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Wednesday, January 12, 2011

Negotiating Terms, Protecting your IP, and Getting Inspired To Start

In the SLP Boston January 10, 2011 class, we had a three part class with three distinct sessions. After an interesting pitch by fellow Harpreet Singh on his company AcademicRoom, we launched into the sessions.

Session I - Term Sheets with Richard Kimball, partner EAPD
Richard walked us through negotiating an investment and specifically into what each term meant. He spoke in detail about some terms that look benign on the surface but instead can really hurt the valuation down the line, such as:

  • Keep the option pool small, because when it gets near 15% it can really dilute the rest of the founders stock in the event of an exit.

  • Watch out for the liquidation preferences. In general, you would prefer that the A-Round investor takes convertible preferred, which basically means that they can choose whether they want their initial investment + interest or convert their investment into stock. Something to watch out for is participating preferred where they get to do both (aka double dipping)

  • Watch out when an investor asks for anti-dilution. If you ever have to raise money at a lower valuation, this investor can get most of the outstanding shares.

  • When negotiating board seats, do not give the founder's seat away to an incoming CEO. This person will be someone the board hires, not you.

  • When receiving stock, you should ensure you get restricted stock and your contract includes buyback agreements for the stock, instead of getting common shares.

Session II - Intellectual Property with Melissa Hunter-Ensor, Ph.D., EAPD
Melissa spent most of her session speaking about patents, since many of the fellows are in clean tech, medical devices, and biotech. She spoke about applying for patents, filing provisional patents, and being careful to not disclose your invention before you have filed. The key takeaway for me was that in internet and mobile startups, by the time you get your patent reviewed (~3 years), technology has changed so much that it may not be worth anything. The good news is that the US gives a 1-year grace period so if you have a unique invention that does very well in the market, you still have time to patent it.

Session III - Wayne Chang, Entrepreneur
Wayne is a serial entrepreneur, best known for founding i2hub, a college file sharing/social network founded around the same time as Facebook. Wayne gave the fellows a tour of his life and career in internet startups. He had some fascinating stories about everything from hacking games in early youth to partnering with the famous Winklevoss twins on their ConnectU project. Overall, it was an interesting and remarkable journey for a young entrepreneur. (check out his Wikipedia article)

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