article under the Exit Strategies sub-page Secondary Sources entitled "Primer on Mergers and Acquisitions."  After finding out the type of merger she could go to the Practical Law Company overview and look at the section on tax issues. That section will give her enough of an understanding to answer most client questions, or at least give her a foundation upon which to go ask the firm's tax attorney Albert's question.