Author: azeeadmin

Founders are a special breed — independent, self-reliant, and resourceful. Yet these same attributes, critical in taking an idea from zero to one, can eventually cause first-time founders to misjudge situations and tackle problems without appropriate guidance. This is particularly true (sometimes tragically so) in the legal arena, where founders generally have little or no experience and the risks are difficult to quantify.

To solve this, Extra Crunch is offering up well-sourced lists of the best lawyers for startups, alongside articles and resources written by experts who navigate tricky legal issues for startups on a daily basis. This article is the first of a five-part series covering the legal terrain you should endeavor to navigate with the help of an experienced guide, including:

• Corporate: Business Formation, Capitalization and Financing, Securities and Options, etc.
• Intellectual Property: Patents, Trade Secrets, Trademarks, and Copyright, etc.
• Business Transactions: Master Services / SaaS Agreements, Terms of Use, NDAs, etc.
• Compliance and Regulatory: Business Qualification, Privacy, and FTC Regulation, etc.
• Human Resources: Employee Compensation, Contractors, Discrimination, Immigration, etc.

While none of this will be legal advice per se, it is perhaps the next best thing: a simple checklist followed by in-depth summaries helpful to evaluate whether and when formal legal counsel is needed in key areas. With the information from this article and those to follow, alongside other Extra Crunch resources, you can analyze your business circumstances and evaluate your risk exposure. Should you identify legal risks in the above or related areas, simply reference the list of best startup lawyers compiled by Extra Crunch, then reach out to those lawyers focused on serving companies at your stage with experience in the matters at hand.

This article will examine “corporate law” as it relates to startups, which includes the body of laws, rules and practices that govern the formation and operation of corporations, including most importantly for founders, ownership and investment in securities (or stock) of a company. Yuval Harari, author of Sapiens, calls corporations (and limited liability companies more broadly) “among humanity’s most ingenious inventions” — so it is worth knowing a thing or two about them.

Two final caveats here: first, TechCrunch readers include everyone from first-time founders still bootstrapping a concept on nights and weekends to serial entrepreneurs with multiple large exits behind them. Overall this article will skew in the direction of the former, since those with more experience should have less need for guidance in these areas, but even experienced entrepreneurs should find this and subsequent articles helpful.

Second, for those unfamiliar with the legal profession, there is an important distinction between transactional and litigation practice. Most TechCrunch readers already understand this difference, but simply to address it here: transactional lawyers do deals and ensure compliance with laws and regulations, while litigators file lawsuits and go to court. That’s an over-simplification, but understand that great transactional lawyers are not likely to be especially great litigators in case you become involved in a lawsuit.

This and subsequent articles will focus on transactional issues, but litigation could arise within any of the five areas above and in that unfortunate event you should seek a lawyer (or team of lawyers) focused on litigating within the specific area(s) relevant to your lawsuit.

Read on for the official Extra Crunch corporate law checklist for startups.

Threshold matters: Pre-existing IP and trademarks

Although technically not matters of corporate law, two threshold items relating to intellectual property should be mentioned form the outset. First, make sure you understand whether the intellectual property you are creating is subject to any claims from the prior or existing employers of the founders. We’ll discuss this topic further in a later article, but it is worth mentioning now so it is on your radar.

Second, because your startup will need to brand itself to attract customers and/or users, put some effort in on the front end to make sure your business name is available and it will not result in trademark disputes down the road. This is easy enough to do using the USPTO’s trademark database, for example, but ultimately it could be a state-by-state question.

Entity selection and incorporation – C corp/S corp/LLC

While many types of legal business structures exist, assuming you are interested in starting a high-growth technology company, really only two matter: the corporation and the limited liability company, or “LLC.” Each allows for multiple individuals to share in the ownership of the company and most of the time will shield owners’ personal assets from the obligations of the business — that is, unless otherwise agreed by the owners themselves, or due to some malfeasance of the owners (such as mixing personal and business expenses, something which founders have been known to do unfortunately). In the latter case, where a business owner’s personal assets can be held to account for liabilities of the company, courts have creatively termed this “piercing the corporate veil.”

For startups ultimately looking to pursue a traditional VC route, incorporating in Delaware as a C corp is the obvious choice — there is no reason to overthink it. Under your certificate of incorporation (sometimes called a “charter”), you’ll typically want to authorize 10 million shares of stock at a “par value” price of $0.00001. (“Par value” is simply the lowest price at which a corporation may issue shares upon initial offering.) Of these 10 million “authorized” shares, only about 4-6 million shares of common stock are typically “issued” to founders from the outset (and don’t worry, percentage ownership is calculated based only on the issued shares).

This will leave available additional “authorized but unissued” shares which can later be issued to create a stock option pool for incentivizing employees, or issued as preferred stock to investors in exchange for cash. With respect to the latter use specifically, it is generally not necessary to specifically authorize a separate class of preferred stock upon initial formation — this can always be done by amending the charter in connection with the actual investment round later on, since the round is likely to require a charter amendment in any case.

One final note on initial formation: more recently, a new class of stock called “Series FF Stock” is sometimes included during initial formation for issuance to founders (essentially, a hybrid of common and preferred stock) in order to later facilitate stock sales by the founders themselves to investors in future equity financings, effectively allowing founders to personally realize some liquidity before an actual sale or IPO. If this sounds appealing to you as a founder, which it should, it is definitely worth asking your lawyer about.

If you are not looking at a traditional VC path, however, S corps and LLCs can provide better options in certain situations, particularly if your business will remain relatively small over the long term (tens of employees and not hundreds). In terms of tax treatment, these entities are typically advantageous, especially in the early years, since business income and losses are “passed through” to the owners and taxed on an individual basis using Schedule K-1, with no separate layer of tax liability for the company itself.

Also, in states like Delaware, California, and others that allow for “statutory conversion,” LLCs can relatively easily convert to a C corp later down the road, should the need arise, through a tax-free transaction under Internal Revenue Code Section 351; provided, however, that the operating agreement is initially well-drafted to anticipate this event (for example, using “membership units” rather than simple percentages to indicate the ownership interests of members).

Finally, if you incorporate outside the state where you will be primarily running the business, you will also need to “qualify as a foreign entity” in your home state (in this case, “foreign” means different state, not country). Put differently, you will need to register your “foreign” company with the state where you are primarily “transacting business” and perhaps your specific county too depending on the nature of your business and any required business licenses. In both cases, the process is very simple (see, for example, New York and California) and most of the time a lawyer is not truly required here, but many, many founders just skip this step entirely, creating problems later on.

Corporate governance

From a high level, a corporation is owned by the shareholders, who in turn have the power to elect individuals to the Board of Directors. The “Directors” govern the corporation on important matters outside the “ordinary course of business” and have the power to elect (and remove) the “Officers” of the corporation, who are responsible for day-to-day management of the business. The following offices must generally be filled right from the start: President (often the CEO), Treasurer (often the CFO or COO), and Secretary.

That said, all three offices can usually be filled by the same person; for example, in California and Delaware both, a corporation may have only a single shareholder and Director. In California, however, once a corporation has two shareholders, it must have at least two board members, and once it has three shareholders or more, it must have at least three board members. Corporations must also typically hold certain required meetings wherein formal minutes are recorded, including in most states at least one annual meeting of the Board of Directors and one annual meeting of the Stockholders (or written consents in lieu thereof).

Since the Board of Directors is the governing body of a corporation, a shareholder owning even a majority of the shares can be outvoted at the Board level with respect to important governing matters (e.g., sales of additional stock or election/removal of officers). Shareholders can remove Directors, of course, but this is a relatively drastic move, so selecting those who will occupy seats on the Board of Directors is extremely important for founders. In the beginning, the Board of Directors should only include founders and ideally an odd number of them to avoid voting deadlock on important company decisions. If you must have an even number of Directors on the Board, e.g., two 50/50 co-founders, then at least make sure you’ve included specific “tie-breaker” provisions in the governing documents of the company.Now, once the “certificate of incorporation” (or “charter”) is filed with the Secretary of State, the initial Directors of the company will be formally appointed by a written document called the “Initial Action by the Sole Incorporator” (often company counsel will perform this action). The initial Directors will then elect the Officers, authorize and issue stock to the founders, authorize the opening of a business bank account including establishing a federal Employment Identification Number (EIN), and paying expenses, etc. All of this is generally done through a “unanimous written consent” of the Board of Directors, which is a document signed by all Directors, rather than through votes taken in a formal in-person organizational meeting.

Other matters often addressed through this first “unanimous written consent” may include adoption of the following:

• Bylaws, which set out board election and voting procedures;
• Restricted Stock Purchase Agreement, which imposes “vesting” and rights of first refusal on founder/employee stock, as well as an assignment of pre-existing intellectual property to the company in certain cases;
• Equity Incentive Plan (i.e., stock option plan), which sets forth the terms on which stock options can be granted and exercised;
• Proprietary Information and Invention Assignment Agreement (PIIA), which will be signed by all founders, employees, and consultants, assigning to the company ownership of all intellectual property created in the business;
• Selection of applicable fiscal year; and
• Election of S Corp tax treatment (if desired).

Note finally, going forward, separate from any income taxes owed, corporations (as well as LLCs) must generally file certain information with the Secretary of State and pay franchise taxes each year as well (e.g., see Delaware’s Annual Report and California’s Statement of Information). For further discussion of corporate governance structure, see Holloway Guides.

For LLCs, rather than shareholders, each owner is called a “member” and instead of the “certificate of incorporation” and “bylaws,” the LLC is governed by the “articles of organization” and an “operating agreement” respectively. The operating agreement is often a lengthy, comprehensive contract detailing each member’s ownership interest (either percentage-based, or preferably, measured in ownership units), economic rights (distribution of profits and losses), governance and voting rights (addressing “tie-breaker” scenarios if necessary), and rights between members with respect to ownership interests (e.g., right of first refusal, buy-sell agreements, or other restrictions on transfers).

LLCs can either be “member managed” (all members approve major decisions and can act on behalf of the LLC) or “manager managed” (members may elect one or more managers with ultimate decision-making authority, but otherwise have no governance authority themselves). In the latter case, managers may also delegate responsibility for day-to-day business operations to officers, similar to the Board of Directors and Officers in a corporation. Since the operating agreement is essentially a contract between the members, which can be drafted with almost infinite variation, LLCs are known for being extremely flexible, but therefore less predictable for outside investors.

Since the operating agreement is less susceptible to standardization, it is wise to consult an experienced attorney to establish the desired governance and capitalization structure. Also, since equity issuance and compensation is less straightforward in the LLC context, most of the remaining sections below (except for the last) are specific to corporations, though many of the underlying principles may still apply.

All of that is to say, upon formation, you should have a clear understanding of what roles each founder will play, what time commitment is expected, what the ownership structure will look like, and who will serve on the Board of Directors (or serve as managers of the LLC) and therefore how decisions will ultimately be made. In the Delaware corporation context specifically, the Delaware Incorporation Package from Cooley Go, or services like Clerky, provide founders streamlined options and helpful resources to understand the steps involved; and again, if you’re thinking about going the LLC route, consult with a knowledgeable lawyer to ensure you don’t foreclose or complicate viable investment options later on.

Issuing “founder stock” at initial formation

“Founders Stock” is simply the common stock issued to founders when a corporation is initially formed; if done correctly, it is non-taxable because: (1) it is equal in value to the small amount of cash founders pay into the company in exchange for receiving the stock at par value (another good reason to set the par value very low, again say, $0.00001, allowing for  minimal cash outlay); or (2) “property” has been contributed to the company in exchange for the stock under Section 351 of the Internal Revenue Code, which provides that no gain or loss is recognized if property is transferred to a corporation by a person or persons who together own at least 80% of the corporation.

“Property” has been broadly defined to include legally protectable know-how and trade secrets, but this definition is not infinite in scope, so don’t get carried away trying to avoid paying the par value price for the stock in cash. Instead, one recommended hybrid approach involves each founder paying a portion of the par value purchase price of their stock to the company in cash, with the remainder covered by or attributable to an assignment by each founder to the company of their pre-existing intellectual property. This approach covers all the bases in terms of valid consideration (i.e., the cash payment) while ensuring that the pre-existing intellectual property of each founder is properly owned by the company.

Founder vesting and section 83(b) within 30 days

Where co-founders have contributed cash or other property to the company in exchange for their shares at par value, they own the stock outright. Thus, to achieve vesting and protect all founders from any particular co-founder leaving early with a large chunk of the company, each founder should enter a “Restricted Stock Purchase Agreement” (directly with the company), which gives the company the right to buy back that founder’s shares, often at par value. This right gradually lapses over time with respect to more and more of the founder’s shares, creating the effect of vesting for those shares no longer subject to the company’s repurchase right.

For co-founders involved immediately upon initial formation, you could reasonably argue that a “cliff” is not necessarily required, but the typical vesting schedule is 4 years, with 25% of the total shares vesting after the first year in a single chunk (this first year representing the “cliff” since nothing will vest if this one-year mark is not reached) then monthly vesting thereafter. Founders should also be aware of single and double-trigger acceleration provisions, which typically become more relevant once institutional investors are involved — more on that via Cooley Go.

Once the Restricted Stock Purchase Agreement is signed, however, certain tax implications are raised, because technically the founder’s stock is now at a “substantial risk of forfeiture” (since founders might forfeit stock if they leave the company). This means that by the time the stock actually “vests” it will almost certainly be worth more than the par value for which it was purchased. The IRS will want taxes paid on that delta, since technically that increase in value is taxable gain.

The solution? Internal Revenue Code Section 83(b), which allows founders and employees to elect treatment of non-vested shares as fully transferred at the very beginning of the vesting schedule, rather than over time as the shares vest. This allows for immediate taxation at the relatively lower current value, which in the case of a newly formed corporation is only some nominal amount based on the par value. This Section 83(b) election must be made in a written document actually signed and filed by the taxpayer within 30 days of the date the stock was made subject to restriction (or in the case of stock options, the date granted). While relatively simple to carry out, this process is important enough that getting oversight from experienced corporate counsel is prudent. See Holloway Guides for more discussion.

Raising capital

Capitalization, accredited vs. non-accredited investors. “Capitalization” in the startup context generally means the funding necessary for a startup to open for business, while “capital structure” refers to the types of capital (broadly, either equity or debt) available to fund business operations. Capital structure often consists of common stock and preferred stock (equity), as well as convertible notes (debt). A “capitalization table” (or “cap table”) will provide a summary of all securities (stock) issued by the company, along with the fully diluted percentage ownership of each shareholder based on all issued shares (not the total authorized shares).

Capitalization of your startup may include issuance of convertible notes or the sale of preferred stock and other securities, all of which are subject to the federal “Securities Act of 1933” as well as various “Blue Sky” state laws, essentially intended to prevent fraudsters from selling shares in worthless companies to unwitting investors. In determining compliance with these laws, the distinction between ‘Accredited’ and ‘Non-Accredited’ investors is important; in brief, raising money from accredited investors generally means there is less to worry about.

“Accredited Investors” by definition must have net worth of $1 million (excluding a principal residence) or annual income for the current and past two years of at least $200,000 (or $300,000 jointly with a spouse). If you are planning on raising money from Non-Accredited Investors, which founders should NOT do but often will do anyway, then in addition to familiarizing yourself with Rule 502(b)(1) and related Rules 504-506 of Regulation D (which provide relevant exemptions in this context), you should absolutely consult with an experienced securities attorney to make sure your reliance on these rules is not misplaced, as they are deceptively complex, though essentially can be summarized as follows:

• Rule 504 provides an exemption for the sale of up to $1 million in securities within any 12 month period;
• Rule 505 provides an exemption for the sale of up to $5 million in securities within any 12 month period to any number of accredited investors and up to 35 unaccredited investors; and
• Rule 506 provides an exemption to an unlimited number of accredited investors and up to 35 other purchases, provided, however, that all non-accredited investors are “sophisticated” — having sufficient knowledge and experience in financial and business matters to make them capable of evaluating the merits and risks of the prospective investment.

Failure to comply with federal and state securities laws is a big deal: non-compliance gives rise to a rescission right for investors (legally they can demand their money back) and there are serious civil and criminal penalties for any materially false statements or omissions made during the offer or sale of any securities.

Selling preferred stock. Once you’ve found investors, outside of convertible notes and similar instruments discussed below, you should only be selling preferred stock to them, typically in the context of a “priced round.” If you sell common stock to investors, you will be setting the price of the common stock too high for purposes of granting attractive stock options to employees / advisers later on — that is, the “strike” or exercise price for the options will simply reflect the enterprise value of the company when sold, eliminating any real upside for employees (as well as the incentive to work extra hard) since there will be little or no spread between the strike price of the option and the ultimate price per share in an acquisition.

Selling preferred stock to investors in the context of a “priced round” requires that the company be assigned a specific valuation, however, which can be difficult and time consuming at the beginning of a company’s life. This is why convertible notes and SAFEs (discussed below) are so popular in the very early stages.

Preferred stock is so called because it carries certain “liquidation preferences” — meaning that if the company is sold or liquidated and there is not enough money to pay out all shareholders (e.g., the total investment was greater than the final acquisition price), then preferred shareholders get their money back before the common shareholders, i.e., the founders, will receive anything. The exact terms of the liquidation preference is negotiated (usually one to three times the amount of cash invested) and may be either “participating” or “nonparticipating” — though founders will want the “nonparticipating” variety.

A number of other special rights are also negotiated for preferred stock in a priced round, including those listed below; more info at Cooley Go, but for now, simply understand that these terms are complex enough that experienced corporate counsel is absolutely required when selling preferred stock in a priced round to investors:

• Valuation/Dilution (pre/post-money)
• Dividend preferences;
• Redemption rights;
• Conversion rights;
• Anti-dilution protections (in order of most to least founder-friendly: “weighted average — broad based,” “weighted average – narrow based,” or “ratchet based”);
• Voting rights (election of “x” number of members to the Board of Directors, approval of a sale or merger, issuing more shares, etc);
• Registration rights;
• Protective provisions, which can include certain affirmative covenants (e.g., investor access to financial information of the company) and certain negative covenants (e.g., agreement not to take certain actions without approval of the preferred shareholders)
• Right of first refusal; and
• Co-sale rights.

Convertible notes. For startups looking to raise less than ~$500K (sometimes more), rather than selling preferred stock and negotiating all the particulars above, alternatives exist which do not require setting a specific company valuation, namely:

Convertible Notes: As in “promissory note,” so technically a loan and therefore debt which carries interest, which in most circumstances converts to equity as preferred stock upon a later “qualified financing” when preferred stock is sold at a specific price. Usually the note converts at a 10%-30% “discount” to the preferred share price, or subject to a valuation “cap” that is effectively lower than the preferred share price, in order to reward the earlier investment for the additional risk. More info via 500 Startups.

KISS and SAFE Instruments: The relatively more recent “KISS” (from 500 Startups) and “SAFE” (from Y-Combinator) both remove the debt element of the convertible note, but otherwise operate in a similar fashion. Even more recently, Y-Combinator adjusted the terms of its SAFE from a “pre-money” to “post-money” valuation cap structure, which effectively means the new SAFE structure is now relatively more dilutive to current stockholders when issued (often the founders and early employees), but it is also now easier to calculate the amount of ownership sold to investors via the SAFE on a percentage basis (because the percentage no longer changes based on the potential addition or increases to the employee option pool in a later priced round).

“Finders” and brokers. The startup ecosystem is filled with certain people — known as “finders” or “connectors” — who promise to find investment for startups in exchange for a fee. These “finders” typically are not registered securities brokers, so technically they should not do any of the following: participate in negotiations with respect to investing in securities, provide counsel to investors or recommend securities as investments, and perhaps most of all, receive percentage-based compensation on amounts invested.

If presented with a written agreement from a “finder” who is offering to assist in fundraising, be sure that the agreement is non-exclusive and that there is no percentage-based compensation on the funds raised; instead, seek true “advisors” who can offer real business insights, have deep industry knowledge and connections, then pay them via an hourly rate, monthly retainer, and/or properly issued stock options, generally 0.10% to 1% vesting over 2-3 years.

Correctly issuing stock options to employees and advisers

Stock options are not stock, but merely the option to buy a certain amount of stock at a given price — the “exercise” or “strike” price. Employee stock options typically vest over four years, subject to a one-year “cliff” (i.e., the employee must work for at least one year to meet the “cliff” in order to vest any options at all; after that, vesting continues in monthly increments).

Startups generally get into trouble here for two reasons: (1) they fail to establish and formally adopt through appropriate corporation action (i.e., written board consent) a written “Equity Incentive Compensation Plan” (or “option plan”) pursuant to which the options are granted; and (2) they make a promise to grant stock options at a certain time (which implies a certain strike price at that time), but then do not take the necessary corporate action to actually make the stock option grant; namely, a written board consent approving the option grant with an exercise price equal to the fair market value of the stock, as determined by the board of directors, as of the date of grant (ideally with reference to a recent and valid 409A valuation).

It is critical that the board of directors accurately set the exercise price of the stock option to be equal to the fair market value of the optioned stock as of the date of grant. The 409A valuation, when done by a qualified third-party, is really the only way to completely safeguard the Board of Directors’ determination of fair market value of the stock in this regard should the IRS or some other financial auditor later take interest. Not getting this right could later blow up crucial deals — including investment rounds and potential acquisitions — due to the accounting and tax implications. Fortunately, there are now a number of companies which provide 409A valuation services at affordable rates, including Carta, Capshare, and more recently Meld Valuation.

Moreover, unless you want to commit securities fraud, you cannot “backdate” option grants (so that the option granted reflects a previous, lower price). That said, you can set the vesting commencement date to some point in the past in order to give credit for time served. Also, for those interested, there is an important distinction, with corresponding tax implications, between Statutory or Incentive Stock Options (“ISOs”), which can only be issued to employees, and Nonstatutory or Non-Qualified Stock Options (“NSOs”), sometimes issued to non-employee advisors — more on that via the Internal Revenue Service and Investopedia.

One last point worth mentioning in this section: very early on, when company valuation is still extremely low, it is possible and still practical (since tax liability will be minimal in light of the low valuation) to grant “restricted stock” even to non-founders – though you still need an Equity Incentive Plan in place first. In fact, restricted stock is the best option for non-founders involved in the very beginning of a startup’s life because aside from some immediate tax liability (which again, should be light given the relatively low valuation of a new company), ultimate tax treatment will likely be at capital gain rates and so much more favorable as compared to stock options, which usually end up being taxed as ordinary income.

Check out Holloway Guides for more discussion of equity compensation topics.

S Corp and LLC equity compensation

In the S corp and LLC contexts respectively, stock options or equivalent instruments are not as easily issued, and thus again, corporate counsel is appropriate. In the case of the S corp, if an option holder exercises an option who is not a qualified S corp shareholder (e.g., they are a nonresident alien), the S corp could lose its “S election” for pass-through taxation entirely. For LLCs, exercising an option on an interest in the LLC requires complex accounting entries, plus the person exercising the option will then become a member of the LLC, so they will receive “IRS Form 1065, Schedule K-1” and may be required to pay tax on the income of the LLC (in some cases whether or not they actually receive it).

While LLCs can create “profit interests” for its employees, which may entitle recipients to receive a percentage of the future appreciation in enterprise value, these plans are fairly complex to administer. A simpler alternative, used by many S corps and LLCs alike, is “phantom stock” which can be placed on a vesting schedule as well. Phantom stock is essentially a creature of contract, promising that a certain amount of the company’s ultimate acquisition price shall be reserved for distribution to holders of the “phantom stock units.” The amount so reserved is then divided by the number of phantom stock units established in the operating agreement and taken “off the top” from the final acquisition price, to be distributed to each phantom stock holder in accordance with the number of phantom stock units held.

Conclusion

Admittedly, the foregoing covered a bit of ground. As a founder, it is important that you have at least basic familiarity with an incredibly broad range of legal topics — corporate law being one of the most important. Such familiarity will allow you to identify and distinguish between situations that your team can readily handle internally, from those that require outside legal counsel. If you’ve made it this far, a congrats are in order — you are well on your way to startup success.

Daniel T. McKenzie, Esq., manages the Law Office of Daniel McKenzie, specializing in the representation of startups and startup founders. Prior to establishing his law office, Daniel McKenzie co-founded and served as lead in-house counsel for Reelio, Inc., backed by eVentures, and acquired in 2018 by Fullscreen (a subsidiary of Otter Media and AT&T).

Thank you to Stephane Levy, a partner at Cooley, for providing comments on this article.

DISCLAIMER: This post discusses general legal issues, but it does not constitute legal advice in any respect. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction. TechCrunch, the author and the author’s law firm, expressly disclaim all liability in respect of any actions taken or not taken based on any contents of this post.

Google today announced its intention to acquire Alooma, a company that allows enterprises to combine all of their data sources into services like Google’s BigQuery, Amazon’s Redshift, Snowflake and Azure. The promise of Alooma is that handles the data pipelines and manages for its users. In addition to this data integration service, though, Alooma also helps with migrating to the cloud, cleaning up this data and then using it for AI and machine learning use cases.

“Here at Google Cloud, we’re committed to helping enterprise customers easily and securely migrate their data to our platform,” Google VP of engineering Amit Ganesh and Google Cloud Platform director of product management Dominic Preuss write today. “The addition of Alooma, subject to closing conditions, is a natural fit that allows us to offer customers a streamlined, automated migration experience to Google Cloud, and give them access to our full range of database services, from managed open source database offerings to solutions like Cloud Spanner and Cloud Bigtable.”

Before the acquisition, Alooma had raised about $15 million, including an $11.2 million Series A round ed by Lightspeed Venture Partners and Sequoia Capital in early 2016. The two companies did not disclose the price of the acquisition, but chances are we are talking about a modest price given how much Alooma had previously raised.

Neither Google now Alooma said much about what will happen to the existing products and customers — and whether it will continue to support migrations to Google’s competitors. We’ve reached out to Google and will update this post once we hear more.

Update. Here is Google statement about the future of the platform:

For now, it’s business as usual for Alooma and Google Cloud as we await regulatory approvals and complete the deal. After close, the team will be joining us in our Tel Aviv and Sunnyvale offices, and we will be leveraging the Alooma technology and team to provide our Google Cloud customers with a great data migration service in the future. 

 

Regarding supporting competitors, yes, the existing Alooma product will continue to support other cloud providers. We will only be accepting new customers that are migrating data to Google Cloud Platform, but existing customers will continue to have access to other cloud providers.   

Alooma’s co-founder do stress, though, that “the journey is not over.” “Alooma has always aimed to provide the simplest and most efficient path toward standardizing enterprise data from every source and transforming it into actionable intelligence,” they write. “Joining Google Cloud will bring us one step closer to delivering a full self-service database migration experience bolstered by the power of their cloud technology, including analytics, security, AI, and machine learning.”

Ask any attorney what kind of lawyer they are and they’re likely to respond, “the good kind.” Certainly, there are “good” lawyers and there are “bad” lawyers, but aside from avoiding the truly unscrupulous scriveners, much of the issue here is simply making sure you have grabbed the right tool for the job and by selecting counsel knowledgeable in matters pertinent to your situation. That’s ultimately on you.

Beyond that, founders need to understand that there are also “good” clients and “bad” clients — lawyers want the former. It might even be said that good clients on average receive higher quality and more consistent legal services at a lower overall cost than do bad clients; so it is certainly worth the effort to engage with your lawyer thoughtfully. I say this both as an attorney myself and the co-founder of a venture-backed startup that ultimately made it across the finish line, so I can personally appreciate the position of both founders and lawyers here.

That said, this is my roadmap for founders to work with lawyers effectively. It’s part of TechCrunch’s new membership product, Extra Crunch. Along with deep company profiles, events and other features, we’re profiling great lawyers and other outside experts, and providing guide on how to work with them to make your company successful.

The attorney-founder relationship

In the journey of a startup founder, few things are more valuable than a truly excellent startup lawyer. Why is this the case? First, ownership of your company will largely be determined by the legal documents drafted at initial formation and the subsequent terms your lawyer helps to negotiate with investors. Sure, market forces, product development and burn rate provide the context, but lawyers draft the definitive documents, which can be outcome-determinative in many exit scenarios.

Moreover, in the early days, when the founders’ common stock composes perhaps the entire capitalization of the company (often right up until the day funds are wired in your seed round), your startup lawyer is essentially representing the collective interests of the founders as a whole, while also setting up precedent for all subsequent investment rounds. Did you get stuck with a large liquidation preference or “participating preferred” in your seed round? Well, you are likely stuck with those or similar terms in all subsequent rounds, too.

Vincross, the company behind the six-legged robot Hexa, said on Tuesday that it’s picked up $10 million in a Series A+ funding round led by Lenovo Capital, the startup fund managed by Lenovo Group. Returning investor GGV Capital and newcomer Seekdource Capital also participated. The company declined to disclose its latest valuation but said the proceeds will go towards research and development as well as new product lines.

Neuroscience and artificial intelligence researcher Tianqi Sun started Vincross in Beijing back in 2016 when he raised $220,000 for Hexa on Kickstarter. At the time the insectile, programmable robot had separated itself from the horde of humanoids on the market by billing itself as the first robot that can climb stairs, making it suitable for firefighting and other rescue tasks.

Meanwhile, Lenovo’s interest in the startup underscores the personal computer giant’s intent to catch the impending robotics wave, which has been evident since it shelled out $500 million in 2016 for a new investment vehicle to back artificial intelligence, robot and cloud computing startups as the PC market dwindled. Some notable AI companies from its 100-plus portfolio are face recognition company Face++, chipmaker Cambricon and electric automaker Nio.

Beta testers have used the Mind Kit to build a salt-passing robot. Photo: Vincross

“Lenovo lead this round as they had an aligned vision with us on how the future of consumer electronics products that will be in everyone’s home will be robotics, similar to how this has been the case for laptops and computers, which Lenovo is also known for,” founder and chief executive Sun told TechCrunch.

Vincross also announced Tuesday a new developer kit called Mind to serve customers at all levels of building capacities. The firm says early testers have used it to build devices from a voice-controlled gadget that passes you salt and pepper at the dining table, to an all-terrain, legged robot that looks just like Hexa. Amateurs and professional developers can order the suite for $99 on Kickstarter before it gets retailed at $150, a pricetag Sun believes is competitive for consumer-facing robotic development kits.

Vincross already runs an open platform for developers to toy with new hacks for Hexa, upon which they can sell those skills through the company’s online marketplace. The firm has sold about 2,000 devices till this day to researchers, educators, young developers and more in 20 countries, with most of its sales coming from China and the U.S., where Vincross has set up overseas operations.

Within the space of robots for kids, Vincross faces competition from Shenzhen-based Makeblock, which raised $30 million in 2017 to build its development kit targeted at young programmers.

“The types of consumers [Mind Kit is] targeting should be in the process of learning basic programming skills but interested in robotics development, and so we anticipate interest from high school students or older, all the way up to robotics makers,” suggested Sun.

Last year, Spotify took a stake in music distribution service DistroKid. Apple acquired Platoon. And today, SoundCloud announced it’s adding its own music distribution tools to its premium accounts aimed at artists, SoundCloud Pro and SoundCloud Pro Unlimited. With SoundCloud Premier distribution, artists can upload their tracks to all major music services, including Amazon Music, Apple Music, Spotify, Tencent, YouTube Music and even Instagram, directly from SoundCloud.

The service, which is now launching into beta, is available at no extra cost to existing premium account holders.

The company notes this is the first distribution tool built directly into a streaming platform, but that’s not likely to remain the case for long. When Spotify invested in DistroKid in October 2018, it said that it would soon roll out a tool that would allow musicians to upload their tracks to the service through the Spotify for Artists platform. And Apple’s acquisition of Platoon seems to indicate the company wants to go in a similar direction in terms of offering more tools and services to artists.

However, SoundCloud touts the benefits of its own Premier distribution service as a means of centralizing artist payouts, from all music services – itself included. Via SoundCloud Premier, artists can monetize their music through a revenue-sharing program. With the distribution service, artists can now publish their tracks more broadly – and SoundCloud says it doesn’t take a cut of the payouts from the other services.

In addition, the company highlights the tool’s feature set, noting how it allows artists to make changes and correct mistakes on the fly, rather than having to go through customer service as on some other distribution services. It even offers to help artists currently using alternatives like DistroKid or TuneCore to switch over, so they don’t lose their stats.

The ew distribution tool is rolling out to eligible Pro ($6/mo) and Pro Unlimited ($12/mo) subscribers who are 18 years of age or older, creators of original music, have zero copyright strikes, and at least 1,000 monetizable track plays, the company says.

Creators will be notified by email and in-product notifications when the tool becomes available to them.

SoundCloud had once aimed to compete on the same playing field as streaming music giants like Apple Music and Spotify, but may be waking up to the fact that it can offer more value by investing in tools that artists need.

It wouldn’t be the first company to make this sort of shift either. In the video space, Vimeo once aimed to compete with YouTube, before changing its focus entirely to become a hub for tools for video creators. That pivot has paid off for Vimeo – this month, parent company IAC noted Vimeo saw a 28 percent increase in revenue during the past quarter.

SoundCloud, however, has progressed slowly, including on monetization and other changes – allowing competitors to catch up or surpass its own offerings. That could be the case with music distribution, too, as Spotify’s soon-to-launch tools could outdo SoundCloud’s in the near future.

Palo Alto Networks announced today that it intends to acquire security startup, Demisto, for $560 million.

The company sees a tool that can help enhance the Palo Alto security portfolio by adding a higher level of automation. “The addition of Demisto’s orchestration and automation technologies will accelerate Palo Alto Networks Application Framework strategy and serve as a critical step forward in the company’s aim to deliver immediate threat prevention and response for security teams,” the company explained in a statement.

Palo Alto also hopes that Demisto’s automated solutions will help accelerate its AI and machine learning capabilities to bring intelligent automation across the platform. The company brings more than technology, of course. It also brings its 150 customers to Palo Alto, a quarter of which are in the Fortune 500.

Prior to being acquired, Demisto had raised $69 million from Accel, Greylock, Stewart McClure and others. We covered the company’s $6 million Series A, and what the investors saw was a platform that enabled security professionals with a range of backgrounds and skill levels to communicate with one another, while automating security tasks across a variety of security tools.

Here’s how Demisto CEO Slavik Markovich described his company in that funding article:

“If you look at the security space, each company has its own API and UI to run their [product]. What customers don’t have is a cross-product workflow,” Demisto CEO and co-founder Slavik Markovich told TechCrunch. That’s what Demisto is attempting to solve with this product.

With an acquisition price of $560 million after raising $69 million, it would appear that Demisto has given its investors a healthy return, although rumors prior to the sale had the price pegged higher. Its customers will have to wait and see what impact becoming part of a much larger organization will have on Demisto’s products and services. The larger company offers much greater resources, but also brings a level of uncertainty, as in any acquisition scenario.

The acquisition is expected to close in the company’s third quarter, which should be some time in the next few months. As always, the acquisition is subject to regulatory approval.

As online gaming becomes the new social forum for living out virtual lives, a new startup called Medal.tv has raised $3.5 million for its in-game clipping service to capture and share the Kodak moments and digital memories that are increasingly happening in places like Fortnite or Apex Legends.

Digital worlds like Fortnite are now far more than just a massively multiplayer gaming space. They’re places where communities form, where social conversations happen, and where, increasingly, people are spending the bulk of their time online. They even host concerts — like the one from EDM artist, Marshmello, which drew (according to the DJ himself) roughly 10 million players onto the platform.

While several services exist to provide clips of live streams from gamers who broadcast on platforms like Twitch, Medal.tv bills itself as the first to offer clipping services for the private games that more casual gamers play among friends and far flung strangers around the world.

“Essentially the next generation is spending the same time inside games that we used to playing sports outside and things like that,” says Medal.tv’s co-founder and chief executive, Pim DeWitte. “It’s not possible to tell how far it will go. People will capture as many if not more moments for the reason that it’s simpler.”

The company marks a return to the world of gaming for DeWitte, a serial entrepreneur who first started coding when he was 13 years old.

Hailing from a small town in the Netherlands called Nijmegen, DeWitte first reaped the rewards of startup success with a gaming company called SoulSplit. Built on the back of his popular YouTube channel the SoulSplit game was launched with DeWitte’s childhood friend, Iggy Harmsen, and a fellow online gamer, Josh Lipson who came on board as SoulSplit’s chief technology officer.

At its height, Soulsplit was bringing in $1 million in revenue and employed roughly 30 people, according to interviews with DeWitte.

The company shut down in 2015 and the co-founders split up to pursue other projects. For DeWitte that meant a stint working with Doctors Without Borders on an app called MapSwipe that would use satellite imagery to better locate people in the event of a humanitarian crisis. He also helped the non-profit develop a tablet that could be used by doctors deployed to treat Ebola outbreaks.

Then in 2017, as social gaming was becoming more popular on games like Fortnite, DeWitte and his co-founders returned to the industry to launch Medal .tv.

It initially started as a marketing tool to get people interested in playing the games that DeWitte and his co-founders were hoping to develop. But as the clipping service took off, DeWitte and co. realized that they potentially had a more interesting social service on their hands.

“We were going to build a mobile app and were going to load a bunch of videos of people playing games and then we’re going to load videos of our games,” DeWitte says. 

The service allows users to capture the last 15 seconds of gameplay using different recording mechanisms based on game type. Medal.tv captures gameplay on a device and users can opt-in to record sound as well.

“It is programmed so that it only records the game,” DeWitte says. “There is no inbound connection. It only calls for the API [and] all of the things that would be somewhat dangerous from a privacy perspective are all opt-in.”

There are roughly 30,000 users on the platform every week and around 15,000 daily active users, according to DeWitte. Launched last May, the company has been growing between 5% and 10% weekly, according to DeWitte. Typically, users are sharing clips through Discord, WhatsApp and Instagram direct messages, DeWitte said.

In addition to the consumer-facing clipping service, Medal also offers a data collection service that aggregates information about the clips that are shared by Medal’s users so game developers and streamers can get a sense of how clips are being shared across what platform.

“We look at clips as a form of communication and in most activity that we see, that’s how it’s being used,” says DeWitte.

But that information is also valuable to esports organizations to determine where they need to allocate new resources.

“Medal.tv Metrics is spectacular,” said Peter Levin, Chairman of the Immortals esports organization, in a statement. “With it, any gaming organization gains clear, actionable insights into the organic reach of their content, and can build a roadmap to increase it in a measurable way.”

The activity that Medal was seeing was impressive enough to attract the attention of investors led by Backed VC and Initial Capital. Ridge Ventures, Makers Fund, and Social Starts, all participated in the company’s $3.5 million round as well, with Alex Brunicki, a founding partner at Backed, and Matteo Vallone, principal at Initial, joining the company’s board.

“Emerging generations are experiencing moments inside games the same way we used to with sports and festivals growing up. Digital and physical identity are merging and the technology for gamers hasn’t evolved to support that.” said Alex Brunicki, partner at Backed.vc, in a statement.

Medal’s platform works with games like Apex Legends, Fortnite, Roblox, Minecraft and Oldschool Runescape (where DeWitte first cut his teeth in gaming).

“Friends are the main driver of game discovery, and game developers benefit from shareable games as a result. Medal.tv is trying to enable that without the complexity of streaming” said Vallone, who previously headed up games for Google Play Europe, and now sits on the Medal board. 

If you think you knew everything there’s to know about the Samsung Galaxy S10, the company’s Norwegian ad has now leaked on YouTube. The Verge first spotted the ad — a Verge reader was watching TV and it accidentally aired on commercial TV. It matches up with devices that have already leaked over the past couple of months. But there are some additional features that haven’t been discussed yet.

The most glaring change is that Samsung is opting for a pinhole cutout in the corner of the screen instead of an iPhone-style notch. The S10 will have a rounded hole while the S10+ will get an oblong hole punch with a couple of front-facing camera sensors.

As you can see in the ad, Samsung has integrated the fingerprint sensor in the display. It’s still unclear whether you’ll be able to touch any part of the screen, but the ad shows that you’ll be able to put your finger right above the USB-C connector to unlock your phone.

The photo gallery app will get a new tab for stories. It sounds like you’ll be able to create stories using the default camera app without having to use Instagram or Snapchat.

In addition to wireless charging, the S10 will be able to act as a wireless charger. For instance, you’ll be able to recharge the company’s AirPods-like earbuds using your phone.

Rumor has it that Samsung will also release a third device this year. In addition to the usual S10 (6.1-inch display), the S10+ (6.4-inch display), there could be a cheaper 5.8-inch phone. This variant could feature an LCD display, and two cameras on the back instead of three.

And yet, the ad only shows two phones. It’s unclear whether Samsung will run separate advertising campaigns or launch that cheaper phone at a later date.

Update: Original video has been removed from YouTube. I replaced it with a re-upload.

Walmart this morning posted strong holiday sales growth for its holiday quarter, with U.S. sales up 4.2 percent over the same time last year, and a 43 percent rise in Walmart’s U.S. e-commerce sales. The retailer topped analyst expectations, with $138.8 billion in revenue for the quarter, just ahead of the forecasted $138.76 billion; and earnings per share of $1.41, ahead of analysts’ estimates of $1.33.

Most notably, Walmart attributed the strong e-commerce growth to the expansion of its grocery pickup and delivery businesses, and a broader assortment on Walmart.com.

The company has been challenging Amazon, Instacart, Target’s Shipt, and others on grocery. It had toyed with the idea for years, before figuring out a model that made sense and didn’t lose money. With grocery pickup, Walmart offers an alternative to the higher cost of using grocery delivery services, while still allowing for convenience, as its customers can skip shopping the aisles and instead remain in their cars while groceries are loaded into the trunk.

More recently, the company began working with a network of partners to offer grocery delivery to customers’ homes. It has ended relationships with Uber, Lyft, and Deliv while adding new partners like Point Pickup, Skipcart, AxleHire and Roadie, and shifting business to partners like Postmates and DoorDash.

Today, Walmart’s grocery pickup service is available at more than 2,100 Walmart locations and delivery is offered at nearly 800. It expects to offer pickup at 3,100 locations and delivery at 1,600 locations by the end of fiscal year 2020, it says.

Meanwhile, Walmart has been working to expand its assortment online and offer more types of shopping experiences. For example, in fiscal year 2019, the retailer launched the high-end Lord & Taylor shop on the site; added 3D virtual shopping in its Home category; launched a sports fan-focused Fanatics shop; introduced a new Nursery destination on Walmart.com; began adding merchandise from its acquired brands to the main website; and launched Walmart eBooks in partnership with Kobo; among other things.

Walmart has also made shipping to your home more affordable. In 2017, Walmart introduced an alternative to Amazon’s pricier Prime membership with free, two-day shipping on orders of $35 or more. This past year, it expanded free, two-day shipping to its marketplace items by working with hundreds of its top sellers, and third-party fulfillment providers, like Deliverr.

The company last year also launched a new, more personalized website, which included a revamped Home section, as well as a cleaner, more modern design and sections that showcased items trending in the shoppers’ local area. The redesigned website made it easier to order groceries and reorder favorites, too.

In November, eMarketer noted Walmart had overtaken Apple to become the No. 3 online retailer in the U.S., with Walmart (including its Jet and Sam’s Club brands) poised to capture 4 percent of all online retail by year-end. Amazon, of course, remained No. 1, followed by eBay.

“Progress on initiatives to accelerate growth, along with a favorable economic environment, helped us deliver strong comp sales and gain market share,” said Walmart CEO Doug McMillion, in a statement. “We’re excited about the work we’re doing to reach customers in a more digitally-connected way. Our commitment to the customer is clear – we’ll be there when, where and how they want to shop and deliver new, convenient experiences that are uniquely Walmart.”

If a picture is worth a thousand words, how many emails can you replace with a video? As offices fragment into remote teams, work becomes more visual, and social media makes us more comfortable on camera, it’s time for collaboration to go beyond text. That’s the idea behind Loom, a fast-rising startup that equips enterprises with instant video messaging tools. In a click, you can film yourself or narrate a screenshare to get an idea across in a more vivid, personal way. Instead of scheduling a video call, employees can asynchronously discuss projects or give ‘stand-up’ updates without massive disruptions to their workflow.

In the 2.5 years since launch, Loom has signed up 1.1 million users from 18,000 companies. And that was just as a Chrome extension. Today Loom launches its PC and Mac apps that give it a dedicated presence in your digital workspace. Whether you’re communicating across the room or across the globe, “Loom is the next best thing to being there” co-founder Shahed Khan tells me.

Now Loom is ready to spin up bigger sales and product teams thanks to an $11 million Series A led by Kleiner Perkins . The firm’s partner Ilya Fushman, formally Dropbox’s head of business and corporate development, will join Loom’s board. He’ll shepherd Loom through today’s launch of its $10 per month per user Pro version that offers HD recording, calls-to-action at the end of videos, clip editing, live annotation drawings, and analytics to see who actually watched like they’re supposed to.

“We’re ditching the suits and ties and bringing our whole selves to work. We’re emailing and messaging like never before. but though we may be more connected, we’re further apart” Khan tells me. “We want to make it very easy to bring the humanity back in.”

Loom co-founder Shahed Khan

But back in 2016, Loom was just trying to survive. Khan had worked at Upfront Ventures after a stint as a product designer at website builder Weebly. Him and two close friends, Joe Thomas and Vinay Hiremath, started Opentest to let app makers get usabilty feedback from experts via video. But after six months and going through the NFX accelerator, they were running out of bootstrapped money. That’s when they realized it was the video messaging that could be a business as teams sought to keep in touch with members working from home or remotely.

Together they launched Loom in mid-2016, raising a pre-seed and seed round amounting to $4 million. Part of its secret sauce is that Loom immediately starts uploading bytes of your video while you’re still recording so it’s ready to send the moment you’re finished. That makes sharing your face, voice and screen feel as seamless as firing off a Slack message, but with more emotion and nuance.

“Sales teams use it to close more deals by sending personalized messages to leads. Marketing teams use Loom to walk through internal presentations and social posts. Product teams use Loom to capture bugs, stand ups, etc” Khan explains.

Loom has grown to a 16-person team that will expand thanks to the new $11 million Series A from Kleiner, Slack, Cue founder Daniel Gross, and actor Jared Leto that brings it to $15 million in funding. They predict the new desktop apps that open Loom to a larger market will see it spread from team to team for both internal collaboration and external discussions from focus groups to customer service.

Loom will have to hope that after becoming popular at a company, managers will pay for the Pro version that shows exactly how long each viewer watched for. That could clue them in that they need to be more concise, or that someone is cutting corners on training and cooperation. It’s also a great way to onboard new employees. ‘Just watch this collection of videos and let us know what you don’t understand.’

Next Loom will have to figure out a mobile strategy — something that’s surprisingly absent. Khan imagines users being able to record quick clips from their phones to relay updates from travel and client meetings. Loom also plans to build out voice transcription to add automatic subtitles to videos and even divide clips into thematic sections you can fast-forward between. Loom will have to stay ahead of competitors like Vidyard’s GoVideo and Wistia’s Soapbox that have cropped up since its launch. But Khan says Loom looms largest in the space thanks to customers at Uber, Dropbox, Airbnb, Red Bull, and 1100 employees at Hubspot.

“The overall space of collaboration tools is becoming deeper than just email + docs” says Fushman, citing Slack, Zoom, Dropbox Paper, Coda, Notion, Intercom, Productboard, and Figma. To get things done the fastest, businesses are cobbling together B2B software so they can skip building it in-house and focus on their own product.

No piece of enterprise software has to solve everything. But Loom is dependent on apps like Slack, Google Docs, Convo, and Asana. Since it lacks a social or identity layer, you’ll need to send the links to your videos through another service. Loom should really build its own video messaging system into its desktop app. But at least Slack is an investor, and Khan says “they’re trying to be the hub of text-based communication” and the soon-to-be-public unicorn tells him anything it does in video will focus on real-time interaction.

Still, the biggest threat to Loom is apathy. People already feel overwhelmed with Slack and email, and if recording videos comes off as more of a chore than an efficiency, workers will stick to text. But Khan thinks the ubiquity of Instagram Stories is making it seem natural to jump on camera briefly. And the advantage is that you don’t need a bunch of time-wasting pleasantries to ensure no one misinterprets your message as sarcastic or pissed off.

Khan concludes “We believe instantly sharable video can foster more authentic communication between people at work, and convey complex scenarios and ideas with empathy.”