The passing of the JOBS Act created much fanfare, especially given the relaxation of the securities laws with respect to the use of "general solicitations." Notwithstanding the excitement from the blogosphere, the revised rules also come with some hidden costs that make using a “general solicitation” in fundraising less attractive.
In a prior Founder Tip of the Week we discussed how the Internal Revenue Code (the “Tax Code”) characterizes unvested founder stock as not being purchased until it has vested, and that this characterization can have adverse tax consequences for the founder because the Tax Code treats as taxable income the excess, if any, of the fair market value of stock at the time it vests over the purchase price of the stock (the “spread”).
A new Delaware law, signed on July 17 by Gov. Jack Markell, allows companies to be formed as public benefit corporations (PBCs), which balance stockholders’ returns, the impact on other people affected by a company's business activities, and the creation of an overall public benefit. Starting on August 1, Delaware companies will be able to form or reincorporate as PBCs, or merge with PBCs.
Whether a financing, merger or other acquisition, or other major transaction, parties often outline the major provisions in a non-binding term sheet or letter of intent. A principal benefit of this approach it to help the parties identify major areas of disagreement early to avoid wasted expense on additional diligence and drafting of the definitive agreements.
A corporation is a separate entity with its own liabilities for which the individual owners cannot be held personally liable. It is a concept that is old as dirt and right as rain, right? Surely everyone accepts this basic premise of doing business as a corporate entity? Well, perhaps everyone but the plaintiff’s attorney seeking to hold someone with deep pockets financially responsible for his client’s injuries.
Dilution is a term that is frequently discussed in the context of preferred stock financings. However, it is important to understand that there is a difference between dilution in the general sense and the type of dilution with respect to which preferred stockholders receive protection.
“Pre-money” or “pre-money valuation” is a term that entrepreneurs will hear and use a lot in the context of securing equity financing, so I thought it would be a good idea to make sure entrepreneurs have a clear understanding of it.
The date of an agreement is an important part of most business transactions and M & A is no exception. Many acquisition agreements begin with an “Agreement between” the parties “effective as of” a given date. Does it matter if this effective date is prior to the date the parties actually entered into the agreement? And if so, is this ‘backdating’ problematic or even potentially illegal?
A commonplace among emerging companies is the need to promise investors seats on the board of directors. For a lot of different reasons, it makes sense to make this promise. It is usually a condition to receiving the investor’s capital, so there’s that.
You've developed your idea into a business. It's taken a lot of sweat and hard work, and there have been more than a few rough spots. Acquirers are now taking note and making inquiries. Maybe investment bankers are courting you. You have arrived!! Well, almost . . . .
Potential investors usually request an "Executive Summary" prior to meeting with new startups. The Executive Summary is a one- to two-page document that covers the aspects of the startup that investors care about most, including the concept, the market need and opportunity, and the startup team.
“Vesting” is a term of art that is often glossed over by new entrepreneurs as they grapple with other newer and scarier terms to which they are being introduced as they start their companies, like “pre-money valuation,” “fully-diluted capitalization” and “broad-based weighted average antidilution adjustments.” However, I think it is good for entrepreneurs to have a thorough understanding of what vesting means.
Convertible notes are a common structure for private company financings, most often for early stage companies trying to raise $1 million or less (see "Your First Vehicle for Fund Raising: Convertible Notes or Preferred Stock"). Here is a summary of the types of terms for such financings, and a quick primer on what to look out for if you’re considering this type of funding.
Starting a consumer-facing technology company or developing a new application to make a consumer's life easier or more fun is an exciting journey. At this stage, you are all about the development, getting the product or service to market, and making sure it can scale. But neglecting the privacy implications of your product or service during the development stage is a big mistake that will come back to haunt you later.
Imagine, for example, that your dream of building a great company has come true and you are faced with an acquisition offer. During the customary due diligence phase, you quickly discover that your privacy house is not in order. Why?
As founders, you are likely very familiar with the multitude of obstacles that a successful venture must overcome: financing, management, creation and protection of valuable intellectual property, marketing, and building profitable and sustainable customer relationships. Another obstacle that is well known yet rarely labeled as such is “complexity.” In building a new venture, the old adage “keep it simple” remains an important philosophy.
A company's culture is often established in its earliest days. Once ingrained, it can be very difficult to change. Although many founders recognize the importance of infusing a culture of giving into their enterprises, they wonder how they can go about it with limited time and resources. The answer should be apparent to every founder. Early stage companies can meet cultural challenges with the same tactics they use for meeting operational challenges with limited cash. When early stage companies don't have cash, they apply "sweat" or "equity." How do you apply "sweat" and "equity" to establish a culture of giving?
At one time or another, most startup companies work with a consultant or enter a contract with a strategic partner and are presented with a dilemma: should the company offer equity to the consultant or strategic partner in payment for services?
Founders should make sure that their companies’ agreements assign intellectual property presently. In other words, an agreement should provide that the assigning party (the “assignor”) “hereby assigns” to the company the intellectual property in question.
One of the most common conversations I have with the founders of businesses involves how they determined a way to split the ownership amongst themselves. It is probably the first difficult decision new partners face together in starting a company. In many instances, the new founders decide that they are going to split ownership equally.
Founding a company can be an overwhelming experience, but for those founders looking to raise capital from angel or venture capital investors, deciding where to incorporate and selecting an entity type are two choices that deserve careful consideration.
