MASS BEST LEGALpdf PDF

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BEST
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PRACTICES
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2016
BEST
LEGAL
PRACTICES
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BEST
LEGAL
PRACTICES
TABLE OF CONTENTS
10
22 40 48
Introduction
WHAT LEGAL
WHAT DO I NEED
WHY AND
HOW SHOULD I
About MassChallenge
ENTITY SHOULD
TO KNOW ABOUT
HOW CAN WE
STRUCTURE OUR
About Greenberg Traurig

and Arturo Prez
I FORM?
FUNDRAISING?
PROTECT OUR IP?
EQUITY?
Special Thanks to
Disclaimer
Introduction
13
Introduction
22 Introduction
26 Introduction
Different Legal Entities

Explained
13
How do valuations
work?
23 Explanation of
the Four Types of IP
26 Employee Option Pool
Analysis of Different Legal

Structures
14
Explanation and
Analysis of Terms
24 IP Protection Checklist
27 Vesting Explained
22 Dos and DontsDontss
25 IP Assignment
Clause Template
29 Taxation on Shares
in the Event of a
Liquidation Event
25 Privacy Policy Template
MASSCHALENGE | GREENBERG TRAURIG
INTRODUCTION
Mexico has grown rapidly since 2008.
The amount of startups, acceleration
programs, as well as investment capital
funds has quickly expanded. Mexican
startups have received series A and
series B funding; they are expanding
throughout LATAM and entering other
economies and the US. Although the
ecosystem has grown, there is still
a lack of legal content specifically
targeted to Mexican startups.
MassChallenge and Greenberg Traurig have partner

together to create this study
that will allow entrepreneurs
and startups have a deeper
understanding in the following
relevant issues in their entrepreneurial development: (a)
where and what type of entity
shall the startup form depending on their goals; (b) fundraising, what to take into account
when negotiating term-sheets;
(c) IP Protection and (d) how
to and when to structure an
option pool for employees.
As part of the study we
interviewed founders of early
stage and later stage startups,
venture capital firms as well as
lawyers. We asked questions
about what they wished they
knew, what they should had
known and areas that should
be taken into account. This input helped us as a guideline to
understand were the biggest
gaps of knowledge were and
how to approach them in this

document.
Our objective with this
project is not to give legal advice, but to help entrepreneurs
understand areas to be taken
into account in the different
stages of development of their
startup. We want them to have
a clear understanding of the
legal implications on where
they want to go, how they
want to grow, who they want
to partner up with, and under
which terms. We are providing
legal information for educational purposes only, not as
legal advice.
We hope this document
helps build the basis for a
more prepared generation of
startups, but most of all helps
to build a better and improved
entrepreneurial ecosystem.
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The entrepreneurial ecosystem in
About
Greenberg Traurig
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assChallenge is the most startup-friendly accelerator on the planet.

No equity and not-for-profit, we are
obsessed with helping entrepreneurs
across all industries. We also reward the highest-impact startups through a competition to
win a portion of several million dollars in equity-free cash awards. Through our global network of accelerators in Boston, the UK, Israel,
Switzerland, and Mexico, and unrivaled access
to our corporate partners, we can have a massive impact driving growth and creating value
the world over. To date, 835 MassChallenge
alumni have raised over $1.4 billion in investment, generated over $575 million in revenue,
and created over 50,000 jobs.
MassChallenge works with some of the
worlds best brands to help them innovate with
startups. Top corporate partners in Mexico include: SEDECO, FONDESO, INADEM, Gentera,
Greenberg Traurig, Aeromexico, and Promotora
Social Mxico.
reenberg Traurig helps clients bridge diverse legal

systems and cultures, with a focus on efficient and effective strategic advice and legal services. Greenberg
Traurigs growth to 2000 lawyers and38locations is an
example of the firms instincts for leveraging a changing marketplace. The need for lawyers to help clients navigate change continues to escalate. For Greenberg Traurig, merging with other law
firms to be in new markets overnight is not the way to respond to
the market need. Preserving the firms built for change culture
is. The firms leaders travel across the country handpicking lawyers with the talents to guide clients through the very moments
their businesses and markets are changing most. It is this rare
combination of talents around which we relentlessly hire legal,
business and leadership skills. Thats why we refer to Greenberg
Traurig lawyers as 3-D lawyers.
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About
MassChallenge
About Arturo Prez
rturo Perez-Estrada is a corporate partner in the Mexico City office of Greenberg Traurig. He focuses on the
representation of domestic and international companies doing business in Mexico and other Latin American countries. He is an active advisor to startup and emerging
growth companies, and also seed and venture capital funds that
invest in those companies; Arturo specializes in all areas of corporate and securities, including the formation and financing of
its clients, corporate governance, M&A, debt and equity financings. He is an active mentor, judge and panelist under several acceleration programs and collaborates proposing changes to the
legal framework applicable to the entrepreneurship ecosystem in
Mexico with the Mexican and U.S. Government through the Mexico United States Entrepreneurship and Innovation Committee
(MUSEIC).
Arturo received his law degree from Escuela Libre de Derecho in Mexico City and his masters degree from The University
of Texas at Austin. He enjoys reading, scuba diving, soccer and
innovation.
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The attorneys at Greenberg Traurig, LLP, which

we often refer to as GT, are happy to collaborate in the preparation of the Thought Leadership Program document.
Please note that we are providing legal information for educational purposes only. We are
not providing legal advice or business advice;
and you should not take what we say as that.
This document is not intended as one between an attorney and client, and will not create
an attorney-client relationship between GT and
you. Additionally, this document should not be
considered or relied on to be or to create that.
Likewise, the ethical rules which prevent attorneys from representing one client adversely
to another client will not apply here, since you,
acting as readers, are not a client.
If you decide to proceed with a venture or
idea, we strongly encourage you to seek legal
counsel from an experienced and knowledgeable attorney of your choice. You may of course
consider GT for that role; but we are not soliciting that. Many other attorneys are also available
to you; and you have no obligation to consider
or pursue that with us. Rather, you can and
should feel to choose whomever you decide,
irrespective of your having met with GT attorneys today.
10
Special Thanks to
Greenberg Traurig Team
Arturo Prez Estrada
Chinh H. Pham
Robert L. Hover
Jeff K. Joyner
Ryan P. Kelley
Roco Olea
MassChallenge Team
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Disclaimer
Andrea Escalante
Camila Lecaros
Riley Soward
Paola Toledo
Independent Collaborators
Pablo Rena (Mayoreo Total)

Manuel Alejandro Villegas Lpez (Capptu)
Roberto Rogel (Learny)
Matas Recchia (IguanaFix)
Angel Meja Santiago (Iventive Power)
Francisco Ruiz (RankTab)
Alejandro Cant Segura (Sky Alert)
Adolfo Babatz (Clip)
Ricardo Elizondo (Ideas y Capital)
Xavier Ponce de Len (Ideas y Capital)
Sergio Romo (Investomex)
Daniel Green (Gunderson Dettmer)
Vicente Encarnacin (E-De)
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MASSCHALENGE
WHAT
LEGAL
ENTITY
SHOULD
I FORM?
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TTULO DEL MANUAL
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BEST LEGAL PRACTICES
Introduction
As you begin your company, there
WHAT LEGAL ENTITY SHOULD FORM?
DIFFERENT LEGAL
ENTITIES EXPLAINED
Entity
Explanation
SAPI
SAPI was created in Mexico more than 10 years ago to provide more adequate protection for shareholders rights and,
in particular, more effective minority rights than those traditionally available for shareholders of a SA with the purpose to
encourage and facilitate the participation of investors, such
as private equity/venture capital funds, and other institutional
investors.. Over this time, SAPI has become a very customary
corporate structure for investors and is well known by practitioners (notary publics, accountants and lawyers), government officers and courts.
Notwithstanding, SAPI is regulated under Mexican Stock
Market Law (LMV), SAPI is (i) not supervised or inspected
by the Mexican National Banking and Securities Commission
(Comisin Nacional Bancaria y de Valores) and (ii) mandated
to evolve, although it can, into a public company (which stock
is publicly listed and traded in a stock exchange).
As a limited liability stock corporation, SAPI offers corporate liability protection to its shareholders, which are only
liable for the amount of capital each of them made to the
SAPI. Capital stock is divided into shares, each of which represent a portion of the capital paid in by SAPIs shareholders.
SAPIs corporate governance structure is quite flexible and
is managed by a Board of Directors, formed by at least two
(2) directors, and the general shareholders meeting.
Formation of a SAPI requires intervention of a Mexican notary or commercial broker (corredor pblico) and could take
from one (1) to three (3) weeks.
If interested, you may find additional information about
SAPI in the following link http://www.gtlaw.com/supplemental/MA-Report-Vol7-Ed1-5
choose from. The one you pick will

significantly impact all aspects of your business
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from fundraising, to hiring employees, from paying taxes, to (potentially) selling your company.
Unfortunately, one legal entity does not stand
out from all others. Theres not a clear answer
for you there are strengths and weaknesses to

each entity. The information below is formatted
to help you think about all the important questions you should consider when deciding which
legal entity to form. Weve provided an analysis
of each legal entity depending on where you
hope to fundraise, operate, grow, and sell. But
first, lets quickly go over explanations of the dif-
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is a range of legal entities you can
ferent types of legal entities!

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Delaware
C-Corp
Holding
Company
with SAPI
A Delaware C-Corp, as described in detail above, can be a

valuable entity to use as a holding company because it can
provide significant tax savings in some cases, such as a Delaware C-Corp whose only function is to maintain and manage
intangible assets such as the stock of other companies. Companies that meet these requirements can be exempt from
paying Delaware state taxes.
Cayman
Islands
Holding
Company with
Delaware
LLC and
SAPI
Over the last few years, there has been a trend driven by
some venture capital funds to consider corporate structures
for startups including a Cayman Islands corporation as a
holding company. Our understanding is that companies incorporated in the Cayman Islands are similar in most respects
to companies and corporations formed elsewhere in Mexico
or the US (i.e. shareholders liability is usually limited and the
Board of Directors manage the business of the company).
In this structure, a Cayman company is formed to become a holding company for international business whose
main activities are to be carried out of the Cayman Islands.
Companies falling into this category are known as exempted
companies.
You should seek counsel and ask your investors prior to
considering this alternative as some investors may have be
prevented either by their formation documents or their investors to make investments in this jurisdiction.
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A corporation (C-Corp) formed in Delaware offers a familiar and useful form of entity. The state of Delaware is the
most popular and sophisticated location used to form entities in the United State. Delaware C-Corps are the standard
form of entity for venture capital investments. Formation of
a C-Corp in Delaware can be accomplished in one (1) day.
Delaware C-Corps can have an unlimited number and type
of owners, called shareholders. The liability of a Delaware
C-Corps shareholder for the debts and obligations of the
entity is limited to the amount of capital he or she contributed to the Delaware C-Corp. Taxation of all C-Corps occurs
in two stages: First, a C-Corps income is taxed at the corporate tax rate. Second, any distribution of profits made by a
C-Corp to shareholders is taxed as personal income of those
shareholders.
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Delaware
C-Corp
In this structure, the Cayman Island entity A Cayman Islands entity would own a Delaware LLC, and the Delaware
LLC would own all other entities in the group (i.e. Mexican
SAPI for example).
A limited liability company (LLC) is an entity with certain differences from a C-Corp. In Delaware, the liability of an
owner of an LLC (which is referred to as member) is also
limited to the amount of capital he or she contributed to the
Delaware LLC. But LLCs generally require fewer administrative formalities than C-Corps, and can be managed directly
by their members. The primary distinction, and advantage, of
an LLC is the manner of taxation. An LLC can be taxed as a
pass-through entity, which means that the LLC is not subject to income tax but rather its members are taxed directly
for their portions of the LLCs income and losses. An LLC can
also choose to be taxed as a C-Corporation instead. This flexibility is another attribute of an LLC.
SAPI see our description of SAPI above.
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Financial Analysis
Where are you
going to raise
money?
Mexico
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r SAPI: Most Mexican investors strongly prefer SAPIs. As explained before, SAPI has
become a customary corporate vehicle to
receive third party investments due to its
corporate flexibility.
r You should also consider that certain VC

funds might be restricted to invest in Mexican companies as those, which have received or plan receiving federal funds INADEM.
r As an alternative to SAPI, a corporation

(sociedad annima) may also work for
the purposes of receiving venture capital
financing. SAPI is a special form of sociedad annima and thus, these vehicles share
many of its most important features. Nonetheless, SAPI is normally preferred over a
S.A.
r C-Corp: _Although this has been changing
over the last months, and as such may vary
between different investors, Mexican investors would normally prefer investing in a
Mexican corporate structure rather than an
offshore vehicle such as a C-Corp.
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Another
Country
in LATAM
r Nationality of
the investor
and tax considerations related
thereto would
be factors that
investors from
other LatAm
countries may
take into considering an
investment.
US
r SAPI: US investors
would prefer to invest
in a familiar corporate
structure such as a
C-Corp.
r C-Corp: US investors will
normally prefer to invest
in C-Corps, and specifically in C-Corps formed
in Delaware. One reason
for this preference is
the predictability that
working with Delaware
laws provides. Another
reason is their desire not
to be taxed for passthrough income of an
LLC without receiving
the associated distributions of profit, also
referred to as phantom
income.
By whom do you hope

to get acquired (if applicable)?
Company in Mexico
r SAPI and/or other Mexican entity: Factors related with labor, regulatory
and tax issues may be
relevant for a Mexican
acquirer performing an
acquisition. However,
the most important part
would always be where
the main portion of the
business is located.
Company in US
r SAPI: See comments above

regarding investors preference to invest in corporate
structures to which they
are familiar. However, this
may not be relevant if the
acquirer is seeking to enter
into the Mexican market
and the target business
becomes a wholly-owned
subsidiary.
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ANALYSIS OF DIFFERENT
LEGAL STRUCTURES
Both US and Mexico
r Considering investors,
regardless of their nationality, would typically use common used
structures which they
are familiar to it is hard
to predict where a mix
of investors would prefer to invest in. Factors
such as who the major
investor is may incline
the decision whether to
use a domestic, offshore
entity or a combination
thereof.
r C-Corp: Mexican companies/investors doing

business only in Mexico
may want to focus their
investments in Mexican
entities especially if the
business is generally
based in Mexico. However, having an offshore
structure may be perceived as convenient if
the nature of the business allows to consider
an expansion to other
LatAm countries.
r C-Corp: US acquirers
would be familiar with a
C-Corp. However, if the
business is actively operating in Mexico, the creation
of Mexican opCo may still
be necessary. C-Corp &
Company in another
LATAM country
r It is difficult to anticipate
any trend herein as several
factors may impact the
decision.
r C-Corp & SAPI: Having

an offshore holding
structure, as explained
above, may be beneficial if the nature of the
business foresees an
expansion to countries
other than Mexico.
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Operations Analysis
Where are you going
to hire your team?
US
r C-Corp: A C-Corp formed

in the US can automatically
hire its team and conduct
business in the state in
which it was formed. If the
C-Corp wants to conduct
business in a different
state, then it would need to
register to do business in
that state by making relevant filings with the authorities and it would often
pay state taxes there as
well. This is usually a simple registration process. An
alternative approach would
be to form a subsidiary in
the state where the C-Corp
wants to conduct business.
Seek tax advice in order to
determine the best method.
r C-Corp & SAPI: Provided
that the C-Corp and SAPI
are respectively registered
to conduct business in the
localities where they want
to hire their teams, this
entity structure would provide flexibility for hiring in
both the US and in Mexico.
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r SAPI: Forming a Mexican company is

recommendable if the business will be
operating in Mexico. Even if there is a
US holding Company, forming a Mexican
entity to act as the employer would limit
labor liability to the US parent and would
be easier to deal with regarding labor and
social security obligations.
r C-Corp: In principle, it would depend on
where the company will be operating.
A Delaware C-Corp that wants to hire a
team in Mexico would most likely need
to register to do business in Mexico at
the federal level as a branch office or by
forming a subsidiary company that it
owns and that will conduct business in
Mexico. Seek tax advice in order to determine the best method.
r C-Corp & SAPI: Idem.
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Another Country
in LATAM
r LaborLabour & tax laws

and regulations may need
to be carefully reviewed
and considered when considering hiring personnel
from an offhsoreoffshore
company.
Mexico
r SAPI: If youre selling a product in Mexico

forming a MX entity is recommended because of product liability and consumer protection issues. Other factors such as access
to opening local bank accounts, tax issues
and unwillingness from local suppliers/vendors to enter into agreements with foreign
entities are also relevant.
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Mexico
Where are you

going to sell your
product?
Both US and Mexico
r See comments above for

C-Corp and SAPI structure.
r C-Corp: See factors above.
US
r SAPI: The same factors listed above when

products are to be sold in Mexico would
inversely apply if products are to be sold in
the US from a Mexicanx company.
r C-Corp: As a US entity a C-Corp would be
able to conduct business where authorized
to operate in the US.
Both US and Mexico
r Formation of a US and Mexican entity may

be convenient if products are directly sold
at these markets.
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Strategy Analysis
Cost Analysis
Where do I hope to be based out of?

Both US and Mexico
r Incorporation in different
jurisdictions might be
necessary if operations
are to be carried separate
countries. A global law firm
such as Greenberg Traurig
offers comprehensive advice on cross-border issues
such as these, and can recommend accountants with
cross-border expertise as
well.
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r Where your business operations are going to be located is an important factor

when considering where to incorporate. Similar factors as those described
above in connection with the hiring of
a team and product sales are applicable. Domestic operations carried out
by Mexican would be customary for tax,
legal and accoutingaccounting counsel.
US
r Same comments as above.
Another
Country in LATAM
r See comments as above.
How rapidly do I want to scale and where do I

hope to expand into other countries in the future
(if applicable)?
Mexico
US
r Input analysis here
Another
Country in LATAM
Type of Cost
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Rapidly
SAPI
$$
C-Corp
$$
C-Corp / SAPI
Cayman / LLC / SAPI
Maintenance
Cost
$$$$
$$$$
SAPI
$$
C-Corp
$$
C-Corp / SAPI
$$$$
Cayman / LLC / SAPI
$$$$
SAPI
Slowly
Cost
Set-Up Cost
Switching Cost
Both US and
Mexico
Type of Company
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Mexico
$$
C-Corp
$$$
C-Corp / SAPI
$$$$
Cayman / LLC / SAPI
$$$$
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MASSCHALENGE
WHAT DO
I NEED
TO KNOW
ABOUT
FUNDRAISING?
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TTULO DEL MANUAL
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Fundraising is a huge part of most startups

journeys. Many startups take investment from
angel investors or venture capital funds at some
point, however, the amount of money they take and the terms
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that they agree to generally differ greatly.
There is much more to consider when negotiating an in-
vestment deal than simply trying to receive the highest valuation or the largest investment. The terms of an investment
deal, such as liquidation preference, conditional funding, and
protective provisions, in many cases will impact your startup
just as much as the valuation or amount of investment you
receive.
This piece first discusses how valuations work and then ex-
plains the different terms normally included in a term sheet

and provides analysis on what is standard for these terms,
HOW DO
VALUATIONS WORK?
The pre-money valuation is the valuation of your company excluding the money an investor is going to invest in your company.
The post-money valuation is the valuation of your company including the money an investor is going to invest in your company,
which is the same as the invested capital added to the pre-money valuation. The amount of equity an investor receives is determined by the amount they invest divided by the post-money
valuation. Thus:
The equity an investor receives is equal to:
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Introduction
WHAT DO I NEED TO KNOW ABOUT FUNDRAISING?
invested capital
(pre-money valuation + invested capital)
Which is the same as:
invested capital
(post-money valuation)
For example, if an investor gives you $1M at a $4M pre-money

valuation, your post-money valuation will be $5M and the investor will receive 20% equity in your company ($1M / $5M).
pre-money
valuation
invested
capital
$4M
post-money
valuation
=
$4M + $1M =
equity
received by
investor
= $1M / $5M =
$1M
$5M
20%
what is important to negotiate, and what you should not worry about. After that, well cover a few dos and donts for fundraising.
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EXPLANATION
AND ANALYSIS OF TERMS
Price
Conditional Funding
Example
Upon the Closing of the financing, 15.0% of the fully diluted capital stock of the
Company (on an as--converted to Common Stock basis), will be reserved for future grants pursuant to the Companys unallocated employee option pool (for purposes of clarity, which number will equal XXXXX shares of Common Stock).
Example
An option pool is the percentage of equity a company sets aside for their employees. This allows companies to incentivize employees to work their hardest by aligning the interests of the company with the interests of the employees.
Investors almost always include the option pool in the pre-money valuation.
Doing this makes a VCs valuation of your company seem higher than it actually is.
For example, assume a company is presented with the following terms: a $1M
investment at a pre-money valuation of $4M, including an option pool equal to
20% of the post-money valuation.
20% of the post-money valuation is $1M. This means out of the pre-money valuation of $4M, $1M is dedicated to creating an employee option. Thus, the effective
pre-money valuation is really $3M.
Explanation
Investors will sometimes include certain conditions that must be met or milestones
you have to hit in order to get part of your money or equity.
In some cases, investors will say they will give you a certain amount of equity
back if you hit certain milestones. For example, they might try to get 50% of the
company initially and then give you 20% back if you hit certain milestones.
Examples of milestones include: passing a certain number of users or revenue;
getting investors to commit a certain amount of funding; or closing a certain important partnership.
Analysis
While investors in Mexico commonly include conditions or milestones in their term

sheets, you should do your best to avoid these.
Conditions force you to focus on very specific things that might not be good
for the long-term interest of your business. Furthermore, startups sometimes
struggle before doing well, but these conditions give investors the power to pull
out too quickly without giving you the actual amount of time you need to succeed
Analysis
Generally option pools arent part of the term sheet during a seed round. During a
Series A round they might be included in the term sheet.
Investors rarely will agree to not include the option pool in the pre-money valuation. Thus, its not worth trying to negotiate with investors to move this option
pool to the post-money valuation.
However, if the option pool is 15 20%, its worth negotiating down to a lower
option pool.
Ultimately, its just very important to realize that a large option pool will make
an investors valuation seem higher than it actually is.
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In the event that the Company meets the conditions set forth on Exhibit A as of
no later than XXXX, 2017, then the conversion price at which the investors shares
of preferred stock convert into common stock will be adjusted concurrently such
that it reflects a higher agreed upon pre-money valuation, equal to $XXXX.
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Explanation
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Option Pool
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Liquidation Event
Example
The securities sold in this financing will be Series X Preferred

Stock (the Series X Preferred), and will be entitled to the rights
and privileges set forth in this Term Sheet.
Example
Explanation
Investors generally are issued preferred shares, as opposed to

founders and employees who are issued common shares.
Preferred stockholders get certain privileges. These include
protective provisions (explained later) and the priority to get
money before any of the common stockholders do.
The proceeds of any liquidation, dissolution, or winding up of

the Company will be paid as follows: First pay one times the
applicable Original Purchase Price (as adjusted for stock splits,
stock dividends, recapitalizations, and etc.), plus declared and
unpaid dividends on each share of Series X Preferred (the Liquidation Preference)
Explanation
Liquidation preference is usually a multiple of the investors initial investment, such as 1x, 1.5x, or 2x. This multiple dictates how
much money the investor gets before common stockholders
receive their money. Preference exists to protect investors from
downside risk. It helps investors in the case that your company
does not have a very profitable acquisition.
For example, assume an investor invested $1M originally and
soon the company is acquired for $2M. If the liquidation preference is 1x, the investor would receive $1M before anyone else gets
any more. If the liquidation preference is 2x, then the investor
would receive all $2M.
Analysis
This is completely normal.
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Liquidation Preference
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Preferred Shares
Analysis
You should negotiate for a 1x liquidation preference. 1x is very

common in the US, but often Mexican investors will try to negotiate a higher liquidation preference.
This is especially important because the terms you agree to
here will likely set precedence for future investors. Even though
giving away a generous liquidation multiple in a seed round may
not seem like a big deal, investors in your Series A, Series B, and
so on will likely ask for the same or better terms than you agreed
on in the seed round.
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Conversion to Common Stock
Example
The proceeds of any liquidation, dissolution, or winding up of

the Company will be paid as follows: Thereafter theThereafter
the Series X Preferred participates with the Common Stock pro
rata on an as-converted basis.
Example
Explanation
Participation details what occurs after the preferred stockholders

get the money from their liquidation preference. There are three
different types (detailed below).
To make things clear, assume a situation where an investor
invested $1M for 20% equity of a company and had a 1x liquidation preference.
Non-Participating The investor does not receive anything
after getting their liquidation preference. Thus, if the company
were acquired for $2M, the investor would receive $1M and then
the remaining $1M would be split proportionally across all of the
common shareholders.
Fully Participating The investor gets part of the remaining
money, equal to their ownership percentage. In the case above,
the investor would receive a total of $1.2M. They would get $1M
from their 1x liquidation preference and then 20% of the remaining $1M.
Capped Participating The investor gets part of the remaining
money, but only up to a certain overall multiple.
Analysis
You should negotiate for non-participating. Worst case scenario

you should agree to capped participation. You should carefully
consider the implications of agreeing to fully participating.
As mentioned before, this is especially important as it will set
precedent for future investors.
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A merger, acquisition, sale of voting control, exclusive license, or sale of all or

substantially all of the assets of the Company or any other transaction or series of
transactions as a result of which the stockholders of the Company do not own a
majority of the outstanding shares of the surviving corporation (but excluding the
issuance of stock pursuant to customary venture capital financings by the Company) will be deemed to be a liquidation or winding up of the Company (a Liquidation Event). Upon a Liquidation Event, unless the holders of at least a majority of
the outstanding shares of Series X Preferred (Requisite Holders) elect otherwise,
the holders of Series X Preferred will be entitled to receive at the closing (and at
each date after the closing on which additional amounts (such as earn-out payments, escrow amounts, and other contingent payments) are paid to stockholders of the Company) the greater of (1) the amount they are entitled to receive as
holders of Series X Preferred above, or (2) the amount they would be entitled to
receive had such holder of Series X Preferred converted such shares into Common
Stock prior to the closing of the transaction giving rise to the Liquidation Event.
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Participation
Explanation
As discussed above, investors are generally granted preferred stock. This stock
allows them to get their money first in the case of a liquidation event.
However, depending on the size of the exit, it might be more lucrative for investors to have common stock rather than to benefit from the liquidation preference.
For example, imagine an investor invested $1M for 20% ownership of a company and has a non-participating 1.5x liquidation preference. If the company sells
for $5M, the investor would prefer to exercise their preference, as they would get
$1.5M. $1.5M / $5M is 30%, which is greater than their share of the company.
However, if the company was sold for $10M, then the investor would rather convert their preferred shares to common shares so they could receive $2M, which is
20% of the $10M.
Analysis
This is completely normal and fair for investors. Please note that the term Liquidation Event when used in the context of a venture capital financing should not be
confused with the term Liquidacin used only in Mexico when a company is being shut down. In this context Liquidation Event, as shown above, conceptually
encompasses several other event in addition to the winding up of a company.
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Board of Directors
Additional Powers Granted to Investor
Example
At the Closing, the Board shall comprise [______] members consisting of

(i) [name] as the representative designated by [____], as the lead Investor;
(ii) [name] as the representative designated by the remaining Investors; (iii)
[name] as the representative designated by the Founders; (iv) the person
then serving as the Chief Executive Officer of the Company; and (v) [___]
person(s) who are not employed by the Company and who are mutually acceptable [to the Founders and Investors][to the other directors].
Example
In the event the Company proposes to offer equity securities to any person
(excluding Exempted Securities), each stockholder of the Company will have
the right to purchase their pro rata portion of such equity securities. Each such
stockholder will have twenty (20) calendar days after delivery of a notice from
the Company describing such offering to elect to purchase their pro rata portion. Any such equity securities not purchased by a stockholder may be reallocated among the other stockholders.
Explanation
Investors will often ask for a seat on your board of directors. Doing so will put
them in a position to oversee and have a lot of control over your company.
Explanation
Analysis
This is normal for the lead investor of a Series A round or later round to get
a board seat. In most circumstances, you should strongly negotiate against
giving up a board seat during a seed round unless special circumstances suggest you should consider it otherwise (e.g. fintech company giving a board
seat to the former governor of Banco de Mexico).
When thinking about adding someone to your board, you should think
very carefully about two things:
Value to Your Company: Do you want this person to have significant power over your company? Are they someone you trust to make good decisions
for your company? Do you want to work with them? Its vital you trust them,
as they will have the power to vote to replace you.
Implications for Voting Power: How will adding this person to your board
impact your companys control over the board? Its normal for earlier stage
companies to have a board comprised of one investor, two founders, and
potentially one other outside person. You want to try to maintain majority
control over the board for as long as you can.
Pro rata rights give the investor the option to invest in a future round to maintain their percentage of the company.
For example, lets say today an investor invests $1M in your company at a
$5M post-money valuation. This means they own 20% of your company.
If in one year, your company decides to raise a second round of $4M from
other investors at a $16M post-money valuation, then the initial investors ownership is diluted by 25% (4M / 16M).
Pro rata rights exist so investors can avoid this dilution. In the scenario
above, the initial investor could exercise his or her pro rata rights and invest
an amount equal to 20% of the second round (keep in mind, this is 20% of the
round, not the valuation), which would be $800,000.
By doing this, the initial investor would own 20% of the new shares being
created for the second round, and thus would still own 20% of the overall company.
Analysis
Pro rata rights are very standard and you should keep them in your term sheet.
In fact, its in your best interest for your investors to have pro rata rights, as it
aligns your interests with those of your investors: as your company continues
to grow in value, your earlier investors are able to maintain their stakes.
If a Mexican company is receiving the investment, you should check with
your own counsel as certain corporate entities would mandatorily grant this
right to any investor (i.e. no worth negotiating something already afforded under applicable law).
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Pro Rata Rights
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Board Seat
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Protective Provisions
Drag Along
Example
Example
Each current and future holder of Common

Stock will be required to enter into an agreement providing that in the event a majority
of the stockholders have approved an acquisition of the Companywhether by merger,
consolidation, sale of assets, sale of stock or
otherwisesuch holder will grant any consents or approvals reasonably determined
by the Board to be necessary in order to approve or participate in the acquisition of the
Company subject to customary limitations.
Explanation
In the situation that over X% of shareholders

(generally X is equal to or greater than 50)
agree to a sale of the company, then all other
shareholders must agree to the sale. The idea
here is to prevent a situation where a few
shareholders are able to prevent an acquisition form happening.
For example, lets say the Drag Along
clause dictates that if over 50% of the shareholders are in favorfavour of a sale, then
everyone else must agree to it. If an acquisition is proposed and 60% of shareholders
support it, but 40% are strongly opposed to
it, these 40% still have to go through with the
acquisition.
Analysis
This is completely normal and fair for investors.
For so long as any shares of the Series X Preferred remain outstanding, the vote
or written consent of the Requisite Holders, voting together as a single class on
an as-if converted basis, will be necessary for the Company to take the following
actions:
Explanation
Protective provisions are the veto powers you give to your investor. They require you to get your investors approval before doing things such as taking
on debt over a certain amount of money, amending your companys bylaws, or
selling your company.
Analysis
The sample protective provisions above are standard and are generally acceptable to investors and founders. The investors will want to ensure their ability to
control company actions that could impact their investment, while the founders and the company will prefer to retain the freedom to operate the company.
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amend, alter, or repeal any provision of the Certificate of Incorporation or Bylaws of the Company;
II. change the authorized number of shares of Series X Preferred or Common
Stock;
III. authorize, designate or issue, whether by reclassification or otherwise, of any
new class or series of stock or any other equity or debt securities convertible
into equity securities of the Company ranking on parity with or senior to the
Series Seed Preferred in right of redemption, liquidation preference, voting or
dividends or any increase in the authorized or designated number of any such
new class or series;
IV. redeem or repurchase with respect to Common Stock (excluding shares repurchased upon termination of an employee or consultant pursuant to a restricted share purchase agreement or right of first refusal);
V. enter into any agreement regarding an asset transfer of more than $XXXXXX,
license of intellectual property out of the ordinary course of business, acquisition of the stock or assets of another entity or a Liquidation Event;
VI. borrow, loan or guarantee an amount in excess of $XXXXX;
VII. consummate any interested party transaction;
VIII. change the number of directors;
IX. hire, fire, or change the compensation of the Companys executive officers;
X. change the principal business of the Company, enter new lines of business, or
exit the current line of business;
XI. declare or pay any dividend; or
XII. any voluntary dissolution or liquidation of the Company.
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I.
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Example
Right of First Refusal

If at any time, a Stockholder who (together with its Affiliates)
holds no less than [51]% of the outstanding Common Stock
of the Company (the Selling Stockholder) proposes to sell
any shares of its Common Stock to an Independent Third Party (the Proposed Transferee) and the Selling Stockholder
cannot or has not elected to exercise its drag-along rights set
forth in Section [XX], each other Stockholder (each, a Tagalong Stockholder) shall be permitted to participate in such
sale (a Tag-along Sale) on the terms and conditions set
forth in this Section [XXX].
In a situation where majority shareholders sell their shares,

the tag along provision allows minority shareholders to tag
along and sell their shares at the same terms.
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Explanation
Analysis
Also known or referred to as a co-sale right. This provision,

is often times also used to restrict or condition sale of the
Founders stock to a third party unless investors are given a
first refusal right to purchase the stock or to participate in
such stock sale on a pro-rata basis. This is customary and a
provision many investors would expect having in any financing.
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Example
Right of First Refusal. At any time, and subject to the terms

and conditions specified in this Section [XX], each Stockholder shall have a right of first refusal if any other Stockholder
(the Offering Stockholder) receives an offer from a Third
Party that the Offering Stockholder desires to accept to purchase all or any portion of the shares owned by the Offering
Stockholder (the Offered Shares).
Explanation
A contractual obligation of an stockholder to offer to sell its

equity to the other holders, or sometimes back to the company, after receiving a bona fide offer from a third party to buy
that equity stake. The offer to the other stockholders must
typically be made on substantially the same terms as those
offered by the third party.
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Tag Along
Analysis
This contractual provision covers the circumstances

where a shareholder (often times a Founder or Key management) propose to sell any of their shares to a third party. This
provision would require the seller to give the company first,
and then the investors second, notice of a proposed sale
and grants the company/investors a right of first refusal to
purchase their shares. It is common for this provision to be
present in combination with the co-sale right provision (tagalong) and for both to operate succesivelysuccessively (i.e.
if the investor does not exercise its ROFR then it would still
have the right to tag its shares to the proposed sale to a
third party).
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Dos and Donts
DONTS
Know your
companys financial details,
market potential, and preferred financing numbers.
Conduct reference checks by

chatting with
existing portfolio companies
of investors
youre considering.
Hire a top
lawyer even
though its
costlyit will
pay off in the
long-term.
Keep in mind
that later investors will
oftentimes ask
for terms that
are the same or
better than the
terms you give
earlier investors.
Read as much
as you can
about each
term online
and research
what their implications are
for your company.
Decide which
top terms matter the most
for your company and focus
on your negotiation on these
terms.
Be prepared
for tough questions related
with your IP
protection,
legal barriers,
competitive
advantages,
and investors
rights granted
to prior investors.
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Practice giving your pitch

presentation,
and review
your company
materials, with
several different people.
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Dont accept
the first term
sheet youre
given. Dont
only focus on
the valuation
and amount
of money an
investor is
offering.
The other
terms and the
quality of the
investor are
just as important.
Cold calls are

often not an
effective way
to approaching a VC.
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DOS
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42
MASSCHALENGE
WHY
AND HOW
CAN WE
PROTECT
OUR IP?
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TTULO DEL MANUAL
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Introduction
Protecting your companys intellectual property
WHY AND HOW CAN WE PROTECT OUR IP?
EXPLANATION
OF THE FOUR TYPES OF IP
(IP) is vital to your success. IP is a huge component of the value of your company. This is especially true in your early days, before you have many users or
much revenue, when all you really have is IP.
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thing they will often ask is whether or not all IP created by the
employees of your company has been legally assigned to your
company. Investors want to ensure that current or past employ-
ees cant walk away with your trade secrets or client list or algorithms or anything else. The last thing they want to do is invest
in a company with a great idea and then have a past employee
steal that idea or steal a major component of the companys IP.
Thus, its important from the beginning that you protect
your IP. There are many different things you should be doing
as you start and grow your company. Below weve included an
Copyright
Trademark
Patents
A copyright protects
original content that
you create. For example, one would file a
copyright for a piece
of artwork, a song,
or movie. Copyrights
are generally more
relevant to art than to
business.

A trademark protects
a symbol or word(s)
that uniquely indicates your companys
product or service. For
example, one would
file a trademark for a
product name, logo, or
slogan. It is important
to note, however, that
a trademark does not
protect a companys
name. Trademarks are
generally more relevant to business than
to art.
A patent protects a
unique product or
process you create.
For example, one
would file for a patent
on a machine that
cooks food in a new
way or on a novel process for manufacturing something.
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When you go out to fundraise money from investors, some-
explanation of the different types of IP in your company, an IP

protection checklist, a template for an IP assignment clause of
a labor agreement, and a privacy policy template. But first, lets
discuss the four types of IP!
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Trade
Secrets
A trade secret protects a strategy or

knowledge that gives
a business a competitive advantage
so long as that information remains a secret. Once the trade
secret is made public,
protection of the trade
secret is lost. For example, a trade secret
could be a client list or
go-to-market strategy. Unlike copyrights,
trademarks, and patents, you cant file to
protect a trade secret.
However, if you have
employees sign an IP
assignment contract
(discussed below)
and keep the strategy
or knowledge secret
from the public, then
the trade secret is
legally protected.
IP PROTECTION
CHECKLIST
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Understanding the differences between the

four types of IP is critical because no one type
alone can provide you with comprehensive
protection. Instead, the four types should be
thought of as individual elements of an overall
IP structure. For example, if your product is a
robot, you may want to:
File a patent application(s) directed to the robot

itself and any novel components;
File for trademarks covering

the product
name/logo;
Put protections in
place to keep your
marketing strategy and robotic
control algorithms
as trade secrets;
and
Without all of these four elements working

together, one or more of your technology (the
product), your business reputation (the name/
logo), your marketing strategy, or your supporting materials could be misappropriated by your
competitors and used to neutralize your competitive advantage!
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File for copyrights

on the owners
manual, maintenance guides, and
any advertising
materials.
Item
Why this is important
Include an IP assignment
clause in the labor agreement every time you hire a
new employee
Employees come and go. You want to make

sure that any work an employee does while
employed by you is owned by your company.
Investors will ask about this when you fundraise.
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Understanding the Differences
Registration of patent/
trademarks with the Patent
and Trademark Office
Patents and trademarks, as explained above

need to be registered to protect the companys
IP rights.. Costs and expenses would depend
upon the number of trademarks involved and
the jurisdiction at which registry is sought. Registration of a patent requires specialized counsel to be involved and thus, the process and
expenses associated to it are higher than those
associated with a trademark registration.
Registration of copyrights
with the Copyrights Office
Usually, this is not an expensive procedure. Both

in the US and in Mexico, copyright protection
attaches as soon as content is created and memorialized on a medium (e.g., on paper, a website, etc.). One can then put a , followed by
the year and company name to indicate copyright ownership. Filing a copyright application
is necessary if litigation is likely to occur.
Execute an NDA (Non-disclosure Agreement) with

the companys employees.
You want to make sure that the employee protects the companys confidential information
(i.e., trade secrets and any other type of information that is not subject to registration). .
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Why this is important
Execute an NDA with

third parties (investors, vendors, suppliers, manufacturers,
distributors, contractors, etc.)
You want to make sure that the businesses and people you collaborate
with as you grow your business protect the companys confidential information and dont try to use it for their own gain. Remember, an NDA
allows you to sue but it wont bring back your competitive advantage if
the NDA is broken so discuss/disclose as little as possible. Additionally,
an NDA does not prevent someone from filing a patent application, so
to be certain you should file a patent application before a meeting or
discussing your IP.
Your competitive advantage is often driven by IP but you cant capitalize

on that IP if you dont know about it! Make invention disclosure forms
readily available to your employees. Regularly ask your employees what
they are working on, what ideas they have, what problems they are
solving or trying to solve, and what successes, no matter how small, that
theyve achieved. This applies equally to patentable ideas, ideas that are
protectable as trade secrets, confidential information such as customer
contacts or business contacts, and ideas for logos, trademarks, or ornamental designs. These are the ideas that IP comes from but engineers
and business staff are often quick to dismiss them as insignificant
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Develop internal systems to promote IP

capture
Develop internal
procedures to keep
information confidential (and train
your employees)
These can include:

Restrict access to those who need it.
Keep technology secret until the patent application is filed! That means
not publishing white papers or marketing materials and, whenever possible, not even discussing with investors, contractors, or potential licensees.
Use encrypted and password protected systems.
Have automatically locked, restricted access doors that require keys/
FOBs/badges to enter.
Monitor visitors/guests in your offices.
Have a document retention policy.
IP
Privacy
Assignment
Policy
Clause Template
Template
As discussed above, including an IP assignment

clause in your labor agreement when you hire
someone is an easy and critical part of protecting your companys IP. The clause should at
least include the language I hereby assign, and
agree to assign in the future . . .
This clause is frequently left out of labour
agreements but can be an important tool in the
event an employee becomes a former employee
or even hostile to the company. Templates for
IP assignment clauses can be found on a number of websites, including, for example:
Privacy Policies cover what information is

collected on a site or app and how it will be
used. It is very important to have a privacy
policy if you are collecting any information,
even if its as simple as just collecting email
addresses for a newsletter. The data a company collects from its users is a valuable
piece of a companys IP. If a company doesnt
have a privacy policy and is collecting information from its users, then the company
doesnt own this information. This creates
problems when fundraising or getting acquired. Privacy Policy templates can be
found on a number of websites, including, for
example:
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Item
https://www.legalzoom.com/legalforms/intellectual-property-assignment
IP rights often times are critical assets you

must carefully protect. You should seek specialized counsel adviseadvice to ensure your companys rights are well protected.
https://www.legalzoom.com/business/business-operations/website-terms-and-conditions-overview.html
http://inicio.ifai.org.mx/SitePages/Modelos-De-Aviso-De-Privacidad.aspx
Monitor your IP
Regularly identify and observe competitors, identify and observe competitive products, and perform internet searches to detect unauthorized
use of trademarks or potentially infringing technology and products.
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49
50
MASSCHALENGE
HOW
SHOULD I
STRUCTURE
OUR
EQUITY?
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Equity is always a difficult area

as it often involves uncomfortable conversations and decisions.
However, ownership in your company is a key
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motivator for founders and employees, so its important you dedicate significant thought to how
you structure equity. Doing so will help you avoid
major conflicts in the case of a liquidation event.
Below we discuss equity for yourselves, your
employees, and mechanisms you can implement

to make sure you get the most out of equity.
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EMPLOYEE
OPTION POOL
What is an employee option
pool and why should I have
one? An employee option pool
is a portion of equity you set
aside to give to current and
future employees.
Even though creating an
option pool dilutes the founders equity, its in your best interest to create one. There are
two main reasons for this:
1.
How can I implement an employee option pool?

SAPI; Creating and implementing an option pool for a SAPI
or any other Mexican entity
had been traditionally considered as part of high-level employees total compensation,
especially if the employer is
a member of an international
company group. Nonetheless,
recently implementation of
participation in share plans has
become more common for
startups seeking to attract and
retain talent. While the corporate and contractual documentation generally encompasses
(i) a board or shareholders
resolution, (ii) general plan
guidelines and policies, and
(iii) a stock option agreement,
companies must carefully review the plan terms so as to
avoid the benefits under such
plan to be consider labor benefits (in which case, such benefits would be part of the integrated salary upon which labor
severance is calculated). Also,
accountants and tax counsel
should review and communicate tax advantages and costs
related to both the grantor and
the beneficiary of the plan.
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Introduction
HOW SHOULD I STRUCTURE OUR EQUITY?
Giving your employees equity aligns their

long-term interests with
those of the business.
It incentivizes them to
make decisions based
on the long-term success of the business,
rather than short-term
benefits.
2. Giving your employees

equity motivates them
to stay with your company longer, reducing
turnover. With equity,
employees both feel
a closer tie to your
company and want to
stay to benefit from the
upside in the case of a
liquidation event.
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VESTING
EXPLAINED
What is vesting? Vesting allows you to give equity incrementally over a period of time instead of all at once. It helps you to
motivate your team to stay working for your startup for a longer
period of time and prevents uncommitted team members from
receiving all of their equity if they quit your startup early on in
your journey. The normal structure is vesting on a monthly basis
over a four-year period with a one-year cliff.
What does vesting on a monthly basis over a four-year period
with a one-year cliff mean? This is best explained with an example.
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C-Corp: Creating and implementing an option

pool for a C-Corp is easy, though it does require
careful monitoring with your legal counsel in
order to ensure compliance with law. A C-Corps
formation document that is filed with the State
of Delaware, or a resolution of its Board of Directors, creates the option pool by establishing
the number of shares of stock reserved for the
option pool and stating the terms and conditions that govern the issuance of options to employees, officers, and directors along with the
administration of those options. US federal law
and Delaware law impose many requirements
on stock options, so the advice of knowledgeable legal counsel is essential.
A typical option pool for a C-Corp in its early
stages ranges from 5% to 15% of the C-Corps
fully-diluted capital stock, although some investors will ask for 20%. Most investors will require
the inclusion of an option pool in the pre-money
valuation of the C-Corp, which means that the
option pool will dilute the ownership percentages of the existing shareholders. While investors
will have an idea of the option pool size that
they want, and while existing shareholders will
want to resist the dilution, the most important
thing to consider when creating the option pool
is the expected number of employees that the
C-Corp will need and how many options will be
used to grow and retain that expected number
of employees.
Assume an employee is allocated 4,800 shares. If you do

not have vesting in place, this employee could leave the
second day with all 4,800 shares, even though they havent
contributed that much to your company yet.
With monthly vesting over a four-year period, this employee

would earn 100 of their shares (which is equal to 1 / 48 of
their allocated shares) each month. If a one-year cliff isnt in
place, the employee would receive 100 shares at the end of
month 1, end of month 2, end of month 3, and so on.
With a one-year cliff in place, any equity is delayed from
being earned until an individual stays for at least one year.
In practice, this employee would not get any equity until
the end of the first year, when they would receive all of their
equity for the first 12 months.
Thus, the employee in this example would receive 0 shares

for the first 11 months, then 1,200 shares at the end of month
12, and then 100 shares a month for months 13 48. If they
stay for 48 months, then they would receive all 4,800
shares. If they only stayed for 10 months, they would receive
0 shares. If they stayed for 14 months, theyd receive 1,400
shares.
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Founders should also be subject to vesting for

two major reasons:
1.
C-Corp: For each grant of stock or options subject to vesting, the Board of Directors will establish the timing and the amount of the vesting.
The restricted stock agreement (for founders)
or the option agreement will contain language
that echoes the vesting terms established by
the Board of Directors. Note that vesting in
terms of founders shares is a term commonly
used to describe the lapse of the restrictions
placed on those shares. The founders own their
shares completely as of the date they are granted, but those shares are subject to restrictions
on transfer and can often be repurchased by the
company if the founder leaves before a certain
date. Accordingly, the vesting is actually a
lapse of these restrictions.
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Who should be subject to vesting? A startup

should have vesting for both the founders and
the employees.
As discussed earlier, vesting for your employees serves to award them for their contributions
to your team and prevent employee turnover.
With the standard four year vesting period, employees have significant incentive to work for
your startup for at least 4 years.
How can I implement vesting?

SAPI: although vesting terms for founder stock
are legally possible to implement in a SAPI, they
are uncommon in Mexico and generally most
companies when formed, does not create any
vesting schedule for the stock granted to the
founders. As explained before, founders must
consider including certain transfer restrictions
for founders or a repurchase right granted to
the company to deal with certain issues such
as founders lack of achievement of certain
milestones or to prevent founders leaving the
company and preserve their stock. Vesting for
founders stock may be addressed directly in
the companys bylaws and the stock certificates
issued to the founders.
Theres always a very small chance

something happens between you and
your other founder(s) and you want to
make sure they cant walk away with
huge pieces of your company.
2. As a founder, its your job to set the

standard for your company. If all of your
employees are subject to vesting, you
should lead by example and be subject
to vesting too
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What happens when our company is acquired and some individuals shares
have not fully vested? Some companies will implement something called accelerated vesting for this exact situation. Accelerated vesting is where an individual
receives some or all of their unvested shares in the case of an event, usually an
acquisition.
The idea accelerated vesting is to reward employees for achieving a great outcome. If employees work very hard for a year and manage to build a successful
enough company that a larger company wants to acquire it, then the accelerated
vesting would reward them for their efforts.
There are two types of acceleration: single-trigger acceleration and double-trigger acceleration.
Term
Explanation
Example
Single-Trigger
Acceleration
Single-trigger means that only one event

has to happen to trigger the acceleration
of some or all unvested shares. When
single-trigger acceleration is usually implemented, the trigger is an acquisition.
However, in some cases, the trigger could
be someone being involuntarily terminated
from the startup.
Imagine an executive at a startup has been allocated 10,000

shares at a startup. After the
executive has been at the
startup for one year, they are
acquired. Thus, at this moment,
the executive only has vested
2,500 shares.
Double-Trigger Acceleration
Double-trigger means that two events

have to happen to trigger the acceleration
of some or all unvested shares. Generally
these two triggers would be an acquisition
combined with an involuntary termination.
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Why should we include a cliff? You should

have a cliff in place so you can avoid giving
equity to bad hires who might leave or who
you might fire within the first few months of
joining. This allows you to avoid having to deal
with a cluttered cap table that has a bunch of
people with very small amounts of equity. It also
strongly discourages anyone from leaving in
their first year.
Acquisitions sometimes will result in layoffs

in the acquired startup, since the acquirer
might not need the whole team of the original startup. Double-trigger acceleration
benefits employees who worked very hard
to help the startup get acquired but got
terminated after the acquisition.
If the executive was originally

guaranteed the acceleration of
25% of his unvested stock in
the event of an acquisition (single-trigger acceleration), then
25% of his/her remaining 7,500
shares would instantly vest
(which is 1,785 shares).
If the executive was originally
guaranteed the acceleration
of 25% of his stock if the startup is acquired and he/she is
terminated (double-trigger
acceleration), then 1,785 shares
would instantly vest only if the
executive is terminated when
the company is acquired.
57
Employee joins
Company issues common
stock options to employee
Company is acquired
Employee receives money for
the shares he /she has exercised
Company and employee agree on strike price,

the amount for which an
employee can buy their
shares in the future
Taxes: No taxes are incurred by employee or

company at this moment
D
RA
FT
Taxes: At this moment, the acquisition price per share is likely

higher than the FMV of the
shares when the employee exercised their stock options. Thus,
taxes must be paid on the difference between the acquisition
share price and the fair market
price at the time the employee
exercised their options
Company creates option pool

Company allocates a portion of common shares
that you can issue to current and future employees
Employee exercises
vested stock options
Employee pays strike price
for each share of vested stock
theyve been allocated
Company determines the

rights of these common
shares
58
Taxes: At this moment, the

fair market value (FMV),
which is the amount a share
is currently worth based on
the valuation of the company, is generally higher than
the strike price. Taxes must
be paid on the difference
between strike price and fair
market value of share
D
RA
FT
TAXATION ON SHARES
IN THE EVENT
OF A LIQUIDATION EVENT
D
RA
FT

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About Greenberg Traurig

PROTECT OUR IP?

Different Legal Entities

26 Employee Option Pool

Analysis of Different Legal

22 Dos and DontsDontss

25 Privacy Policy Template

MASSCHALENGE | GREENBERG TRAURIG

MASSCHALENGE | GREENBERG TRAURIG

MASSCHALENGE | GREENBERG TRAURIG

MassChallenge and Greenberg Traurig have partner

how to approach them in this

The entrepreneurial ecosystem in

MASSCHALENGE | GREENBERG TRAURIG

assChallenge is the most startup-friendly accelerator on the planet.

MASSCHALENGE | GREENBERG TRAURIG

reenberg Traurig helps clients bridge diverse legal

About Arturo Prez

MASSCHALENGE | GREENBERG TRAURIG

The attorneys at Greenberg Traurig, LLP, which

MASSCHALENGE | GREENBERG TRAURIG

Pablo Rena (Mayoreo Total)

MASSCHALENGE | GREENBERG TRAURIG

TTULO DEL MANUAL

MASSCHALENGE | GREENBERG TRAURIG

BEST LEGAL PRACTICES

WHAT LEGAL ENTITY SHOULD FORM?

choose from. The one you pick will

Unfortunately, one legal entity does not stand

out from all others. Theres not a clear answer

for you there are strengths and weaknesses to

is a range of legal entities you can

ferent types of legal entities!

MASSCHALENGE | GREENBERG TRAURIG

MASSCHALENGE | GREENBERG TRAURIG

BEST LEGAL PRACTICES

A Delaware C-Corp, as described in detail above, can be a

WHAT LEGAL ENTITY SHOULD FORM?

MASSCHALENGE | GREENBERG TRAURIG

MASSCHALENGE | GREENBERG TRAURIG

BEST LEGAL PRACTICES

WHAT LEGAL ENTITY SHOULD FORM?

r You should also consider that certain VC

r As an alternative to SAPI, a corporation

MASSCHALENGE | GREENBERG TRAURIG

By whom do you hope

r SAPI: See comments above

Both US and Mexico

r C-Corp: Mexican companies/investors doing

r C-Corp & SAPI: Having

MASSCHALENGE | GREENBERG TRAURIG

BEST LEGAL PRACTICES

WHAT LEGAL ENTITY SHOULD FORM?

r C-Corp: A C-Corp formed

r SAPI: Forming a Mexican company is

MASSCHALENGE | GREENBERG TRAURIG

r LaborLabour & tax laws

r SAPI: If youre selling a product in Mexico

Where are you

Both US and Mexico

r See comments above for

r C-Corp: See factors above.