INNOVATION AND EMERGING TECHNOLOGY IN BRAZIL SOUZA, CESCON, BARRIEU & FLESCH ADVOGADOS SÃO PAULO RIO DE JANEIRO BELO HORIZONTE BRASÍLIA SALVADOR

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1 INNOVATION AND EMERGING TECHNOLOGY IN BRAZIL SOUZA, CESCON, BARRIEU & FLESCH ADVOGADOS SÃO PAULO RIO DE JANEIRO BELO HORIZONTE BRASÍLIA SALVADOR

2 INNOVATION AND EMERGING TECHNOLOGY IN BRAZIL

3 This guide describes the viewpoint and legal advisory activities of Souza Cescon in the Innovation and Emerging Technology area. Additionally, we present a checklist of the essential issues for business development in this market from a legal perspective.

4 SUMMARY

5 5 Innovation and Emerging Technology 6 Our Practice 6 Structuring of the Startups Directed to Innovation 7 Protection of Intellectual Property Assets 8 Funding and Divesture 8 Entrepreneur Protection 9 Conflict Prevention and Resolution 10 Checklist

6 4

7 INNOVATION AND EMERGING TECHNOLOGY IN BRAZIL 5 INTRODUCTION Following the trend of several countries that promote the development of emerging technology and innovation companies, a new type of entrepreneurship is growing in Brazil. Adopted mainly by a group of young entrepreneurs with varying qualifications and experiences, this new business model (in which the companies are called as startups) is mainly characterized by the dynamic nature of relationships. The participants are expected to have significant resilience to deal with the expectations of significant growth and escalated development, as well as with the risks and uncertainties arising both from the business model and the specific characteristics of the Brazilian market. In order to support the entrepreneurs and investors throughout the entire capital formation stages, and to serve this fast growing market, we have created our Innovation Desk. The Innovation Desk comprises a multidisciplinary group of lawyers prepared to advise the emerging technology and innovation industries, such as information technology, highly complex medical equipment, life sciences, healthcare, clean tech, electric energy, telecommunications, health, insurance, financial businesses, internet, internet of things, digital media, payment methods, e-commerce and oil & gas, among others, as well as entrepreneurs, startups, emerging companies, venture capital

8 6 and private equity funds, and investors in general, interested in such industries and companies. OUR PRACTICE The purpose of our practice is to provide the most skilled and dedicated legal advice to the market players, such as entrepreneurs, investors or companies, covering all diverse stages of development in relation to their strategic issues. Structuring of the Startups Directed to Innovation We structure the company, or the type of investment, in light of the goals set forth in the business plans presented by our clients. Accordingly, we provide legal advice on: the corporate type to be adopted; the definition of the company s jurisdiction based on its purposes; the most appropriate contractual framework for each operation; the most appropriate method for contracting employees; and the most efficient tax planning to foster the business expansion.

9 INNOVATION AND EMERGING TECHNOLOGY IN BRAZIL 7 In this extremely dynamic environment, we use our experience in the sector to find solutions for the potential contingencies arising from sudden and unexpected expansion demands or reduction of the startup activities. Protection of Intellectual Property Assets As the emerging technology and innovation market is focused on inventions, the protection of intellectual property rights is essential for business success. In this context, we aim at protecting the interests of our customers in the development of intellectual property assets. Trademarks, patents, trade secrets, industrial designs, software, domain names and copyrights are the heart of this industry, and we treat them as such. We operate strategically in the analysis, negotiation and preparation of all possible types of agreements in this area, such as technology transfer agreements, industrial property licenses, technical support service agreements, partnerships with public and/or private agents (including universities and research centers) and joint development agreements.

10 8 Funding and Divesture The success in the search for capital is a prerequisite for an emerging company. We understand the relevance and urgency of this issue. In this regard, we advise our customers throughout all capital formation stages, by means of the negotiation and preparation of loan agreements, debt instruments, promissory notes, issuance of debentures, investment agreements, stock offers, fund raising through crowdfunding and other instruments, taking into consideration the tax effects and economic incentives obtained from each type of operation. In addition to the capital contribution stages, we also operate in company divesture operations, which may be performed by means of interest disposal, initial public offering or settlement of assets. Entrepreneur Protection The definition of rights and obligations of each employee is essential to avoid future conflicts. We provide legal advice on the structuring, negotiation and preparation of shareholders agreements to formalize the relationship among entrepreneurs, as well as between the entrepreneurs and

11 INNOVATION AND EMERGING TECHNOLOGY IN BRAZIL 9 investors. We ensure the protection of their interests through the proper contractual structure in relation to the controlling interest in the company, compensation, incentive, responsibilities and commitment with the business, as well as with respect to the succession risk in the investment and divesture operations. Conflict Prevention and Resolution The adoption of alternatives for prevention and resolution of conflicts is another important issue. In the innovation sector, entrepreneurs, investors, customers and associates in general may have conflicts, which may involve corporate, financial and intellectual property matters, among others. Our large experience in drafting of instruments that govern the relationship of several parties, such as articles of association, bylaws, shareholders agreements, memorandum of understandings and investment agreements, allows us to establish in advance the solution for problems that usually impact emerging companies. In addition, proactive conflict management not only reduces costs and time, but also protects the relationships and ensures the continuity of the company s operations. Alternative dispute resolution methods are further being used to avoid lawsuits or resolve conflicts in a more secure and prompt manner.

12 10 In this scenario, our Innovation Desk counts on lawyers with qualification and experience in presenting legal solutions specifically directed to the technology industry. Our practice comprises legal advice in the preparation of agreements, full support in resolution procedures, such as mediation, negotiation, reconciliation and arbitration, and representation of customers in the courts throughout Brazil. CHECKLIST The purpose of the checklist below is to encourage reflection regarding matters deemed extremely relevant to the Innovation and Emerging Technology businesses. a Definition of the role to be exercised by each project member, in terms of rights, obligations, risks, compensation, incentives and decision-making power. Considering that is not possible to accurately determine the necessary time for the startup to be able to generate the expected returns and meet the high expectations of entrepreneurs and investors, such definition is essential to manage the conflicts and expectations of all parties involved.

13 INNOVATION AND EMERGING TECHNOLOGY IN BRAZIL 11 b Verification of the business model application in light of the Brazilian market particularities, taking into consideration the formal procedures to begin the activities, under applicable tax legislation, labor law restrictions and possible environmental limitations that could hamper or impact the future development plans. c Definition about the commercial interest to expand the business outside Brazil and verification of the legal alternatives for such. d Definition of the purposes to be complied with by the company. The participants shall determine whether the initial idea is to develop a long-term project or seek a fast growth in order to attract third parties interested in investing or acquiring the business. e In the relationship with new investors, the entrepreneurs shall be prepared to deal with structural changes that may turn the company s management more complex and that could reduce the power initially exercised by the entrepreneurs. f Analysis of the possibilities of benefiting from the several governmental incentives in the operating sector.

14 12 g Legal certainty in the investment operations. The investors in this market generally have significant negotiation experience; on the other hand, the entrepreneurs, having the full 360 business viewpoint, shall be motivated to keep the business running as efficiently as possible. In this regard, the legal instruments shall cover the needs and obligations of each party in the investments to be carried out over the different capital formation stages. h Verification of reasonableness of costs for the maintenance of the startup in view of the need of financial contributions and uncertainties as regards to the raising of funds. Company s debt is common during this stage, however, the shareholders shall consider the best alternatives to obtain the necessary funds whenever it is necessary, establishing the acceptable limits and complying with their legal obligations before the company. i Knowledge of the possible manners of protecting the company s competitive advantages, including intellectual property rights. The inventor or owner of the invention shall take the measures to ensure the exclusivity of the inventions and decide whether extending exclusivity rights overseas is desirable.

15 INNOVATION AND EMERGING TECHNOLOGY IN BRAZIL 13 j Protective measures in the disclosure of confidential information to third parties, including employees and associates. Execution of a confidentiality agreement before the disclosure of any sensitive information.

16 14 Representatives ALEXANDRE GOSSN BARRETO is the partner of Banking and Capital Markets, Infrastructure and Venture Capital of Souza Cescon. He has a bachelor s degree in Law from Universidade de São Paulo (USP) and a master s degree in Banking Law (LL.M.) from Boston University Law School. He has significant experience in investments made by venture capital and private equity funds in emerging companies. Alexandre participated as a spokesman in several events related to this sector in Brazil and abroad. DARKSON DELMONDES GALVÃO is the partner of Mergers and Acquisitions and Private Equity of Souza Cescon. He has a bachelor s degree in Law from Universidade de São Paulo (USP) and a master s degree in Law (LL.M.) from University of Chicago Law School. He has significant experience in investments made by venture capital and private equity funds in emerging companies.

17 INNOVATION AND EMERGING TECHNOLOGY IN BRAZIL 15 FREDERICO VIANA RODRIGUES is the partner of Capital Markets, Mergers and Acquisitions, and Private Equity of Souza Cescon. He has a bachelor s degree in Law from Faculdade de Direito Milton Campos and a master s degree in Corporate Law from Universidade Federal de Minas Gerais (UFMG). He has significant experience in startups and investments made by capital venture funds, and advises several startups, supporting companies, accelerating companies and investors in this sector. LUIZ FELIPE DI SESSA is the senior associate of Technology and Intellectual Property of Souza Cescon. He has a bachelor s degree in Law from Faculdade de Direito da Pontifícia Universidade Católica de São Paulo (PUC/SP), specialization in Intellectual Property from Escola Superior de Advocacia ESA-SP and master s degree (LL.M) in Intellectual Property from the World Intellectual Property Organization. He has significant experience in negotiating intellectual property assets in venture capital and private equity operations.

18 16 This guide is not intended to be exhaustive or a substitute of a legal counsel and does not constitute legal advice. The interested parties shall consult with their own legal counsel to detemine the risks and opportunities in this sector.

19 INNOVATION AND EMERGING TECHNOLOGY IN BRAZIL 17 CONTACTS SOUZA, CESCON, BARRIEU & FLESCH ADVOGADOS ALEXANDRE BARRETO DARKSON DELMONDES GALVÃO FREDERICO VIANA RODRIGUES LUIZ FELIPE DI SESSA

20 SOUZA, CESCON, BARRIEU & FLESCH ADVOGADOS SÃO PAULO RIO DE JANEIRO BELO HORIZONTE BRASÍLIA SALVADOR