S-1/A 1 a2209713zs-1a.htm S-1/A

Use these links to rapidly review the document
TABLE OF CONTENTS
LEGALZOOM.COM, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 2009, 2010 and 2011 and the Six Months Ended June 30, 2011 and 2012

Table of Contents

As filed with the Securities and Exchange Commission on July 30, 2012

Registration No. 333-181332

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549



Amendment No. 4
to
FORM S-1
REGISTRATION STATEMENT
Under
The Securities Act of 1933



LegalZoom.com, Inc.
(Exact name of Registrant as specified in its charter)

Delaware   7370   95-4752856
(State or other jurisdiction of
incorporation or organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification Number)
101 North Brand Boulevard, 11th Floor
Glendale, California 91203
(323) 962-8600
(Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices)
John Suh
Chief Executive Officer
LegalZoom.com, Inc.
101 North Brand Boulevard, 11th Floor
Glendale, California 91203
(323) 962-8600
(Name, address, including zip code, and telephone number, including area code, of agent for service)
Please send copies of all communications to:
C. Thomas Hopkins, Esq.
Louis P.A. Lehot, Esq.
Sheppard, Mullin, Richter & Hampton LLP
1901 Avenue of the Stars, Suite 1600
Los Angeles, California 90067
(310) 228-3735
  Fred Krupica
Chief Financial Officer
Chas Rampenthal, Esq.
General Counsel and Secretary
LegalZoom.com, Inc.
101 North Brand Boulevard, 11th Floor
Glendale, California 91203
(323) 962-8600
  Steven B. Stokdyk, Esq.
Latham & Watkins LLP
355 South Grand Avenue
Los Angeles, California 90071
(213) 485-1234



        Approximate date of commencement of the proposed sale to the public:    As soon as practicable after this Registration Statement becomes effective.

         If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. o

         If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

         If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

         If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

         Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o   Accelerated filer o   Non-accelerated filer ý
(Do not check if a smaller
reporting company)
  Smaller reporting company o

         The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.


Table of Contents

The information in this prospectus is not complete and may be changed. Neither we nor the selling stockholders may sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and neither we nor the selling stockholders are soliciting offers to buy these securities in any jurisdiction where the offer or sale is not permitted.

PROSPECTUS (Subject to Completion)
Issued July 30, 2012

8,000,000 Shares

LOGO

COMMON STOCK



LegalZoom.com, Inc. is offering 3,800,000 shares of its common stock and the selling stockholders are offering 4,200,000 shares of common stock. We will not receive any proceeds from the sale of shares by the selling stockholders. This is our initial public offering and no public market currently exists for our shares. We anticipate that the initial public offering price of our common stock will be between $10.00 and $12.00 per share.



We have applied for listing of our common stock on the New York Stock Exchange under the symbol "LGZ."



We are an "emerging growth company" under the federal securities laws and will be subject to reduced public company reporting requirements. Investing in our common stock involves risks. See "Risk Factors" beginning on page 13.



PRICE $              A SHARE



 
 
Price to
Public
 
Underwriting
Discounts and
Commissions
 
Proceeds to
LegalZoom
 
Proceeds
to Selling
Stockholders

Per Share

  $            $            $            $         

Total

  $                     $                     $                     $                  

We and the selling stockholders have granted the underwriters the right to purchase up to an additional 1,200,000 shares of common stock to cover over-allotments.

The Securities and Exchange Commission and state regulators have not approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the shares of common stock to purchasers on                           , 2012.



MORGAN STANLEY   BofA MERRILL LYNCH

RBC CAPITAL MARKETS   WILLIAM BLAIR   CANTOR FITZGERALD & CO.   MONTGOMERY & CO.

   

                           , 2012


Table of Contents

GRAPHIC


Table of Contents


TABLE OF CONTENTS

 
  Page

Prospectus Summary

  1

Risk Factors

  13

Special Note Regarding Forward-Looking Statements

  28

Market, Industry and Other Data

  29

Use of Proceeds

  30

Dividend Policy

  30

Capitalization

  31

Dilution

  33

Selected Consolidated Financial Data

  35

Management's Discussion and Analysis of Financial Condition and Results of Operations

  39

Business

  67

Management

  78

Executive Compensation

  85

Certain Relationships and Related Person Transactions

  103

Principal and Selling Stockholders

  105

Description of Capital Stock

  109

Shares Eligible For Future Sale

  114

Material U.S. Federal Tax Considerations for Non-U.S. Holders of Common Stock

  116

Underwriting

  120

Legal Matters

  126

Experts

  126

Where You Can Find More Information

  126

Index to Consolidated Financial Statements

  F-1



        The information in this prospectus is not complete and is subject to change. No person should rely on the information contained in this document for any purpose other than participating in our proposed initial public offering, and only the prospectus dated                        , 2012, is authorized by us to be used in connection with our proposed initial public offering. The prospectus will only be distributed by us and the underwriters named herein and no other person has been authorized by us to use this document to offer or sell any of our securities.

        Until                        , 2012 (25 days after the commencement of our initial public offering), all dealers that buy, sell, or trade shares of our common stock, whether or not participating in our initial public offering, may be required to deliver a prospectus. This delivery requirement is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

        For investors outside the United States: Neither we, nor the selling stockholders, nor the underwriters have done anything that would permit our initial public offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the shares of our common stock and the distribution of this prospectus outside of the United States.

i


Table of Contents


PROSPECTUS SUMMARY

        This summary highlights information contained in greater detail elsewhere in this prospectus. This summary is not complete and does not contain all of the information that you should consider in making your investment decision. You should read this entire prospectus carefully before making an investment in our common stock. You should consider, among other things, our consolidated financial statements and the related notes and sections titled "Risk Factors," "Special Note Regarding Forward-Looking Statements" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this prospectus.


LEGALZOOM.COM, INC.

        We believe that everyone deserves access to quality legal services so they can benefit from the full protection of the law. Our mission is to be the trusted destination where small businesses and consumers address their important legal needs and to be our customers' legal partner for life.

Overview

        LegalZoom is the leading online provider of services that meet the legal needs of small businesses and consumers in the United States. We believe that we are transforming the small business and consumer legal services market by leveraging the power of technology and people. Our online legal platform enables us to deliver services at scale with a compelling combination of quality, customer care and value. Our services include a portfolio of interactive legal documents that are personalized by our customers through our dynamic online processes, as well as subscription legal plans and registered agent services.

        We developed our easy-to-use, online legal platform to make the law more accessible to small businesses and consumers. Our scalable technology platform enables the efficient creation of personalized legal documents, automates our supply chain and fulfillment workflow management, and provides customer analytics to help us improve our services. For small businesses and consumers who want legal advice, we offer subscription legal plans that connect our customers with experienced attorneys who participate in our legal plan network.

        We have served approximately two million customers over the last 10 years. In 2011, nine out of ten of the approximately 34,000 customers who responded to a survey we provided said they would recommend LegalZoom to their friends and family. Our customers placed approximately 490,000 orders and more than 20 percent of new California limited liability companies were formed using our online legal platform in 2011. We believe the volume of transactions processed through our online legal platform creates a scale advantage that deepens our knowledge and enables us to improve the quality and depth of the services we provide to our customers.

The Small Business and Consumer Legal Services Market

        The law provides numerous benefits and protections to businesses and consumers. For example, entrepreneurs incorporate their businesses to shield personal assets, limit liabilities and help raise capital, and consumers use estate planning tools to ensure their assets are distributed according to their wishes and to minimize tax liabilities. According to the U.S. Census Bureau, in 2009, there were approximately 26 million businesses with fewer than ten employees. We estimate that in 2010, approximately two million new businesses were formed in the United States. According to the U.S. Bureau of Economic Analysis, legal services in the United States in 2010 represented a $266 billion market. We estimate that in 2011 approximately $97 billion of legal services were provided to small businesses and consumers, based on a study conducted on our behalf by L.E.K. Consulting LLC.

        Despite the enormous amount spent on legal services, we believe that small businesses and consumers have not been adequately served by the options traditionally available to them. Every year, small

 

1


Table of Contents

businesses enter into legal contracts and become entangled in disputes, many of which require legal services to address. Consumers experience important life events that affect their families, including the birth of a child, marriage, divorce and death, all of which can also give rise to diverse needs for legal services. Small businesses and consumers often do not understand their legal needs or know where to start looking for an attorney. The high and unpredictable cost of traditional legal services also presents challenges. As a result, many small businesses and consumers often are unsure of or dissatisfied with the legal services available to them, and many either elect not to seek help or take no action to address their important legal needs.

Our Opportunity

        We founded LegalZoom with a vision of combining the power of online technology with deep legal experience to create a scalable online legal platform that would fundamentally transform the way legal services are delivered to small businesses and consumers. We believe we are uniquely positioned to continue transforming the small business and consumer legal services market through the use of technology. Furthermore, there is a significant opportunity to expand the legal services market by making the benefits and protection of the law more accessible to small businesses and consumers. We are taking advantage of this opportunity by providing the following benefits to our customers:

    Quality.  Our deep legal knowledge, portfolio of interactive legal documents and subscription legal plans enable us to provide quality services designed to meet the specific needs of our customers.

    Customer Care.  We strive to deliver an exceptional customer experience, and we guarantee customer satisfaction.

    Value.  We believe that fixed, transparent pricing offers superior value compared to traditional hourly billing.

Our Strengths

        Our key strengths include:

    Leading Brand.  We are the leading, nationally recognized legal brand for small businesses and consumers in the United States, with 60% aided brand awareness based on a survey we conducted using United Sample, Inc. in January 2012. We believe that we are redefining the small business and consumer legal services market and that the strength of our brand is enabling us to expand this market.

    Deep Legal Knowledge.  We have a deep understanding of the legal needs of small businesses and consumers based on over 10 years of experience serving our customers. We leverage our legal knowledge and team of experienced, in-house attorneys, often in consultation with outside attorneys from across the United States, to design, review and maintain our services. The high volume of transactions we handle and feedback we receive from customers and government agencies give us a scale advantage that deepens our knowledge and enables us to further develop additional services to address our customers' needs and refine our business processes.

    Exceptional Customer Experience.  Customer care is central to our culture and we are highly focused on providing exceptional customer experiences. Our online legal platform was designed to be easy for our customers to navigate and use. Our customers have access to live customer care representatives, and subscribers to our legal plans may consult with an experienced attorney licensed in their jurisdiction. If a customer is not completely satisfied with our services for any reason, we will attempt to correct the situation, or provide a refund or credit.

 

2


Table of Contents

    Advanced Systems and Processes.  We have developed advanced systems and processes to efficiently deliver services at scale that meet the specific needs of our customers. Our technology allows us to efficiently serve thousands of small businesses and consumers every day. Our supply chain and fulfillment systems integrate external and internal technologies, enabling intelligent workflow management while increasing processing speed and efficiency.

    Accessible Services.  Our online legal platform allows customers to access our services from their home, office or anywhere they have an Internet connection. Our fixed, transparent pricing is often more affordable when compared to traditional hourly billing, and our subscription legal plans allow our customers to avoid the often difficult process of finding and meeting with an attorney.

Our Strategy

        The key elements of our strategy include:

    Expand and Improve Our Services.  We plan to expand and improve the services we offer our customers to better address their legal needs and deepen our relationships with them.

    Leverage and Grow Our Subscription Legal Plans.  We intend to offer our subscription legal plans to a wider group of customers by making them available in additional states, bundling them with more of our services, and offering them on a standalone basis. We plan to invest in marketing campaigns to promote our subscription legal plans. Our aim is to reach a broader group of customers through our legal plans, including those who are unsure of their legal needs or who want the added comfort of speaking with an attorney.

    Expand Internationally.  We plan to replicate our U.S. model abroad in the near term, as we believe that our online legal platform represents a compelling value proposition to small businesses and consumers globally. We plan to partner with legal services providers outside of the United States to expand our operations internationally. We believe that the strength of our brand, focus on customer care, deep understanding of the legal needs of small businesses and consumers, and scalable technology will help us successfully enter markets outside the United States.

    Continue to Build a Trusted Brand and Drive Awareness of Our Services.  We will continue to build a trusted brand by delivering a compelling combination of quality, customer care and value. We plan to enhance our marketing activities to build our brand and increase awareness of our services. We plan to continue to make significant investments in marketing campaigns, including through online, television and radio advertising, to enhance our ability to acquire new customers and increase customer retention.

Our Services

        Through our online legal platform, we offer a variety of services to meet the specific needs of small businesses and consumers.

    Interactive Legal Documents

        We offer a broad portfolio of interactive legal documents that our customers can tailor to their specific needs through our dynamic online processes and scalable technology. Our interactive legal documents are designed for use, as appropriate, at the federal level, as well as in all 50 states, the District of Columbia and approximately 2,900 U.S. counties. Our interactive legal document services for small businesses include limited liability company formations, incorporations and trademark applications. Our interactive legal document services for consumers include wills, living trusts and powers of attorney.

 

3


Table of Contents

    Subscription Legal Plans

        For small businesses and consumers who want legal advice, we offer legal plans that connect subscribers with experienced attorneys licensed in their jurisdiction to address their specific legal needs. In order to be considered for participation in our legal plan network, independent attorneys must satisfy certain quality standards established by us and be highly focused on customer care. Our small business and consumer subscription legal plans are currently available in 40 states and the District of Columbia. Our subscription legal plans include free attorney consultations on new legal matters, review of our interactive legal documents, and discounts on LegalZoom services and additional services provided by legal plan network attorneys.

    Subscription Registered Agent Services and Other Services

        We offer subscription registered agent services for business entities, who are required to appoint and maintain a registered agent in their state of formation to receive service of process and official government communications. We offer other services to our customers, including unlimited access to our forms library, electronic storage of applicable LegalZoom documents and document revisions. We also introduce our customers to relevant non-legal services and products through our relationships with leading credit card companies, commercial banks and other companies serving our customer base.

Risks Associated with Our Business

        Our business is subject to numerous risks and uncertainties, as discussed more fully in the section entitled "Risk Factors" immediately following the prospectus summary and elsewhere in this prospectus. You should carefully consider these risks before making an investment in our common stock. Some of these risks include:

    our business and services subject us to complex and evolving U.S. and foreign laws and regulations regarding the unauthorized practice of law, legal document processing and preparation, legal plans, privacy and other matters;

    if we fail to provide high quality services, customer care and customer experience and add new services that meet our customers' expectations, we may not be able to attract and retain customers;

    our business model is evolving from a transaction model to a combined transaction and subscription model, and our existing and new customers may not become subscribers;

    if we fail to successfully promote and maintain our brand and reputation, or if we incur excessive expenses in doing so, our business may be adversely affected;

    if our marketing efforts are unsuccessful, our ability to attract new customers or retain existing customers to our services may be adversely affected;

    if we fail to safeguard our customers' information and privacy, our brand and reputation may be harmed, customers may curtail or stop using our services and we may face claims and potential liabilities;

    we expect to face increasing competition in the online and offline legal services markets from law firms, solo attorneys, online legal document services, national legal plans and other service providers;

    if we are unable to effectively manage and minimize errors, failures, interruptions or delays caused by third parties, or if our third-party service providers cease to do business with us, our ability to deliver our services may be adversely affected;

 

4


Table of Contents

    we depend on top talent, including our senior management team, to grow and operate our business, and if we are unable to hire, retain and motivate our employees, we may not be able to grow effectively;

    we may experience significant disruptions in our online services or otherwise fail to ensure that our website is accessible; and

    we are involved in several class action lawsuits and other litigation matters that are expensive and time consuming and that could be resolved adversely.

Corporate Information

        We were initially formed as a California corporation in July 1999, and we converted to a Delaware corporation in February 2007. Our principal executive offices are located at 101 North Brand Boulevard, 11th Floor, Glendale, California 91203, and our telephone number at this address is (323) 962-8600. Our website is www.legalzoom.com. Information contained on, or that can be accessed through, our website shall not be deemed incorporated into and is not a part of this prospectus or the registration statement of which it forms a part. Unless the context otherwise requires, the terms "LegalZoom.com," "LegalZoom," "company," "we," "us" and "our" refer to LegalZoom.com, Inc. and its direct and indirect subsidiaries.

        We are not a law firm, and we do not provide legal advice. We provide self-help legal documents at our customers' specific direction and general information on legal issues generally encountered. Independent, licensed attorneys participate in our attorney network to provide services to our customers through our legal plans.

        LegalZoom, the LegalZoom.com logo and other LegalZoom-formative marks are trademarks of LegalZoom.com, Inc. in the United States or other countries. This prospectus also includes other trademarks of LegalZoom.com and trademarks of other persons.

Reverse Stock Split

        Our board of directors and stockholders approved a 2-for-3 reverse stock split of our common stock and a proportional adjustment to the conversion ratio of our Series A redeemable convertible preferred stock, or Series A, that will be effective immediately prior to the effectiveness of this initial public offering. We will issue cash in lieu of fractional shares in connection with this reverse split. All references to common stock, options and restricted stock units to purchase common stock, share, per share data and related information have been retroactively adjusted, where applicable, in this prospectus to reflect the reverse stock split of our common stock as if it had occurred at the beginning of the earliest period presented.

 

5


Table of Contents


THE OFFERING

Common stock offered

   

By us

  3,800,000 shares

By the selling stockholders

  4,200,000 shares

Total

  8,000,000 shares

Total common stock to be outstanding after our initial public offering

 

40,328,846 shares

Over-allotment option of common stock offered by us and the selling stockholders

 

1,200,000 shares

Use of proceeds

 

We currently intend to use the net proceeds to us from this offering primarily for general corporate purposes, including working capital and capital expenditures associated with scaling our operations, technology and infrastructure to support our growth. We will not receive any of the proceeds from the sale of shares by the selling stockholders. See "Use of Proceeds" on page 30.

Risk factors

 

See "Risk Factors" beginning on page 13 and the other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in our common stock.

Proposed New York Stock Exchange symbol

 

"LGZ"

        The total number of shares of common stock to be outstanding after this offering is based on 36,528,846 shares of common stock outstanding, as of June 30, 2012, and excludes, as of June 30, 2012:

    616,383 shares of our common stock issuable upon the exercise of outstanding options granted pursuant to our 2000 Stock Option Plan at a weighted-average exercise price of $0.93 per share, 4,297,270 shares of our common stock issuable upon the exercise of outstanding options granted pursuant to our 2010 Stock Incentive Plan at a weighted-average exercise price of $3.40 per share and 50,000 restricted stock units to be settled in shares of our common stock granted pursuant to our 2010 Stock Incentive Plan which will remain outstanding after this offering, unless earlier exercised;

    217,799 shares of common stock available for future issuance under our 2010 Stock Incentive Plan; and

    2,700,000 shares of common stock, subject to increase on an annual basis, reserved for future issuance under our 2012 Equity Incentive Plan, which will become effective in connection with this offering.

        Unless otherwise stated, information in this prospectus assumes:

    2-for-3 reverse stock split of our common stock and a proportional adjustment to the conversion ratio of our Series A that will be effective immediately prior to the effectiveness of this offering;

    that our amended and restated certificate of incorporation, which we will file in connection with the completion of this offering, is in effect;

 

6


Table of Contents

    the automatic conversion of all outstanding shares of Series A into an aggregate of 15,256,000 shares of our common stock immediately prior to the completion of this offering;

    the exercise by a selling stockholder of an option to purchase 40,000 shares of common stock at a weighted average exercise price of $2.245, for total proceeds to us of $89,800; and

    no exercise by the underwriters of their option to purchase up to an additional 1,200,000 shares of common stock to cover over-allotments.

 

7


Table of Contents


SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA

        The following tables summarize our consolidated financial data. You should read this summary consolidated financial data in conjunction with the sections titled "Selected Consolidated Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and related notes, all included elsewhere in this prospectus.

        We derived the consolidated statements of operations data for the years ended December 31, 2009, 2010 and 2011 and the consolidated balance sheet data as of December 31, 2011, from our audited consolidated financial statements included elsewhere in this prospectus. We derived the summary unaudited interim consolidated balance sheet data as of June 30, 2012 and the statements of operations data for the six months ended June 30, 2011 and 2012 from our unaudited interim consolidated financial statements included elsewhere in this prospectus. The unaudited interim consolidated financial statements were prepared on a basis consistent with our audited consolidated financial statements and include, in the opinion of management, all adjustments, consisting of only normal recurring adjustments, necessary for a fair statement of the financial information contained in those statements. Our historical results are not necessarily indicative of the results that may be expected in the future.

 

8


Table of Contents

 
  Year Ended December 31,   Six Months Ended
June 30,
 
 
  2009   2010   2011   2011   2012  
 
  (in thousands, except per share data)
 

Consolidated Statements of Operations Data:

                               

Revenues(1)

  $ 103,299   $ 120,771   $ 156,066   $ 78,959   $ 96,459  

Costs and operating expenses(2):

                               

Cost of services

    53,082     60,643     80,437     41,805     46,571  

Sales and marketing

    32,673     36,322     41,891     22,189     31,198  

Technology and development

    4,686     7,509     8,117     3,961     4,474  

General and administrative(1)

    13,154     20,024     19,343     9,447     11,717  
                       

Total costs and operating expenses

    103,595     124,498     149,788     77,402     93,960  
                       

Income (loss) from operations

    (296 )   (3,727 )   6,278     1,557     2,499  

Interest and other expense, net

    (33 )   (15 )   (153 )   (74 )   (76 )
                       

Income (loss) before income taxes

    (329 )   (3,742 )   6,125     1,483     2,423  

Income tax (provision) benefit

    (311 )   (282 )   5,998     (143 )   (1,166 )
                       

Net income (loss)

  $ (640 ) $ (4,024 ) $ 12,123   $ 1,340   $ 1,257  
                       

Accretion of Series A redeemable convertible preferred stock

    (4,035 )   (4,038 )   (4,042 )   (2,005 )   (2,017 )

Net income attributable to participating securities

            (3,407 )        
                       

Net income (loss) attributable to common stockholders

  $ (4,675 ) $ (8,062 ) $ 4,674   $ (665 ) $ (760 )
                       

Net income (loss) per share attributable to common stockholders(3)(5):

                               

Basic

  $ (0.25 ) $ (0.42 ) $ 0.22   $ (0.03 ) $ (0.04 )
                       

Diluted

  $ (0.25 ) $ (0.42 ) $ 0.19   $ (0.03 ) $ (0.04 )
                       

Weighted-average shares used to compute net income (loss) per share attributable to common stockholders(3)(5):

                               

Basic

    18,700     19,360     20,925     20,878     21,136  
                       

Diluted

    18,700     19,360     24,195     20,878     21,136  
                       

Pro forma net income per share(4)(5):

                               

Basic:

              $ 0.34         $ 0.03  
                             

Diluted:

              $ 0.31         $ 0.03  
                             

Weighted average number of shares used in computing pro forma net income per share(4)(5):

                               

Basic

                36,181           36,392  
                             

Diluted

                39,451           40,598  
                             

(1)
We recorded an estimated charge of $5.4 million during the year ended December 31, 2010 related to legal settlements, of which $4.6 million was included as part of general and administrative expenses and $0.8 million was recorded as a reduction of revenues. During the six months ended June 30, 2012, we recorded an additional $0.2 million charge related to a change in estimate of the settlement costs of these legal matters, which was recorded as a reduction of revenues. The ultimate costs of resolving these matters are dependent on a number of factors, including the resolution of any appeals of the approved settlements, actual claims made by, participation rates of, and the resulting payments, if any, to the class members. Any difference between the amount accrued and the ultimate costs of these matters will be recognized as an additional or lower expense in the period in which the matters are resolved. If the actual costs of these matters are higher than the amount we estimated, this difference could have a material adverse effect on our business, operating results, cash flows and financial

 

9


Table of Contents

    condition. See Note 6 to our consolidated financial statements included elsewhere in this prospectus for a full discussion of this legal settlement accrual.

(2)
Stock-based compensation expense included in the above line items:

   
  Year Ended December 31,   Six Months Ended
June 30,
 
   
  2009   2010   2011   2011   2012  
   
  (in thousands)
 
 

Cost of services

  $ 200   $ 178   $ 155   $ 82   $ 67  
 

Sales and marketing

    124     46     56     21     135  
 

Technology and development

    114     155     133     64     75  
 

General and administrative

    699     929     600     288     402  
                         
 

Total stock-based compensation expense            

  $ 1,137   $ 1,308   $ 944   $ 455   $ 679  
                         
(3)
See Note 2 to our consolidated financial statements included elsewhere in this prospectus for a description of the method to compute basic and diluted net income (loss) per share attributable to common stockholders.

(4)
Unaudited basic and diluted pro forma net income per share has been calculated assuming the conversion of all outstanding shares of our redeemable convertible preferred stock (using the if-converted method) into 15,256,000 shares of our common stock as though the conversion had occurred on January 1, 2011. See Note 2 to our consolidated financial statements included elsewhere in this prospectus.

(5)
All share, per-share and related information have been retroactively adjusted, where applicable, to reflect the impact of the 2-for-3 reverse stock split, including an adjustment to the preferred stock conversion ratio which will be effective immediately prior to the effectiveness of this offering.

 
  Year Ended December 31,   Six Months Ended
June 30,
 
 
  2009   2010   2011   2011   2012  
 
  (in thousands, except percent data)
 

Key Metrics(1):

                               

Number of orders placed(2)

    408     436     490     259     284  

Number of subscribers(3)

    47     116     228     187     300  

Subscription revenues as a percentage of total revenues

    5 %   9 %   18 %   14 %   22 %

(1)
For additional information, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Key Metrics" and "—Unaudited Quarterly Results of Operations Data, Other Financial Data and Seasonality" for information regarding numbers of orders placed and number of subscribers.

(2)
This metric represents total customer orders placed in the period, which may include one or more services purchased at the same time.

(3)
This metric includes total paid and free subscribers at the end of a period.

 
   
  As of June 30, 2012  
 
  As of December 31,
2011
  Actual   Pro Forma(1)   Pro Forma As
Adjusted(1)(2)
 
 
  (in thousands)
 

Consolidated Balance Sheet Data:

                         

Cash and cash equivalents

  $ 27,108   $ 31,374   $ 31,374     68,709  

Working capital (deficit)

    (2,316 )   (4,451 )   (4,451 )   34,124  

Total assets

    53,501     61,895     61,895     96,193  

Total liabilities

    50,620     56,679     56,679     55,439  

Redeemable convertible preferred stock

    62,691     64,708          

Total stockholders' equity (deficit)

    (59,810 )   (59,492 )   5,216     40,754  

(1)
The pro forma consolidated balance sheet data gives effect to the automatic conversion of all outstanding shares of convertible preferred stock into an aggregate of 15,256,000 shares of common stock immediately prior to the completion of this offering.

 

10


Table of Contents

(2)
The pro forma as adjusted consolidated balance sheet data gives effect to (i) the pro forma adjustments described in footnote (1) above, (ii) the sale of 3,800,000 shares of common stock in this offering by us at an assumed initial public offering price of $11.00 per share (the mid-point of the price range set forth on the cover page of this prospectus), after deducting underwriting discounts and commissions and estimated offering expenses payable by us, and (iii) the exercise by a selling stockholder of an option to purchase 40,000 shares of common stock with total proceed to us of $89,800.

Non-GAAP Adjusted EBITDA

        To provide investors and others with additional information regarding our financial results, we have disclosed in the table below and within this prospectus non-GAAP Adjusted EBITDA, a non-GAAP financial measure. We define non-GAAP Adjusted EBITDA as net income (loss) plus interest and other expense, net; income tax provision (benefit); certain non-cash charges, including depreciation, amortization and stock-based compensation; and loss from legal settlements. Our non-GAAP Adjusted EBITDA financial measure differs from GAAP in that it excludes certain items of income and expense. Non-GAAP Adjusted EBITDA or the equivalent is frequently used by securities analysts, investors and others as a common financial measure of operating performance.

        Non-GAAP Adjusted EBITDA is one of the primary measures used by our management and board of directors to understand and evaluate our financial performance and operating trends, including period to period comparisons, to prepare and approve our annual budget and to develop short and long term operational plans. Additionally, non-GAAP Adjusted EBITDA is one of the key measures used by the compensation committee of our board of directors to establish the target for and ultimately pay our annual employee bonus pool for virtually all bonus eligible employees. We also frequently use non-GAAP Adjusted EBITDA in our discussions with investors, commercial bankers and other users of our financial statements.

        Management believes non-GAAP Adjusted EBITDA reflects our ongoing business in a manner that allows for meaningful period to period comparisons and analysis of trends. In particular, in calculating non-GAAP Adjusted EBITDA, we exclude certain income and expense items that we believe are not directly attributable to the underlying performance of our business, or are the result of long-term investment decisions in previous periods rather than day-to-day operating decisions, and may be used in future decisions for expansion and acquisition opportunities.

        Our use of non-GAAP Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:

    although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, non-GAAP Adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements;

    non-GAAP Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

    non-GAAP Adjusted EBITDA does not consider the potentially dilutive impact of equity-based compensation;

    non-GAAP Adjusted EBITDA does not reflect tax payments that may represent a reduction in cash available to us;

    non-GAAP Adjusted EBITDA does not include losses associated with, or reflect the cash requirements for, legal settlements; and

    other companies, including companies in our industry, may calculate non-GAAP Adjusted EBITDA differently, which reduces its usefulness as a comparative measure.

 

11


Table of Contents

        Because of these limitations, you should consider non-GAAP Adjusted EBITDA alongside other financial performance measures, including various cash flow metrics, net income (loss) and our other GAAP results. We encourage investors and others to review our financial information in its entirety and not rely on a single financial measure.

        The following table presents a reconciliation of net income (loss) to non-GAAP Adjusted EBITDA for each of the periods indicated:

 
  Year Ended December 31,   Six Months Ended
June 30,
 
 
  2009   2010   2011   2011   2012  
 
  (in thousands)
 

Net income (loss)

  $ (640 ) $ (4,024 ) $ 12,123   $ 1,340   $ 1,257  

Interest and other expense, net

    33     15     153     74     76  

Income tax provision (benefit)

    311     282     (5,998 )   143     1,166  

Depreciation and amortization

    2,937     3,509     4,562     2,058     2,537  

Stock-based compensation

    1,137     1,308     944     455     679  

Loss from legal settlements

    293     5,359             200  
                       

Non-GAAP Adjusted EBITDA

  $ 4,071   $ 6,449   $ 11,784   $ 4,070   $ 5,915  
                       

 

12


Table of Contents


RISK FACTORS

        Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below, together with all of the other information in this prospectus, including our consolidated financial statements and related notes included elsewhere in this prospectus, before deciding whether to invest in shares of our common stock. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, may also become important factors that adversely affect our business. If any of the following risks are realized, our business, results of operations, financial condition and future prospects could be materially and adversely affected. In that event, the price of our common stock could decline, and you could lose part or all of your investment.

Risks Relating To Our Business

Our business and services subject us to complex and evolving U.S. and foreign laws and regulations regarding the unauthorized practice of law, or UPL, legal document processing and preparation, legal plans, privacy and other matters. These laws and regulations may result in claims, changes to or discontinuance of some of our services, potential liabilities or additional costs that could have a material adverse effect on our business, results of operations, financial condition and future prospects.

        Our business involves providing services that meet the legal needs of our customers and, as a result, is subject to a variety of complex and evolving U.S. and foreign laws and regulations, including the following:

    Our business model includes the provision of services that represent an alternative to traditional legal services, which subjects us to allegations of UPL. UPL generally refers to an entity or person giving legal advice who is not licensed to practice law. However, laws and regulations defining UPL, and the governing bodies that enforce UPL rules, differ among the various jurisdictions in which we operate. We are unable to acquire a license to practice law in the United States, or employ licensed attorneys to provide legal advice to our customers, because we do not meet the regulatory requirement of being exclusively owned by licensed attorneys. We are also subject to laws and regulations that govern business transactions between attorneys and non-attorneys, including those related to the ethics of attorney fee-splitting and the corporate practice of law.

    Regulation of legal document processing and preparation services varies among the jurisdictions in which we conduct business.

    Regulation of our legal plans varies considerably among the insurance departments, bar associations and attorneys general of the particular states in which we offer, or plan to offer, our legal plans. In addition, some states may seek to regulate our legal plans as insurance or specialized legal service products.

        Additionally, we are required to comply with laws and regulations related to privacy and the storing, use, processing, disclosure and protection of personal information and other customer data.

        Our business operations also subject us to laws and regulations relating to general business practices and the manner in which we offer our services to customers subjects us to various consumer laws and regulations, including false advertising and deceptive trade practices.

        The scope of these laws and regulations are often vague and broad, and their applications and interpretations are often uncertain and conflicting. Compliance with these disparate laws and regulations requires us to structure our business and services differently in certain jurisdictions. We dedicate significant management time and expense to dealing with these issues and expect that these issues will continue to be a significant focus as we expand into other services and jurisdictions, including those outside the United States.

13


Table of Contents

        In addition, any failure or perceived failure by us to comply with applicable laws and regulations may subject us to regulatory inquiries, claims, suits and prosecutions. We have incurred in the past, and expect to incur in the future, costs associated with responding to, defending and settling such proceedings, particularly those related to UPL, and the provision of our services more generally. We can give no assurance that we will prevail in such regulatory inquiries, claims, suits and prosecutions on commercially reasonable terms or at all. Responding to, defending and/or settling regulatory inquiries, claims, suits and prosecutions may be time-consuming and divert management and financial resources or have other adverse effects on our business. A negative outcome in any of these proceedings may result in changes to or discontinuance of some of our services, potential liabilities or additional costs that could have a material adverse effect on our business, results of operations, financial condition and future prospects.

If we fail to provide high quality services, customer care and customer experience and add new services that meet our customers' expectations, we may not be able to attract and retain customers.

        The quality and value of our services, customer care and customer experience, as well as the quality of the services provided by the licensed attorneys who participate in our legal plan network, are critical to our ability to attract and retain customers. We have made substantial investments in developing our website, interactive legal documents, customer relationship management, automated supply chain and fulfillment, integrated digital workflow management and other dynamic online processes that comprise our online legal platform to improve the quality of our services, customer care and customer experience. We also intend to add new services such as our legal plans and enhance our existing services. We may fail to attract new customers or lose existing customers if these or future development efforts or services fail to meet changing customer preferences on a timely basis or if the licensed attorneys who participate in our legal plan network fail to provide high quality services, customer care and customer experience. If we are unable to attract new customers or lose existing customers, our business, revenues, results of operations, financial condition and future prospects would be adversely affected.

Our business model is evolving from a transaction model to a combined transaction and subscription model. If a sufficient number of our existing and new customers do not become subscribers, our business, revenues, results of operations and future prospects would be adversely affected.

        Our revenues have historically been derived mostly from providing business formation, estate planning and other interactive legal documents to our customers for a one-time fee. In 2010, we began offering subscription legal plans for small businesses and consumers. Providing access to attorneys in a legal plan network to small businesses and consumers via the Internet is in large part commercially untested. We have invested, and intend to continue to invest, in expanding our subscription services for small businesses and consumers, including continuing to develop technology and infrastructure to support our legal plans and attorney network and expanding our sales and marketing efforts, particularly to promote legal plans and our brand. We expect our total operating expenses to increase in the foreseeable future as a result of continued investments in our subscription legal plan services. These investments will occur in advance of realizing any benefit from such investments, and therefore it may be difficult for us to determine if we are effectively allocating resources in these areas. In addition, we cannot predict whether sufficient numbers of our existing or new customers will subscribe to our legal plans or other subscription services. If we are unable to attract new subscribers to grow our legal plan services or our existing subscribers cancel their legal plan or other subscriptions, or if we are unable to attract attorneys to our legal network, our revenues, results of operations and future prospects would be adversely affected.

14


Table of Contents

Our business depends on a strong brand and reputation. If we fail to successfully promote and maintain our brand and reputation, or if we incur excessive expenses in doing so, our business, revenues and results of operations may be adversely affected.

        We believe our brand has contributed to the success of our business and we have made substantial investments to build and strengthen our brand and reputation. Maintaining and enhancing the LegalZoom brand and our reputation is critical to growing and retaining our customer base. Regulatory proceedings, consumer claims, litigation, customer complaints or negative publicity through word-of-mouth, social media outlets, blogs, the Better Business Bureau and other sources related to our business practices, services, customer care, data privacy, security issues, or reputation of our endorsers irrespective of their validity, could diminish confidence in our services and adversely affect our brand and reputation and our ability to attract and retain customers. In addition, maintaining and enhancing our brand and reputation may require us to incur significant expenses and make substantial investments, which may not be successful. If we fail to successfully promote and maintain our brand and reputation, or if we incur excessive expenses in doing so, our business, revenues and our results of operations may be adversely affected.

If our marketing efforts are unsuccessful, our ability to attract new customers or retain existing customers to our services may be adversely affected, which may adversely affect our business, revenues, results of operations and future prospects.

        Our ability to attract new customers and retain existing customers to our services depends in large part on the success of our marketing channels. Our primary marketing channels to generate traffic for our website include search engine marketing, television and radio.

        We rely on both algorithmic and paid listing Internet search results to drive customer traffic to our website. Algorithmic listings are determined and displayed solely by a set of formulas designed by Internet search engine companies, such as Google and Bing. Paid listings can be purchased and then are displayed if particular words or terms are included in a customer's Internet search. We bid on words or terms we expect customers will use to search for our services in the search engine's auction system for preferred placement on its results page. Placement in paid listings is generally not determined solely on the bid price, but also takes into account the search engines' assessment of the quality of the website featured in the paid listing and other factors. Our ability to maintain or increase customer traffic to our website from Internet search engines is not entirely within our control. For example, Internet search engines sometimes revise their algorithms to optimize their search result listings or maintain their internal standards and strategies. Changes in search algorithms could cause our websites to receive less favorable placement and reduce traffic to our website. In addition, we bid for paid listings against our competitors and third parties that may outbid us for preferred placement, which could adversely impact advertising efficiency and customer acquisition efforts. If competition for paid listings increases, we may be required to increase our marketing expenses or reduce the number or prominence of these paid listings. If we reduce our Internet search engine advertising, the number of customers who visit our website could decline significantly.

        In our radio advertising, we currently rely heavily on the use of advertisements featuring exclusive endorsements from prominent on-air radio personalities to drive prospects to our website. A loss of our relationships with, or decline in the reputation or effectiveness of, any endorser could reduce our prospective traffic or harm our brand.

        A reduction or loss of any of our advertising channels may adversely affect our ability to attract new customers to our services, which could adversely affect our business, revenues, results of operations and future prospects.

15


Table of Contents

If we fail to safeguard our customers' information and privacy, our brand and reputation may be harmed, customers may curtail or stop using our services and we may face claims and potential liabilities, which could adversely affect our business, results of operations, financial condition and future prospects.

        Our online legal platform involves the receipt, use, storage, processing and transmission of information from and about our customers, some of which may be personal or confidential. We rely on encryption and authentication technology licensed from third parties to secure the storage and transmission of customer information. Sophistication of intrusion techniques used to gain unauthorized access to or sabotage systems change frequently and are generally not recognized until launched against a target. We may be unable to anticipate these techniques or implement adequate preventative measures. Third parties may also attempt to fraudulently induce our employees or customers to disclose information in order to gain access to customer information. A third party that is able to circumvent our security measures could misappropriate customer or proprietary information or cause interruptions in our business and operations. Computer malware, viruses, hacking and phishing attacks, and spamming could also harm our business and operations. If an actual or perceived breach of our security measures occurs as a result of third-party action, employee error, malfeasance or otherwise, our brand and reputation may be harmed, customers may curtail or stop using our services and we may face claims and potential liabilities, which could adversely affect our business, results of operations, financial condition and future prospects.

Our business is subject to seasonal fluctuations that may cause our results of operations to vary from period to period.

        Many of the factors that contribute to seasonal fluctuations in our results of operations are out of our control. We have experienced, and expect that we will continue to experience, seasonality in the number of orders placed. Customers tend to place a higher number of orders in the first quarter of the year as we believe the demand for forming businesses is the highest at the beginning of the year. Further seasonality is reflected in the timing of our revenue recognition in the second quarter, when we typically recognize a high amount of revenues from orders placed in the first quarter but fulfilled in the second quarter. Also, we generally see demand for our services decline around the beginning of the third quarter with summer vacations and in the last two months of the fourth quarter around the winter holidays. We expect this seasonality to continue into the future, which may cause period to period fluctuations in certain of our operating results and financial metrics and thus limit our ability to predict our future results.

We expect to face increasing competition in the online and offline legal services markets from law firms, solo attorneys, online legal document services, national legal plans and other service providers and our failure to effectively compete with these providers may adversely affect our business, results of operations, financial condition and future prospects.

        We face intense competition from law firms and solo attorneys, online legal document services, national legal plans and other service providers. The online legal document services market is evolving rapidly and is becoming increasingly competitive. Other companies that focus on the online legal document services market, such as BizFilings, RocketLawyer, and The Company Corporation, and law firms that may elect to pursue the online legal document services market, can and do directly compete with us. Law firms and solo attorneys, who provide in-person consultations and are able to provide direct legal advice that we cannot offer due to laws and regulations regarding UPL, compete with us offline and have and may develop competing online legal services. We also compete with several national legal plans, including Hyatt Legal Plans (a MetLife company), ARAG and LegalShield. Many legal plan competitors have focused on employer-sponsored markets or have acquired customers through in-person multi-level marketing. At least one of these competitors, LegalShield, has recently rebranded itself from a multi-level marketing operation to a direct-to-consumer operation that more closely competes with our legal plans. Other legal plan companies may similarly decide to migrate into the direct-to-consumer market and offer plans that compete with ours. We compete in the registered agent services business with several companies, including

16


Table of Contents

CT Corporation and Corporation Services Company, and these competitors have extensive experience in this market.

        Our competitors, whether they are online legal document providers, legal plan providers, law firms or solo attorneys, may also be developing innovative and cost-effective services that target our existing and potential customers. We expect to face increasing competition from offline and online legal services providers in our market, and our failure to effectively compete with these providers may adversely affect our business, results of operations and future prospects.

If we are unable to effectively manage and minimize errors, failures, interruptions or delays caused by third parties, or if our third-party service providers cease to do business with us, our ability to deliver services to our customers, business, brand and reputation and results of operations may be adversely affected.

        We rely on third parties to fulfill portions of the services we offer and to support our operations. For example, we rely on government agencies, including secretary of state offices and the United States Patent and Trademark Office, to process business formation documents and intellectual property applications. If these agencies are unable to process submissions in a timely manner, our brand and reputation may be adversely affected or customers may seek other avenues for their business formation or intellectual property needs. We have other third parties who fulfill our services, including the independent attorneys in our legal plan network. If we cannot attract additional, qualified attorneys into our legal plan network to service the needs of our legal plan subscribers, we may not be able grow our legal plan subscription business effectively and our business, revenues, results of operations and future prospects may be adversely affected. Our data centers, which host many facets of our online legal platform, are also operated out of third-party facilities, and we rely on third-party technology licenses for many aspects of our operations. We exercise limited control over these third parties, which increases our vulnerability to problems with the products and services they provide for us. These third parties may also be subject to financial issues and other unanticipated problems or events. Delays in the services provided by the third parties we rely on could result in deferred revenue recognition. If we are unable to effectively manage and minimize errors, failures, interruptions or delays caused by third parties, or if our third-party service providers cease to do business with us, our ability to deliver services to our customers, business, brand and reputation and results of operations may be adversely effected.

If we fail to effectively manage our growth, our business, brand and reputation, results of operations and financial condition may be adversely affected.

        We have experienced, and continue to experience, rapid growth in headcount and operations, which has placed, and will continue to place significant demands on our management team and our operational and financial infrastructure. As we continue to grow, we must effectively integrate, develop and motivate a large number of new employees, and maintain the beneficial aspects of our corporate culture. To attract top talent, we have had to offer, and believe we will need to continue to offer, highly competitive compensation packages before we can validate the productivity of those employees. The risks of over-hiring or over compensating and the challenges of integrating a rapidly growing employee base into our corporate culture are exacerbated by our expected international expansion.

        Additionally, if we do not effectively manage our growth, the quality of our services could suffer, which could adversely affect our business, brand and reputation, results of operations and financial condition. If operational, technology and infrastructure improvements are not implemented successfully, our ability to manage our growth will be impaired and we may have to make significant additional expenditures to address these issues. To effectively manage our growth, we will need to continue to improve our operational, financial and management controls and our reporting systems and procedures. This will require that we refine our information technology systems to maintain effective online services and enhance information and communication systems to ensure that our employees effectively communicate with each other and our growing base of customers. These system enhancements and

17


Table of Contents

improvements will require significant incremental and ongoing capital expenditures and allocation of valuable management and employee resources. If we fail to implement these improvements and maintenance programs effectively, our ability to manage our expected growth and comply with the rules and regulations that are applicable to publicly reporting companies will be impaired and we may incur additional expenses.

        We expect to invest significant resources in pursuing opportunities in new products and markets and expect our expenses to increase as we broaden our customer base, hire additional employees and expand internationally. Historically, our costs have increased each year due to new opportunities and investments in technology, and we expect these costs to increase including as a result of additional investments in software licenses and data centers to support our anticipated future growth. Our expenses may be greater than we anticipate, and our investments to make our business and our online legal platform more efficient may not be successful. In addition, we may increase marketing, sales, and other operating expenses to grow and expand our operations and to remain competitive. Increases in our costs may adversely affect our results of operations and financial condition, including, for example, that we expect to make investments over the next few quarters to grow our business that will reduce non-GAAP Adjusted EBITDA and compress related margins.

We may be unsuccessful in expanding our operations internationally, which may adversely affect our business, results of operations, financial condition and future prospects.

        We are considering expanding our operations internationally in the near term, which may not be successful. Expanding internationally may subject us to new risks or increase risks that we currently face, including risks associated with:

    entering into strategic transactions, acquisitions or joint ventures to establish our presence in international markets;

    developing and customizing services that conform to the local legal systems to address the needs of small businesses and consumers in international markets;

    difficulties in developing and marketing our services and brand as a result of language and cultural differences;

    competition from local legal service providers;

    compliance with varied, unfamiliar, unclear and changing laws and regulations, including consumer protection, data protection and privacy laws;

    recruiting and retaining talented and capable employees;

    currency exchange rate fluctuations;

    political, economic and social instability in some countries;

    potential adverse tax consequences;

    higher costs of doing business internationally;

    negotiating economically beneficial agreements with local vendors and strategic partners;

    the inability to extend proprietary rights in our brand, content or technology into new jurisdictions;

    implementing alternative payment methods to comply with local laws and practices and prevent fraud, higher levels of credit risk and payment fraud;

    protectionist laws and business practices that favor local businesses in some countries; and

    delays and interruptions to our business in the United States.

18


Table of Contents

        As a result of these obstacles, we may find it difficult or prohibitively expensive to expand internationally, and we may be unsuccessful in our attempt to do so, which may adversely affect our business, results of operations, financial condition and future prospects.

Adverse application of existing tax laws, rules or regulations or implementation of new unfavorable laws, rules or regulations, could adversely affect on our business, results of operations and financial condition.

        The application of domestic and international sales, use, occupancy, value-added, payroll and other tax laws, rules and regulations to our services is subject to interpretation by the applicable authorities. We currently pay sales or other transaction taxes for certain services in jurisdictions where we do business. A successful assertion by any state, local jurisdiction or country that we should be paying sales or other transaction taxes on services with respect to which we have not been paying such taxes, or the imposition of new laws requiring the payment of sales or other transaction taxes on services in which we do not currently pay such taxes, or increase in the tax rates, or some combination of the foregoing, could result in substantial increase in our sales and other transaction taxes, create increased administrative burdens or costs, discourage customers from purchasing services from us, decrease our ability to compete or otherwise adversely affect our business, results of operations and financial condition.

        The current administration in the United States has publicly stated that international tax reform is a priority, and key members of the United States Congress have conducted hearings and proposed new legislation in that area. Recent changes to U.S. tax laws, including limitations on the ability of taxpayers to claim and use foreign tax credits and the deferral of certain tax deductions until earnings outside of the United States are repatriated to the United States, as well as changes to applicable tax laws that may be enacted in the future, could impact the tax treatment of our foreign earnings. Given our plans to expand internationally in the near term, any changes in the U.S. taxation of such activities may increase our worldwide effective tax rate which could adversely affect our business, results of operations and financial condition.

We depend on top talent, including our senior management team, to grow and operate our business, and if we are unable to hire, retain and motivate our employees, we may not be able to grow effectively which may adversely affect our business and future prospects.

        Our future success will depend upon our continued ability to identify, hire, develop, motivate and retain top talent. Competition for such talent is intense. If we are not able to effectively attract and retain quality employees, our ability to achieve our strategic objectives will be adversely impacted, our brand or reputation could suffer and our business will be adversely affected. Our ability to execute efficiently depends upon contributions from all of our employees, in particular our chief executive officer, John Suh, and the rest of our senior management team. Key institutional knowledge remains with a small group of long-term employees and directors whom we may not be able to retain. In addition, from time to time, there may be changes in our senior management team that may be disruptive to our business. If our senior management team, including any new hires that we may make, fails to work together effectively and execute our plans and strategies on a timely basis, our business and future prospects may be adversely affected.

We may not effectively ensure that our website is accessible and any significant disruption in our online services could adversely affect our business, brand and reputation, results of operations, financial condition and future prospects.

        A key element of our continued growth is the ability of our customers to access our website and our ability to fulfill orders. Our systems may not be adequately designed with the necessary reliability to avoid performance delays, disruptions or outages that could be harmful to our business. At times we have experienced, or may in the future experience, website disruptions, outages, and other performance problems due to a variety of factors, including infrastructure maintenance, human or software errors,

19


Table of Contents

capacity constraints, denial-of-service, fraud or security attacks. In some instances, we may not be able to identify the cause or causes of these website performance problems within an acceptable period of time. It may become increasingly difficult to maintain and improve our website performance, especially during peak usage times, if the number of online services we offer increases, our services become more complex, or our customer traffic grows. If our website is unavailable when customers attempt to access it, our customers may seek other solutions to address their legal needs and may not return to our website in the future. To the extent that we do not effectively address future capacity constraints, upgrade our systems as needed and continually develop our online legal platform to accommodate actual and anticipated technology changes, our business, brand and reputation, results of operations, financial condition and future prospects could be adversely affected.

        Our product fulfillment locations and data centers are vulnerable to damage or interruption from natural disasters, power losses, telecommunication failures, terrorist attacks, human errors, break-ins and similar events. The occurrence of a natural disaster or other unanticipated problems at our facilities could result in lengthy interruptions in our services. We may not be able to efficiently relocate our fulfillment and delivery operations due to disruptions in service if one of these events occurs and our insurance coverage may be insufficient to compensate us for such losses. Because the Los Angeles area is located in an earthquake fault zone, we are particularly sensitive to the risk of damage to, or total destruction of, our primary office and one of our key fulfillment and delivery centers. We are not insured against any such loss or expense that may result from a disruption to our business due to earthquakes, which, if incurred, could adversely affect our business, results of operations and financial condition.

We are involved in several litigation matters that are expensive and time consuming, and, if resolved adversely, could harm our business, brand and reputation, financial condition or results of operations.

        We are involved in several lawsuits brought by customers or other parties alleging that we engage in the unauthorized practice of law or otherwise violate the law. The plaintiffs in these actions generally seek disgorgement, monetary damages, penalties, and/or injunctive relief. For example, class action lawsuits were filed against us in California state court in September 2009 and May 2010 alleging, primarily, that we failed to comply with the California Legal Document Assistant Act, engaged in unfair business practices and made misrepresentations in our business operations. Between the cases, plaintiffs sought to have all contracts between LegalZoom and its customers for the prior four years declared void, a return of all revenues generated from these customers, punitive damages, penalties and injunctive relief. A statewide class action lawsuit was filed against us in Missouri state court in December 2009, alleging that we were engaged in the unauthorized practice of law and had violated the Missouri Merchandising Practices Act and seeking damages of five years of fees charged to Missouri customers with the fees from the two years immediately preceding the complaint trebled and an injunction enjoining us from continued operation in Missouri. While we have denied and continue to deny all of the allegations and claims asserted in these lawsuits, without admitting liability, and to avoid additional legal costs to defend these matters, we signed settlement agreements to resolve the claims in the California cases in June 2011 and the Missouri case in August 2011. The maximum settlement for these matters, assuming all eligible claimants made a valid claim, was estimated to be $16 million. The ultimate cost of these two pending settlements are dependent on a number of factors, including the resolution of any appeals of the approved California settlement, and actual claims made by, and the resulting payments to, the class members. As of December 31, 2011, we had reasonably estimated the collective range of aggregate probable losses for these matters to be between $5.4 million and $7 million and, in accordance with GAAP, had accrued $5.4 million included in other current liabilities, the low end of the range. The determination of the probability of loss and the range of loss requires significant judgment. The range of loss has been estimated based on an analysis of numerous factors, including possible claim amounts within the class, whether the claim amounts are payable in-kind or in cash, the date when the services subject to the class were sold, comparable class action settlement and redemption rate statistics, experience available from other companies for similar types of settlements, and the claims rates to date. Based on the claims received through May 14 and 15, 2012, the claims submission

20


Table of Contents

deadlines for these two matters, and claims processed to date, we have reasonably estimated the collective aggregate probable loss to be approximately $5.6 million ($2.9 million estimated for the California matter and $2.7 million estimated for the Missouri matter), resulting in an additional $0.2 million accrual during the six months ended June 30, 2012. In June 2012, we paid $1.9 million to the plaintiffs' attorneys related to the Missouri matter for their fees and expenses pursuant to the settlement agreement bringing the total accrued liability for both matters to $3.7 million as of June 30, 2012. The ultimate costs of these two matters are dependent on a number of factors, including the resolution of any appeals of the approved California settlement, and actual claims made by, and the resulting payments to, the class members. There is at least a reasonable possibility that we may incur an additional loss in excess of the amount accrued at June 30, 2012. We are unable to estimate the amount of additional loss or range of additional loss, if any, relating to these matters. If the actual payments for the settlements are materially higher than the amount estimated by us, this difference could have a material adverse effect on our business, financial condition and results of operations.

        We anticipate that we will continue to be a target for such lawsuits in the future. Any litigation to which we are a party may result in an onerous or unfavorable judgment that may not be reversed upon appeal, or we may decide to settle lawsuits on unfavorable terms. In addition, defending these claims is costly and can impose a significant burden on management and employees, and we may receive unfavorable preliminary or interim rulings in the course of litigation. Any such negative outcome could result in payments of substantial monetary damages or fines, adverse effects on the market price of our common stock or changes to our products or business practices, and accordingly our business, brand and reputation, financial condition, or results of operations could be materially and adversely affected.

If we fail to adequately protect our website from computer malware, viruses, hacking, phishing and denial-of-service attacks, our brand and reputation and our ability to retain existing customers and attract new customers could be harmed.

        Computer malware, viruses, hacking, phishing and denial-of-service attacks have become more prevalent in the online services industry. Denial-of-service attacks, a type of security attack which affects access to and speed of operation of our website, have occurred on our systems in the past, and may occur on our systems in the future. We have experienced two instances of service interruption as a result of denial-of-service attacks in the past. Both instances caused our website to be intermittently unavailable for several hours. Any failure to maintain performance, reliability, security, and availability of our interactive legal documents services and online technology platform to the satisfaction of our customers may harm our brand and reputation and our ability to retain existing customers and attract new customers, which could adversely affect our business, results of operations and financial condition.

If we are unable to adequately protect our intellectual property to prevent unauthorized use or appropriation, the value of our brand and other intangible assets, as well as our business, results of operations, financial condition and future prospects may be adversely affected.

        We rely and expect to continue to rely on confidentiality and license agreements with our employees, consultants and third parties, and on trademark, copyright, trade secret, and domain name protection laws, to protect our proprietary rights. In the United States and internationally, we have filed applications to protect elements of our intellectual property. We have no issued patents or pending patent applications. Third parties may knowingly or unknowingly infringe on or challenge our proprietary rights, and pending and future trademark or other intellectual property applications may not be approved. In addition, effective intellectual property protection may not be available in every country in which we operate or intend to operate our business. In these cases, we may expend significant time and expense to prevent infringement and enforce our rights. We cannot assure you that others will not offer services or concepts that are substantially similar to ours and compete with our business. If the protection of our proprietary rights is inadequate to prevent unauthorized use or appropriation, the value of our brand and other

21


Table of Contents

intangible assets may be diminished and competitors may be able to more effectively mimic our services, business practices or operations which may have an adverse effect on our business, results of operations, financial condition and future prospects.

We may in the future become party to lawsuits and other intellectual property rights claims that are expensive and time consuming, and, if resolved adversely, could adversely affect our business, results of operations and financial condition.

        As we face increasing competition and gain an increasingly high profile, including in connection with our initial public offering, third parties may make intellectual property claims, file lawsuits or initiate other proceedings against us. In addition, we may introduce new services, including in areas where we currently do not compete, which could increase our exposure to intellectual property claims. Defending against lawsuits and other intellectual property claims is costly and can place a significant burden on management and employees. If claims are made against us, there can be no assurances that favorable final outcomes will be obtained and, if resolved adversely, may result in changes to or discontinuance of some of our services, potential liabilities or additional costs which could adversely affect our business, results of operations and financial condition.

We are subject to risks related to accepting credit and debit card payments that may harm our business or expose us to additional costs and liabilities.

        We accept payments from our customers primarily through credit and debit card transactions. For credit and debit card payments, we pay interchange and other fees, which may increase over time and raise our operating costs and lower profitability. We rely on a third party to provide payment processing services, including the processing of our credit and debit card transactions, and it could interrupt our business if this third party becomes unwilling or unable to provide these services to us. If our processing vendor has problems with our billing software, or the billing software malfunctions, we could lose customers who subscribe to our legal plans, registered agent services and other subscription services, which could decrease our revenues. In addition, if our billing software fails to work properly and, as a result, we do not automatically charge our subscribers' credit cards on a timely basis or at all, our revenues could be adversely affected.

        We are also subject to payment card industry rules, certification requirements and rules governing electronic funds transfer, any of which could change or be reinterpreted to make it more difficult for us to comply. Our failure to comply fully with these rules or requirements may subject us to fines, higher transaction fees, penalties, damages, and civil liability and may result in the loss of our ability to accept credit and debit card payments, which could have a material adverse effect on our business, results of operations and financial condition.

        As we expand our business to jurisdictions outside the United States, we may be required to explore and adopt new payment methods and processes. This may require the development of software or application for licenses for billing and collection purposes. Our failure to timely and efficiently adopt those new methods and implement new processes could adversely affect our business, results of operations, financial condition and future prospects.

We are an "emerging growth company," and we cannot be certain if the reduced reporting requirements applicable to emerging growth companies will make our common stock less attractive to investors.

        We are an "emerging growth company," as defined in the Jumpstart Our Business Startups Act, or the JOBS Act. For as long as we continue to be an emerging growth company, we may take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of

22


Table of Contents

holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We could be an emerging growth company for up to five years, although we could lose that status sooner if our revenues exceed $1 billion, if we issue more than $1 billion in non-convertible debt in a three year period, or if the market value of our common stock held by non-affiliates exceeds $700 million as of any June 30 before that time, in which case we would no longer be an emerging growth company as of the following December 31. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

        Under the JOBS Act, emerging growth companies can also delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected not to avail our self of this exemption from new or revised accounting standards and, therefore, will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

If we are unable to implement and maintain effective internal control over financial reporting in the future, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock may decline.

        As a public company, we will be required to maintain internal control over financial reporting and to report any material weaknesses in such internal control. In addition, beginning with our 2013 annual report on Form 10-K to be filed in 2014, we will be required to furnish a report by management on the effectiveness of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act. We are in the process of designing, implementing, and testing the internal control over financial reporting required to comply with this obligation, which process is time consuming, costly, and complicated. In addition, our independent registered public accounting firm will be required to attest to the effectiveness of our internal control over financial reporting beginning with our annual report on Form 10-K following the date on which we are no longer an "emerging growth company," which may be up to five full years following the date of this offering. If we identify material weaknesses in our internal control over financial reporting, if we are unable to comply with the requirements of Section 404 in a timely manner or assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal control over financial reporting when required, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock could be negatively affected, and we could become subject to investigations by the stock exchange on which our securities are listed, the Securities and Exchange Commission, or the SEC, or other regulatory authorities, which could require additional financial and management resources.

The requirements of being a public company may strain our resources and divert management's attention.

        As a public company, we will be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Act, the listing requirements of the New York Stock Exchange, or the NYSE, and other applicable securities rules and regulations. Despite recent reforms made possible by the JOBS Act, compliance with these rules and regulations will nonetheless increase our legal and financial compliance costs, make some activities more difficult, time-consuming or costly and increase demand on our systems and resources, particularly after we are no longer an "emerging growth company." The Exchange Act requires, among other things, that we file annual, quarterly, and current reports with respect to our business and operating results.

        As a result of disclosure of information in this prospectus and in filings required of a public company, our business and financial condition will become more visible, which we believe may result in threatened or actual litigation, including by competitors and other third parties. If such claims are successful, our

23


Table of Contents

business and operating results could be harmed, and even if the claims do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them, could divert the resources of our management and adversely affect our business, brand and reputation and results of operations.

        We also expect that being a public company and these new rules and regulations will make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our audit committee and compensation committee, and qualified executive officers.

Risks Relating to Our Common Stock

The market price of our common stock may be volatile or may decline regardless of our operating performance, and you may not be able to resell your shares at or above the initial public offering price, if at all.

        The initial public offering price for our common stock will be determined through negotiations between the underwriters and us and may vary from the market price of our common stock following our initial public offering. If you purchase shares of our common stock in this offering, you may not be able to resell those shares at or above the initial public offering price, if at all. We cannot assure you that the initial public offering price of our common stock, or the market price following this offering, will equal or exceed prices in privately negotiated transactions of our shares that have occurred from time to time prior to this offering. The market price of our common stock may fluctuate significantly in response to numerous factors, many of which are beyond our control, including:

    actual or anticipated fluctuations in our revenues and results of operations;

    the financial projections we may provide to the public, any changes in these projections or our failure to meet these projections;

    increase or loss of customers;

    fluctuations in product sales mix;

    changes in our pricing strategy or those of our competitors;

    developments in new legislation and pending lawsuits or regulatory actions, including interim or final rulings by judicial or regulatory bodies;

    lawsuits threatened or filed against us;

    actual or anticipated changes in our growth rate relative to those of our competitors;

    announcements of technological innovations or new services offered by us or our competitors;

    announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital-raising activities or commitments;

    additions or departures of key personnel;

    actions of securities analysts who initiate or maintain coverage of us, changes in financial estimates by any securities analysts who follow our company, or our failure to meet these estimates or investor expectations;

    fluctuations in the valuation of companies perceived by investors to be comparable to us;

    additional shares of our common stock being sold into the market by us or our existing stockholders or the anticipation of such sales, including if existing stockholders sell shares into the market when applicable "lock-up" periods end;

24


Table of Contents

    price and volume fluctuations in the overall stock market, including as a result of trends in the economy as a whole;

    other events or factors, including those resulting from war or incidents of terrorism, or responses to these events; and

    general economic and market conditions.

        Furthermore, the stock markets recently have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. These fluctuations often have been unrelated or disproportionate to the operating performance of those companies. These broad market fluctuations, as well as general economic, political and market conditions such as recessions, interest rate changes or international currency fluctuations, may negatively impact the market price of our common stock. If the market price of our common stock after this offering does not exceed the initial public offering price, you may not realize any return on your investment in us and may lose some or all of your investment. In the past, companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We may be the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert our management's attention from other business concerns, which could adversely affect our business, results of operations and financial condition.

Future sales of our common stock in the public market could cause the price of our common stock to decline.

        Sales of a substantial number of shares of our common stock in the public market after our initial public offering, or the perception that these sales might occur, could depress the market price of our common stock and could impair our ability to raise capital through the sale of additional equity securities. After this offering, we will have outstanding 40,328,846 shares of common stock, based on the number of shares of our common stock outstanding as of June 30, 2012. This number includes 8,000,000 shares that we and the selling stockholders are selling in this offering, and assumes no additional exercise of outstanding options.

        All of the shares of common stock sold in this offering will be freely tradable without restrictions or further registration under the Securities Act of 1933, as amended or the Securities Act, except for any shares held by our affiliates pursuant to Rule 144 under the Securities Act. On the date of this prospectus, 733,311 shares will be available for sale in the public market without restriction. Approximately 31,595,535 of the remaining shares of our common stock outstanding after this offering, based on shares outstanding as of June 30, 2012, will be restricted as a result of securities laws, lock-up agreements or other contractual restrictions that restrict transfers for at least 180 days after the date of this prospectus, subject to certain extensions.

        Morgan Stanley & Co. LLC and Merrill Lynch, Pierce, Fenner & Smith Incorporated may permit our executive officers, directors and stockholders who have executed lock-up agreements with the underwriters to sell shares prior to the expiration of the restrictive provisions contained in such lock-up agreements. In addition, we may permit our stockholders and option holders who are subject to lock-up agreements with us and who are not subject to a lock-up agreement with the underwriters to sell shares prior to the expiration of the restrictive provisions contained in such lock-up agreements with us.

        After this offering, the holders of 11,725,759 shares of common stock, or 29.08% of our total outstanding common stock, based on shares outstanding as of June 30, 2012 and giving effect to the sale of shares by us and the selling stockholders, will be entitled to rights with respect to registration of these shares under the Securities Act pursuant to an investors' rights agreement. If these holders of our common stock, by exercising their registration rights, sell a large number of shares, they could adversely affect the market price for our common stock. If we file a registration statement for the purposes of selling additional shares to raise capital and are required to include shares held by these holders pursuant to the exercise of

25


Table of Contents

their registration rights, our ability to raise capital may be impaired. We intend to file a registration statement on Form S-8 under the Securities Act to register up to approximately 8.0 million shares of our common stock for issuance under our 2000 Stock Option Plan, our 2010 Stock Incentive Plan and our 2012 Equity Incentive Plan. Once we register these shares, they can be freely sold in the public market upon issuance and once vested, subject to a 180-day lock-up period and other restrictions provided under the terms of the applicable plan and/or the option agreements entered into with option holders.

No public market for our common stock currently exists, and an active public trading market may not develop or be sustained following this offering.

        Prior to this offering, there has been no public market for our common stock. Although we expect to apply to list our common stock on the NYSE, an active trading market may not develop following the completion of this offering or, if developed, may not be sustained. The lack of an active market may impair your ability to sell your shares at the time you wish to sell them or at a price that you consider reasonable. The lack of an active market may also reduce the fair value of your shares. An inactive market may also impair our ability to raise capital to continue to fund operations by selling shares and may impair our ability to acquire other companies or technologies by using our shares as consideration.

If you purchase shares of our common stock in our initial public offering, you will experience substantial and immediate dilution.

        If you purchase shares of our common stock in our initial public offering, you will experience substantial and immediate dilution in the pro forma net tangible book value per share of $10.14 per share as of June 30, 2012, based on an assumed initial public offering price of our common stock of $11.00 per share, the midpoint of the price range on the cover page of this prospectus, because the price that you pay will be substantially greater than the pro forma net tangible book value per share of the common stock that you acquire. This dilution is due in large part to the fact that our earlier investors paid substantially less than the initial public offering price when they purchased their shares of our capital stock. You will experience additional dilution upon exercise of options to purchase common stock under our equity incentive plans, if we issue restricted stock to our employees under our equity incentive plans, or if we otherwise issue additional shares of our common stock. See "Dilution."

We have broad discretion in the use of the net proceeds from our initial public offering and may not use them effectively.

        We intend to use the net proceeds to us from this offering primarily for general corporate purposes, including working capital and capital expenditures. We may also use a portion of the net proceeds for the acquisition of, or investment in, technologies, solutions, businesses or assets that complement our business or operations, although we have no present commitments or agreements to enter into any acquisitions or investments. However, we will have broad discretion over the uses of the net proceeds, and we may spend or invest them in ways that our stockholders disagree or that could adversely affect our business, results of operations and financial condition.

If securities or industry analysts do not publish research or reports about our business, or publish negative reports about our business, our share price and trading volume could decline.

        The trading market for our common stock will, to some extent, depend on the research and reports that securities or industry analysts publish about us or our business. We do not have any control over these analysts. If one or more of the analysts who cover us downgrade our shares or change their opinion of our shares, our share price would likely decline. If one or more of these analysts cease coverage of us or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause our share price or trading volume to decline.

26


Table of Contents

We do not intend to pay dividends for the foreseeable future, which could reduce the attractiveness of our stock to some investors.

        We currently intend to retain any future earnings to finance the operation and expansion of our business, and we do not expect to declare or pay any dividends in the foreseeable future. As a result, you may only receive a return on your investment in our common stock if the market price of our common stock increases. In addition, our credit facility contains restrictions on our ability to pay dividends.

Delaware law and provisions in our amended and restated certificate of incorporation and bylaws that will be in effect at the closing of our initial public offering could make a merger, tender offer, or proxy contest difficult, thereby depressing the trading price of our common stock.

        Following the closing of our initial public offering, our status as a Delaware corporation and the anti-takeover provisions of the Delaware General Corporation Law may discourage, delay, or prevent a change in control by prohibiting us from engaging in a business combination with an interested stockholder for a period of three years after the person becomes an interested stockholder, even if a change of control would be beneficial to our existing stockholders. In addition, our amended and restated certificate of incorporation and bylaws that will be in effect at the closing of our initial public offering will contain provisions that may make the acquisition of our company more difficult, including the following:

    our amended and restated certificate of incorporation will authorize undesignated preferred stock, the terms of which may be established, and shares of which may be issued, without stockholder approval;

    require that any action to be taken by our stockholders be effected at a duly called annual or special meeting and not by written consent;

    specify that special meetings of our stockholders can be called only by our board of directors, the Chairman of our board of directors, or our Chief Executive Officer;

    establish an advance notice procedure for stockholder proposals to be brought before an annual meeting, including proposed nominations of persons for election to our board of directors;

    establish that our board of directors is divided into three classes, Class I, Class II and Class III, with each class serving three-year staggered terms;

    prohibit cumulative voting in the election of directors;

    provide that vacancies on our board of directors may be filled only by a majority of directors then in office, even though less than a quorum; and

    require the approval of our board of directors or the holders of a supermajority of our outstanding shares of capital stock to amend our bylaws and certain provisions of our certificate of incorporation.

        These provisions could depress the trading price of our common stock or reduce the ability of someone to acquire the company at a premium to the trading price of our common stock.

27


Table of Contents


SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

        This prospectus, including the sections entitled "Prospectus Summary," "Risk Factors," "Use of Proceeds," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business," contains forward-looking statements. In some cases you can identify these statements by forward-looking words such as "believe," "may," "will," "estimate," "continue," "anticipate," "intend," "could," "would," "project," "plan," "expect" or the negative or plural of these words or similar expressions. These forward-looking statements include, but are not limited to, statements concerning the following:

    our financial performance, including our revenue, operating expenses and our ability to attain and sustain profitability;

    our ability to comply with and adapt to the dynamic legal and regulatory landscape applicable to our business;

    our ability to maintain, protect and enhance our brand;

    our ability to continue to develop, enhance and expand our online interactive legal document services;

    the success and development of our legal plans;

    our ability to timely and effectively scale and adapt our existing online legal platform;

    our ability to increase engagement of services by our customers;

    our ability to protect our customers' information and adequately address privacy concerns;

    our ability to maintain an adequate rate of revenue growth;

    the effects of increased competition in our market;

    our ability to effectively manage our growth;

    our ability to successfully enter new markets and manage our international expansion;

    costs associated with defending intellectual property infringement and other claims;

    the attraction and retention of our senior management team; and

    other risk factors included under "Risk Factors" in this prospectus.

        These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in "Risk Factors." Moreover, we operate in a competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this prospectus may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.

        You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur. Moreover, except as required by law, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements. We undertake no obligation to update publicly any forward-looking statements for any reason after the date of this prospectus to conform these statements to actual results or to changes in our expectations.

        You should read this prospectus and the documents that we reference in this prospectus and have filed with the SEC as exhibits to the registration statement of which this prospectus is a part with the understanding that our actual future results, levels of activity, performance and events and circumstances may be materially different from what we expect.

28


Table of Contents


MARKET, INDUSTRY AND OTHER DATA

        Unless otherwise indicated, information contained in this prospectus concerning our industry and the market in which we operate, including our general expectations and market position, market opportunity and market size, is based on information from various sources, on assumptions that we have made that are based on those data and other similar sources and on our knowledge of the markets for our services. These data involve a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates. We have not independently verified any third-party information and cannot assure you of its accuracy or completeness. While we believe the market position, market opportunity and market size information included in this prospectus is generally reliable, such information is inherently imprecise. In addition, projections, assumptions and estimates of our future performance and the future performance of the industry in which we operate is necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in "Risk Factors" and elsewhere in this prospectus. These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by us.

        Neither we, nor the selling stockholders, nor the underwriters, have authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses we have prepared. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. We and the selling stockholders are offering to sell, and seeking offers to buy, shares of our common stock only in jurisdictions where offers and sales are permitted. The information in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of shares of our common stock. Our business, financial condition, results of operations, and prospects may have changed since that date.

29


Table of Contents


USE OF PROCEEDS

        We estimate that the net proceeds to us from the sale of the shares of our common stock offered by us will be approximately $35.4 million, based on an assumed initial public offering price of $11.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters' over-allotment option to purchase additional shares in this offering is exercised in full, we estimate that our net proceeds will be approximately $41.4 million, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. We will not receive any proceeds from the sale of common stock by the selling stockholders.

        A $1.00 increase (decrease) in the assumed initial public offering price of $11.00 per share would increase (decrease) the net proceeds to us from this offering by approximately $3.5 million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase (decrease) of one million shares in the number of shares of common stock offered by us would increase (decrease) the net proceeds to us from this offering by approximately $10.2 million, assuming the assumed initial public offering price remains the same and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

        The principal purposes of this offering are to create a public market for our common stock and thereby enable access to the public equity markets by our employees and stockholders, obtain additional capital and increase our visibility in the marketplace. We currently intend to use the net proceeds to us from this offering primarily for general corporate purposes, including working capital and up to approximately $5.0 million for capital expenditures, approximately half of which would be for capitalized software expenditures and the other half of which would be for other capital expenditures associated with scaling our operations, technology and infrastructure to support our growth. We may also use a portion of the net proceeds for the acquisition of, or investment in, technologies, solutions, businesses or assets that complement our business or operations, although we have no present commitments or agreements to enter into any acquisitions or investments. We will have broad discretion over the uses of the net proceeds in this offering. Pending these uses, we intend to invest the net proceeds from this offering in short-term, investment-grade interest-bearing securities.


DIVIDEND POLICY

        We have never declared or paid any cash dividends on our common stock. We currently intend to retain any future earnings for use in the operation of our business and do not intend to declare or pay any cash dividends in the foreseeable future. Any further determination to pay dividends on our capital stock will be at the discretion of our board of directors, subject to applicable laws, and will depend on our financial condition, results of operations, capital requirements, general business conditions, and other factors that our board of directors considers relevant. In addition, the terms of our credit facility contain restrictions on our ability to pay dividends.

30


Table of Contents


CAPITALIZATION

        The following table shows our cash and cash equivalents and our capitalization as of June 30, 2012:

    on an actual basis;

    on a pro forma basis, giving effect to the filing of our amended and restated certificate of incorporation and the automatic conversion of all outstanding shares of Series A into an aggregate of 15,256,000 shares of common stock immediately prior to the completion of this offering as if such conversion had occurred on June 30, 2012; and

    on a pro forma as adjusted basis, giving effect to the pro forma adjustments described in the immediately preceding bullet, and the sale by us of 3,800,000 shares of common stock in this offering, at an assumed initial public offering price of $11.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, and the exercise by a selling stockholder of an option to purchase 40,000 shares of common stock at a weighted average exercise price of $2.245 for total proceeds to us of $89,800, as if this offering had occurred on June 30, 2012.

 
  As of June 30, 2012  
 
  Actual   Pro Forma   Pro Forma,
As Adjusted(1)
 
 
  (in thousands, except share and par value data)
 

Cash and cash equivalents

  $ 31,374   $ 31,374   $ 68,709  
               

Series A redeemable convertible preferred stock, $0.001 par value: 7,628,000 shares authorized, issued and outstanding, actual; no shares authorized, issued and outstanding, pro forma and pro forma as adjusted

  $ 64,708   $   $  

Stockholders' equity (deficit):

                   

Preferred stock, $0.001 par value: no shares authorized, issued and outstanding, actual; 50,000,000 shares authorized, no shares issued and outstanding, pro forma and pro forma as adjusted

             

Common stock, $0.001 par value: 66,180,000 shares authorized, 21,412,846 shares issued and 21,232,846 shares outstanding, actual; 66,180,000 shares authorized, 36,668,846 shares issued and 36,488,846 outstanding, pro forma; and 150,000,000 shares authorized, 40,508,846 shares issued and 40,328,846 shares outstanding, pro forma as adjusted

    22     37     41  

Additional paid-in capital

        64,693     100,227  

Treasury stock, at cost, 180,000 shares

    (519 )   (519 )   (519 )

Accumulated deficit

    (58,995 )   (58,995 )   (58,995 )
               

Total stockholders' equity (deficit)

    (59,492 )   5,216     40,754  
               

Total capitalization

  $ 5,216   $ 5,216   $ 40,754  
               

(1)
A $1.00 increase (decrease) in the assumed initial public offering price of $11.00 per share would increase (decrease) the amount of cash and cash equivalents, additional paid-in capital, total stockholders' equity and total capitalization by approximately $3.5 million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase (decrease) of one million shares in the number of shares of common stock offered by us would increase (decrease) cash and cash equivalents, and additional paid-in capital, total stockholders' equity and total capitalization by

31


Table of Contents

    approximately $10.2 million, assuming the assumed initial public offering price remains the same, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. The pro forma as adjusted information discussed above is illustrative only and will be adjusted based on the actual public offering price and other terms of this offering determined at pricing.

            The total number of shares of our common stock reflected in the discussion and table above is based on 36,488,846 shares of common stock (including preferred stock on an as converted basis) outstanding on a pro forma basis, as of June 30, 2012, and excludes, as of June 30, 2012:

    616,383 shares of common stock issuable upon the exercise of outstanding options granted pursuant to our 2000 Stock Option Plan at a weighted-average exercise price of $0.93 per share, 4,337,270 shares of common stock issuable upon the exercise of options granted pursuant to our 2010 Stock Incentive Plan at a weighted-average exercise price of $3.40 per share and 50,000 restricted stock units to be settled into shares of our common stock granted pursuant to our 2010 Stock Incentive Plan;

    217,799 shares of common stock available for future issuance under our 2010 Stock Incentive Plan; and

    2,700,000 shares of common stock, subject to increase on an annual basis, reserved for future issuance under our 2012 Equity Incentive Plan, which will become effective in connection with this offering.

32


Table of Contents


DILUTION

        If you invest in our common stock, your interest will be diluted to the extent of the difference between the initial public offering price per share of our common stock and the pro forma as adjusted net tangible book value per share of our common stock immediately after this offering. The historical net tangible book value of our common stock as of June 30, 2012 was a deficit of $3.9 million, or $(0.19) per share. Historical net tangible book value per share represents our total tangible assets, excluding deferred tax assets and deferred costs of this offering, less our total liabilities, divided by the number of shares of outstanding common stock.

        After giving effect to the (i) automatic conversion of all outstanding shares of Series A into our common stock immediately prior to the completion of this offering; (ii) receipt of the net proceeds from our sale of 3,800,000 shares of common stock in this offering at an assumed initial public offering price of $11.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us and (iii) the exercise by a selling stockholder of an option to purchase 40,000 shares of common stock at a weighted average exercise price of $2.245, for total proceeds of $89,800, our pro forma as adjusted net tangible book value as of June 30, 2012 would have been $34.6 million, or $0.86 per share. This represents an immediate increase in pro forma as adjusted net tangible book value of $0.97 per share to existing stockholders and an immediate dilution of $10.14 per share to new investors purchasing common stock in this offering.

        The following table illustrates this dilution on a per share basis to new investors:

Assumed initial public offering price per share

        $ 11.00  
             

Net tangible book value (deficit) per share as of June 30, 2012

    (0.19 )      

Increase per share attributable to conversion of Series A

    0.08        
             

Pro forma net tangible book value (deficit) per share as of June 30, 2012

    (0.11 )      

Increase per share attributable to this offering

    0.97        

Pro forma net tangible book value per share, as adjusted to give effect to this offering

          0.86  
             

Dilution in pro forma net tangible book value per share to new investors in this offering

        $ 10.14  
             

        A $1.00 increase (decrease) in the assumed initial public offering price of $11.00 per share would increase (decrease) the pro forma net tangible book value, as adjusted to give effect to this offering, by $0.09 per share and the dilution to new investors by $0.91 per share, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting underwriting discounts and commissions and estimated expenses payable by us. Similarly, each increase (decrease) of one million shares in the number of shares of common stock offered by us would increase (decrease) the pro forma net tangible book value, as adjusted to give effect to this offering, by $0.23 per share and the dilution to new investors by $0.23 per share, assuming the assumed initial public offering price remains the same and after deducting underwriting discounts and commissions and estimated expenses payable by us. If the underwriters exercise their over-allotment option in full, the pro forma net tangible book value per share of our common stock, as adjusted to give effect to this offering, would be $0.99 per share, and the dilution in pro forma net tangible book value per share to investors in this offering would be $10.01 per share of common stock.

        The table below summarizes as of June 30, 2012, on a pro forma as adjusted basis described above, the number of shares of our common stock, the total consideration and the average price per share, after giving effect to the conversion of all outstanding shares of preferred stock into common stock and exercise of a stock option by a selling stockholder, (i) paid to us by existing stockholders and (ii) to be paid by new investors purchasing our common stock in this offering at an assumed initial public offering price of $11.00

33


Table of Contents

per share, the midpoint of the price range set forth on the cover page of this prospectus, before deducting underwriting discounts and commissions and estimated offering expenses.

 
  Shares Purchased   Total Consideration    
 
 
  Average Price
Per Share
 
 
  Number   Percent   Amount   Percent  

Existing stockholders(1)

    36,528,846     90.6 % $ 54,396,605     56.5 % $ 1.49  

New investors

    3,800,000     9.4 % $ 41,800,000     43.5 % $ 11.00  
                         

Total

    40,328,846     100.0 % $ 96,196,605     100.0 %      
                         

(1)
Includes the exercise by a selling stockholder of an option to purchase 40,000 shares of common stock.

        The total number of shares of our common stock reflected in the discussion and table above is based on 36,528,846 shares of common stock (including preferred stock on an as converted basis) outstanding, as of June 30, 2012, and excludes, as of June 30, 2012:

    616,383 shares of common stock issuable upon the exercise of outstanding options granted pursuant to our 2000 Stock Option Plan at a weighted-average exercise price of $0.93 per share, 4,297,270 shares of common stock issuable upon the exercise of options granted pursuant to our 2010 Stock Incentive Plan at a weighted-average exercise price of $3.40 per share and 50,000 restricted stock units to be settled into shares of our common stock granted pursuant to our 2010 Stock Incentive Plan which will remain outstanding after this offering, unless earlier exercised;

    217,799 shares of common stock available for future issuance under our 2010 Stock Incentive Plan; and

    2,700,000 shares of common stock, subject to increase on an annual basis, reserved for future issuance under our 2012 Equity Incentive Plan, which will become effective in connection with this offering.

        Sales by the selling stockholders in this offering will cause the number of shares held by existing stockholders to be reduced to 32,328,846 shares, or 80.2% of the total number of shares of our common stock outstanding after this offering, and will increase the number of shares held by new investors to 8,000,000 shares, or 19.8% of the total number of shares of our common stock outstanding after this offering. In addition, if the underwriters' over-allotment option is exercised in full, the number of shares held by the existing stockholders after this offering would be reduced to 77.5% of the total number of shares of our common stock outstanding after this offering, and the number of shares held by new investors would increase to 9,200,000 shares, or 22.5% of the total number of shares of our common stock outstanding after this offering.

34


Table of Contents


SELECTED CONSOLIDATED FINANCIAL DATA

        You should read the following selected historical consolidated financial data below in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements, related notes and other financial information included in this prospectus. The selected consolidated financial data in this section are not intended to replace the consolidated financial statements and are qualified in their entirety by the consolidated financial statements and related notes included elsewhere in this prospectus.

        The consolidated statements of operations data for the years ended December 31, 2009, 2010 and 2011 and the consolidated balance sheet data as of December 31, 2010 and 2011 are derived from our audited consolidated financial statements included elsewhere in this prospectus. We derived the summary unaudited interim consolidated balance sheet data as of June 30, 2012 and statements of operations data for the six months ended June 30, 2011 and 2012 from our unaudited interim consolidated financial statements included elsewhere in this prospectus. The unaudited interim consolidated financial statements were prepared on a basis consistent with our audited consolidated financial statements and include, in the opinion of management, all adjustments, consisting of only normal recurring adjustments, necessary for a fair statement of the financial information contained in those statements. Our historical results are not necessarily indicative of the results to be expected in the future.

 
  Year Ended December 31,   Six Months Ended
June 30,
 
 
  2009   2010   2011   2011   2012  
 
  (in thousands, except per share data)
 

Consolidated Statements of Operations Data:

                               

Revenues(1)

  $ 103,299   $ 120,771   $ 156,066   $ 78,959   $ 96,459  

Costs and operating expenses(2):

                               

Cost of services

    53,082     60,643     80,437     41,805     46,571  

Sales and marketing

    32,673     36,322     41,891     22,189     31,198  

Technology and development

    4,686     7,509     8,117     3,961     4,474  

General and administrative(1)

    13,154     20,024     19,343     9,447     11,717  
                       

Total costs and operating expenses

    103,595     124,498     149,788     77,402     93,960  
                       

Income (loss) from operations

    (296 )   (3,727 )   6,278     1,557     2,499  

Interest and other expense, net

   
(33

)
 
(15

)
 
(153

)
 
(74

)
 
(76

)
                       

Income (loss) before income taxes

    (329 )   (3,742 )   6,125     1,483     2,423  

Income tax (provision) benefit

   
(311

)
 
(282

)
 
5,998
   
(143

)
 
(1,166

)
                       

Net income (loss)

  $ (640 ) $ (4,024 ) $ 12,123   $ 1,340   $ 1,257  
                       

Accretion of Series A redeemable convertible preferred stock

    (4,035 )   (4,038 )   (4,042 )   (2,005 )   (2,017 )

Net income attributable to participating securities

            (3,407 )        
                       

Net income (loss) attributable to common stockholders

  $ (4,675 ) $ (8,062 ) $ 4,674   $ (665 ) $ (760 )
                       

Net income (loss) per share attributable to common stockholders(3)(5):

                               

Basic

  $ (0.25 ) $ (0.42 ) $ 0.22   $ (0.03 ) $ (0.04 )
                       

Diluted

  $ (0.25 ) $ (0.42 ) $ 0.19   $ (0.03 ) $ (0.04 )
                       

35


Table of Contents

 
  Year Ended December 31,   Six Months Ended
June 30,
 
 
  2009   2010   2011   2011   2012  
 
  (in thousands, except per share data)
 

Weighted-average shares used to compute net income (loss) per share attributable to common stockholders(3)(5):

                               

Basic

    18,700     19,360     20,925     20,878     21,136  
                       

Diluted

    18,700     19,360     24,195     20,878     21,136  
                       

Pro forma net income per share(4)(5):

                               

Basic

              $ 0.34         $ 0.03  
                             

Diluted

              $ 0.31         $ 0.03  
                             

Weighted average number of shares used in computing pro forma net income per share(4)(5):

                               

Basic

                36,181           36,392  
                             

Diluted

                39,451           40,598  
                             

(1)
We recorded an estimated charge of $5.4 million during the year ended December 31, 2010 related to legal settlements, of which $4.6 million was included as part of general and administrative expenses and $0.8 million was recorded as a reduction of revenues. During the six months ended June 30, 2012, we recorded an additional $0.2 million charge related to a change in estimate of the settlement costs of these legal matters, which was recorded as a reduction of revenues. The ultimate costs of resolving these matters are dependent on a number of factors, including the resolution of any appeals of the approved settlements, actual claims made by, participation rates of, and the resulting payments, if any, to the class members. Any difference between the amount accrued and the ultimate costs of these matters will be recognized as an additional or lower expense in the period in which the matters are resolved. If the actual costs of these matters are higher than the amount we estimated, this difference could have a material adverse effect on our business, operating results, cash flows and financial condition. See Note 6 to our consolidated financial statements included elsewhere in this prospectus for a full discussion of this legal settlement accrual.

(2)
Stock-based compensation expense included in the above line items:

 
  Year Ended December 31,   Six Months Ended
June 30,
 
 
  2009   2010   2011   2011   2012  
 
  (in thousands)
 

Cost of services

  $ 200   $ 178   $ 155   $ 82   $ 67  

Sales and marketing

    124     46     56     21     135  

Technology and development

    114     155     133     64     75  

General and administrative

    699     929     600     288     402  
                       

Total stock-based compensation expense

  $ 1,137   $ 1,308   $ 944   $ 455   $ 679  
                       
(3)
See Note 2 to our consolidated financial statements included elsewhere in this prospectus for a description of the method to compute basic and diluted net income (loss) per share attributable to common stockholders.

(4)
Unaudited basic and diluted pro forma net income per share has been calculated assuming the conversion of all outstanding shares of our redeemable convertible preferred stock (using the if-converted method) into 15,256,000 shares of our common stock as though the conversion had occurred on January 1, 2011. See Note 2 to our consolidated financial statements included elsewhere in this prospectus.

(5)
All share, per-share and related information presented have been retroactively adjusted, where applicable, to reflect the impact of the 2-for-3 reverse stock split, including an adjustment to the preferred stock conversion ratio which will be effective immediately prior to the effectiveness of this offering.

36


Table of Contents

 
  As of December 31,    
 
 
  As of June 30,
2012
 
 
  2010   2011  
 
  (in thousands)
 

Consolidated Balance Sheet Data:

                   

Cash and cash equivalents

  $ 19,169   $ 27,108   $ 31,374  

Working capital (deficit)

    (5,905 )   (2,316 )   (4,451 )

Total assets

    35,629     53,501     61,895  

Total liabilities

    46,488     50,620     56,679  

Redeemable convertible preferred stock

    58,649     62,691     64,708  

Total stockholders' deficit

    (69,508 )   (59,810 )   (59,492 )

Non-GAAP Adjusted EBITDA

        To provide investors and others with additional information regarding our financial results, we have disclosed in the table below and within this prospectus non-GAAP Adjusted EBITDA, a non-GAAP financial measure. We define non-GAAP Adjusted EBITDA as net income (loss) plus interest and other expense, net; income tax provision (benefit); certain non-cash charges, including depreciation, amortization and stock-based compensation; and loss from legal settlements. Our non-GAAP Adjusted EBITDA financial measure differs from GAAP in that it excludes certain items of income and expense. Non-GAAP Adjusted EBITDA or the equivalent is frequently used by securities analysts, investors and others as a common financial measure of operating performance.

        Non-GAAP Adjusted EBITDA is one of the primary measures used by our management and board of directors to understand and evaluate our financial performance and operating trends, including period to period comparisons, to prepare and approve our annual budget and to develop short and long term operational plans. Additionally, non-GAAP Adjusted EBITDA is one of the key measures used by the compensation committee of our board of directors to establish the target for and ultimately pay our annual employee bonus pool for virtually all bonus eligible employees. We also frequently use non-GAAP Adjusted EBITDA in our discussions with investors, commercial bankers and other users of our financial statements.

        Management believes non-GAAP Adjusted EBITDA reflects our ongoing business in a manner that allows for meaningful period to period comparisons and analysis of trends. In particular, in calculating non-GAAP Adjusted EBITDA, we exclude certain income and expense items that we believe are not directly attributable to the underlying performance of our business, or are the result of long-term investment decisions in previous periods rather than day-to-day operating decisions, and may be used in future decisions for expansion and acquisition opportunities.

        Our use of non-GAAP Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:

    although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, non-GAAP Adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements;

    non-GAAP Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

    non-GAAP Adjusted EBITDA does not consider the potentially dilutive impact of equity-based compensation;

    non-GAAP Adjusted EBITDA does not reflect tax payments that may represent a reduction in cash available to us;

37


Table of Contents

    non-GAAP Adjusted EBITDA does not include losses associated with, or reflect the cash requirements for, legal settlements; and

    other companies, including companies in our industry, may calculate non-GAAP Adjusted EBITDA differently, which reduces its usefulness as a comparative measure.

        Because of these limitations, you should consider non-GAAP Adjusted EBITDA alongside other financial performance measures, including various cash flow metrics, net income (loss) and our other GAAP results. We encourage investors and others to review our financial information in its entirety and not rely on a single financial measure.

        The following table presents a reconciliation of net income (loss) to non-GAAP Adjusted EBITDA for each of the periods indicated:

 
  Year Ended December 31,   Six Months Ended
June 30,
 
 
  2009   2010   2011   2011   2012  
 
  (in thousands)
 

Net income (loss)

  $ (640 ) $ (4,024 ) $ 12,123   $ 1,340   $ 1,257  

Interest and other expense, net

    33     15     153     74     76  

Income tax provision (benefit)

   
311
   
282
   
(5,998

)
 
143
   
1,166
 

Depreciation and amortization

    2,937     3,509     4,562     2,058     2,537  

Stock-based compensation

    1,137     1,308     944     455     679  

Loss from legal settlements

    293     5,359             200  
                       

Non-GAAP Adjusted EBITDA

  $ 4,071   $ 6,449   $ 11,784   $ 4,070   $ 5,915  
                       

38


Table of Contents


MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

        The following Management's Discussion and Analysis of Financial Condition and Results of Operations should be read together with "Prospectus Summary—Summary Consolidated Financial Data," "Selected Consolidated Financial Data" and our consolidated financial statements and accompanying notes included elsewhere within this prospectus. This discussion includes both historical information and forward-looking information that involves risks, uncertainties and assumptions. Our actual results may differ materially from management's expectations as a result of various factors, including but not limited to those discussed in the sections entitled "Risk Factors" and "Special Note Regarding Forward-Looking Statements."

Overview

        LegalZoom is the leading online provider of services that meet the legal needs of small businesses and consumers in the United States. We believe that we are transforming the small business and consumer legal services market by leveraging the power of technology and people. Our online legal platform enables us to deliver services at scale with a compelling combination of quality, customer care and value. Our services include a portfolio of interactive legal documents that are personalized by our customers through our dynamic online processes, as well as subscription legal plans and registered agent services.

        We developed our easy-to-use, online legal platform to make the law more accessible to small businesses and consumers. Our scalable technology platform enables the efficient creation of personalized legal documents, automates our supply chain and fulfillment workflow management, and provides customer analytics to help us improve our services. For small businesses and consumers who want legal advice, we offer subscription legal plans that connect our customers with experienced attorneys who participate in our legal plan network.

        We have served approximately two million customers over the last 10 years. In 2011, nine out of ten of the approximately 34,000 customers who responded to a survey we provided said they would recommend LegalZoom to their friends and family. Customers that completed orders for certain of our services are invited to take an email survey. Our customers placed approximately 490,000 orders and more than 20 percent of new California limited liability companies were formed using our online legal platform in 2011. We believe the volume of transactions processed through our online legal platform creates a scale advantage that deepens our knowledge and enables us to improve the quality and depth of the services we provide to our customers.

        Our revenues consist primarily of transaction revenues and subscription revenues. We generate transaction revenues when we fulfill customer orders. We generate subscription revenues from customers who subscribe to our legal plans, registered agent services and unlimited access to our forms library. We also generate other revenues from fees we earn when our customers purchase products and services offered by certain third parties.

        Our business is evolving from primarily a transaction model to a combined transaction and subscription model. As a result, we expect that subscription revenues as a percentage of our total revenues will continue to grow for the foreseeable future. We evaluate how we market and sell transaction services to optimize our subscription business, with the ultimate objective of increasing revenues from customers through additional orders and subscriptions, which we refer to as customer lifetime value.

        We have consistently invested in building and growing our business. Other than $8.5 million of outside capital and cash provided by exercises of stock options, we have funded our operations and capital expenditures since inception from cash flows provided by operating activities.

39


Table of Contents

Key Metrics

        Our management uses a number of financial and business metrics to evaluate and monitor the performance of our business, identify trends affecting our business, determine the allocation of resources and make decisions regarding our business strategies. We believe these metrics are useful to investors to understand the underlying trends in our business.

        The following charts set forth our revenues, non-GAAP Adjusted EBITDA and net income (loss) for each of the ten quarters ended June 30, 2012.

GRAPHIC


(1)
Non-GAAP Adjusted EBITDA is a non-GAAP financial measure. For a reconciliation of non-GAAP Adjusted EBITDA to net income (loss), the most comparable GAAP item, see "Unaudited Quarterly Results of Operations Data, Other Financial Data and Seasonality."

        The following charts set forth the number of orders placed, the number of subscribers (as of period end) and subscription revenues as a percentage of total revenues for each of the ten quarters ended June 30, 2012.

CHART

GRAPHIC

40


Table of Contents

    Number of Orders Placed.  This metric represents total customer orders placed in the period, which may include one or more services purchased at the same time. As part of the order, our customers can enroll in a free, 30-day trial of one or more of our subscription-based services, which does not constitute a separate order, but does create a subscriber, as defined below. We use this metric as a key indicator to measure the performance of our transaction business from period to period.

    Number of Subscribers.  This metric includes total paid and free subscribers at the end of a period. Our subscription services consist primarily of our legal plans, registered agent services and unlimited access to our forms library, and can range in duration from 30 days to two years. Free trial subscriptions are only offered to customers that purchase certain of our transaction-based services and, accordingly, we allocate revenues to all the deliverables in these bundled transactions, including the free trial subscriptions. We believe including bundled free trial subscribers in the total number of subscribers provides a meaningful comparison to subscription revenues which include the value allocated to bundled free trials for our subscription services. We use this metric to measure the growth of our subscription business. See "—Unaudited Quarterly Results of Operations Data, Other Financial Data and Seasonality—Seasonality" for more information regarding bundled free trial subscribers and subscriber attrition.

    Subscription Revenues as a Percentage of Total Revenues.  This metric measures the evolution of our business model from primarily a transaction model to a combined transaction and subscription model. We have experienced rapid growth in our subscription revenues, and we expect that our subscription revenues as a percentage of total revenues will continue to increase.

Factors Affecting Our Performance

        Investment in Our Subscription Legal Plan Business.    While we have a large transaction business for online interactive legal document services, we have invested, and will continue to invest, in expanding our subscription revenues from legal plans. This includes developing technology and infrastructure to support our legal plans and attorney network and expanding our sales and marketing efforts, particularly to promote legal plans and our brand. These investments will occur in advance of realizing any benefit from such investments, and therefore it may be difficult for us to determine if we are effectively allocating resources in these areas.

        Investment in Customer Acquisition and Retention.    We have invested, and expect that we will continue to invest, in the promotion of our services through our various customer acquisition channels, including search engine marketing, television and radio to acquire new customers and grow our business. We also invest in attracting and retaining customers with an objective of increasing overall customer lifetime value through product development and customer care initiatives. We continuously evaluate how we market and sell transaction services in order to optimize our subscription business.

        Continued Adoption of Online Legal Services.    Growth in number of orders placed, number of subscribers and total revenues will depend on continued customer adoption of online interactive legal documents and legal plans. Our business depends on our ability to build and maintain customer trust in the online legal services market and on our ability to broaden the market for small business and consumer legal services. The rate of adoption of online legal services will impact our ability to acquire new customers, increase our subscribers and grow our revenues.

41


Table of Contents

Key Components of our Results of Operations

    Revenues

        We generate revenues from the following sources:

        Transaction Revenues.    Transaction revenues are primarily generated from our legal document preparation services upon fulfillment of these services, as well as certain legal document preparation services that were bundled with one- and five-year document revision and vaulting services. Prior to the change in accounting guidance on how revenue recognition is applied to multiple deliverable arrangements that we adopted on January 1, 2010, the full value of these bundled services were required to be recognized as revenues ratably on a straight-line basis over the service period. Revenues are recognized upon fulfillment of services, predominantly when a completed set of documents is shipped to the customer. Transaction revenues are net of refunds, cancellations, promotional discounts, sales allowances, credit reserves and the value allocated to bundled free-trials for our subscription services.

        Subscription Revenues.    Subscription revenues are generated primarily when customers enroll in subscriptions to our legal plans, registered agent services or unlimited access to our forms library. We recognize revenues from our subscriptions ratably on a straight-line basis over the subscription term as such services are rendered. Subscription terms range from a period of 30 days to two years. Subscription revenues include the value allocated to bundled free-trials for our subscription services and are net of promotional discounts, cancellations, sales allowances, credit reserves and payments to legal plan attorneys.

        Other Revenues.    Other revenues consist primarily of fees earned from third-party providers for services provided to or leads generated for such providers through our online legal platform. We typically earn these revenues on a cost-per-click or cost-per-action basis.

        We generally collect payments and fees at the time orders are placed. We record amounts collected for services that have not been performed as deferred revenues on our consolidated balance sheet. See "—Critical Accounting Policies—Revenue Recognition" for a description of the accounting policies related to revenue recognition, including arrangements that contain multiple deliverables.

    Cost of Services

        Our cost of services include all costs of providing and fulfilling our services. Cost of services primarily include government filing fees; costs of fulfillment, customer care and inbound sales personnel and related benefits, including stock-based compensation, and costs of independent contractors for document preparation; telecommunications and data center costs, including depreciation and amortization of network computers, equipment and internal use software; printing, shipping and courier charges; credit and debit card fees; allocated overhead; legal document kit expenses; and sales and use taxes.

    Sales and Marketing

        Our sales and marketing expenses are comprised of customer acquisition media, consisting primarily of search engine marketing, television and radio; compensation and related benefits, including stock-based compensation, for marketing and outbound sales personnel; media production; public relations and other promotional activities; general business development activities; and allocated overhead. Marketing and advertising costs to promote our products and services are expensed in the period incurred. Media production costs are expensed the first time the advertisement is aired.

    Technology and Development

        Technology and development expenses consist primarily of personnel costs and related benefits, including stock-based compensation, and expenses for outside consultants. These expenses also include

42


Table of Contents

allocated overhead and costs incurred in the development, implementation, amortization and maintenance of internal use software, including our website, online legal platform and related infrastructure. Technology and development costs are expensed as incurred, except to the extent that such costs are associated with internal use software or website development costs that are capitalized.

    General and Administrative

        Our general and administrative expenses relate primarily to employee compensation and related benefits, including stock-based compensation, for executive and corporate personnel; professional and consulting fees; allocated overhead; and legal loss contingencies.

    Interest and Other Expense, Net

        Interest and other expense, net, consists primarily of interest expense on our capital lease obligations, amortization of deferred financing fees and annual commitment fees on our revolving line of credit.

    Income Taxes

        Our income tax (provision) benefit is comprised of current and deferred federal and state income taxes. Our current income tax provision is primarily related to state income taxes in jurisdictions where we generate taxable income. In 2011, our deferred federal and state income tax benefit was generated from the release of the valuation allowance pertaining to our federal and state net deferred income tax assets. In 2009 and 2010, we did not record any deferred income tax benefit or provision as we maintained a full valuation allowance against our federal and state net deferred income tax assets. See "—Critical Accounting Policies—Income Taxes."

Segments

        We operate in one operating segment, providing legal document preparation and related subscription services. Our chief operating decision maker is our Chief Executive Officer, who manages our operations on a consolidated basis for purposes of evaluating financial performance and allocating resources. Our Chief Executive Officer reviews separate revenue information for our transaction and subscription services. All other financial information is reviewed by him on a consolidated basis. All of our principal operations, decision-making functions and assets are located in the United States. Assets and revenues generated outside of the United States are not material for any of the periods presented.

43


Table of Contents

Results of Operations

        The following table sets forth our consolidated statements of operations data for each of the periods indicated. The period-to-period comparison of financial results should not be considered as a prediction or indicative of our future results.

 
  Year Ended December 31,   Six Months Ended
June 30,
 
 
  2009   2010   2011   2011   2012  
 
  (in thousands)
 

Consolidated Statements of Operations Data:

                               

Revenues(1)

  $ 103,299   $ 120,771   $ 156,066   $ 78,959   $ 96,459  

Costs and operating expenses(2):

                               

Cost of services

    53,082     60,643     80,437     41,805     46,571  

Sales and marketing

    32,673     36,322     41,891     22,189     31,198  

Technology and development

    4,686     7,509     8,117     3,961     4,474  

General and administrative(1)

    13,154     20,024     19,343     9,447     11,717  
                       

Total costs and operating expenses

    103,595     124,498     149,788     77,402     93,960  
                       

Income (loss) from operations

    (296 )   (3,727 )   6,278     1,557     2,499  

Interest and other expense, net

    (33 )   (15 )   (153 )   (74 )   (76 )
                       

Income (loss) before income taxes

    (329 )   (3,742 )   6,125     1,483     2,423  

Income tax (provision) benefit

    (311 )   (282 )   5,998     (143 )   (1,166 )
                       

Net income (loss)

  $ (640 ) $ (4,024 ) $ 12,123   $ 1,340   $ 1,257  
                       

(1)
We recorded an estimated charge of $5.4 million during the year ended December 31, 2010 related to legal settlements, of which $4.6 million was included as part of general and administrative expenses and $0.8 million was recorded as a reduction of revenues. During the six months ended June 30, 2012, we recorded an additional $0.2 million charge related to a change in estimate of the settlement costs of these legal matters, which was recorded as a reduction of revenues. The ultimate costs of resolving these matters are dependent on a number of factors, including the resolution of any appeals of the approved settlements, actual claims made by, participation rates of, and the resulting payments, if any, to the class members. Any difference between the amount accrued and the ultimate costs of these matters will be recognized as an additional or lower expense in the period in which the matters are resolved. If the actual costs of these matters are higher than the amount we estimated, this difference could have a material adverse effect on our business, operating results, cash flows and financial condition. See Note 6 to our consolidated financial statements included elsewhere in this prospectus for a full discussion of this legal settlement accrual.

(2)
Stock-based compensation expense included in the above line items:

 
  Year Ended December 31,   Six Months Ended
June 30,
 
 
  2009   2010   2011   2011   2012  
 
  (in thousands)
 

Cost of services

  $ 200   $ 178   $ 155   $ 82   $ 67  

Sales and marketing

    124     46     56     21     135  

Technology and development

    114     155     133     64     75  

General and administrative

    699     929     600     288     402  
                       

Total stock-based compensation expense

  $ 1,137   $ 1,308   $ 944   $ 455   $ 679  
                       

44


Table of Contents

        The following table sets forth our consolidated statements of operations data as a percentage of revenues for each of the periods indicated. The period-to-period comparison of financial results should not be considered as a prediction or indicative of our future results.

 
  Year Ended December 31,   Six Months Ended
June 30,
 
 
  2009   2010   2011   2011   2012  

Consolidated Statements of Operations Data:

                               

Revenues

    100 %   100 %   100 %   100 %   100 %

Costs and operating expenses:

                               

Cost of services

    51     50     52     53     48  

Sales and marketing

    32     30     27     28     32  

Technology and development

    5     6     5     5     5  

General and administrative

    13     17     12     12     12  
                       

Total costs and operating expenses

    101     103     96     98     97  
                       

Income (loss) from operations

    (1 )   (3 )   4     2     3  

Interest and other expense, net

                     
                       

Income (loss) before income taxes

    (1 )   (3 )   4     2     3  

Income tax (provision) benefit

            4         (1 )
                       

Net income (loss)

    (1 )%   (3 )%   8 %   2 %   2 %
                       

Six Months Ended June 30, 2011 and 2012

    Revenues

 
  Six Months Ended June 30,  
 
  2011   2012   % Change  
 
  (in thousands)
 

Revenues by type:

                   

Transaction revenues

  $ 64,055   $ 69,905     9 %

Subscription revenues

    11,430     21,359     87 %

Other

    3,474     5,195     50 %
               

Total revenues

  $ 78,959   $ 96,459     22 %
               

        Total revenues increased $17.5 million for the six months ended June 30, 2012 primarily as a result of increases in both transaction and subscription revenues. Transaction revenues increased $5.8 million for the six months ended June 30, 2012 primarily due to a 10% increase in the number of orders placed. The increase in the number of orders placed was largely driven by an increase in business formation services.

        Subscription revenues increased $9.9 million for the six months ended June 30, 2012, benefitting from a 60% increase in the number of subscribers across all of our subscription services combined with price increases for our legal plans that we implemented in first quarter of 2011. We expect our subscription revenues to grow as a percentage of total revenues as we continue to transition our business from a transaction model to a combined transaction and subscription model.

        Other revenues increased $1.7 million for the six months ended June 30, 2012 primarily due to increased revenues from third-party products and services purchased by our customers.

45


Table of Contents

    Cost of Services

 
  Six Months Ended June 30,  
 
  2011   2012   % Change  

Cost of services

  $ 41,805   $ 46,571     11 %

Percentage of total revenues

    53 %   48 %      

        Cost of services increased $4.8 million for the six months ended June 30, 2012 primarily due to the growth in orders placed. The decrease in cost of services as a percentage of total revenues was largely attributable to the increase in subscription revenues, which have lower associated costs of services.

        We plan to continue efforts to manage cost of services but expect total cost of services to increase as we fulfill greater volumes. However, with our business model evolving from primarily a transaction model to a combined transaction and subscription model, we expect the total cost of services as a percentage of total revenues to decrease over time as subscription services require less fulfillment labor and related costs.

    Sales and Marketing

 
  Six Months Ended June 30,  
 
  2011   2012   % Change  

Sales and marketing

  $ 22,189   $ 31,198     41 %

Percentage of total revenues

    28 %   32 %      

        Sales and marketing expenses increased $9.0 million for the six months ended June 30, 2012, $5.7 million of which was attributable to increased spend on customer acquisition media, including search engine marketing, television and radio. The remaining increase was primarily attributable to increases in personnel and related costs and allocated overhead.

        We have invested, and expect that we will continue to invest, in sales and marketing. Sales and marketing expenses as a percentage of total revenues are expected to increase in the near term, as we continue to invest in building our brand, particularly to promote our legal plans. Additionally, we plan to add marketing, sales and business development personnel, develop new campaigns and continue to invest in various forms of media. However, as we continue to grow and transform our business into a combined transaction and subscription model and achieve a higher scale for our services, we expect sales and marketing expenses as a percentage of total revenues to decrease over the long-term.

    Technology and Development

 
  Six Months Ended June 30,  
 
  2011   2012   % Change  

Technology and development

  $ 3,961   $ 4,474     13 %

Percentage of total revenues

    5 %   5 %      

        Technology and development expenses increased $0.5 million for the six months ended June 30, 2012. The increase was primarily attributable to increased compensation expense for additional technology hires, partially offset by the impact of capitalizing more software costs in the current period.

        We have focused our technology and development efforts on improving and maintaining our internally-developed online technology platform, efficiency in operations and expanded infrastructure. As we grow our business, we expect to increase the cost of investment in technology and development in these areas and develop new services while enhancing the quality of customer experience for existing services, but we expect that technology and development expenses as a percentage of total revenues will remain relatively consistent over the long term.

46


Table of Contents

    General and Administrative

 
  Six Months Ended June 30,  
 
  2011   2012   % Change  

General and administrative

  $ 9,447   $ 11,717     24 %

Percentage of total revenues

    12 %   12 %      

        General and administrative expenses increased $2.3 million for the six months ended June 30, 2012 due to approximately $0.2 million in higher compensation expense for additional executive and corporate hires and $0.8 million in increased professional fees, including legal and audit fees. We also experienced $0.6 million in increased rent and travel due to the expansion of our operations and $0.7 million in increased other general and administrative costs.

        We expect our general and administrative expenses to increase as we continue to expand our operations, hire additional personnel, grant additional stock-based awards and transition from a private to a public company. Public company costs we incur will include quarterly and annual reporting and compliance costs, including ongoing evaluation and maintenance of our internal control over financial reporting, professional fees, exchange listing fees, shareholder and other investor communications, institution of an internal audit function and increased costs for directors' and officers' insurance and other support services. However, as we continue to grow and transform our business into a combined transaction and subscription model and achieve a higher scale for our services, we expect general and administrative expenses as a percentage of total revenues to decrease slightly over the long-term.

    Interest and Other Expenses, net

 
  Six Months Ended June 30,  
 
  2011   2012   % Change  

Interest and other expenses, net

  $ (74 ) $ (76 )   3%  

Percentage of total revenues

    %   %      

        Interest and other expenses, net increased for the six months ended June 30, 2012 primarily due to interest expense on amortization of deferred financing fees. We have no amounts outstanding under our line of credit and do not expect to draw on the line in 2012. We may also generate additional interest income on our investment of the proceeds from this offering.

    Income Tax Provision

 
  Six Months Ended June 30,
 
  2011   2012   % Change

Income tax provision

  $ 143   $ 1,166   NM

Percentage of total revenues

    %   1 %  

        We recorded an income tax provision of $1.2 million for the six months ended June 30, 2012, which included $0.8 million of change in deferred income taxes and $0.4 million of current state income taxes. We recorded an income tax provision of $0.1 million for the six months ended June 30, 2011.

47


Table of Contents

Years Ended December 31, 2009, 2010 and 2011

    Revenues

 
  Year Ended December 31,    
   
 
 
  2009 to 2010
% Change
  2010 to 2011
% Change
 
 
  2009   2010   2011  
 
  (in thousands)
   
   
 

Revenues by type:

                               

Transaction revenues

  $ 92,561   $ 105,491   $ 121,856     14 %   16 %

Subscription revenues

    4,966     10,889     27,878     119 %   156 %

Other

    5,772     4,391     6,332     (24 )%   44 %
                           

Total revenues

  $ 103,299   $ 120,771   $ 156,066     17 %   29 %
                           

        2011 Compared to 2010.    Total revenues increased $35.3 million in 2011 as a result of increases in transaction revenues and subscription revenues. Transaction revenues increased $16.4 million in 2011 due to a 12% increase in the number of orders placed. We implemented a number of new initiatives in the fourth quarter of 2010 that we believe contributed to the overall growth in orders in 2011, including lowered pricing for certain business formation services, the introduction of flexible customer payment options for certain of our services and website enhancements that we believe improved customer experience and conversion. The increase in the number of orders placed was largely in business formation services, which tend to have a higher average order value. In addition, our revenues in 2010 also included a reduction of revenues of $0.8 million related to legal settlements described in "—Critical Accounting Policies and Estimates—Loss Contingencies" and Note 6 to our consolidated financial statements included elsewhere in this prospectus. No similar reduction to revenues was recorded in 2011.

        Subscription revenues increased $17.0 million in 2011 with a 97% increase in the number of subscribers across all of our subscription services as a result of an expansion of our services. Our registered agent services benefited from a full year of expanded in-house operations in 2011, compared to only 10 months in 2010. Additionally, our legal plan services benefitted from an increase in legal plan prices and a full year of operations in 2011, compared to a partial year in 2010.

        Other revenues increased $1.9 million due primarily to increased revenues from third-party products and services purchased by our customers.

        2010 Compared to 2009.    Total revenues increased $17.5 million in 2010. Transaction revenues increased $12.9 million primarily as a result of an increase in the number of orders placed and the recognition of $4.7 million of revenue from certain document preparation services due to the adoption of new revenue recognition rules as of January 1, 2010. See "Critical Accounting Policies and Estimates—Revenue Recognition." The 2010 revenue growth was partially offset by the $0.8 million reduction of revenue related to legal settlements as further described in "—Critical Accounting Policies and Estimates—Loss Contingencies" and Note 6 to our consolidated financial statements included elsewhere in this prospectus.

        Subscription revenues increased $5.9 million in 2010 primarily as a result of a 147% increase in the number of subscribers. The increase in the number of subscribers and subscription revenues was driven primarily by two factors. First, prior to 2010, we performed our registered agent services in only six states, with the remainder of the states serviced by third parties. In March 2010, we began to expand our in-house operations to perform our registered agent services in an additional 43 states and the District of Columbia. For registered agent services we perform, we recognize as revenues the full amount we charge the customer and record the related costs incurred in fulfilling those services in cost of services. For registered agent customers serviced by a third party, we recognize revenues net of the fees paid to the third party. Second, we launched both our legal plan and our forms subscriptions in 2010, with the initial offering in California in April and a further expansion to other states in August.

48


Table of Contents

    Cost of Services

 
  Year Ended December 31,    
   
 
 
  2009 to 2010
% Change
  2010 to 2011
% Change
 
 
  2009   2010   2011  
 
  (dollars in thousands)
   
   
 

Cost of services

  $ 53,082   $ 60,643   $ 80,437     14 %   33 %

Percentage of total revenues

    51 %   50 %   52 %            

        2011 Compared to 2010.    Cost of services increased $19.8 million in 2011 primarily due to the growth in orders placed. The increase in cost of services as a percentage of total revenues was largely attributable to the strategic decision to reduce pricing of certain business formation services in the fourth quarter of 2010. This resulted in a shift in service mix toward business formation services, which have higher associated costs of services.

        2010 Compared to 2009.    Cost of services increased $7.6 million in 2010 due to the increase in number of orders placed and expansion of operations. During March 2010, we opened a new customer service and production center in Austin, Texas, increasing both direct and allocated overhead costs by $0.7 million in 2010 as compared to 2009. We also experienced increased fulfillment costs associated with the expansion of our registered agent services business beginning in March 2010.

    Sales and Marketing

 
  Year Ended December 31,    
   
 
 
  2009 to 2010
% Change
  2010 to 2011
% Change
 
 
  2009   2010   2011  
 
  (dollars in thousands)
   
   
 

Sales and marketing

  $ 32,673   $ 36,322   $ 41,891     11 %   15 %

Percentage of total revenues

    32 %   30 %   27 %            

        2011 Compared to 2010.    Sales and marketing expenses increased $5.6 million in 2011, $4.0 million of which was attributable to increased spend on customer acquisition media, including search engine marketing, television and radio. The remaining increase was primarily attributable to increases in personnel and related costs, and allocated overhead.

        2010 Compared to 2009.    Sales and marketing expenses increased $3.6 million in 2010, $3.4 million of which was attributable to increased spend on customer acquisition media.

    Technology and Development

 
  Year Ended December 31,    
   
 
 
  2009 to 2010
% Change
  2010 to 2011
% Change
 
 
  2009   2010   2011  
 
  (dollars in thousands)
   
   
 

Technology and development

  $ 4,686   $ 7,509   $ 8,117     60 %   8 %

Percentage of total revenues

    5 %   6 %   5 %            

        2011 Compared to 2010.    Technology and development expenses increased $0.6 million in 2011. The increase was primarily attributable to increased technology hiring and resulting compensation.

        2010 Compared to 2009.    Technology and development expenses increased $2.8 million in 2010. The increase was primarily attributable to the expansion of technology personnel and consultants for the development of our legal plan services, investments to improve operating efficiencies and to maintain and expand our infrastructure.

    General and Administrative

 
  Year Ended December 31,    
   
 
 
  2009 to 2010
% Change
  2010 to 2011
% Change
 
 
  2009   2010   2011  
 
  (dollars in thousands)
   
   
 

General and administrative

  $ 13,154   $ 20,024   $ 19,343     52 %   (3 )%

Percentage of total revenues

    13 %   17 %   12 %            

49


Table of Contents

        2011 Compared to 2010.    General and administrative expenses decreased $0.7 million in 2011 because 2010 included a $4.6 million charge for estimated legal settlements with no similar charges in 2011. Excluding the legal settlements charge, further described in "—Critical Accounting Policies and Estimates—Loss Contingencies" and Note 6 to our consolidated financial statements included elsewhere in this prospectus, general and administrative expenses increased by $3.9 million in 2011, approximately $1.8 million of which was attributable to bonuses awarded for company performance. No bonuses for company performance were awarded in 2010. The remaining $2.1 million increase was comprised primarily of $1.3 million in higher compensation for and additional new hires of executive and corporate personnel and $0.8 million in increased legal and audit fees.

        2010 Compared to 2009.    General and administrative expenses increased $6.9 million in 2010, including a $4.6 million charge related to legal settlements. See "—Critical Accounting Policies and Estimates—Loss Contingencies" and Note 6 to our consolidated financial statements included elsewhere in this prospectus. The remaining $2.3 million in increased general administrative expenses came primarily as a result of a $2.1 million increase in personnel costs and related benefits, including stock-based compensation, due to higher compensation and hiring, but was partially offset by lower bonus accruals and a $0.3 million legal settlement in 2009. In 2010, we did not award any bonuses based on company performance compared to $1.1 million in 2009. The remaining $1.3 million is attributable to other expenses including costs associated with relocating our headquarters from Los Angeles to Glendale, California and opening our facility in Austin, Texas.

    Interest and Other Expenses, Net

 
  Year Ended December 31,    
   
 
 
  2009 to 2010
% Change
  2010 to 2011
% Change
 
 
  2009   2010   2011  
 
  (dollars in thousands)
   
   
 

Interest and other expenses, net

  $ (33 ) $ (15 ) $ (153 )   (55 )%   NM  

Percentage of total revenues

    %   %   %            

        Interest and other expenses, net, increased $0.1 million in 2011 primarily due to increased interest expenses on capital lease obligations and amortization of deferred financing fees. Interest and other expenses, net, was immaterial in 2009 and 2010.

    Income Tax (Provision) Benefit

 
  Year Ended December 31,    
   
 
 
  2009 to 2010
% Change
  2010 to 2011
% Change
 
 
  2009   2010   2011  
 
  (dollars in thousands)
   
   
 

Income tax (provision) benefit

  $ (311 ) $ (282 ) $ 5,998     (9 )%   NM  

Percentage of total revenues

    %   %   4 %            

        Our income tax provision in 2009 and 2010 consisted of state taxes in states where we generated taxable income. Our income tax benefit in 2011 consisted of the release of a valuation allowance of $6.9 million, partially offset by a provision for state and federal income taxes of $0.6 million and $0.3 million, respectively. Prior to 2011, we generated losses and federal net operating loss carryforwards and we were not subject to federal income taxes but provided for a full valuation allowance against our net deferred tax assets. In 2011, we became profitable and achieved a three-year cumulative income before income taxes during the second half of 2011. We also generated sufficient taxable income to begin to utilize a significant portion our previously recorded federal net operating loss carryforwards. Therefore, based on the weight of positive evidence that our deferred tax assets are more likely than not realizable, we released the valuation allowance against our remaining net deferred tax assets during the fourth quarter of 2011, except for capital loss carryforwards, which we do not expect to utilize prior to expiration in 2012. See "—Critical Accounting Policies and Estimates—Income Taxes."

50


Table of Contents

        We currently expect that we will continue to generate sufficient federal taxable income and be able to utilize our remaining net deferred tax assets available as of December 31, 2011. We also expect to continue to generate taxable income and pay income taxes in federal and state jurisdictions where we operate.

Unaudited Quarterly Results of Operations Data, Other Financial Data and Seasonality

        The tables below set forth our unaudited quarterly consolidated statements of operations data and other financial data for each of the ten quarters ended June 30, 2012. We have prepared the quarterly consolidated statements of operations data on a basis consistent with the audited consolidated financial statements included in this prospectus. In the opinion of management, the financial information reflects all adjustments, consisting only of normal recurring adjustments necessary for a fair presentation of this data. This information should be read in conjunction with the audited consolidated financial statements and related notes included elsewhere in this prospectus. The results of historical periods are not necessarily indicative of the results of operations for a full year or any future period.

 
  Three Months Ended  
 
  Mar. 31,
2010
  June 30,
2010
  Sept. 30,
2010
  Dec. 31,
2010
  Mar. 31,
2011
  June 30,
2011
  Sept. 30,
2011
  Dec. 31,
2011
  Mar. 31,
2012
  June 30,
2012
 
 
  (in thousands)
 

Consolidated Statements of Operations Data:

                                                             

Revenues(1)

  $ 30,146   $ 31,206   $ 30,734   $ 28,685   $ 38,288   $ 40,671   $ 40,507   $ 36,600   $ 46,988   $ 49,471  

Costs and operating expenses:

                                                             

Cost of services

    14,756     15,345     14,864     15,678     20,459     21,346     20,088     18,544     22,847     23,724  

Sales and marketing

    10,524     9,044     9,189     7,565     12,388     9,801     11,747     7,955     15,651     15,547  

Technology and development

    2,012     1,702     1,711     2,084     1,869     2,092     2,113     2,043     2,071     2,403  

General and administrative(1)

    8,313     3,178     3,620     4,913     4,596     4,851     5,195     4,701     6,167     5,550  
                                           

Total costs and operating expenses

    35,605     29,269     29,384     30,240     39,312     38,090     39,143     33,243     46,736     47,224  
                                           

Income (loss) from operations

    (5,459 )   1,937     1,350     (1,555 )   (1,024 )   2,581     1,364     3,357     252     2,247  

Interest and other income (expense), net

    (12 )   (14 )   16     (5 )   (51 )   (23 )   (40 )   (39 )   (27 )   (49 )
                                           

Income (loss) before income taxes

    (5,471 )   1,923     1,366     (1,560 )   (1,075 )   2,558     1,324     3,318     225     2,198  

Income tax (provision) benefit

    (435 )   153     174     (174 )   103     (246 )   (127 )   6,268     (280 )   (886 )
                                           

Net income (loss)

  $ (5,906 ) $ 2,076   $ 1,540   $ (1,734 ) $ (972 ) $ 2,312   $ 1,197   $ 9,586   $ (55 ) $ 1,312  
                                           

Other Financial Data:

                                                             

Net income (loss)

  $ (5,906 ) $ 2,076   $ 1,540   $ (1,734 ) $ (972 ) $ 2,312   $ 1,197   $ 9,586   $ (55 ) $ 1,312  

Interest and other expense (income), net

    12     14     (16 )   5     51     23     40     39     27     49  

Income tax provision (benefit)

    435     (153 )   (174 )   174     (103 )   246     127     (6,268 )   280     886  

Depreciation and amortization

    888     866     879     876     1,002     1,056     1,206     1,298     1,244     1,293  

Stock-based compensation

    318     292     305     393     266     189     193     296     332     347  

Loss from legal settlements

    5,359                                 200      
                                           

Non-GAAP Adjusted EBITDA(2)

  $ 1,106   $ 3,095   $ 2,534   $ (286 ) $ 244   $ 3,826   $ 2,763   $ 4,951   $ 2,028   $ 3,887  
                                           

(1)
We recorded an estimated charge of $5.4 million during the three months ended March 31, 2010 related to legal settlements, of which $4.6 million was included as part of general and administrative expenses and $0.8 million was recorded as a reduction of revenues. During the three months ended March 31, 2012, we recorded an additional $0.2 million charge related to a change in estimate of the settlement costs of these legal matters, which was recorded as a reduction of revenues. See Note 6 to our consolidated financial statements included elsewhere in this prospectus for a full discussion of this legal settlement accrual.

(2)
For a definition of non-GAAP Adjusted EBITDA and a discussion of the limitations of using non-GAAP Adjusted EBITDA, see "Selected Consolidated Financial Data—Non-GAAP Adjusted EBITDA."

51


Table of Contents

    Seasonality

        We have experienced, and expect that we will continue to experience, seasonality in the number of orders placed. Customers tend to place a higher number of orders in the first quarter of the year as we believe the demand for forming businesses is the highest at the beginning of the year. Further seasonality is reflected in the timing of our revenue recognition in the second quarter, as we typically recognize in the second quarter a high amount of revenues from orders placed in the first quarter that are fulfilled in the second quarter. Also, we generally see demand for our services decline around the beginning of the third quarter with summer vacations and in the last two months of the fourth quarter around the winter holidays. We expect this seasonality to continue into the future, which may cause period to period fluctuations in certain of our operating results and financial metrics and thus limit our ability to predict our future results. At the end of each of our last ten fiscal quarters, bundled free trial subscribers constituted less than 20% of the total number of subscribers and in six of those quarters bundled free trial subscribers constituted 10% or less of the total number of subscribers. As the size of our subscription business grows as a percentage of our total revenues, we expect that the number of bundled free trial subscribers as a percentage of the total number of subscribers will generally decline, with potential seasonal increases in the first quarter of each year related to the seasonality of our transactional service business. During each of the twelve calendar months ended June 30, 2012, we estimate that the percentage of monthly subscriber cancellations divided by the sum of beginning subscribers and subscriber additions ranged from approximately five to eight percent. We believe that month-over-month attrition across our subscription plans generally decreases among subscribers that have been paying subscribers for at least 90 days.

        Cost of services follow similar seasonal patterns of orders placed and revenues recognized, with higher levels of spending for customer care during periods in which our revenues are higher. Costs of services, including government filing fees, printing and shipping, credit and debit card fees and sales and use taxes, tend to be variable costs and are generally aligned with the number of orders placed. We use temporary personnel and outsourced independent contractors to provide flexibility in hiring and to manage costs. The fourth quarter cost of services as a percent of revenue tends to increase slightly over the third quarter due to increased full-time and temporary customer care and fulfillment personnel hired 45 to 60 days prior to the anticipated seasonally higher volumes in the first quarter in order to allow for appropriate training and development of such personnel. We expect the trend of hiring new customer care representatives and fulfillment personnel 45 to 60 days before the calendar year-end to continue.

        Media spend is generally at its highest in the first quarter and in line with the seasonal first quarter increase in the number of orders placed. Media spend generally reaches its second highest level of spend in the third quarter. Fourth quarter media spend is generally the lowest for the year in line with our expectations of a lower number of orders placed at that time.

        We also expect that the investments in our subscription legal plan business, customer acquisition and retention, and potential international expansion will reduce non-GAAP Adjusted EBITDA in the next few quarters.

Liquidity and Capital Resources

        As of June 30, 2012, we had cash of $31.4 million, which consisted entirely of cash on deposit with banks. Other than $8.5 million of outside capital and cash provided by exercises of stock options, we have funded our operations and capital expenditures since inception from cash flows provided by operating activities.

        We expect cash provided by operating activities to be our primary source of funds in future periods and to be driven by our anticipated growth in our transaction and subscription revenues, partially offset by increases in working capital requirements and capital expenditures associated with scaling our operations, technology and infrastructure to support our growth and cash payments made for legal settlements. We expect to make capital expenditures of approximately $5.0 million in 2012, approximately half of which would be for capitalized software expenditures and the other half of which would be for other capital expenditures associated with scaling our operations, technology and infrastructure to support our growth. Our future capital requirements may vary from those now planned and will depend on many factors, including:

    the development, launch and success of new services;

    the levels of marketing required to attract new customers and retain existing customers;

52


Table of Contents

    the continuous development of our online legal platform to accommodate actual and anticipated technology changes;

    defending and settling potential regulatory investigations, claims, suits and prosecutions;

    the expansion of our business into international markets; and

    the timing and extent to which we scale our operations, technology and infrastructure to support future growth.

        Based on our current level of operations and anticipated growth, we believe that our existing cash, together with cash provided by operating activities and the proceeds from this offering, will be sufficient to fund our operations and capital expenditures for at least the next 12 months. We may supplement our liquidity needs with borrowings under our $10 million revolving line of credit facility, if available. See "—Line of Credit Facility."

 
  Year Ended December 31,   Six Months Ended June 30,  
 
  2009   2010   2011   2011   2012  
 
  (in thousands)
 

Consolidated Statement of Cash Flows Data:

                               

Net cash provided by operating activities

  $ 14,679   $ 1,488   $ 13,722   $ 7,812   $ 8,261  

Net cash used in investing activities

    (4,484 )   (4,673 )   (6,060 )   (3,840 )   (2,396 )

Net cash provided by (used in) financing activities

    247     3,386     277     150     (1,599 )

    Net Cash Provided by Operating Activities

        Net cash provided by operating activities during the six months ended June 30, 2012 resulted primarily from a net decrease in our operating assets and liabilities of $3.0 million and our net income of $1.3 million adjusted for non-cash expenses of $4.0 million. The net decrease in operating assets and liabilities was primarily due to an increase in deferred revenues, accounts payable and accrued expenses and other current liabilities. Deferred revenues increased primarily as a result of the growth in the number of orders placed and mix of services, as well as the timing of the completion of those services. The increase in accounts payable was primarily due to timing of payments to our vendors, and the increase in accrued expenses and other current liabilities was primarily due to an increase in accrued advertising and accrued professional fees, offset by a decrease in accrued payroll and related expenses mainly due to the year-end accrued bonus payments made during the six months ended June 30, 2012 and the June 2012 payment of $1.9 million to the plaintiffs' attorneys for fees and expenses in connection with the Missouri legal settlement as further described in Note 6 to our consolidated financial statements included elsewhere in this prospectus. Non-cash expenses during the six months ended June 30, 2012 were comprised primarily of depreciation and amortization of property and equipment totaling $2.5 million, stock-based compensation of $0.7 million and deferred income taxes of $0.8 million.

        Net cash provided by operating activities during the six months ended June 30, 2011 resulted primarily from a net decrease in our operating assets and liabilities of $4.0 million and our net income of $1.3 million adjusted for non-cash expenses of $2.5 million. The net decrease in operating assets and liabilities was primarily due to an increase in accounts payable and accrued expenses and other current liabilities. The increase in accounts payable was primarily due to the timing of payments to our vendors, and the increase in accrued expenses and other current liabilities was primarily due to an increase in accrued advertising and payroll and related costs with increased headcount. Non-cash expenses during the six months ended June 30, 2011 were comprised primarily of depreciation and amortization of property and equipment totaling $2.0 million and stock-based compensation of $0.5 million.

        Net cash provided by operating activities in 2011 resulted primarily from net income of $12.1 million and a net decrease in our operating assets and liabilities of $2.9 million, offset in part by non-cash items of $1.3 million. The net decrease in operating assets and liabilities was primarily due to an increase in accrued expenses and other current liabilities of $4.3 million primarily attributable to accrued incentive bonuses,

53


Table of Contents

partially offset by an increase in accounts receivable of $1.4 million primarily attributable to our customers selecting the three-pay plan, which allows them to pay for an order in three equal payments. Non-cash items in 2011 included a $6.9 million income tax benefit on the release of the valuation allowance related to our deferred tax assets, offset in part by non-cash expenses, including depreciation, amortization and disposals totaling $4.7 million and stock-based compensation of approximately $1.0 million.

        Net cash provided by operating activities in 2010 resulted from our net loss of $4.0 million adjusted for non-cash expenses of $5.2 million and a net decrease in our operating assets and liabilities of $0.3 million. Our net loss and the net decrease in operating assets and liabilities was primarily due to the accrual of $5.4 million for the legal settlements described in "—Critical Accounting Policies—Loss Contingencies" and Note 6 to our consolidated financial statements included elsewhere in this prospectus. Non-cash expenses in 2010 were comprised primarily of depreciation, amortization and a loss on disposal of property and equipment totaling $3.8 million and stock-based compensation of $1.3 million.

        Net cash provided by operating activities in 2009 resulted from a net decrease in our operating assets and liabilities of $11.2 million and our net loss of $0.6 million, adjusted for non-cash expenses of $4.1 million. The net decrease in operating assets and liabilities was primarily due to an increase in deferred revenues and accrued expenses and other current liabilities. Deferred revenues increased primarily as a result of the growth in the number of orders placed and mix of services, as well as the timing of the completion of those services. The increase in accrued expenses and other current liabilities was primarily due to an increase in payroll and related costs with increased headcount and related compensation. Non-cash expenses in 2009 were comprised primarily of depreciation, amortization and loss on disposal of property and equipment totaling $3.0 million and stock-based compensation of $1.1 million.

    Net Cash Used in Investing Activities

        Net cash used in investing activities during the six months ended June 30, 2011 and 2012 primarily resulted from continued investment in internally developed capitalized software and the purchase of property and equipment. For the six months ended June 30, 2011, restricted cash decreased as a financial institution removed the requirement to maintain collateral against the available credit limit on procurement credit cards.

        Net cash used in investing activities in 2011 primarily resulted from continued investment in internally developed capitalized software and the purchase of property and equipment, including approximately $2.5 million for data center server and computer equipment upgrades to support our operations and online legal platform, offset in part by a decrease in restricted cash held by a financial institution for banking and credit card merchant services.

        Net cash used in investing activities in 2010 primarily resulted from the continued investment in internally developed capitalized software and the purchase of property and equipment to build out our facilities in Glendale, California and Austin, Texas, offset in part by proceeds received for disposal of property and equipment.

        Net cash used in investing activities in 2009 primarily resulted from the purchase of property and equipment and investment in internally developed capitalized software associated with the development of a new order management system together with an increase in restricted cash held by a financial institution for banking and credit card merchant services.

    Net Cash Provided by (used in) Financing Activities

        Net cash provided by financing activities during the six months ended June 30, 2011 resulted from proceeds from exercises of stock options, partially offset by the payment of capital lease obligations. Net cash used in financing activities during the six months ended June 30, 2012 resulted primarily from payment of deferred offering costs related to this offering and payment of capital lease obligations, offset by proceeds from exercises of stock options.

54


Table of Contents

        Net cash provided by financing activities in 2011 resulted primarily from the payment of capital lease obligations, largely offset by proceeds from exercises of stock options and excess windfall tax benefits related to stock-based compensation.

        Net cash provided by financing activities in 2010 resulted primarily from proceeds from exercises of stock options and repayment of notes receivable from stockholders.

        Net cash provided by financing activities in 2009 primarily resulted from proceeds from exercises of stock options.

    Line of Credit Facility

        On October 31, 2008, we entered into a revolving line of credit facility with Comerica Bank, which was amended on October 29, 2010 that allows us to borrow up to $10 million for up to 180 days from the date of borrowing. We are obligated to pay an unused line fee equal to 0.20% per annum of the average unused portion of the line of credit, payable in quarterly installments on the last day of each quarter. Borrowings under the line of credit bear interest at the London Interbank Offered Rate (LIBOR) or prime rate, which we can select at the time of borrowing, plus an applicable margin, and are collateralized by substantially all of our assets. The line of credit expires on October 31, 2012 and limits our ability to declare and pay dividends and to incur additional credit obligations or indebtedness. The line of credit requires immediate repayment of amounts outstanding upon an event of default, as defined in the agreement, which includes events such as a payment default, a covenant detail or the occurrence of a material adverse change. At December 31, 2010, December 31, 2011 and June 30, 2012, we had no amounts outstanding or any letters of credit backed by the line of credit.

    Contractual Obligations

        The following table sets forth our contractual obligations as of December 31, 2011:

 
   
  Payment due by Period  
 
  Total   Less than
1 year
  1 - 3 years   4 - 5 years   More than
5 years
 
 
  (in thousands)
 

Operating lease commitments

  $ 17,256   $ 2,572   $ 6,108   $ 1,828   $ 6,748  

Purchase commitments

    19,559     18,380     1,179          

Capital lease obligations

    205     205              
                       

Total

  $ 37,020   $ 21,157   $ 7,287   $ 1,828   $ 6,748  
                       

        Operating lease commitments primarily relate to minimum lease payments under the operating leases we entered into for facility space in Glendale, California, Austin, Texas and San Francisco, California. Purchase commitments relate primarily to minimum purchase commitments for advertising and media. As of December 31, 2011 and June 30, 2012, we did not have any debt. We believe our current cash and cash equivalents, as well as cash expected to be generated by future operating activities, will be sufficient to meet our contractual obligations for the next twelve months.

    Off-Balance Sheet Arrangements

        We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such, we are not exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in those types of relationships. We enter into guarantees in the ordinary course of business related to the guarantee of our own performance and the performance of our subsidiaries.

55


Table of Contents

Recent Accounting Pronouncements

        In 2011, the Financial Accounting Standards Board, or FASB, issued new accounting guidance that amends some fair value measurement principles and disclosure requirements. The new guidance states that the concepts of highest and best use and valuation premise are only relevant when measuring the fair value of nonfinancial assets and prohibits the grouping of financial instruments for purposes of determining their fair values when the unit of account is specified in other guidance. The adoption of this accounting guidance during the six months ended June 30, 2012 did not have any impact on our consolidated financial statements.

        In 2011, the FASB issued new disclosure guidance related to the presentation of the Statement of Comprehensive Income. This guidance eliminates the current option to report other comprehensive income and its components in the consolidated statement of stockholders' equity. The requirement to present reclassification adjustments out of accumulated other comprehensive income on the face of the consolidated statement of income has been deferred. The adoption of this accounting guidance during the six months ended June 30, 2012 did not have any impact on our consolidated financial statements.

        As an emerging growth company under the JOBS Act, we have elected to opt out of the extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the Act. This election is irrevocable.

Critical Accounting Policies and Estimates

        The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts in our consolidated financial statements and related notes. Our significant accounting policies are described in Note 2 to our consolidated financial statements included elsewhere in this prospectus. We have identified below our critical accounting policies and estimates that we believe require the greatest amount of judgment. On an ongoing basis, we evaluate our estimates that are subject to significant judgment including those related to sales allowances and credit reserves, the evaluation of revenue recognition criteria, including the determination of standalone value and estimates of the selling price of deliverables in our revenue arrangements, loss contingencies, valuation allowances and reserves related to income taxes and assumptions underlying stock-based compensation. Actual results could differ materially from those estimates. On an ongoing basis, we evaluate our estimates compared to historical experience and trends, which form the basis for making judgments about the carrying value of assets and liabilities. To the extent that there are material differences between our estimates and our actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected.

        We believe the assumptions and estimates associated with the following have the greatest potential impact on our financial statements.

    Revenue Recognition

        We recognize revenues when four basic criteria are met: persuasive evidence of an arrangement exists; services have been rendered; the fees are fixed or determinable and collectability is reasonably assured. We consider persuasive evidence of a sales arrangement to be the customer's placement of the order and acceptance of our terms of service. For arrangements with third-party companies related to other revenues, we ensure a written contract is in place. Our customers generally pay for their orders and subscription services in advance by credit or debit card. The total fees, or the consideration, collected by us for our services include, as applicable, expedited services fees, government filing fees and shipping fees. We record the total consideration initially as deferred revenues that are then recognized as revenues when we meet all of the criteria for revenue recognition. Deferred revenues that we will recognize during the succeeding 12 month period from our balance sheet date is recorded as current deferred revenues, and the remaining portion is recorded as non-current at the balance sheet date. In circumstances where we do not receive the

56


Table of Contents

payment in advance, revenues are only recognized if collectability is reasonably assured, assuming we meet all other revenue recognition criteria.

        For our legal document preparation services, transaction revenues are recognized when we fulfill the service. For time-based, subscription services, such as legal plans, registered agent services or unlimited access to our forms library, we recognize subscription revenues ratably on a straight-line basis over the subscription term for those services, which ranges from a period of 30 days to two years.

        We record transaction revenues net of refunds, cancellations, promotional discounts, sales allowances, credit reserves and the value allocated to bundled free-trials for our subscription services. We record subscription revenues net of promotional discounts, cancellations, sales allowances, credit reserves and payments to legal plan attorneys.

        Other revenues are recognized when the related performance based criteria have been met. We assesses whether performance criteria have been met on a cost-per-click or cost-per-action basis and whether the fees are fixed or determinable based on a reconciliation of the performance criteria and the payment terms associated with the transaction. The reconciliation of the performance criteria generally includes a comparison of internally tracked performance data to the contractual performance obligation and, when available, to third-party or affiliate provided performance data. These arrangements do not include multiple deliverables.

        A significant number of our arrangements include multiple, bundled deliverables, such as the preparation of legal documents combined with related document revision, document storage, 30-day free trial of our registered agent services or our legal plans. We therefore recognize revenues for these arrangements in accordance with FASB ASC 605-25, Revenue Recognition—Multiple-Element Arrangements ("ASC 605-25"). ASC 605-25 was updated by Accounting Standards Update ("ASU") 2009-13, Revenue Recognition (Topic 605)—Multiple-Deliverable Revenue Arrangements—a Consensus of the Emerging Issues Task Force ("ASU 2009-13").

        We elected to early adopt ASU 2009-13 on a prospective basis for all arrangements entered into or materially modified after January 1, 2010.

        For multiple deliverable revenue arrangements, we first assesses whether each deliverable has value to our customer on a standalone basis and performance is considered probable and substantially in our control. Our services can be sold both on a standalone basis and as part of multiple deliverable arrangements. Accordingly, substantially all of our services have standalone value to our customer. Based on that standalone value of the deliverables, we allocate our revenues among the separate deliverables in the arrangement, including the bundled free-trials, using the relative selling price method hierarchy established in ASU 2009-13. This hierarchy requires the selling price of each deliverable in a multiple deliverable revenue arrangement to be based on, in descending order: (i) vendor-specific objective evidence, or VSOE, (ii) third-party evidence of selling price, or TPE, or (iii) management's best estimated selling price, or BESP.

        We establish VSOE for a majority of our services based on the price we charge when the deliverable is sold separately. In determining VSOE, we require that a substantial majority of our selling prices for our services to fall within a reasonably narrow pricing range, and we then establish VSOE based on the mid-point of the range for those services. This requires significant management judgment, including as to how we group similar services, the time period analyzed for assessing transactions, and the volume of similar transactions available to us in the relevant time period.

        When we cannot establish VSOE, we apply our judgment with respect to whether we can obtain TPE based on competitor prices for similar deliverables that are sold separately. We believe our strategy differs from that of our peers, and our services contain a significant level of differentiation such that comparable pricing of our services cannot be obtained. Our competitors do not sell services similar to ours on a standalone basis, and we therefore are unable to reliably determine what similar competitor services'

57


Table of Contents

selling prices are on a stand-alone basis. As a result, we have been unable to establish selling price based on TPE.

        When we cannot establish VSOE or TPE, we apply our judgment to determine BESP. The objective of BESP is to determine the price at which we would transact a sale if the service were sold on a stand-alone basis. The determination of BESP requires us to make significant estimates and judgments and we consider numerous factors in this determination, including the nature of the deliverables, market conditions and our competitive landscape, internal costs and our pricing and discounting practices. Our determination of BESP is made through consultation with and formal approval by our senior management. We update our estimates of both VSOE and BESP on an ongoing basis as events and as circumstances may require. Because we can establish VSOE for substantially all of our services, use of BESP estimate for revenue recognition is limited to document revisions and document storage services.

        We are unable to determine VSOE or TPE for document revision and document storage services, which we bundle with certain of our consumer services. Accordingly, as of January 1, 2010, the selling prices of these document revision and document storage services are determined based on BESP, and we recognize revenues from these services based on the relative selling price of the deliverables in the arrangement. Our adoption of ASU 2009-13 resulted in us recognizing $4.7 million of transaction revenues in 2010 that we would not have otherwise recognized during that year.

        Prior to January 1, 2010, we considered document revision and document storage services that we bundle with other consumer services to be a single unit of accounting and the total fees received from those arrangements were recognized as transaction revenues ratably on a straight-line basis over the service term. Prior to August 2009, we offered document revision and document storage services with a term of five years and, accordingly, the deferred revenues will be recognized as transaction revenues through August 2014. Beginning in August 2009, we sold these services only on a one year service term. At December 31, 2010, December 31, 2011 and June 30, 2012, our non-current deferred revenues balances of $7.0 million, $3.3 million and $1.7 million, respectively, included in our consolidated balance sheets primarily consist of document revision and document storage services.

    Sales Allowances

        Our revenue arrangements do not include contractual provisions for cancellations or terminations. However, as a business practice we provide a satisfaction guarantee that if our customer is not fully satisfied with the services or support and they notify us within a limited period of time after the purchase, we will attempt to resolve the matter, offer a credit that can be used for future services or provide a refund, excluding third-party fees. Revenues are recognized net of promotional discounts and estimated sales allowances and credit reserves related to credit or debit card chargebacks, sales credits and refunds. For completed services where the customers have elected the three-pay plan, we record a sales allowance for estimated charge backs, credits and collection losses for the second and third payment receivable amounts. The sales allowance is recorded against the customers' receivable balance. For completed and paid services, we record a sales and credit reserve based on our estimate of refunds, charge backs or credits. The sales and credit reserves are included in accrued expenses and other current liabilities. The sales allowance and the sales and credit reserves are made at the time of revenue recognition based on our historical experience, activity occurring after the balance sheet date and other factors. We have established a sufficient history of estimating refunds, charge backs, write offs and credits given the large number of our homogeneous transactions and the majority of the our allowances and reserves are known within the time period of our financial reporting cycle. The estimated provision for sales allowances and reserves has varied from actual results within ranges consistent with our expectations. If actual sales allowances, credit reserves and promotional discounts are greater than estimated by us, revenues and operating results would be negatively impacted.

58


Table of Contents

    Principal Agent Considerations

        We evaluate the criteria as prescribed by FASB ASC 605-45, Principal Agent Considerations, in order to determine whether we can recognize revenues gross as a principal or net as an agent. We record revenues on a gross basis when we are the primary obligor in the arrangement and therefore principally responsible for the fulfillment of the services. We are the primary obligor in substantially all of our legal document preparation and registered agent services. The determination of whether we are the principal or agent requires us to evaluate a number of indicators including which party, as applicable, in the arrangement:

    is the primary obligor, or has primary fulfillment responsibility and obligation to perform the services being sold to the customer;

    has latitude in establishing the sales price;

    can make changes to or perform part of the service;

    has supplier selection; and

    has credit or collection risk.

        When forming our conclusion on whether we are the principal or agent in an arrangement and whether to present revenues gross or net, we weight the above factors, and places more weight on the first factor, or primary obligor, followed by whether we have latitude in establishing the sales price and whether we perform part of the service.

        In arrangements in which we are the primary obligor and the indicators are weighted towards us acting as a principal, we record as revenues the amounts we have billed to our customer, and we record the related costs we have incurred in fulfilling our services. We are the primary obligor in substantially all of our legal document preparation and registered agent services.

        In arrangements in which we are not the primary obligor and the indicators are more weighted towards us acting as the agent in the arrangement, we record revenues on a net basis, which is equal to the amount billed to our customer, net of the fee payable to the primary obligor, which is another third party that is primarily responsible for performing the services for the customer. Because we are not a law firm and cannot provide legal advice, the participating independent law firms in our legal plans have the primary service obligation to provide attorney consultations to our customers, for which we pay the law firms a monthly fee. Therefore, we recognize revenues net as an agent for subscriptions to our legal plans. We also recognized revenues net as an agent for registered agent services in 43 states prior to March 2010. Before March 2010, we contracted with third-party service providers to perform substantially all registered agent services on our behalf and accordingly, we recorded the amount received from the customer net of the fee payable to the service provider.

    Loss Contingencies

        We record loss contingencies in our consolidated financial statements in the period when they are probable and reasonably estimable. If the amount is probable and we are able to reasonably estimate a range of loss, we accrue the amount that is the best estimate within that range, and if no amount is better than any other in the range, we record the amount at the low end in the range. We disclose those contingencies that we believe are at least reasonably possible but not probable regardless of whether they are reasonably estimable. We currently do not have any loss contingencies that are probable but not estimable. The likelihood of our contingencies is determined using a number of factors including nature of the matter, advice of our internal and external counsel, previous experience and historical and relevant information available to us. As discussed in Note 6 to our consolidated financial statements included elsewhere in this prospectus, we have agreed to settlements with respect to two matters with the maximum settlement, assuming all eligible claimants made a valid claim, estimated to be $16 million. As of

59


Table of Contents

December 31, 2011, we had reasonably estimated the collective range of aggregate probable losses for these matters to be between $5.4 million and $7 million and, in accordance with GAAP, had accrued $5.4 million, the low end of the range. The determination of the probability of loss and the range of loss requires significant judgment.

        Based on the claims received through May 14 and 15, 2012, the claims submission deadlines for these two matters and claims processed to date, we increased the accrued settlement liability by an additional $0.2 million to $5.6 million during the six months ended June 30, 2012 and in June 2012 we paid $1.9 million to the plaintiffs' attorneys for fees and expenses in one of the two settlements. We have reasonably estimated the collective aggregate probable loss to be approximately $3.7 million included in accrued expenses and other current liabilities as of June 30, 2012.

        The ultimate cost of these two settlements are dependent on a number of factors, including the resolution of any appeals of the approved settlements, and actual claims made by, and the resulting payments to, the class members. There is at least a reasonable possibility that we may incur an additional loss in excess of the amount accrued at June 30, 2012. We are unable to estimate the amount of additional loss or range of additional loss, if any, relating to these matters. If the actual payments for the settlements are higher than the amount estimated by us, this difference could have a material adverse effect on our business, operating results, cash flows and financial condition. We will recognize any difference between the amount accrued and the ultimate cost of the settlements as an additional expense or reversal of amount already accrued in the period in which the final settlement is approved and the claims made by the plaintiffs are finalized.

        As discussed in Note 6 to our consolidated financial statements included elsewhere in this prospectus, we are subject to additional pending matters for which we believe that we have meritorious defenses to the claims and intend to defend against vigorously. The plaintiffs have yet to state any dollar amounts being sought associated with these matters and we have denied and continue to deny all of the allegations and claims asserted in the lawsuits. Accordingly, we are unable to predict the ultimate outcome of these matters and have not recorded any losses in our consolidated financial statements as the amount of losses, if any, associated with these matters are not probable and estimable. If these matters are not resolved in our favor, the potential losses arising from results of litigation or settlements may have a material adverse effect on our business, operating results, cash flows and financial condition.

    Income Taxes

        We use the liability method of accounting for income taxes. Under the liability method, we determine our deferred tax assets and liabilities based on differences between our financial reporting and tax bases of our assets and liabilities, and measure them using enacted tax rates and laws that are expected to be in effect based on when we expect these differences to reverse. We must also make judgments in evaluating whether deferred tax assets will be recovered from future taxable income. To the extent that we believe that recovery is not likely, we establish a valuation allowance. The carrying value of our net deferred tax assets is based on whether it is more likely than not that we will generate sufficient future taxable income to realize these deferred tax assets. We record a valuation allowance when it is more likely than not that some or all of our net deferred tax assets will not be realized. Our judgments regarding future taxable income may change over time due to changes in market conditions, changes in tax laws, tax planning strategies or other factors. If our assumptions and consequently our estimates change in the future, our valuation allowance established may be increased or decreased, resulting in a material respective increase or decrease in income tax provision (benefit) and related impact on our reported net income (loss).

        In determining the need for a valuation allowance, we review all available evidence pursuant to the requirements of ASC 740, Income Taxes. The determination of recording or releasing tax valuation allowances is made, in part, pursuant to an assessment performed by us regarding the likelihood that we will generate sufficient future taxable income against which benefits of the deferred tax assets may or may

60


Table of Contents

not be realized. This assessment requires us to exercise significant judgment and make estimates with respect to our ability to generate revenues, operating income and taxable income in future periods. Amongst other factors, we must make assumptions regarding overall current and projected business and legal document and ancillary services' industry conditions, operating efficiencies, our ability to timely and effectively adapt to technological change, fully and successfully resolve outstanding legal matters, and the competitive environment which may impact our ability to generate taxable income and, in turn, realize the value of the deferred tax assets. Significant cumulative operating losses in 2010 and prior years and economic uncertainties in the market made our ability to project future taxable income uncertain and volatile at December 31, 2010. Based upon our assessment of all available evidence, including our history of cumulative losses, we concluded as of December 31, 2010, that it was not more likely than not that our net deferred tax assets would be realized, and therefore we had a full valuation allowance against our deferred tax assets.

        In 2011, we became profitable due to the significant increase in our revenues as we experienced an increase in demand for our services. As a result, we were able to utilize a substantial amount of our federal net operating loss carryforwards. The majority of our year ended December 31, 2011 income from operations was earned in the second half of the year resulting in our achievement of three-year cumulative income before income taxes by the fourth quarter of 2011. Accordingly, during the fourth quarter of 2011, we released our valuation allowance against deferred tax assets based on the weight of positive evidence that existed at December 31, 2011, except for the allowance of $0.4 million relating to our deferred tax asset for a capital loss carryforward which we expected to expire unused. Based upon the current trend of our operating results and forecasts, we believe that it is more likely than not that we will recognize the benefits of our deferred tax assets.

        We adopted the provisions of FASBs guidance on Accounting for Uncertainty in Income Taxes on January 1, 2007. This guidance clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements and prescribes a recognition threshold and measurement process for the accounting of a tax position taken or expected to be taken in a tax return. We consider many factors when evaluating and estimating our tax positions and tax benefits, which may require periodic adjustments and which may not accurately forecast actual outcomes. We recognize interest and penalties accrued related to unrecognized tax benefits in income tax expense (benefit) in the accompanying statements of operations. We do not have significant uncertain tax positions.

    Stock-based Compensation

        We recognize compensation expense related to our employee option grants in accordance with FASB ASC 718, Compensation—Stock Compensation ("ASC 718"). We estimate the fair value of employee share-based payment awards on the grant-date. We use the Black-Scholes option pricing model for estimating the fair value of our options granted under our stock option plans. We have elected to treat share-based payment awards with graded vesting schedules and time-based service conditions as a single award and recognize stock-based compensation on a straight-line basis, net of estimated forfeitures, over the requisite service period. As our stock-based compensation expense recognized is based on our awards that are ultimately expected to vest, the amount has been reduced by our estimated forfeitures. ASC 718 requires us to estimate forfeitures at the time of the grant and revise, if necessary, in subsequent periods if our actual forfeitures differ from our estimates. We estimated forfeitures based on our historical experience and future expectations.

        We recognize compensation expense for non-employee stock-based awards in accordance with ASC 718 and FASB ASC 505-50, Equity Based Payments to Non-Employees ("ASC 505-50"). We account for stock option awards issued to non-employees at fair value using the Black-Scholes option pricing model. We believe that the fair value of the stock options is more reliably measured than the fair value of services received and record compensation expense based on the then-current fair values of the stock options at each financial reporting date. We adjust compensation recorded during the service period in subsequent

61


Table of Contents

periods for changes in the stock options' fair value until the earlier of the date at which the non-employee's performance is complete or a performance commitment is reached, which is generally when the stock option award vests.

        The Black-Scholes option pricing model requires us to make certain assumptions, including the fair value of our underlying common stock, the expected term, the expected volatility, the risk-free interest rate and the dividend yield.

    Fair value of our common stock: Because our stock is not publicly traded, we must estimate the fair value of our common stock, as discussed in "—Common Stock Valuations" below.

    Expected term: Our expected term of our employee stock options represents the weighted-average period that the stock options are expected to remain outstanding. We calculate the expected term of options granted based upon our actual historical exercise and post-vesting cancellations, adjusted for our expected future exercise behavior.

    Expected volatility: Because our common stock does not have a publicly traded history, we estimate the expected volatility of the awards from the historical volatility of selected public companies within the Internet and media industry with comparable characteristics to us, including similarity in size, lines of business, market capitalization, revenues and financial leverage. We determined the expected volatility assumption using the frequency of daily historical prices of comparable public company's common stock for a period equal to the expected term of our options in accordance with the guidance in ASC 718. We periodically assess our peer companies and other relevant factors used to measure our expected volatility for future stock option grants.

    Risk-free interest rate: Our risk-free interest rate assumption is based upon our observed interest rates on U.S. government securities appropriate for our expected term.

    Dividend yield: Our dividend yield assumption is based on our historical practice and our expectation of dividend payouts. We have never declared or paid any cash dividends on our common stock, and we do not anticipate paying any cash dividends in the foreseeable future.

        The assumptions that we used to calculate the grant date fair value of our employee and non-employee stock option grants for the periods indicated:

 
  Year Ended December 31,   Six Months
Ended
June 30,
2012
 
 
  2009   2010   2011  

Risk-free interest rate

    2.34 %   2.35 %   1.25 %   1.22 %

Expected life (years)

    5.95     5.90     6.10     5.90  

Dividend yield

    0.0 %   0.0 %   0.0 %   0.0 %

Volatility

    50 %   45 %   42 %   42 %

62


Table of Contents

    Common Stock Valuations

        We have regularly conducted contemporaneous valuations to assist us in the determination of the fair value of our common stock for each stock option grant. The fair value per common share underlying our stock option grants was determined by our board of directors with input from management at each grant date. The valuation of our common stock was performed in accordance with the guidelines outlined in the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation. The assumptions we use in the valuation model are based on future expectations combined with management judgement. In the absence of a public trading market for our common stock, our board of directors with input from management reviewed and discussed a variety of objective and subjective factors when exercising its judgment in determining the deemed fair value of our common stock. These factors generally include the following:

    the sale of our common stock to unrelated, third parties;

    the nature and history of our business;

    general economic conditions and specific industry outlook;

    our financial condition;

    our operating and financial performance;

    contemporaneous independent valuations performed at periodic intervals;

    the market price of companies engaged in the same or similar line of business having their equity securities actively traded in a free and open market;

    the likelihood of achieving a liquidity event, such as an initial public offering or sale given prevailing market conditions and the nature and history of our business;

    the differences between our preferred and common stock in respect of liquidation preferences, conversion rights, voting rights and other features; and

    an adjustment necessary to recognize a lack of marketability for our common stock.

        We utilize the probability-weighted expected return model, or PWERM, to allocate value to our common shares. The PWERM determines the fair value of our common stock depending on the likelihood of various liquidity scenarios. We then determine the appropriate allocation of value to the common stockholders under each liquidity scenario based on the rights and preferences of our Series A and common stock at that time. The resulting value of common stock under each scenario is multiplied by a present value factor, calculated based on our cost of equity and the expected timing of the event. The value of common stock is then multiplied by an estimated probability for each of the expected events determined by our management. We then calculate the probability-weighted value per share of common stock and apply a lack of marketability discount.

        Under the PWERM, the value of our common stock is based upon four possible future events for our company: initial public offering, sale, staying private and dissolution. We use the market approach for determining the fair value of our common stock under the IPO, sale and staying private scenarios. The market approach measures the value of a business through an analysis of similar publicly-traded entities. In applying the market approach, valuation multiples are determined for selected comparable companies and are then evaluated based on the strengths and weaknesses of our company relative to the comparable entities. We then apply these market multiples to our operating data to arrive at a value indication. Under the dissolution scenario, we assumed no value remained to be allocated to our common shareholders.

        We also utilize the income approach to test the reasonableness of the results of the application of the PWERM. The income approach estimates value based on the expectation of future net cash flows that

63


Table of Contents

were then discounted back to the present using a rate of return available from alternative companies of similar type and risk.

        We determine the exercise price of our option grants based on the fair value of our common stock as of the immediately preceding valuation, unless circumstances warrant obtaining a more current valuation, including any material changes in our business or events, size of the award and the proximity of the grant to the preceding valuation. The following table summarizes options we granted in 2011 and the first quarter of 2012 based on the immediately preceding valuation:

Date
  Number of Shares
(in thousands)
  Exercise Price
and Fair Value
Per Share of
Common Stock
 

September 29, 2011

    537   $ 8.21  

December 20, 2011

    51   $ 8.22  

January 31, 2012

    56   $ 8.61  

March 31, 2012

    280   $ 10.59  

        Based upon an assumed initial public offering price of $11.00 per share, which is the mid-point of the range set forth on the cover of this prospectus, the aggregate intrinsic value of outstanding stock options as of June 30, 2012 was $39.1 million, of which $27.4 million related to vested options and $11.7 million related to unvested options.

        The most significant factors considered by our board of directors in determining the fair value of our common stock each quarter were as follows:

    Second Quarter 2011

        Our board of directors determined the fair value of our common stock was $8.21 per share as of June 30, 2011. Our board of directors took into consideration the February 2011 purchases by third parties of our common stock from our existing stockholders at an imputed purchase price of $7.46 per share. We obtained a contemporaneous third-party valuation that used PWERM to assist our board of directors in determining the fair value of our common stock. Our board of directors also considered events and changes from the previous valuation, including our business growth, and positive outlook and favorable market conditions, including various other Internet companies recently completing initial public offerings. Significant estimates and assumptions were as follows:

    Probability-weighted expected return method scenario probabilities—a 71% initial public offering probability; a 27% sale or merger probability and remaining a private company or dissolution was deemed unlikely and assigned a 1% probability for each event.

    Discount rate applied was 15% based on the calculated weighted average cost of capital.

    Lack of marketability discount was determined to be 16%.

    Third Quarter 2011

        Our board of directors determined the fair value of our common stock was $8.22 per share as of September 30, 2011. We obtained a contemporaneous third-party valuation that used PWERM to assist our board of directors in determining the fair value of our common stock. Our board of directors also considered other factors including our growth in revenues and profitability, as well as the volatile condition of the financial markets as a result of global financial uncertainties and a weakening in the environment for initial public offerings. Significant estimates and assumptions were as follows:

    Probability-weighted expected return method scenario probabilities—our management estimated a 74% initial public offering probability; a 24% sale or merger probability; and remaining a private company or dissolution was deemed unlikely and assigned a 1% probability.

64


Table of Contents

    Discount rate applied was 14% based on the calculated weighted average cost of capital.

    Lack of marketability discount was determined to be 13%.

    Fourth Quarter 2011

        Our board of directors determined the fair value of our common stock was $8.61 per share as of December 31, 2011, resulting in an increase of $0.39 per share or an increase of 5% over the September 2011 valuation. We obtained a contemporaneous third-party valuation that used PWERM to assist our board of directors in determining the fair value of our common stock. Our board of directors also considered other factors including our business growth and stronger than forecasted fourth quarter results, positive outlook and improved financial market conditions in general. Significant estimates and assumptions were as follows:

    Probability-weighted expected return method scenario probabilities—our management estimated an 87% initial public offering probability; a 12% sale or merger probability; and remaining a private company or dissolution was deemed unlikely and assigned a 1% probability.

    Discount rate applied was 14% based on the calculated weighted average cost of capital, unchanged from the previous valuation.

    Lack of marketability discount was determined to be 12%, a 1% decrease from the previous valuation due to the shorter expected time until a potential initial public offering.

    First Quarter 2012

        Our board of directors determined the fair value of our common stock was $10.59 per share as of February 29, 2012, resulting in an increase of $1.98 per share or an increase of 23% over the December 2011 valuation. We obtained a contemporaneous third-party valuation that used PWERM to assist our board of directors in determining the fair value of our common stock. Our board of directors also considered other factors including:

    Discussions with our underwriters as to the potential timing of an initial public offering of our common stock.

    Improved operating results in the first quarter 2012. Our first quarter volume of business is typically the strongest driven by seasonality and other factors as discussed in this prospectus. We obtained improved clarity as to the operating results in the first quarter of 2012 in February 2012.

    The stock markets in general, and internet related stocks in particular, showed robust growth during the first quarter of 2012. The Dow Jones and NASDAQ composite indices increased by 6% and 14%, respectively from December 30, 2011 through February 29, 2012, and in particular the comparable publicly-traded companies in the internet and e-commerce sector that we use in determining the fair value of our common stock increased by 19% over the same period using a market capitalization weighted index.

        Significant estimates and assumptions were as follows:

    Probability-weighted expected return method scenario probabilities—91% initial public offering probability, an increase from the prior valuation date given continued execution and plan to file for an initial public offering; 8% sale or merger probability; and remaining a private company or dissolution was deemed unlikely and assigned a 1% probability.

    Discount rate applied was 14% based on the calculated weighted average cost of capital.

    Lack of marketability discount was determined to be 12%.

65


Table of Contents

Qualitative and Quantitative Disclosures About Market Risk

    Interest Rate Fluctuation Risk

        Our cash is comprised entirely of cash on deposit with banks. We do not have any long-term borrowings. The primary objective of our investment activities is to preserve principal while maximizing income without significantly increasing risk. Because our cash is entirely in bank deposits, our portfolio's fair value is insensitive to interest rate changes. We determined that the increase in yield from potentially investing our cash in longer-term investments did not warrant a change in our investment strategy. In future periods, we will continue to evaluate our investment policy in order to ensure that we continue to meet our overall objectives.

    Foreign Currency Exchange Risk

        Our sales transactions to date have been primarily denominated in U.S. dollars and therefore substantially all of our revenues are not subject to foreign currency risk.

    Inflation Risk

        We do not believe that inflation has had a material effect on our business, financial condition or results of operations. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition and results of operations.

66


Table of Contents


BUSINESS

        We believe that everyone deserves access to quality legal services so they can benefit from the full protection of the law. Our mission is to be the trusted destination where small businesses and consumers address their important legal needs and to be our customers' legal partner for life.

Overview

        LegalZoom is the leading online provider of services that meet the legal needs of small businesses and consumers in the United States. We believe that we are transforming the small business and consumer legal services market by leveraging the power of technology and people. Our online legal platform enables us to deliver services at scale with a compelling combination of quality, customer care and value. Our services include a portfolio of interactive legal documents that are personalized by our customers through our dynamic online processes, as well as subscription legal plans and registered agent services.

        We developed our easy-to-use, online legal platform to make the law more accessible to small businesses and consumers. Our scalable technology platform enables the efficient creation of personalized legal documents, automates our supply chain and fulfillment workflow management, and provides customer analytics to help us improve our services. For small businesses and consumers who want legal advice, we offer subscription legal plans that connect our customers with experienced attorneys who participate in our legal plan network.

        We have served approximately two million customers over the last 10 years. In 2011, nine out of ten of the approximately 34,000 customers who responded to a survey we provided said they would recommend LegalZoom to their friends and family. Customers that completed orders for certain of our services are invited to take an email survey. Our customers placed approximately 490,000 orders and more than 20 percent of new California limited liability companies were formed using our online legal platform in 2011. We believe the volume of transactions processed through our online legal platform creates a scale advantage that deepens our knowledge and enables us to improve the quality and depth of the services we provide to our customers.

The Small Business and Consumer Legal Services Market

    The Law Provides Numerous Benefits and Protections

        The law provides numerous benefits and protections to businesses and consumers. Businesses use patents and trademarks to protect their intellectual property and help them achieve the full potential of their ideas and innovations. Entrepreneurs incorporate their businesses to shield personal assets, limit liabilities and help raise capital. Consumers use wills, trusts and other estate planning tools to ensure their assets are distributed according to their wishes, to minimize tax liabilities and to avoid or limit probate process and expenses. The law also provides a framework for resolving disputes and navigating life's challenges, including bankruptcy and divorce.

    Significant Legal Services Market for Small Businesses and Consumers

        According to the U.S. Census Bureau, in 2009, there were approximately 26 million small businesses with fewer than ten employees. We estimate that in 2010, approximately two million new businesses were formed in the United States. According to the U.S. Bureau of Economic Analysis, legal services in the United States in 2010 represented a $266 billion market. We estimate that in 2011 approximately $97 billion of legal services were provided to small businesses and consumers, based on a study conducted on our behalf by L.E.K. Consulting LLC.

    Small Businesses and Consumers Have Many Unmet Legal Needs

        Despite the enormous amount spent on legal services, we believe that small businesses and consumers have not been adequately served by the options traditionally available to them. Every year, small

67


Table of Contents

businesses enter into legal contracts and become entangled in disputes, many of which require legal services to address. Consumers experience important life events that affect their families, including the birth of a child, marriage, divorce and death, all of which can also give rise to diverse needs for legal services.

        Making the right choices with respect to legal matters can be difficult, especially for those with limited time and resources. The U.S. legal system consists of overlapping jurisdictions at the city, county, state and federal levels, each of which has its own evolving laws and regulations. Businesses may be subject to additional laws, regulations and legal issues applying specifically to the industries in which they operate. In addition, the policies and procedures associated with the creation, filing and certification of legal documents are often arcane and confusing.

        When in need of legal help, small businesses and consumers lack an efficient and reliable way to find high quality, trustworthy attorneys with the appropriate experience to navigate this complex legal system and handle their specific needs. Small businesses and consumers often do not understand their legal needs or know where to start looking for an attorney. Some are wary of attorneys in general, and others may have heard from friends or family about negative experiences with attorneys or the legal system.

        The high and unpredictable cost of traditional legal services also presents challenges for many small businesses and consumers. In 2011, the average billing rate for small and midsize law firms was $318 per hour, according to ALM's 2012 Survey of Billing and Practices for Small and Midsize Law Firms. Attorneys are frequently unable to predict the time required to address a client's legal matter, sometimes billing thousands of dollars to research a legal issue they have not previously encountered. This can be particularly true of generalist attorneys that offer many disparate legal services to members of their local communities. Unlike attorneys at large global law firms or specialty boutiques who handle high volumes of similar matters and develop expertise in specific domains, generalists can find it difficult to efficiently address a client's particular legal issue due to their lack of specialized expertise. Due to the high and unpredictable costs of traditional legal services, many small businesses and consumers limit their use of attorneys and instead often attempt to resolve legal issues without assistance.

        As a result of these factors, many small businesses and consumers often are unsure of or dissatisfied with the legal services available to them, and many either elect not to seek help or take no action to address their important legal needs.

    Most Online Legal Services Fail to Address the Needs of Small Businesses and Consumers

        The use of technology and the Internet to address the inefficiencies in the small business and consumer legal services market has been limited to date. Available online services include distribution of standardized legal forms that are generally incapable of meeting the specific needs of a particular small business or consumer. Many legal form distributors do not provide tools for customers to make informed decisions or connect with experienced attorneys. While many solo attorneys and small law firms maintain their own websites, and other websites aggregate attorney listings or feature attorney advertisements, these attorney and firm websites, online directories, and online advertisements generally do little to assure that small businesses and consumers receive the quality, customer care and value they deserve.

Our Opportunity

        We founded LegalZoom with a vision of combining the power of online technology with deep legal experience to create a scalable online legal platform that would fundamentally transform the way legal services are delivered to small businesses and consumers. We believe we are uniquely positioned to continue transforming the small business and consumer legal services market through the use of technology. Furthermore, there is a significant opportunity to expand the legal services market by making

68


Table of Contents

the benefits and protection of the law more accessible to small businesses and consumers. We are taking advantage of this opportunity by providing the following benefits to our customers:

    Quality.  Our deep legal knowledge, portfolio of interactive legal documents and subscription legal plans enable us to provide quality services designed to meet the specific needs of our customers.

    Customer Care.  We provide all of our customers with end-to-end support and strive to deliver an exceptional customer experience. We guarantee customer satisfaction, and if our customers are not satisfied with our services for any reason, we will attempt to correct the situation, or provide a refund or credit.

    Value.  We believe that fixed, transparent pricing offers superior value compared to traditional hourly billing.

Our Strengths

        Our key strengths include:

    Leading Brand.  We are the leading, nationally recognized legal brand for small businesses and consumers in the United States, with 60% aided brand awareness based on a survey we conducted using United Sample, Inc. in January 2012. We believe that we are redefining the small business and consumer legal services market and that the strength of our brand is enabling us to expand this market.

    Deep Legal Knowledge.  We have a deep understanding of the legal needs of small businesses and consumers based on over 10 years of experience serving our customers.

      Extensive Legal Experience.  We leverage our legal knowledge and team of experienced, in-house attorneys, often in consultation with outside attorneys from across the United States, to design, review and maintain our services. We update and enhance our interactive legal documents based on changes in the law at the federal, state, county and local levels, review by our in-house and external attorneys, feedback from government agencies like secretary of state offices and county clerks, court rule changes and customer feedback. For customers who want legal advice, our legal plans offer access to a variety of experienced attorneys licensed in their jurisdiction to address their specific legal needs.

      Powerful Scale Advantage.  In 2011, our customers placed approximately 490,000 orders. As of June 30, 2012, we had approximately 300,000 subscribers in our legal plans and other subscription services. The high volume of transactions we handle and feedback we receive from customers and government agencies at the federal, state and local levels give us a scale advantage that deepens our knowledge and enables us to further develop additional services to address our customers' needs and refine our business processes.

    Exceptional Customer Experience.  Customer care is central to our culture and we are highly focused on providing exceptional customer experiences.

      Ease of Use.  Our online legal platform was designed to be easy for our customers to navigate and use. Our customers have access to live customer care representatives, and subscribers to our legal plans may consult with an experienced attorney licensed in their jurisdiction. We actively monitor our service levels, fulfillment speed and quality to maintain the highest level of customer care.

      High Customer Satisfaction.  In 2011, our net promoter score, or NPS, was 65% based on the approximately 34,000 customers who responded to a survey we provided, which places us at the upper end of customer satisfaction ratings, comparable to Amazon.com,

69


Table of Contents

          the highest rated Internet company with a score of 76%, and Apple, the highest rated hardware company with a score of 71%, according to the Satmetrix 2012 Net Promoter Benchmark Study. Customers that completed orders for certain of our services are invited to take an email survey. NPS is a commonly used metric to gauge customer satisfaction and is calculated based on customer responses to the question, "How likely are you to recommend a particular service or company to your friends or family?" The percentage of "detractors," or customers who respond with a rating of 6 or less, is subtracted from the percentage of "promoters," or customers who respond with a 9 or 10, to yield NPS. Attorneys in our legal plan network have NPS averaging 65%, based on the approximately 34,000 customers who responded to a survey we provided. This is more than ten times higher than attorneys outside our legal plan network, who yielded NPS averaging 4%, according to surveys we conducted through United Sample, Inc. in January and April 2012. If a customer is not completely satisfied with our services for any reason, we will attempt to correct the situation, or provide a refund or credit.

    Advanced Systems and Processes.  We have developed advanced systems and processes to efficiently deliver services at scale that meet the specific needs of our customers.

      Scalable Technology Platform.  Over the past decade, we have invested extensively in developing our scalable technology platform. Our technology allows us to efficiently serve thousands of small businesses and consumers every day.

      Integrated Workflow Management.  Our integrated workflow management consists of our online questionnaires, document automation and customer relationship management, supply chain and fulfillment systems. Our integrated workflow management systems enable us to deliver efficient, personalized services at scale to our customers. Additionally, our systems allow us to seamlessly connect our customers with an experienced attorney participating in our legal plan network. Our supply chain and fulfillment systems integrate external and internal technologies, enabling intelligent workflow management while increasing processing speed and efficiency.

    Accessible Services.  We provide our customers access to our online legal platform, fixed, transparent pricing and legal plans to address their specific legal needs. Our online legal platform allows customers to access our services from their home, office or anywhere they have an Internet connection. Our fixed, transparent pricing is often more affordable when compared to traditional hourly billing. For example, we offer a basic will to consumers for as low as $69, and we offer basic corporate formation services to consumers looking to form a business for as low as $99 plus government filing fees. Our subscription legal plans allow our customers to avoid the often difficult process of finding and meeting with an attorney.

Our Strategy

        The key elements of our strategy include:

    Expand and Improve Our Services.  We have been providing interactive legal document services for over 10 years, and we plan to expand and improve the services we offer our customers to better address their legal needs and deepen our relationships with them. We have a quality program led by a team of experienced in-house attorneys that leverages the professional knowledge of attorneys across the United States to review, assess, maintain and improve our interactive legal documents. In 2011, we implemented self-scheduling and ratings review systems for legal plan subscribers as well as a legal knowledge base to share information and best practices for attorneys who participate in our legal plan network. We also recently opened a research and development center in San Francisco to further focus on enhancing our existing services, accessing new markets and developing new services.

70


Table of Contents

    Leverage and Grow Our Subscription Legal Plans.  We intend to offer our subscription legal plans to a wider group of customers by making them available in additional states, bundling them with more of our services, and offering them on a standalone basis. We plan to invest in marketing campaigns to promote our subscription legal plans. Our aim is to reach a broader group of customers through our legal plans, including those who are unsure of their legal needs or who want the added comfort of speaking with an attorney.

    Expand Internationally.  We plan to replicate our U.S. model abroad in the near term, as we believe that our online legal platform represents a compelling value proposition to small businesses and consumers globally. We plan to partner with legal services providers outside of the United States to expand our operations internationally, and we have engaged in preliminary discussions with potential partners but no definitive agreements have been reached. We believe that the strength of our brand, focus on customer care, deep understanding of the legal needs of small businesses and consumers, and scalable technology will help us successfully enter markets outside of the United States.

    Continue to Build a Trusted Brand and Drive Awareness of Our Services.  We will continue to build a trusted brand by delivering a compelling combination of quality, customer care and value. We plan to enhance our marketing activities to build our brand and increase awareness of our services. We plan to continue to make significant investments in marketing campaigns, including through online, television and radio advertising to enhance our ability to acquire new customers and increase customer retention.

Our Services

        Through our online legal platform, we offer a variety of services to meet the specific needs of small businesses and consumers. We have built our services seeking to be each customer's legal partner for life.

    Interactive Legal Documents

        We offer a broad portfolio of interactive legal documents that our customers can tailor to their specific needs through our dynamic online processes and scalable technology. Our interactive legal documents are designed for use, as appropriate, at the federal level as well as in all 50 states, the District of Columbia and approximately 2,900 U.S. counties. Our interactive legal documents are created by our customers via an easy three-step process. First, our customers complete an online questionnaire that uses conditional, rules-based logic to personalize questions based on earlier responses. Customer responses to the questionnaires often prompt our systems to automatically offer additional complementary services to our customers, such as Employer Identification Number obtainment and registered agent services for our small business customers. Second, we check customer responses for spelling, grammar and completeness. After our review is completed, our proprietary LegalZip software generates a final document tailored, as applicable, to the appropriate federal, state, or local jurisdiction. Last, we complete the services by printing and shipping the final document and further instructions to our customer. If applicable, we also handle any filing of the customer's completed documents with the appropriate government agency. Our system automatically notifies customers of the status of their order as the documents progress through the workflow cycle, including confirmation of filing with government agencies.

71


Table of Contents

        Our primary interactive legal document services include the following:

Small Business Services   Consumer Services
LLC Formation   Last Will and Testament
Incorporation   Power of Attorney
Trademark   Living Will
DBA/Fictitious Business Name   Living Trust
Copyright   Uncontested Divorce
Non-Profit Corporation   Name Change
Provisional Application for Patent    

    Subscription Legal Plans

        For small businesses and consumers who want legal advice, we offer legal plans that connect subscribers with experienced attorneys licensed in their jurisdiction to address their specific legal needs. Most of the attorneys who participate in our legal plan network practice at small law firms. We pay the participating independent law firms in our legal plan network a monthly fee per paid customer subscription to provide up to 30 minutes of free attorney consultations on new legal matters to our customers, and we do not receive or share in any fees from the law firms. We typically enter into one-year contractual agreements with law firms participating in our legal plan network, with the option to renew for successive one-year periods. In order to be considered for participation in our legal plan network, independent attorneys must satisfy certain quality standards established by us and be highly focused on customer care. We regularly assess our customers' satisfaction with the attorneys who participate in our legal plan network and remove attorneys that fail to satisfy our customers. Our small business and consumer subscription legal plans are currently available in 40 states and the District of Columbia.

        Subscription to a legal plan provides the following benefits to our customers:

    Free attorney consultations of up to 30 minutes on new legal matters;

    Review of LegalZoom interactive legal documents and other legal documents up to 10 pages in length;

    Discounts on other LegalZoom services;

    25% discount on additional services provided by legal plan network attorneys;

    Annual estate planning check-up (for consumer legal plans);

    Revisions and electronic storage of applicable LegalZoom estate planning documents; and

    Unlimited access to our forms library.

        Our small business legal plans are currently priced at $29.99 per month and our consumer legal plans are currently priced at $14.99 per month.

    Subscription Registered Agent Services

        Business entities are often required by state law to appoint and maintain a registered agent in their state of formation to receive service of process and official government communications. For our business formation customers, we offer subscriptions currently priced at $159 per year.

    Other Services

        We offer other services to our customers, including unlimited access to our forms library, electronic storage of applicable LegalZoom documents and document revisions. We also introduce our customers to relevant services and products through our relationships with leading credit card companies, commercial banks and other companies serving our customer base.

72


Table of Contents

Our Technology

        We have developed technology that enables us to efficiently process thousands of daily orders, as well as facilitate interactions between our customers and the attorneys who participate in our legal plan network.

        The key components of our technology include:

    Dynamic Online Questionnaire.  Our interactive legal documents are generated by our customers through our dynamic online processes. Our customers complete a comprehensive, branching questionnaire that uses conditional, rules-based logic to personalize questions each based on earlier responses.

    Document Automation.  Our technology includes complex automation systems that utilize customer responses to generate a document based on specific customer input.

    Customer Relationship Management.  Our technology integrates and manages e-mail and telephone customer notifications and enables customers to remain informed about order status. For example, we automatically notify our customers about the status of their order as interactive legal documents move through our workflow and when we receive confirmation of filing with government agencies.

    Supply Chain and Fulfillment.  Our supply chain and fulfillment systems integrate external and internal technologies, enabling intelligent workflow management between our locations, while increasing processing speed and efficiency.

    Infrastructure.  Our website is hosted on hardware and software co-located at a third-party facility in Los Angeles, California. We currently have a data center located in a third-party facility in Seattle, Washington that could power the limited operation of our website in case of disaster. Within the next year, we plan to relocate this disaster recovery site to Austin, Texas and will increase its scope to cover the website and fulfillment systems. We have designed our websites to be highly available, secure and cost-effective using a variety of proprietary software and freely available and commercially supported tools. We can scale to accommodate increasing numbers of customers by adding relatively inexpensive industry-standard hardware. We use encryption technologies and certificates for secure transmission of personal information between our customers and our website. Maintaining the integrity and security of our websites is critical and we have a dedicated security team that promotes industry best practices and drives compliance with data security standards.

        We devote a substantial portion of our resources to developing new technologies and features and improving our technologies. As of June 30, 2012, we employed approximately 70 engineers, developers, project managers and support technicians who focus on the design and development of new features and products, as well as the development and maintenance of our websites, network infrastructure and internal operations systems. Additionally, we engage with third parties for additional development support as needed.

Customer Care

        Customer care is central to our culture and we are highly focused on providing exceptional customer experiences. All of our employees are trained to focus on our customers and deliver quality customer service. Our customers have access to live customer care representatives and subscribers to legal plans may consult an experienced attorney. As of June 30, 2012, we had 159 customer care representatives located in the United States and 78 attorneys who participate in our legal plan network. As part of our customer relationship management, our customer care representatives proactively contact our customers by phone and email to resolve any issues that may arise during the order fulfillment process as soon as possible in order to timely fulfill an order. Customer satisfaction is a key component of our value proposition. We offer our customers a satisfaction guarantee for our interactive legal document services. If a customer is

73


Table of Contents

not completely satisfied with our services for any reason, we will attempt to correct the situation, or provide a refund or credit. We actively monitor our service levels, fulfillment speed and quality to maintain the highest level of customer care, including the NPS scores of our services and of attorneys who participate in our legal plan network.

Sales and Marketing

        Our key marketing efforts include:

    Customer Acquisition and Brand Marketing.  Our customer acquisition and brand marketing includes search engine marketing, television and radio advertising, search engine optimization, online display advertising, e-mail, affiliate marketing and outbound sales. We routinely monitor return on investment to optimize our customer acquisition and marketing initiatives. We have a long history of advertising on television and radio to drive traffic and enhance customer acquisition. For television, we plan our campaigns at the network, creative and programming level by analyzing data from our past campaigns. For radio, we have successfully used exclusive radio endorsements featuring prominent radio personalities. In addition, we use remarketing efforts such as online retargeting and shopping cart abandonment e-mail campaigns. All of our marketing leverages the brand we have developed from customer referrals and our public relations efforts.

    Conversion Marketing.  Our conversion marketing efforts are focused on converting website visitors to paying customers through optimization of our website user workflows, questionnaire, and navigation experience. We also test and continuously optimize the visual design, messaging and promotion offers to improve conversion. Outbound sales calls and trial offers of our legal plans have also proved to be effective ways for us to acquire new customers.

    Retention Marketing.  Our retention marketing is focused on establishing and maintaining long-term relationships with our customers through personalized marketing of our services, including telephone outreach, e-mail marketing and continuous customer care.

Research and Development

        We are making substantial investments in research and development to increase innovation and develop new services to meet our customers' legal needs. Our research and development efforts are focused on enhancing our existing services, accessing new markets and developing new services. In 2011, we opened a research and development center in San Francisco that has enhanced our ability to focus on developing new services. Our research and development team works closely with both our marketing and technology teams to evaluate and react to customer demand.

Competition

        We face intense competition from law firms and solo attorneys, legal document providers (including online providers) and national legal plan providers. We expect such competition to continue to increase. In addition, the competitive landscape can shift rapidly as new companies enter markets in which we compete and existing companies broaden their offerings. This is particularly true for online services, where barriers to entry are lower.

        Our primary competition comes from small law firms and solo attorneys. Many of our customers have in the past used law firms or solo attorneys to address their legal needs. Attorneys are generally able to provide direct legal advice that we cannot offer due to regulations regarding the unauthorized practice of law, and firms may develop a competing online legal service division. Our primary online competitors for our interactive legal documents services include BizFilings, RocketLawyer, and The Company Corporation. We compete in the registered agent services business primarily with CT Corporation and Corporation Services Company. Our primary competitors for our legal plans include Hyatt Legal Plans (a

74


Table of Contents

MetLife company), ARAG and LegalShield. Hyatt Legal Plans and ARAG primarily focus their marketing to larger employer groups, while LegalShield primarily focuses its marketing to individuals.

        We believe competitive factors for our services include ease of use, breadth of offerings, brand name recognition, reputation, price, quality and customer service. To attract customers, some online competitors are offering free or low-priced entry-level services that may affect our pricing strategy.

Intellectual Property

        Our success depends on our proprietary technology. We protect this proprietary technology by relying on a variety of intellectual property mechanisms including copyright, trade secret and trademark laws, and restrictions on disclosure and other methods. For example, we frequently file applications for copyrights, trademarks and service marks in order to protect our intellectual property. As of June 30, 2012, we have registered 12 trademarks in the United States including LegalZoom, LegalZoom.com, LegalZip, CreatingWill.com and ProxiLaw, and 27 trademarks in 42 foreign countries. We have no issued patents or pending patent applications. We also license intellectual property from third parties, such as software used to support our technology and operations.

Government Regulations

        Our business and the services we provide subject us to complex and evolving U.S. and foreign laws and regulations regarding UPL, legal document processing and preparation, legal plans, privacy and other matters. We do not purport to be a law firm and we do not engage in the practice of law, whether authorized or not. We provide self-help at our customers' specific direction and general information on legal issues generally encountered. Licensed attorneys provide services to our customers through our legal plans, and we rely on third parties to provide certain of our other services.

        Our business involves providing services that meet the legal needs of our customers and, as a result, is subject to a variety of complex and evolving U.S. and foreign laws and regulations, including the following:

    Our business model includes the provision of services that represent an alternative to traditional legal services, which subjects us to allegations of UPL. UPL generally refers to an entity or person giving legal advice who is not licensed to practice law. However, laws and regulations defining UPL, and the governing bodies that enforce UPL rules, differ among the various jurisdictions in which we operate. We are unable to acquire a license to practice law in the United States, or employ licensed attorneys to provide legal advice to our customers, because we do not meet the regulatory requirement of being exclusively owned by licensed attorneys. We are also subject to laws and regulations that govern business transactions between attorneys and non-attorneys, including those related to the ethics of attorney fee-splitting and the corporate practice of law.

    Regulation of legal document processing and preparation services varies among the jurisdictions in which we conduct business.

    Regulation of our legal plans varies considerably among the insurance departments, bar associations and attorneys general of the particular states in which we offer, or plan to offer, our legal plans. In addition, some states may seek to regulate our legal plans as insurance or specialized legal service products.

        Additionally, we are required to comply with laws and regulations related to privacy and the storing, use, processing, disclosure and protection of personal information and other customer data.

        Our business operations also subject us to laws and regulations relating to general business practices and the manner in which we offer our services to customers subjects us to various consumer laws and regulations, including false advertising and deceptive trade practices.

        The scope of these laws and regulations are often vague and broad, and their applications and interpretations are often uncertain and conflicting. Compliance with these disparate laws and regulations requires us to structure our business and services differently in certain jurisdictions. Any failure or

75


Table of Contents

perceived failure to comply with applicable laws and regulations, or if our services are considered to constitute UPL, could cause us to modify or discontinue some of our services or incur significant expenses.

        In addition, any failure or perceived failure by us to comply with applicable laws and regulations may subject us to regulatory inquiries, claims, suits and prosecutions. We have been subject to, and currently are subject to, litigation and regulatory inquiries relating to UPL. We expect to continue to be subject to such litigation and regulatory inquiries, as well as potential investigations from other regulatory agencies as our business expands into new jurisdictions and we introduce new services.

Employees

        As of June 30, 2012, we had 551 full-time and part-time employees and 120 temporary workers, all of whom are located in the United States. We do not currently have any collective bargaining agreements with our employees and we believe employee relations are generally good.

Property and Facilities

        Our corporate headquarters and principal operations are located in Glendale, California, where we lease and occupy approximately 49,000 square feet. The term of our lease expires in 2021.

        We also have additional facilities in Glendale, California, where we lease and occupy approximately 6,000 square feet, Austin, Texas, where we sublease and occupy approximately 59,000 square feet, and San Francisco, California, where we lease and occupy approximately 6,000 square feet. The terms of these leases expire in 2016, 2013 and 2016, respectively.

        We believe that our facilities are adequate for our needs, and that additional space will be available to us on commercially reasonable terms for the foreseeable future.

Legal Proceedings

        On September 15, 2009 and May 27, 2010, class action lawsuits were filed against us in California state court alleging, primarily, that we failed to comply with the California Legal Document Assistant Act, engaged in unfair business practices and made misrepresentations in our business operations. The September 15, 2009 case was brought by Charles Drozdyk. Plaintiff filed an amended complaint on February 14, 2011, principally replacing Drozdyk with a new plaintiff, Randall Whiting. The May 27, 2010 case was brought by Kathryn Webster, as executor of the Estate of Anthony Ferrantino. Between the cases, plaintiffs sought to have all contracts between LegalZoom and its customers for the prior four years declared void, a return of all revenues generated from these customers, punitive damages, penalties, and injunctive relief. While we have denied and continue to deny all of the allegations and claims asserted in these lawsuits, without admitting liability, and to avoid additional legal costs to defend these matters, we signed a settlement agreement of the May 27, 2010 action to resolve the claims in both cases. A fairness hearing was held on April 5, 2012. The court issued an Order Granting Final Approval of Class Action Settlement and Judgment on April 18, 2012. Objector Whiting has filed a notice of appeal of the court's denial of his motion to intervene. Objectors Johnson and Manbeck, Mings and Whiting have filed notices of appeal of the court's order and judgment, but Mings' appeal was subsequently dismissed. At June 30, 2012, we have accrued an estimated settlement liability of $2.9 million for this lawsuit as further described in Note 6 to the consolidated financial statements included elsewhere in this prospectus.

        On December 17, 2009, a statewide class action lawsuit was filed against us by Todd Janson in Missouri state court, alleging that we were engaged in the unauthorized practice of law and violated the Missouri Merchandising Practices Act. The complaint was amended on January 15, 2010 to add plaintiffs Gerald T. Ardrey, Chad M. Ferrell, and C & J Remodeling LLC. It sought damages of five years of fees charged to Missouri customers with the fees from the two years immediately preceding the complaint trebled and an injunction enjoining LegalZoom from continued operation in Missouri. We subsequently removed the case to federal court in Missouri. While we have denied and continue to deny all of the allegations and claims asserted in this lawsuit, without admitting liability, and to avoid additional legal

76


Table of Contents

costs to defend the matter, we signed a settlement agreement to resolve the lawsuit. A fairness hearing was held on April 13, 2012. The court issued a Final Approval Order and Dismissal with Prejudice on April 30, 2012. In June 2012, we paid $1.9 million to the plaintiffs' attorneys for fees and expenses pursuant to the settlement. At June 30, 2012, we have accrued an estimated settlement liability of $0.8 million for this lawsuit as further described in Note 6 to the consolidated financial statements included elsewhere in this prospectus.

        On June 10, 2011, a purported quo warranto action was filed in Alabama state court against us by DeKalb County Bar Association. The complaint generally alleges that LegalZoom engages in the unauthorized practice of law and requests injunctive relief, not damages. We have denied and continue to deny all of the allegations and claims asserted in this lawsuit.

        On July 19, 2012, we prevailed on a motion to dismiss a purported statewide class action filed against us by Christopher Lowry in federal court in Ohio, alleging that we engage in the unauthorized practice of law and violated the Ohio Consumer Sales Practices Act. The complaint, filed on October 27, 2011, sought disgorgement of revenues, among other remedies. We denied and continue to deny all of the allegations and claims asserted in this lawsuit.

        On January 25, 2012, a purported class action complaint was filed against us by Jonathan McIllwain in Arkansas state court, generally alleging that we engage in the unauthorized practice of law constituting violation of the Arkansas Deceptive Trade Practices Act and unjust enrichment. The complaint seeks a refund of all monies paid to us and punitive damages, among other remedies. We have denied and continue to deny all of the allegations and claims asserted in this lawsuit.

        On February 17, 2012, a complaint was filed against us by T. Travis Medlock in South Carolina state court, generally alleging that we engage in the unauthorized practice of law. The complaint requests declaratory relief, injunctive relief and disgorgement of revenues, among other measures. We have denied and continue to deny all of the allegations and claims asserted in this lawsuit.

        On September 30, 2011 we filed a complaint in Raleigh, North Carolina against the North Carolina State Bar. We brought this suit requesting a declaration that our self-help services are lawful and require the registration of our subscription legal plans. We cannot predict the outcome of this matter.

        In addition to these lawsuits, from time to time, we may become involved in legal proceedings arising in the ordinary course of our business. We are not presently involved in any legal proceeding in which we expect the outcome, if determined adversely to us, to have a material adverse effect on our business, results of operations or financial condition.

77


Table of Contents


MANAGEMENT

Executive Officers and Directors

        The following table provides information regarding our executive officers and directors as of the date of this prospectus:

Name
  Age  
Position(s)

John Suh

  41   Chief Executive Officer and Director

Frank Monestere

  43   President and Chief Operating Officer

Edward Hartman

  41   Chief Strategy Officer

Fred Krupica

  60   Chief Financial Officer

Sheila Tan

  48   Chief Marketing Officer

Tracy Terrill

  37   Chief Technology Officer

Chas Rampenthal

  44   General Counsel and Secretary

Brian Liu(5)

  44   Chairman

Daniel Cooperman(1)(3)(4)

  61   Nominated Director

Susan Decker(2)(3)

  49   Director

Kenneth McBride(1)(4)

  44   Nominated Director

Alan Spoon(3)

  61   Director

Jason Trevisan

  37   Director

Nehemia (Hemi) Zucker(1)(2)

  55   Director

(1)
Member of the audit committee upon the completion of this offering.
(2)
Member of the compensation committee upon the completion of this offering.
(3)
Member of the governance and nominating committee upon the completion of this offering.
(4)
Has been nominated and has agreed to serve on our board of directors effective immediately after this registration statement is declared effective by the SEC.
(5)
Mr. Liu intends to resign his position as the Chairman of our board of directors immediately upon the completion of this offering but will remain as a member of our board of directors.

    Executive Officers

        John Suh has served as our Chief Executive Officer since February 2007 and as a member of our board of directors since February 2005. Prior to LegalZoom, Mr. Suh was Chief Executive Officer of StudioDirect, the Internet division of a global supply chain company, Li and Fung. Prior to StudioDirect, Mr. Suh co-founded and served as Chief Executive Officer of Castling Group, helping offline companies create their Internet divisions and launching category leaders such as jcrew.com and hifi.com. Mr. Suh received a B.A. in Organizational Behavior and Public Policy from Harvard College and received his M.B.A. with high distinction from Harvard Business School, graduating as a George F. Baker Scholar. Mr. Suh was selected to serve on our board of directors due to the perspective and experience he brings as our Chief Executive Officer and his extensive background in the Internet industry.

        Frank Monestere has served as our Chief Operating Officer since September 2002 and as our President and Chief Operating Officer since January 2005. Before joining LegalZoom, Mr. Monestere was a management consultant from 2000 to 2002, and assisted clients in executing technology-focused business initiatives for clients such as Comcast and Time Warner Cable. Before that, he served in the U.S. Army as an Infantry Officer in the 82nd Airborne Division from 1991 to 1995 and as a Special Forces Officer from 1995 to 1998 with deployments to Bosnia and Sub-Saharan Africa. He also serves on the Board of Advisors of Special Forces Association, a non-profit organization. Mr. Monestere graduated with a B.S. in International Relations from the United States Military Academy at West Point and received his M.B.A. from Harvard Business School where he focused on operations strategy and management.

        Edward Hartman is one of our co-founders and has served as Chief Strategy Officer since June 2000. Prior to LegalZoom, Mr. Hartman was the Chief Technology Officer at TROON, LTD, later acquired by

78


Table of Contents

Xceed International. Mr. Hartman was a creator of two web-based applications, MajorFind and Megaphone. He sat on the board of the Project Management Institute (Los Angeles Chapter) and is a current board member of the Brent Shapiro Foundation. Mr. Hartman received a B.S. in Computer Science and a B.A. in Anthropology from Yale University and an M.B.A. from the Wharton School, University of Pennsylvania Program for Executives in San Francisco, California, where he was designated a Palmer Scholar. He is a member of the California Bar.

        Fred Krupica has served as our Chief Financial Officer since April 2008. Mr. Krupica has over 30 years of experience at several high-growth corporations, most recently as Chief Financial Officer of Altra Inc., a leading biofuels company from January 2006 through April 2008. Prior to Altra, Mr. Krupica was Chief Financial Officer of Fastclick, Inc., an Internet advertising technology company, where he led Fastclick's initial public offering and subsequent sale and merger to Valueclick Inc. Mr. Krupica's previous positions include serving as the Chief Financial Officer of WJ Communications, Chief Financial Officer of Magnetic Data Technologies, Chief Financial Officer and Chief Operating Officer of a private equity firm, and founder of a professional services firm. Mr. Krupica also served in various senior financial management positions at Atlantic Richfield, Pullman Inc. and PricewaterhouseCoopers. Mr. Krupica is a Certified Public Accountant and holds a B.S. in Accounting from the University of Illinois and an M.B.A. in Finance from UCLA's Anderson School of Management.

        Sheila Tan has served as our Chief Marketing Officer since March 2012. Before joining LegalZoom, Ms. Tan held executive positions at Align Technology Inc. as Vice President, Marketing and Chief Marketing Officer from March 2009 to December 2011 and Vice President of Product Innovation and Marketing Strategy from September 2008 to March 2009. Prior to that, she was Vice President, Marketing for Moka5, Inc., a provider of virtual desktop technology, from August 2007 to July 2008. Ms. Tan served as Vice President Marketing of Presto Services Inc., a digital-delivery service that enables families and friends to stay in touch via e-mail, without the need for a computer or Internet connection, from June 2006 to August 2007. Prior to that, Ms. Tan was Senior Director of Marketing, Quicken.com and QuickBooks at Intuit from 2001 to 2004. From 1995 to 2000, Ms. Tan held marketing positions of increasing scope and responsibility at The Procter & Gamble Company and its subsidiaries. Ms. Tan received a B.S. in Business Management from California Polytechnic State University and an M.B.A. in Business Management from UCLA's Anderson School of Management.

        Tracy Terrill joined LegalZoom in January 2007 and has served as our Chief Technology Officer since October 2008. From March 2005 to December 2006, Mr. Terrill was Director of Sales and Marketing (systems) for GE NBC Universal Home Entertainment. Previous positions included Sr. Director of Digital Business Development and Sr. Director of Research and Development for Universal Music Group. Earlier in his career, Mr. Terrill was a management consultant for Gartner Group. Terrill holds a B.S. in Business Administration from Sonoma State University and an M.B.A. from the University of Southern California.

        Chas Rampenthal has served as our General Counsel since October 2003 and as our Corporate Secretary since February 2007. Before joining LegalZoom, Mr. Rampenthal was a partner at Belanger and Rampenthal, LLC from October 2002 to October 2003. Prior to that, Mr. Rampenthal was an associate at Testa, Hurwitz & Thibeault, LLP of Boston, Massachusetts and the Los Angeles office of Thelen Reid & Priest LLP. Mr. Rampenthal also served as an officer and aviator in the United States Navy. Mr. Rampenthal received his B.S. in Economics and Math Studies from Southern Illinois University at Edwardsville and a J.D. from the University of Southern California.

    Board of Directors

        Brian Liu, one of our co-founders, has served on our board of directors since July 1999, and as our Chairman from July 1999 to February 2005 and since February 2007. Mr. Liu was our Chief Executive Officer from July 1999 to February 2007. Prior to LegalZoom, Mr. Liu was a corporate attorney with the law firm of Sullivan & Cromwell LLP. In addition, Mr. Liu was formerly assistant Vice President—Legal

79


Table of Contents

with investment adviser Oaktree Capital Management, LLC. Mr. Liu graduated from U.C. Berkeley, Phi Beta Kappa, and with honors, in Biochemistry. Mr. Liu received his J.D. from UCLA School of Law and is a member of the California Bar. Mr. Liu intends to resign his position as the Chairman of our board of directors immediately upon the completion of this offering but will remain as a member of our board of directors. Mr. Liu was selected to serve on our board of directors due to his experience as our prior Chief Executive Officer and his involvement with our formation, along with his knowledge of our business, management skills and performance as a board member.

        Daniel Cooperman has agreed to serve on our board of directors effective immediately after this registration statement is declared effective by the SEC. From 2010 to the present, Mr. Cooperman has been Of Counsel with Bingham McCutchen LLP, a law firm. From 2007 to 2009, Mr. Cooperman was the Senior Vice-President, General Counsel & Secretary of Apple Inc. and, before that time, he was the Senior Vice-President, General Counsel & Secretary of Oracle Corporation from 1997 to 2007. Mr. Cooperman is currently a Lecturer in Law at Stanford Law School and is a Fellow at the Arthur and Toni Rembe Rock Center for Corporate Governance at Stanford Law School and Graduate School of Business. He is also currently a strategic advisor to Institutional Venture Partners and several private technology companies. Mr. Cooperman earned his A.B. in Economics from Dartmouth College, his J.D. from Stanford Law School and his M.B.A. from Stanford Graduate School of Business. Mr. Cooperman was nominated to serve on our board of directors upon the completion of this offering due to his extensive knowledge and experience in the legal industry, his expertise in corporate leadership, governance and management practices and his experience with Internet and technology companies.

        Susan Decker has served on our board of directors since October 2010. Ms. Decker also currently serves on the boards of directors of Intel Corporation, Berkshire Hathaway Corporation and Costco Wholesale Corporation and is a Trustee of Save the Children. Previously, Ms. Decker served on the board of directors of Stanford Institute of Economic Policy Research from March 2005 to May 2007. During the 2009-2010 school year, Ms. Decker served as Entrepreneur-in-Residence at Harvard Business School. Prior to that, from June 2000 to April 2009, Ms. Decker held various executive management positions at Yahoo! Inc., including serving as President from June 2007 to April 2009, Head of the Advertiser and Publisher Group from December 2006 to June 2007, and Chief Financial Officer from June 2000-June 2007. Before Yahoo!, Ms. Decker spent 14 years with Donaldson, Lufkin & Jenrette, most recently as Managing Director, Global Equity Research from 1998 to 2000, and previously as an equity research analyst, covering publishing and advertising stocks from 1986 to 1998. In this capacity, Ms. Decker received recognition by Institutional Investor magazine as a top-rated analyst for ten consecutive years. Ms. Decker was selected to serve on our board of directors due to her extensive experience as president of a global Internet company, providing expertise in corporate leadership, financial management, and Internet technology, and to the extent Ms. Decker services as a director for other multinational companies, Ms. Decker also provides cross-board experience.

        Kenneth McBride has agreed to serve on our board of directors effective immediately after this registration statement is declared effective by the SEC. Since 2001, Mr. McBride has been the Chief Executive Officer of Stamps.com, a Nasdaq-traded provider of Internet-based services for mailing or shipping letters, packages or parcels. Beginning in 1999, he has held various positions at Stamps.com, as President from 2001 until January 2012, as Chief Financial Officer from 2000 to 2004 and as Senior Director of Finance from 1999 to 2000. Mr. McBride is also Chairman of the board of directors of Stamps.com. He also serves on the Board of Trustees of The California Science Center Foundation, a non-profit organization. Prior to Stamps.com, Mr. McBride was a research analyst for Salomon Smith Barney covering several industries in the high technology area. Mr. McBride has also worked as an engineer and manager in the semiconductor industry. Mr. McBride holds a bachelor's degree, with honors, and a master's degree, in Electrical Engineering from Stanford University. Mr. McBride also holds an M.B.A. from the Graduate School of Business at Stanford University. Mr. McBride was selected to serve

80


Table of Contents

on our board of directors due to his extensive experience in Internet and technology companies, corporate leadership and financial management.

        Alan Spoon has served on our board of directors since February 2007. Mr. Spoon is a general partner with Polaris Venture Partners, a venture capital firm. Before joining Polaris in 2000, Mr. Spoon served for 18 years in a variety of roles with The Washington Post Company, including President, board member, and Chief Financial Officer. At The Washington Post, Mr. Spoon also was responsible for early stage technology investments in cellular companies, such as Cellular One and Digital PCS, distance learning and educational software, and digital media and e-commerce services. Prior to The Washington Post, Mr. Spoon was an officer at The Boston Consulting Group. In addition to serving on our board of directors, Mr. Spoon also sits on the boards of a variety of other companies, including Art.com, Focus Financial Partners, Remedy Health Media, Phreesia, Danaher Corporation and IAC/InterActiveCorp. In his not-for-profit activities, Mr. Spoon is a member of the Massachusetts Institute of Technology's Corporation and The Council on Foreign Relations. Mr. Spoon was also formerly a member of the MIT Corporation, and a member and Vice Chairman of the Smithsonian Board of Regents. He remains active in both institutions. Mr. Spoon earned his S.B. at Massachusetts Institute of Technology, an S.M. at M.I.T.'s Sloan School of Management, and a J.D., with honors, from Harvard Law School. Mr. Spoon was selected to serve on our board of directors due to his extensive experience with private and public company boards, management practices and involvement with private equity, providing insights into the Internet and technology industries as well as into acquisition strategy and financing.

        Jason Trevisan has served on our board of directors since February 2007. Mr. Trevisan is a general partner with Polaris Venture Partners focusing on growth equity investments and buyouts in Internet, technology and healthcare industries. Before joining Polaris in 2003, Mr. Trevisan held various management roles at aQuantive, which was acquired by Microsoft, where he oversaw client relationships in industries including pharmaceuticals, media/entertainment, financial services and consumer products. Prior to aQuantive, Mr. Trevisan was a consultant with Bain & Company where his clients included private equity firms and Fortune 500 companies in technology, media and consumer products. In addition to serving on our board of directors, Mr. Trevisan is also a member of the board of directors of ShoeDazzle, Life Line Screening, PartsSource and Snappcloud. Mr. Trevisan received his M.B.A. with Distinction from the Tuck School of Business at Dartmouth, where he was recognized as an Edward Tuck Scholar. Mr. Trevisan holds an A.B., cum laude, in English from Duke University. Mr. Trevisan was selected to serve on our board of directors due to his extensive experience in Internet and technology companies, as a venture capitalist and as one of our investors.

        Nehemia (Hemi) Zucker has served on our board of directors since April 2012. Mr. Zucker has been the Chief Executive Officer of j2 Global, Inc., a Nasdaq-traded provider of business cloud services, since May 2008. Prior to that time, and beginning in 1996, he held various executive positions with j2 Global, as Co-President and Chief Operating Officer from August 2005 to May 2008, as Co-President from April 2005 to August 2005, as Chief Marketing Officer from May 2003 to August 2005, as Chief Marketing Officer and Chief Financial Officer from December 2000 to May 2003, and as Chief Financial Officer from 1996 to December 2000. Prior to j2 Global, Mr. Zucker was Chief Operations Manager of Motorola's EMBARC division, which packaged CNBC and ESPN for distribution to paging and wireless networks. From 1980 to 1996, he held various positions in finance, operations and marketing at Motorola in the United States and abroad. Mr. Zucker received his B.A. in Economics from Tel Aviv University. Mr. Zucker was selected to serve on our board of directors due to his extensive experience in Internet, technology and telecommunication companies and his international management experience.

        Each officer serves at the discretion of our board of directors and holds office until his or her successor is duly elected and qualified or until his or her earlier resignation or removal. There are no family relationships among any of our directors or executive officers.

81


Table of Contents

Current Board Composition

        Our board of directors currently consists of six members. Our current certificate of incorporation and voting agreement provide for certain members of our board of directors to be elected by certain classes of our capital stock. The current members of the board of directors were elected as follows:

    Messrs. Suh and Liu were elected by the holders of the majority of the outstanding shares of our common stock.

    Messrs. Spoon and Trevisan were elected by the holders of the majority of the outstanding shares of our Series A.

    Ms. Decker was elected by the holders of the majority of the outstanding shares of our common stock and our Series A, voting together as a single class.

    Mr. Zucker was appointed by our board of directors.

        The voting agreement and the provisions of our certificate of incorporation by which the directors were elected will terminate in connection with our initial public offering, and there will be no further contractual obligations regarding the election of our directors. Our current directors will continue to serve as directors until their resignations or until their successors are duly elected by the holders of our common stock.

Board Composition After This Offering

        Immediately after this registration statement is declared effective by the SEC, our board of directors will consist of eight members. In accordance with our amended and restated certificate of incorporation and amended and restated bylaws that will become effective immediately upon the completion of this offering, our board of directors will be divided into three classes with staggered three-year terms. At each annual general meeting of stockholders, the successors to directors whose terms then expire will be elected to serve from the time of election and qualification until the third annual meeting following election. Upon the completion of this offering, our directors will be divided among the three classes as follows:

    The Class I directors will be Messrs. Liu and Trevisan, and their terms will expire at the annual general meeting of stockholders to be held in 2013;

    The Class II directors will be Ms. Decker and Messrs. Cooperman and Spoon, and their terms will expire at the annual general meeting of stockholders to be held in 2014; and

    The Class III directors will be Messrs. McBride, Suh and Zucker, and their terms will expire at the annual general meeting of stockholders to be held in 2015.

        We expect that additional directorships resulting from an increase in the number of directors will be distributed among the three classes so that, as nearly as possible, each class will consist of one-third of the directors.

        The division of our board of directors into three classes with staggered three-year terms may delay or prevent a change of our management or a change in control.

    Director Independence

        Under the listing requirements and rules of the NYSE, independent directors must comprise a majority of a listed company's board of directors within a specified period of the completion of this offering.

        Our board of directors has undertaken a review of its composition, the composition of its committees and the independence of each director. Based upon information requested from and provided by each incumbent and proposed new director to take office upon completion of this offering concerning his or her

82


Table of Contents

background, employment and affiliations, including family relationships, our board of directors has determined that Ms. Decker and Messrs. Cooperman, Spoon, Trevisan and Zucker do not have a relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director and that each of these directors is "independent" as that term is defined under the applicable rules and regulations of the SEC and the listing requirements and rules of the NYSE. In making this determination, our board of directors considered the current and prior relationships that each non-employee director has with us and all other facts and circumstances our board of directors deemed relevant in determining their independence, including the beneficial ownership of our capital stock by each non-employee director.

Board Committees

        Upon the completion of this offering, we will have an audit committee, a compensation committee and a governance and nominating committee. The composition and responsibilities of each committee are described below. Members serve on these committees until their resignation or until otherwise determined by our board of directors.

    Audit Committee

        Our audit committee provides oversight of our accounting and financial reporting process, the audit of our financial statements and our internal control function. Among other matters, the audit committee assists the board of directors in oversight of the independent registered public accounting firm qualifications, independence and performance; is responsible for the engagement, retention and compensation of the independent auditors; reviews the scope of the annual audit; reviews and discusses with management and the independent registered public accounting firm the results of the annual audit and the review of our quarterly consolidated financial statements including the disclosures in our annual and quarterly reports filed with the SEC; reviews our risk assessment and risk management processes; establishes procedures for receiving, retaining and investigating complaints received by us regarding accounting, internal accounting controls or audit matters; approves audit and permissible non-audit services provided by our independent registered public accounting firm; and reviews and approves related person transactions under Item 404 of Regulation S-K. In addition, our audit committee will oversee our internal audit function when it is established.

        Upon the completion of this offering, the members of our audit committee will be Mr. McBride, who will be the chair of the committee, and Messrs. Cooperman and Zucker. All members of our audit committee meet the requirements for financial literacy under the applicable rules and regulations of the SEC and the NYSE. Our board of directors has determined that Messrs. McBride and Zucker are audit committee financial experts as defined under the applicable rules of the SEC and have the requisite financial sophistication as defined under the applicable rules and regulations of the NYSE. All of the members of our audit committee are independent directors as defined under the applicable rules and regulations of the SEC and the NYSE.

    Compensation Committee

        Our compensation committee adopts and administers the compensation policies, plans and benefit programs for our executive officers and all other members of our executive team. In addition, among other things, our compensation committee annually evaluates, in consultation with the board of directors, the performance of our Chief Executive Officer, reviews and approves corporate goals and objectives relevant to compensation of our Chief Executive Officer and other executives and evaluates the performance of these executives in light of those goals and objectives. Our compensation committee also adopts and administers our equity compensation plans. Upon the completion of this offering, the members of our compensation committee will be Mr. Zucker, who will be the chair of the committee, and Ms. Decker. All

83


Table of Contents

of the members of our compensation committee are independent under the applicable rules and regulations of the SEC and the NYSE, and Section 162(m) of the Internal Revenue Code, or the Code.

    Governance and Nominating Committee

        Our governance and nominating committee is responsible for, among other things, making recommendations regarding corporate governance, the composition of our board of directors, identification, evaluation and nomination of director candidates and the structure and composition of committees of our board of directors. In addition, our governance and nominating committee oversees our corporate governance guidelines, approves our committee charters, oversees compliance with our code of business conduct and ethics, contributes to succession planning, reviews actual and potential conflicts of interest of our directors and officers other than related person transactions reviewed by the audit committee and oversees the board self-evaluation process. Our governance and nominating committee is also responsible for making recommendations regarding non-employee director compensation to the full board of directors. Upon the completion of this offering, the members of our governance and nominating committee will be Mr. Cooperman, who will be the chair of the committee, Ms. Decker and Mr. Spoon. All of the members of our governance and nominating committee are independent under the applicable rules and regulations of the SEC and the NYSE.

Compensation Committee Interlocks and Insider Participation

        None of the members of our compensation committee is or has at any time during the past year been one of our officers or employees. None of our executive officers currently serves or in the past year has served as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving on our board of directors or compensation committee.

Code of Business Conduct and Ethics

        We will adopt a code of business conduct and ethics applicable to all of our employees, including our executive officers and directors, and those employees responsible for financial reporting. The code of business conduct and ethics will be available on our website. We expect that, to the extent required by law, any amendments to the code, or any waivers of its requirements, will be disclosed on our website.

84


Table of Contents


EXECUTIVE COMPENSATION

        Our named executive officers for 2011, which consist of our principal executive officer and the two other most highly compensated executive officers, are:

    John Suh, Chief Executive Officer and Director;

    Fred Krupica, Chief Financial Officer; and

    Edward Hartman, Chief Strategy Officer.

        The following tables and narratives address and explain the compensation provided to our named executive officers in fiscal 2011. All figures below reflect our July 2011 3-for-1 forward stock split and a 2-for-3 reverse stock split which will be effective immediately prior to the effectiveness of this offering.

2011 Summary Compensation Table

Name and Principal Position
  Year   Salary
($)(1)
  Bonus
($)(2)
  Option
Awards
($)(3)
  Non-Equity
Incentive
Plan
Compensation
($)(4)
  All Other
Compensation
($)(5)
  Total
($)
 

John Suh,
Chief Executive Officer and Director

    2011     332,250             350,000     9,800     692,050  

Fred Krupica,
Chief Financial Officer

    2011     253,050         548,472     254,000     68,470     1,123,992  

Edward Hartman,
Chief Strategy Officer

    2011     215,100     40,000     342,795     120,000     15,651     733,546  

(1)
The base salaries for the named executive officers were increased effective as of April 1, 2011 and are as follows: Mr. Suh—$340,000; Mr. Krupica—$255,000; Mr. Hartman—$225,000.

(2)
Mr. Hartman was awarded a discretionary cash bonus award of $40,000 in fiscal 2011 (in addition to his fiscal 2011 performance-based incentive award described in footnote (4)) for his superior performance in heading the broad expansion of our legal plan services in fiscal 2011.

(3)
Represents the total grant date fair value, as determined under Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 718, Stock Compensation, of all option awards granted to the named executive officer during fiscal 2011. Assumptions used to calculate these amounts are included in Note 8, "Stock Option Plans," to our consolidated financial statements included elsewhere in this prospectus. These stock options were each granted on September 29, 2011 and each has a maximum 10-year term and a per-share exercise price of $8.205 which was the fair market value of a common share on such grant date. Vesting terms are described in footnotes (5), (6), and (7) to the "—2011 Outstanding Equity Awards at Fiscal Year-End" table below.

(4)
The named executive officers earned the maximum cash incentive award for fiscal 2011 based on the achievement of annual company performance objectives as discussed in "—Annual Performance-based Cash Bonus Opportunity" below.

(5)
We provided our named executive officers with additional benefits that we believe are reasonable, competitive and consistent with LegalZoom's overall executive compensation program. The incremental costs of these benefits are shown in the table below.

Name
  Relocation($)   Housing($)   LegalZoom
401(k) Match($)(c)
  Total "Other
Compensation"($)
 

John Suh

            9,800     9,800  

Fred Krupica

        62,173 (a)   6,297     68,470  

Edward Hartman

    10,971 (b)   4,680 (b)       15,651  

(a)
Represents the incremental cost incurred in connection with Mr. Krupica's usage of LegalZoom's corporate apartment, as further described in "—Executive Employment Agreements" below.

(b)
In December 2011, Mr. Hartman, as the head of research and development of LegalZoom, relocated to the San Francisco area to co-oversee LegalZoom's research and development center in San Francisco. The amounts in these columns represent a relocation and a housing allowance in connection with Mr. Hartman's establishment of residency.

85


Table of Contents

(c)
Represents LegalZoom matching contributions to the named executive officers' 401(k) savings accounts.

    Annual Base Salary

        The following table provides the annual base salaries for each of the named executive officers for fiscal 2011 based on decisions made by the compensation committee in fiscal 2011. Fiscal 2011 salaries were adjusted effective as of April 1, 2011 as set forth below.

Name
  Fiscal 2011
Salary First
Quarter($)
  Fiscal 2011
Salary (effective
April 1, 2011)($)
 

John Suh

    309,000     340,000  

Fred Krupica

    247,200     255,000  

Edward Hartman

    185,400     225,000  

    Annual Performance-based Cash Bonus Opportunity

        In addition to base salaries, our named executive officers were eligible to receive performance-based cash bonuses in fiscal 2011. The annual cash bonus payouts for the named executive officers in fiscal 2011 were based on the degree of attainment of LegalZoom's performance criteria.

        For fiscal 2011, the annual performance-based cash bonus plan was based on a dollar pool determined alongside the establishment of LegalZoom's overall annual budget. Each named executive officer then had target and maximum bonus amounts established as set forth below:

Name
  Target
Bonus($)
  Maximum
Bonus($)
 

John Suh

    175,000     350,000  

Fred Krupica

    127,000     254,000  

Edward Hartman

    60,000     120,000  

        Payment of a performance-based cash bonus was based on two company performance metrics: non-GAAP Adjusted EBITDA and annual revenue growth. Non-GAAP Adjusted EBITDA is a non-GAAP financial measure. For a definition of non-GAAP Adjusted EBITDA and reconciliation to net income (loss), the most comparable U.S. GAAP item, see "Prospectus Summary—Summary Selected Financial and Other Data Non-GAAP discussion." These performance metrics were chosen based on the compensation committee's belief that attaining or exceeding targets for these metrics would increase LegalZoom's value and growth. The actual amount awarded for the fiscal 2011 cash bonus was primarily dependent on LegalZoom's achievement of a target annual revenue growth of 17.7%. However, in order for a named executive officer to receive any performance-based cash bonus, LegalZoom had to achieve a minimum non-GAAP Adjusted EBITDA of $11.4 million. If LegalZoom did not achieve the minimum non-GAAP Adjusted EBITDA of $11.4 million, regardless of its achievement of the annual revenue growth target, no cash bonus would have been paid to the named executive officers. If this non-GAAP Adjusted EBITDA minimum was achieved, then the amount of the performance bonus would be determined based on the non-GAAP Adjusted EBITDA and annual revenue growth results, with annual revenue growth receiving approximately 70% of the weighting and non-GAAP Adjusted EBITDA receiving approximately 30% of the weighting.

        If LegalZoom had achieved a target annual revenue growth of 17.7% and the minimum non-GAAP Adjusted EBITDA of $11.4 million, the named executive officers would have received the target bonus amount. In all cases, the total annual cash bonus opportunity for each named executive officer for fiscal 2011 had a maximum payout of two times his target amount. If LegalZoom achieved approximately 26% or more in annual revenue growth (and met or exceeded the minimum non-GAAP Adjusted EBITDA goal of $11.4 million), the named executive officers would have received the maximum bonus payout of two times their target bonus amount. If LegalZoom achieved between 17.7% and 26% in annual revenue growth (and met or exceeded the minimum non-GAAP Adjusted EBITDA goal of $11.4 million), the

86


Table of Contents

named executive officers would have received a ratable bonus payout amount in excess of his target bonus amount but not to exceed two times his target amount (maximum payout). As a hypothetical example, if LegalZoom achieved 21.85% in annual revenue growth and a non-GAAP Adjusted EBITDA of at least $11.4 million, the bonus the named executive officers would have earned would be 150% of their target bonus.

        For fiscal 2011, LegalZoom achieved an annual revenue growth of 29.2% and non-GAAP Adjusted EBITDA of $11.8 million. As a result, the compensation committee awarded each of the named executive officers the maximum amount for fiscal 2011 performance-based cash bonuses, which amounts are reported above in the Non-Equity Incentive Plan Compensation column of the 2011 Summary Compensation Table. In fiscal 2011, the compensation committee also awarded Mr. Hartman a $40,000 discretionary bonus in connection with his exceptional performance in fiscal 2011 in growing our legal plan services and almost tripling the number of subscribers in our legal plans.

    Long-term Equity-based Compensation

        Historically, the compensation committee and/or our board of directors has provided long-term equity incentive compensation to retain our named executive officers and to provide for a portion of their compensation to be at risk and linked directly with the appreciation of stockholder value. Long-term compensation has generally been provided through equity awards in the form of stock options subject to continued service and under the terms and conditions of our 2007 Stock Option Plan, which was renamed as the 2010 Stock Incentive Plan (hereafter, referred to as the "2010 Plan"), and related award agreements. Through possession of stock options, our executives participate in the long-term results of their efforts.

        The 2010 Plan, or the stock option grant agreements, can provide for some or all of the unvested stock options to vest immediately when certain events occur, including a change in control. For example, in the event of a corporate change in control transaction in which the named executive officer's stock options are not substituted, assumed or converted, then the named executive officer's stock options shall fully vest and become exercisable immediately prior to the consummation of the change in control.

        The board of directors granted stock option awards to each of the named executive officers, except for Mr. Suh, in fiscal 2011. Mr. Suh did not receive an equity award in fiscal 2011, as he had received a stock option award in 2010 (and the other named executive officers had not). Details on stock option grants in fiscal 2011 are provided in footnote (3) to the "—2011 Summary Compensation Table".

    Employee Benefits and Perquisites

        We have generally not offered extensive or elaborate benefits to the named executive officers, except for permitting Mr. Krupica to stay in our corporate apartment located near our corporate headquarters and providing relocation benefits to Mr. Hartman. Further details on these benefits are described in footnote (5) to the "—2011 Summary Compensation Table". We also provide 401(k) matching contributions as discussed in the "401(k) Plan" section below.

87


Table of Contents

2011 Outstanding Equity Awards at Fiscal Year-End

        The following table shows the number of shares of our common stock covered by stock options and restricted stock units held by the named executive officers as of December 31, 2011. All of the awards shown in the below table were granted under the 2010 Plan. Additionally, all of the stock options in the below table were granted with a per share exercise price equal to the fair market value of one of our shares of common stock on the date of grant. No stock options were exercised by the named executive officers during fiscal 2011.

 
  Option Awards    
   
 
 
  Stock Awards  
 
   
   
  Equity Incentive
Plan Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options
(#)
   
   
 
Name
  Number of
Securities
Underlying
Unexercised
Options
(#)
Exercisable
  Number of
Securities
Underlying
Unexercised
Options
(#)
Unexercisable
  Option
Exercise
Price
($)
  Option
Expiration
Date
  Number of
Shares or
Units of
Stock That
Have Not
Vested
(#)
  Market
Value of
Shares or
Units of
Stock That
Have Not
Vested
($)
 

John Suh

    383,604             1.7900     2/9/17 (1)        

    40,000     360,000         2.1000     2/25/20 (2)        

Fred Krupica

   
420,000
   
60,000
   
   
2.2450
   
6/24/18

(3)
           

                                  50,000 (4)   430,500