This month, the New York Legal Hackers will meet to discuss crowdfunding. In 2012, Congress passed the JOBS Act to facilitate startup fundraising through so-called crowdfunding platforms, as well as other modifications to existing securities regulations. At this meetup, we will provide a quick primer on these important changes to the securities laws and then move on to a holistic discussion on the vices and virtues of equity vs. non-equity crowdfunding.
Nathanial Cotanch - Head Analyst, Rock the Post
Benish Shah - Founder/Attorney, Before the Label
Michal Rosenn - Deputy General Counsel, Kickstarter
James Fanto - Professor, Brooklyn Law School
Shezi (Sheheryar) Sardar - Attorney, Sardar Law Firm
With a short intro presentation from:
Graham Travaligni - Student, Brooklyn Law School
We get a lot of requests to meet up and talk business with professionals that want to switch to “business.” Many times those professionals are looking to buy a business but have not had any experience on how to do so. So we thought it might be helpful to lay out some tips on the first part of formalizing a deal to buy a business: the letter of intent (referred, brilliantly, as the “LOI” during conversations).
The letter of intent is not the end of a negotiation to buy a business; in fact, it’s the first step to formalize mere discussions into an actual business deal. A letter of intent is way to draft out the assumptions and views of both parties regarding the critical elements of the business deal. It’s a tried and true concept: getting it on paper is the first path to understanding what you are getting. Note: remember, the letter of intent is NOT the actual agreement that governs the buy/sell of a business; in fact, it is not an agreement in the contractual sense and should not reflect an agreement (that’s kind of key).
First. This is not an exhaustive list. These are guidelines.
#1: Mark the document as a Letter of Intent.
The document should be clearly marked as a letter of intent and not a binding contract. Your lawyer should include such delineating language in the subject, title, or first paragraph of the LOI to ensure that it is clearly stated and not lost in any fine print. This prevents your LOI from being arguably used as a contract or offer.
#2: Good faith language.
Your LOI should include (and some states may actually impose this via statute) the requirement that all negotiations must be done in good faith. This sounds like an obvious, clearcut idea but “good faith” can be construed in different ways. When including a “good faith” statement, parse it out and define it. Or at the very least, define what can be considered “bad faith” to ensure that all parties are on the same page. For example, your “bad faith” definition can include the barring of the parties from using the negotiation and diligence process as an information collection expedition for competitive purposes.
#3: Is it a sale of stock or assets.
We’ve discussed before the importance of understanding the difference between stock and asset purchasing deals from the seller’s side. It is just as important from the buyer’s side of a deal. Your LOI should make it clear what the parties are negotiating for. This core question is going to be the basis for the deal structure itself, and should be addressed first rather than last.
#4: The purchase price roadmap.
While the LOI is not an agreement, it should include the potential purchase price as well as what the purchase price is based on. This purchase price, as well as the under lying assumptions, will be proved or rendered incorrect during the due diligence process. If the LOI is clear about how the potential purchase price was reached, parties will be able to adjust it better per findings in the due diligence process.
#5: Payment method and delivery.
Will it be an all cash deal, a note, or an alternative retained interest deal? The LOI should state this so that, again, all parties are on the same page. Make a note of what the payment method will be, as well as the payment delivery method.
Withe letters of intent, the key thing to remember is that while it is not an agreement between to parties for the purchase or sale of a business, it is the first step of formalizing negotiations to enter into a business deal. Your LOI should address major points of the potential deal to help all parties get on the same page before wasting valuable time.
Questions about letters of intent? Email Sheheryar Sardar at email@example.com.
The deeply flawed protagonist of the iconic show Mad Men once remarked, “There is no big lie. The universe is indifferent.” If Don Draper witnessed what precipitated the financial crisis of 2008, he may have conceded the big lie in bewilderment. We all know how the story goes since – there is public outcry over the home mortgage crisis and the ensuing government bailout, Congress enacts legislation to institutionally reform the financial sector and capital markets, and, one could posit, the universe isn’t so much indifferent as it is self-correcting. Still, while much of the reform may seem cosmetic, imagine a state legislator or civil servant-lawyer in Maryland thinking about the dire state of things and, to make things better, comes up with one novel solution – a private corporation that benefits people and the environment, thereby making people feel good about business. Maryland quickly passes legislation in 2010, the first state in the union to do so, and voila, the benefit corporation is born.
So, what’s the deal? One would think having the word ‘Benefit’ before ‘Corporation’ may provide a garden variety of practical advantages, but a deeper look begs the question: does a Benefit Corporation really live up to its name? To add further confusion, a Benefit Corporation, a legal entity created by state statute, is distinct from a B Corp, which is a classification designation obtained through a strict, rigorous process that inherits a massive amount of ongoing scrutiny.
Come Again? Please Distinguish
Remarkably, the only minimum requirement to become a Benefit Corporation is the motivation to join. Yes, following the standards aligned with a Benefit Corporation are entirely voluntarily. Whereas the certification process to obtain B Corp classification will make any founder go Mad Hatter on his dinner table subjects. Simply put, a B Corp is similar to a non-profit that must focus on the greater public good, but is still taxed as a business. Please, have a seat with your tea and crumpets, sir, as you are about to receive some alarming news - there are no tax benefits for a B Corp or a Benefit Corporation over traditionally incorporated companies.
So, no tax benefits, and yet, unlike C Corps or LLCs, B Corps must adhere to the most elevated ethical standards of conducting business, while being subjected to thorough scrutiny of the powers-that-be. To become a B Corp, a company must complete an Impact Assessment. The company must score a minimum of 80 out of 200 points to qualify. There are 40 different versions of the Impact Assessment depending on your industry, company size, et. al. The criterion is byzantine but, I argue, productive. Does the company have a history of financial disclosure and transparency with its employees? Do the company use renewable energy sources to power its operations, and if so, how much? What social and environmental criteria does the company impose on its vendors and suppliers? Has the company’s explicitly incorporated its commitment to social impact and the environment into its mission statement?
Because it’s good for humanity. And, it embraces moral, ethical and social values that promote the ideals of how business should be conducted.
Many companies that have obtained B Corp status have done so not for any legal or financial advantage, but to join a movement that is socially conscious. Inviting the rigorous standards of maintaining B Corp status further motivates these founders to continue their social stewardship and not fall off the bandwagon. The world is indeed not indifferent.
Sounds Great, But Can I Just Become a Benefit Corporation Instead?
Sure you can. The uber-cool prescription glasses company Warby Parker is, and here’s why being a Benefit Corporation is a good thing: Quintessentially, a corporation’s first priority and mission is to maximize its profit to the benefit of its shareholders. A Benefit Corporation however, and by extension its Board of Directors, must consider the social and ethical components of any such decisions. A great textbook example cited by major business journals is when Unilever acquired Ben and Jerry through a hostile takeover. Ben Jerry initially rejected Unilever’s offer and instead accepted a lesser offer that embraced its socially conscious corporate mission. Unilever sued and won on the grounds that Ben Jerry had a fiduciary obligation to ensure the maximum return to its shareholders. Ben and Jerry lost control of their own company. If it had been a Benefit Corporation, Ben and Jerry may have been able to prevent such a takeover.
The Benefit Corporation is a legal creation barely out of its diapers, so before you dismiss it outright, think about how you want to conduct business and what type of company you wish to run – for yourself, your employees, and your stakeholders. An old Nigerian proverb says, “better a single decision maker than a thousand advisors.” Your key decision now may very well determine the direction of your company for years to come, with benefits that is.
I’m going to be honest from the get-go: I hold a legal degree, and I’ve spent a long time advising startups after they’ve already gotten themselves into a small (or big) situation. I’ve worked as both a large-firm lawyer and a boutique lawyer. And I think large law firms are great — I just don’t think they happen to be the right choice for every startup.
That said, as an entrepreneur myself, I’m also a big fan of working with service providers that want to grow with your company.
Getting the right legal counsel for your company is like getting a great base for your startup, but you have to know how to pick the lawyer or firm that will best serve your goals. Here are five questions to ask as you embark on your own search:
1. Do they understand your industry?
My biggest gripe with lawyers is that they often don’t understand their clients’ industries. Many firms are excellent with contracts and document preparation, but if they don’t understand the industry your startup lives in, they aren’t going to be the best counsel for you, because they simply won’t know what to look out for.
So test their industry knowledge a little, and make sure they get your business. We’re in the fashion world at Viciare NY, which means we looked for someone who understood everything from international textile buying to copyrights, manufacturing contracts, and e-commerce. If our legal counsel doesn’t know key industry information, they won’t know what to advise you except what you tell them. And in that case, what’s the point?
2. Have they worked with early-stage startups?
Early-stage startups have very different legal needs from mature startups. For early-stage companies, the focus has to be on building a legal infrastructure for the company; for later-stage companies, the focus is often on securities, funding, etc.
If a firm hasn’t worked with early-stage companies, it may not understand what goes into that architecture. I once worked with a startup that had incorporated a C-Corp in Delaware and then registered in New York as a foreign entity – and, as a result, was paying twice the fees and taxes it would have if it had chosen to register in only one state. It just did what its lawyer said to do, without having the lawyer explain exactly why he/she was advising this course of action. The startup folded after two years and paid taxes even without having made any money.
Remember, a lot of firms work with very established clients. Many don’t have the experience of setting up a business from scratch. Look for a lawyer that understands the inception-to-launch process.
3. Which lawyer will actually be working on your matter?
This is critical, because you may get a great presentation by an experienced partner and find out later that the person handling you as a client is a first-year associate who doesn’t understand exactly what your company does.
Those conversations become very annoying, very quickly.
4. What is their fee structure?
Startups want everything for extremely cheap or for free – especially when it comes to service providers (hey, it’s bootstrapping – we get it!). But when someone starts offering you free legal services, I want you to consider this: What are they getting out of it?
If you can’t find an answer, then there is something wrong with the scenario. Last year, I ran into a startup that was two months away from closing a funding round and was in a panic because its lawyers were now demanding legal fees in excess of $30,000. Until that point, the lawyers had been working on the startup’s matter for a mere $150/hour (a heavily reduced rate). What the startup had not realized was the firm was not bound by any obligation to continue that rate – and exactly when the startup needed lawyers the most, the firm upped the charges.
This is not all that unusual — it’s just rarely discussed. There’s a reason they call us sharks — because lawyers are good at knowing the right time to get what is needed.
So look for legal counsel that is up-front with its fee structure or has a startup legal package.
5. Do you actually like the person you’re talking to?
This is something we all forget to consider: Do we actually like the lawyer we’re hiring? In any hiring decision, personality matters. If you don’t want to talk to your lawyer more than you absolutely have to, they not be the right person to represent and advise your company. Treat your legal counsel like any other hire.
- Sardar Law Firm LLC is a startup focused law firm in New York City that has worked with over 60 startups.
ORIGINALLY PUBLISHED IN: http://venturebeat.com/2013/02/09/5-crucial-questions-to-ask-before-hiring-a-startup-lawyer/#duYA5QMpL8KkWwbb.99
Every now and then we have meeting with an individual in the market for investment and they say, “We want to make sure our stock does not get diluted.” We nod and agree, and then they say, “Could you explain to me what diluted stock is?”
So here it is: the Sardar Law Firm attempt at creating a simple explanation of stock dilution.
by,Sheheryar T. Sardar, Esq. Sardar Law Firm LLC
New York, New York Core Practice Areas: Technology, Corporate & General Counsel, Startup Law, Project Finance, VC/PE, Arbitration/Mediation, Entertainment, and Human Capital
Disclaimer: The contents of this article shall not to be considered legal advice or to create any lawyer-client relationship. The article may contain attorney advertising.