The Importance of Legal Counsel in Startup Formation & Investor Financing
Partner Thomas K. Cox from McCarthy Duffy LLP emphasizes the crucial role of legal counsel in startup formation, commercial partnerships, and investor financing. The firm, established in 1886, offers a range of legal services tailored to privately-held businesses, including entity formation, shareholder agreements, tax planning, financing transactions, and more. With a focus on serving early and growth-stage companies, McCarthy Duffy LLP brings a wealth of experience to assist entrepreneurs in navigating the legal complexities of business operations and transactions.
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THE IMPORTANCE OF LEGAL COUNSEL IN STARTUP FORMATION, COMMERCIAL PARTNERSHIPS AND INVESTOR FINANCING Thomas K. Cox Partner McCarthy Duffy LLP February 24, 2022 MCCARTHY DUFFY LLP Attorneys & Counselors since 1886
MCCARTHY DUFFY LLP www.mccarthyduffy.com Business-focused law firm based in Chicago Private Investment Practice focuses on privately-held, growth-oriented businesses and their investors Business entity formation and organization Shareholder agreements and equity incentive plans Customer and supplier agreements, including development of standard forms and templates Human resources and employment matters Tax planning, support and litigation Private equity, venture capital and debt financing transactions Mergers, acquisitions and divestitures Lease transactions and other real estate matters Partnerships, joint ventures and strategic alliances Licensing transactions Litigation and dispute resolution Partners have served as attorneys, investors, entrepreneurs and business owners Have worked with numerous Rosalind Franklin-affiliated startups MCCARTHY DUFFY LLP Attorneys & Counselors since 1886 2
TOM COX PARTNER, MCCARTHY DUFFY LLP Works with early and growth stage companies in initial organizational, structural and shareholder activities and Board matters; equity incentive plan development and implementation; general corporate, commercial and real estate activities; supplier relationships; and general regulatory compliance matters, particularly in the healthcare industry. Also supports these clients in connection with equity and debt financings, joint ventures, mergers, acquisitions and divestitures. Prior to joining McCarthy Duffy, served as a Managing Director and President of three private investment funds (including a healthcare-focused venture fund); the CEO of a private equity-owned distributor of home medical supplies; a senior executive with a venture-backed provider of healthcare software and services; a general manager and attorney with Baxter Healthcare Corporation; and an attorney with Sidley Austin LLP. Mr. Cox has led or participated in over 30 venture and private equity investments as a principal investor over his career. B.A. from Williams College; J.D. from Boston College Law School; M.B.A. from the J.L. Kellogg Graduate School of Business at Northwestern University. MCCARTHY DUFFY LLP Attorneys & Counselors since 1886 3
WHY DO YOU WANT TO BE AN ENTREPRENEUR? Weak reasons: Be the boss Hate your job/boss/office/commute/co-workers/compensation etc. Exploit a specific skill Control your time; achieve flexibility Make money Good reasons: Exploit an opportunity Make an impact Achieve/accomplish something MCCARTHY DUFFY LLP Attorneys & Counselors since 1886 4
TYPES OF COMPANIES AND DIFFERENCES LIMITED LIABILITY COMPANY SOLE PROPRIETORSHIP C CORPORATION S CORPORATION Requirements None Must file with state; small fee required Must file with state; small fee required Must file with state; small fee required Personal Liability Unlimited liability Shareholders are generally not liable Shareholders are generally not liable Members are generally not liable Governance Relatively few requirements Board of directors Board of directors Managers Management Full control Shareholders elect directors; directors appoint key officer who manage the business Shareholders elect directors; directors appoint key officer who manage the business Flexible; generally, members elect managers who manage the business, often through officers Ownership Sole proprietor Shareholders Shareholders; limitations to qualify as an S corporation Members Taxation Sole proprietor is responsible for taxes Company is taxed at the corporate rate; distributions to shareholders are taxed at individual rates Company is not taxed; all income/loss is passed through to the shareholders Company is not taxed; all income/loss is passed through to the members MCCARTHY DUFFY LLP Attorneys & Counselors since 1886 5
NEW BUSINESS KEY REQUIREMENTS 1 2 MARKET PRODUCT Is there a compelling need for your product or service? Do you have a product or services that (1) meets the compelling need and (2) can be sold and produced at a profit? 3 4 TEAM CAPITAL Have you engaged the right people to successfully operate your business? Do you have enough money to launch your company? MCCARTHY DUFFY LLP Attorneys & Counselors since 1886
REQUIREMENT 1: MARKET ASSESSMENT Market vs. viable solution Leading edge vs. bleeding edge Telemedicine example MCCARTHY DUFFY LLP Attorneys & Counselors since 1886
REQUIREMENT 2: COMPELLING PRODUCT License vs. ownership Ownership leaks confidentiality and invention assignment Employees Partners Competitors Investors MCCARTHY DUFFY LLP Attorneys & Counselors since 1886
REQUIREMENT 3: TEAM Governance Board of Directors Management Executive Allocating and controlling equity the Founder in Fiji risk Role of the founder Shareholder Employee or consultant Member of the scientific advisory board Member of the Board of Directors Recipient of funding/grants Cheerleader, bartender, chief cook and bottle washer MCCARTHY DUFFY LLP Attorneys & Counselors since 1886
REQUIREMENT 4: CAPITAL Non-dilutive capital (grants, awards) Debt Equity Ownership, growth and value creation Impact of dilution: a slice of a watermelon or all of a grape? Vs. MCCARTHY DUFFY LLP Attorneys & Counselors since 1886
Key Startup Business Activities MCCARTHY DUFFY LLP Attorneys & Counselors since 1886 11
Key Startup Business Activities (cont.) MCCARTHY DUFFY LLP Attorneys & Counselors since 1886 12
Startup - Due Diligence Basics Market need Innovative products, services Market fit - value proposition Intellectual property Dedicated, specialized personnel Product pipeline Capital Business plan Reputation, experience of founders Directors and advisors MCCARTHY DUFFY LLP Attorneys & Counselors since 1886 13
QUESTIONS? Thomas K. Cox Partner McCarthy Duffy LLP tcox@mccarthyduffy.com 847-702-7896 (c) 312-726-6373 (o) MCCARTHY DUFFY LLP Attorneys & Counselors since 1886 14
