Community Event: Navigating Legal in Climate Tech

This is now Enduring Planet, Planeteer, & Friends’ fifth of our monthly “Financing Your Climate Startup” Community Event Series. If you missed our first four, we highly encourage you to go back and read the teardowns on the Enduring Planet Insights page.

This month, we took it back to the basics and dove into the various legal issues that climate entrepreneurs face across both their founding and financing journey. Panelists discussed key considerations around corporate formation and structuring, navigating financing agreements legal (term sheets, investment docs, etc.), and common legal issues that climate businesses face from idea stages through maturity. 

The event was graciously sponsored by the wonderful team at Orrick.

NOTE: none of the content below should be construed as legal advice. Please consult with an attorney before making any decisions regarding formation, fundraising, IP, etc.

Speakers: ​

• Hannah Friedman, Venture Partner at Planeteer and Head of Partnerships at Mark1 (moderator)
• ​Dimitry Gershenson, CEO, Enduring Planet
• Yael Li-ran Perl, Partner, Orrick
• Sonam Velani, Managing Partner, Streetlife Ventures

Summary Notes

Choosing the Right Corporate Structure, and What the Heck is a B Corp?
There are significant legal considerations and long-term impacts around corporate formation, and founders’ choice of entity structure depends on the business type and ambition. In general, the recommendation is to form companies as a Delaware C Corp as the most common and efficient choice, especially if the founder plans to raise venture capital. Venture capital funds generally prefer C Corps, given the taxation considerations of an LLC as a pass-through entity.

For founders who want to allow for broader social considerations beyond maximizing shareholder wealth, companies can be formed as a Public Benefit Corporation (PBC) without much additional effort. Founders can use tools like AngelList for cheap formation (although only for C Corp, not PBC), however founders should still carefully consult with legal counsel before making decisions. For founders who chose to form a PBC, the process is relatively simple. Note, you can also form as a C-Corp and transition to a PBC later, but that is much more complicated.

Founders should also make sure to register as a foreign entity in the state where their offices are located, not only to stay compliant with local requirements, but also to take advantage of local incentives.

The B Corp consideration is a completely different one, as it’s not a formation question but a certification model for verifying social impact. While not all companies benefit from B Corp certification, the group agreed that in some industries (like consumer goods), the B Corp cert can be a big plus. You can learn more about this process here.

Common Mistakes with Early Equity Issuance
It’s very important to set up equity correctly for founders, typically implementing vesting (typically 4 years with a 1 year cliff), and filing 83(b) forms with the IRS within 30 days of stock purchase. Failing to file an 83(b) can lead to messy tax situations and costly fixes. It’s also critical to review template formation documents and ensure all necessary consents and approvals are obtained to avoid potential legal issues, as often template documents can fail to address the nuances of specific companies and their formation.

This is a critical place to source good legal counsel from the start to prevent problems that may arise during fundraising or when companies attempt to exit. Your investors will notice poor formation documentation and especially noncompliance errors with bylaws. Don’t let sloppy documentation get in the way of making a good investor impression. That said, most things are fixable if caught early and you have good, attentive counsel.

IP Ownership and Management in Startups
One topic of interest to companies at formation is assigning intellectual property (IP), including pre-existing and future IP related to the company's business. Founders coming out of universities may need to grapple with complex IP licensing and ownership dynamics with tech transfer offices, and in some cases, should be prepared for universities to ask for equity in the startup in exchange for releasing IP. When spinning out technology from a university, consider negotiating deferred license fees to avoid early cash burdens and ensure a clean slate for IP ownership.

For founders who begin building their companies while employed elsewhere, extra caution is required. Make sure to segregate both where you work (i.e., don’t use a company computer to write your early code) but also when you work (i.e., don’t build your startup on company time). Also make sure to review your employment contract for any potential risk, and consider terminating your employment prior to starting to build your company in earnest - and especially before you start fundraising for it. 

In contexts where founders expect to work with a corporate partner, either by receiving corporate venture capital (CVC) investment or in cases of co-development, founders should carefully avoid IP conflicts and maintain strict control over commercial decisions related to the deal, often ensured by avoiding Board-level participation from strategic investors. This is best handled in very carefully managed contracts. 

Legal Considerations with Government Grants
There are many nuances involved in receiving or sourcing working capital for government grants or contracts. Government contracts are particularly complex agreements, with lots of dependencies and requirements, so take your time and be thorough. Founders should carefully understand how prior agreements might impact new ones, and take an ownership mindset toward fully understanding the material risks in all contracts around performance, reporting, etc. Founders should carefully evaluate the commercial aspects of a deal and not rely solely on their lawyers to make decisions. 

Understanding Term Sheets and The Legal of Fundraising
Economics (typically valuation) and governance are often the most important aspects of a term sheet in any venture capital deal. Make sure you carefully understand the specifics of the pre-money and post-money valuation(s), the role of the equity pool, and the impact of these factors on existing shareholders. Make sure to carefully review the pro forma cap table and the potential dilution of the founders' and employees’ equity. Ask your lawyers to help you structure this, but also make sure to really understand it yourself; don’t just rely on your legal team. 

Founders, especially first-time founders, need to actively engage with their lawyers to understand the terms and implications of term sheets and investment documents from day 1, due to the frequent imbalance of knowledge between founders and investors or lenders. In this regard, lawyers often have the widest aperture on market terms and their long-term implications, so one of the best uses of time with counsel is learning from their prior experiences.

Last but not least, don’t get too creative with financing structures, as it can have downstream implications on future fundraising. You may want to sweeten the deal with some warrants or other creative terms, but make sure you have a clear understanding of the implications and if the sweetener isn’t applied to all investors, a good rationale to keep everyone content with the unequal dynamics of the round. Remember: Precedent is paramount. What you do in your fundraise today will set the bar for future capital infusions. 

Finding the Right Attorney for Your Climate Startup
Founders often ask (a) how to find a good law firm for your company and (b) how to manage the relationship. In most cases, the best way to find your lawyer is through peer recommendations, as existing clients can speak clearly to the pros and cons and specific expertise of the firm. Founders should try and look for law firms that offer discounted or deferred fees for early-stage companies. Sometimes, the Partner that you work with is more important than the firm.

Once you’re signed, build a good foundation and open channels for communication for effective and efficient (think lowest cost) engagement. Maintain clear communication with lawyers on a regular basis, set expectations upfront (especially around billables), and when possible, try to use brief calls to discuss issues rather than sending long emails with context and questions. Calls can avoid any misunderstandings of scope and unnecessary billable work.