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2 Apr

Sheheryar Sardar and Benish Shah were recently on a panel regarding Equity Crowdfunding in the wake of the Jobs Act.  As Title III of the Jobs Act is what directly affects most equity crowdfunding platforms and startups looking to use them, we thought it would be helpful to summarize some of the main points:

1.  Deals will now allow investments from non-accredited investors.  The term “non-accredited investor” is thrown around a lot, but most people don’t know what it means.  Non-accredited investors are those that are below a certain threshold of income that prevents them from qualifying as accredited.  In simple terms – it’s the SEC trying to protect people from losing all their money in a bad investment.  To do that under Title III, there are camps on how much non-accredited investors are allowed to invest in a given year:

  • For income below $100,000, invest a max of $2,000 or 5% of income or net worth
  • For income over $100,000, invest a max of 10% of income or net worth
  • Investments made in a Title III crowdfunding transaction can’t be resold for a period of one year

2.  Restrictions on how much you can raise.  Companies are restricted to raising $1 million in a 12-month period.  For acceleration purposes, this limit may have larger consequences for companies.

3.  High costs associated with raising under Title III.  Higher compliance and reporting costs that in many instances require an audit.  Let’s break this down in real world terms:  your company is trying to raise $300,000.  You will end up shelling out approximately $20K before you can get approved to raise, and then around $80K+ if you raise.  For a startup looking to raise a seed round, almost half of it may end up going to fees.

4.  Disclosures. Disclosures. Disclosures.  Companies raising under Title III of the Jobs Act must disclose financial statements of the company that, depending on the amount offered and sold during a 12-month period, would have to be accompanied by a copy of the company’s tax returns or reviewed or audited by an independent public accountant or auditor.  Disclose officers and directors information, and owners of 20 percent or more of the company.  They must also disclose: use of proceeds, price to the public of the securities being offered, target offering amount, deadline to reach offering amount, and whether excess investments will be accepted.

 

Questions about equity crowdfunding Email Sheheryar Sardar at sardar@sardarlawfirm.com.

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5 Crucial Questions to Ask Before Hiring a Startup Lawyer

28 Jul

5 questions to ask before hiring a startup lawyer

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

Understanding Dilution

24 Jun

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.

 

stock dilution infographic sardar law firm nyc

 

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.

Top Six Legal Issues Facing Today’s Online Media Companies

18 Apr

legal issues being faced by online media companies

Social and digital media has grown exponentially in the last decade, with enterprising companies creating uncontested market space in the online and digital industries. Whether your company is engaged in a new search engine, an analytics platform, or ecommerce; social media as a tool has become a necessary component of both the customer acquisition process and marketing from within the company.  Without viral capabilities and digital readiness, companies are unable to harness quick user engagement with their platforms and services. Further, now many individuals within a company serve as brand ambassadors through social media, often listing where they work on Facebook, Twitter, Foursquare, Quora, among others.

 

Due to the fast-paced nature of social media, companies often overlook the legal issues inherent in social media that serve as silos of protection.  While staying ahead of the competition is paramount, creating and maintaining well-drafted legal content will reduce the chances of getting mired in disputes that deviate attention from the core focus of growth.

 

Here is a brief list of legal issues to consider:

 

1) Terms of Service.  If you have a website or ecommerce platform, you will need to publish terms of service or use on your website, to put customers and users on notice as to the various limitations and conditions to which they are consenting by using your site. This document will serve to govern the relationship between your company and the audience that interacts with your site. Each Terms of Service is unique to the industry and nature of your company. For example, terms for a fashion ecommerce site will differ greatly from a software development business.

2) Privacy Policy.  A sound privacy policy is important for purposes of maintaining certain state, federal and even international regulatory compliance. Privacy has become a politically charged topic within the digital and electronic landscape, with Congress and international bodies penalizing companies that violate certain privacy laws.  For example, if you collect customer information such as addresses, emails or demographic data, you may need to clearly identify the purpose of such an activity.  In the absence of a well-constructed privacy policy (and thereby user consent), your company may be subject to liability or run afoul of the law.

3) Non-Compete and Non-Solicitation.  Consider protecting your company by prohibiting your partners and employees from competing directly with your company immediately upon their departure. A Non-Compete provision would be framed within a specific time period and limited to a geographic area, but these clauses are very important because these key individuals may possess inside knowledge of your competitive advantage.  A Non-Solicitation provision would prevent ex-partners or employees from soliciting high value colleagues and/or customers away from your company.

4)   Moonlighting and Loyalty:  Moonlighting and Loyalty addresses employee activities outside of the normal course of business. This clause may or may not be necessary, depending on the nature of your business. A lawyer can assess your contract’s needs once you discuss your commercial goals together.

5)  Ownership of Intellectual Property:  You may want to protect any processes, templates, systems, or methods created by an employee, by retaining any IP rights over these items. A contract at the outset will provide necessary protections so that any work products created under your business do not ultimately go to a competitor.

6)  Use, Licensing, Technology Transfer:  Companies often look to outsource their products or services through digital or online channels, often with third party agencies and partners providing additional marketing, acquisition or branding services. Partnerships are often created to facilitate such business development. In this context, contracts protect the use and licensing of your work product so that it isn’t leaked or misappropriated.  A strong vendor/services contract will make your transition to the next stage of development that much more efficient while protecting the proprietary nature of your company’s work product.  Similarly, if you are interested in commercially exploiting your methods, processes or inventions (Technology Transfer), you will need contracts to protect your financial interests.

Spending a little time developing your legal architecture is a strategic investment in your company. Failing to do so may result in a costly dispute that takes valuable resources, including your time and attention, away from the company.  Not implementing a sound legal platform is a risk far too great for any company to take, as the landscape of digital and social media continues to evolve.


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.

VC Financing for Startups: Understanding Cost Drivers

12 Dec

By:  Benish Shah
Sardar Law Firm LLC
New York, New York
Core Practice Areas:  Fashion/Retail, E-commerce, Commercial Litigation, Art Law, Startup Law, Social Media, Mergers & Acquisitions, and Corporate & General Counsel
 

There has been a lot of debate on the legal costs associated with financing rounds for startups.  Fred Wilson’s challenge to startup lawyers called for legal costs to be reduced to $5,000.00 for a seed financing round.   The issue, brought up by many lawyers is this: (1) large firms are not going to drop their rates from $17k+ to $5k because their costs are too high based on the army of associates working on each piece of the matter; (2) startup focused firms aren’t well known enough to VCs but they could get the work done in between $5K-$10k because they are lean and understand the startup world because they themselves are startups.

To understand what drives legal fees (aside from an army of associates) during a financing round, it’s important for startups, especially those going through their first few rounds, to understand why a transaction costs more than a few hundred dollars.  It’s also important to understand why choosing a firm that’s a good fit for a startup matters in these rounds.

Leveraging Knowledge 

Few things can hurt a startup more than a vague or hurried term sheet that will result in increased costs down the road.  To avoid these problems, smart entrepreneurs and investors involve counsel early on in the term sheet process to make it as smooth as possible.  For entrepreneurs, they need to understand that a VC’s counsel is not the startup’s counsel and that they absolutely need their own counsel as well. It’s like buying an insurance policy that will cost your startup much less than potential future problems stemming from vague term sheets.

Involving attorneys from the get go also allows lawyers to provide increased value-add through market knowledge; entrepreneurs and investors can leverage that knowledge and experience for their own benefit.  For startups, they can also discuss with their lawyers what is “normal” or “market-value” and what safeguards they should be pushing for, and what they can be more lenient on.  Lawyers have a knack for seeing what can cause a potentially massive lawsuit down the road, but clients need to involve them early on to leverage such knowledge.

Understanding Due Diligence

In most funding rounds, costs start increasing due to due diligence required by investors before a deal is closed.  This means due diligence on the following (if not more) subjects:

(1) Litigation Diligence:  Investors want to ensure that there are no pending or threatened suits against the startup that could materially reduce its value  (they cannot just take your word on this).

(2) Tax and Liability Diligence: Investors need assurance that the startup is up to date on all taxes and potential obligations.

(3) IP Diligence:  The assurance that each IP the startup claims as its own really belongs to the startup and not anyone else. This also includes review of whether there are any open source or similar issues, that all former/current employees/consultants/contractors/founders have legally and properly assigned rights to any IP to the startup, and if reverse vesting of common stock held by key employees is necessary.

(4) Employee Diligence: Ensuring that employees/contractors/consultants/founders have signed properly drafted non-compete, non-disclosure and non-solicitation agreements.  Also ensuring that employees & contractors are properly classified to avoid potential liabilities.  

(5) Corporate Governance Diligence:  Investors want to ensure that the entity is properly formed and corporate governance matters have been properly followed (i.e. startup’s corporate records must be in order; if they are not, lawyers and the startup must go into overdrive conducting a “cleanup” to ensure that everything is up to date, properly documented, and ready for inspection – this can add significant costs and often can be delay, or kill, a deal closing).

(6) Stock Option Diligence: Legal diligence to ensure that all stock option grants were properly approved and 409A compliant; this may also result in a change to the price per share if contemplated on a “pre-money valuation” basis.

(There are more aspects that can drive up the costs, but those listed above can be some of the most time-consuming).

Setting a Cap

Anytime a startup (or an investor) hires counsel, they should ask for a cap on the legal fees; SLF works to ensure that in closing deals such as early financing rounds, our legal bill comes under the cap, however other firms have been known to bill at the cap regardless of complexity or simplicity of the deal.

If an attorney or firm does not want to talk in terms of a cap on the legal fee, it may be prudent to search around a little more.

For more information on startup legal services, email us at sardar@sardarlawfirm.com or join us for a class taught by Benish Shah and Sheheryar Sardar.

 

 

Granting Equity to Service Providers: What are the types of equity?

21 Aug

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

 

There are 4 types of equity possibilites for C-Corps and S-Corps for purposes of granting equity to service providers.  It’s important for startups to understand the 4 types of equity possibilities in order to make the best decisions on which type to grant, and how much to grant.

(1) Non-Qualified Options  (NQOs)

NQOs are stock options that are not qualified as ISOs under the Internal Revenue Code.  Startups like NQOs because they provide a flexible way to attract and retain both employees and other service providers. For employees/service providers, NQOs represent an opportunity to grow wealth, with tax consequences deferred until the year the option is exercised.

(2) Incentive Stock Options (ISOs) 

ISOs provides unique tax benefits as a stock option, however with significant tax complexity.  It has become popular in the past few years, almost to the level of non-qualified stock options (NQOs). With ISOs, the drawbacks include: (1) you must report taxable income at the time you exercise the option to buy the stock, and (2) the income is treated as compensation, which is then  taxed at a higher rate than long-term capital gains. However, if you hold the stock long enough to satisfy a special holding period, it may be taxed as long-term capital gains instead of simple compensation.

There are also additional restrictions on the issuance of ISOs:

(1) ISOs can only be granted to employees, pursuant to a shareholder approved plan;

(2) ISOs must have a term not greater than 10 years (or 5 in certain circumstances);

(3) ISOs must have an exercise price not less than fair market value (or greater); and

(4) Not more than $100K in value can vest in any one (1) year time period.

There is also the issue of AMT, alternative minimum tax, which is a more complex calculation that you should review with an accountant.

(3) Restricted Stock/Stock Units (RSUs)

With RSUs, the company holds the shares to see if the employee continues working long enough to receive the shares and transfers the shares at that time.

Because the shares are not transferred at the grant date, the employee is not entitled to any dividends from the time the RSU is granted until the shares are transferred.  Also, since there is no actual transfer at the time the shares are granted, the employee cannot convert the future appreciation from compensation income to long-term capital gain.

As for the tax consequences, they are less complex: (1) when the RSU is granted, there is no tax to report; (2)  when the shares are transferred to the employee, the shares become vested and they need to report compensation income equal to the value of the shares at the time of transfer.

(4) Phantom Equity

This is a little known type of equity, but it’s been rumored to be the “next big thing” in employee compensation. Phantom equity pays a future cash bonus equal to the value of a certain number of shares.  Phantom equity provides a cash or stock bonus based on the value of a stated number of shares, to be paid out at the end of a specified period of time.  This can be based on a variety of complex, or intelligently drafted, contractual agreements between the employer and the employee/provider.

Stay tuned for Part II of this article: What type of equity to grant. 

Upcoming Classes:

Crash Course: Creating Your Pitchdeck (August 30, 2012 at SLF Offices) – Register HERE 

What past students have said:

“Great personalized and relevant advice! Made me and my partner see things in a whole new way. ” – Mike Abadi

Fundamentals of a Startup (September 19 & 26  7:30-9:00 pm) – Register HERE

What past students have said about this class:

Benish and Sheheryar provided many useful insights about the startup world and launching a company. I thought I knew the best way to launch before the class, but they helped fill in the gaps in my knowledge about forming a corporation, raising capital, and other various legal considerations. Highly recommended.” – Chris Macke 

“This is a great class to understand the basics of how to establish and grow a startup from the legal/investment perspectiveBenish and Sheheryar are both passionate about the startup world and are able to provide an angle that most entrepreneurs would not naturally consider.” – Ashek Ahmed

Great breakdown of legal advice for a startup– the information was personalized, relatable and clearly presented. My partner and I expected to walk away confused, but we left knowing the right moves for our business.” – Sisi Recht

**This post is NOT intended as tax advice; please see disclaimer**

Angel Financing: 4 Things Startups Must Know

20 Jul

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
 
 

Angel financing is loosely defined, as it runs the gamut in terms of executions.  We’ve seen angels simply hand a check to a startup; while other angels hire aggressive large law firms with armies of associates working on an angel financing round.

Because the experience with angel financing can vary, it’s important for startups and entrepreneurs to understand some of the basic legalities behind this type of financing.  Below are 4 tips as a starting point.

(1) Understand the Key Business Terms. This is not an option, it’s a necessity in any financing round.  Just because an investor is called an angel does not mean they represent those famed characteristics completely.  For a preferred stock financing (this is most likely to occur when there is an aggressive large law firm behind the angel in a deal) key business terms include:  (1) pre-money valuation; (2) liquidation preference terms; (3) anti-dilution provisions; (4) Board composition; (5) dividend-related issues; (6) vesting imposition on founders’ shares; (7) protective provisions.  Take the time and learn the terms; grab a book or talk to your attorney.  Of course, having a corporate attorney versed in startup financing will be a great help here, but it’s in your best interest to have at least a base knowledge of the business terms.

(2) Push for Convertible Notes. For startups raising less than $800,000, its generally not in the entrepreneur’s best interest to issue equity in terms of preferred stock.  In fact, the entrepreneur is best served by issuing convertible notes, not equity, to angel investors.  First, issuance of preferred stock is costly, complicated and time-intensive.  It involves company valuation and potentially high-dilution for startup founders.  At the initial stages of your company, that’s not what you want.  In contrast, a convertible note would allow the angel to loan the money to the startup, with automatic conversion into equity after the first institutional funding round (Series A).  The convertible note allows the startup to keep their costs low, and defer costly valuation to a larger funding round.  If an angel insists on equity at the outset, push for issuance of common stock – which places the founders and the angel in the same boat – and try to avoid preferred stock.

(3) Never accept terms with personal liability.  It seems common-sense that founders should not be personally liable to angel investors if their company fails (barring fraud of course).  However, it’s a mistake that is commonly made by inexperience startups and entrepreneurs.  There are also inexperienced business attorneys (that don’t work in the startup world) who will request that founders personally take on certain personal liabilities.  Make sure your ready to drop a deal if they are pushing for personal warranties of any kind; and have your own counsel so they can push back on such terms.  The tip here is simple:  never agree to potential personal liability.  It’s not worth it.  And it tells you something about the angel as well; every sophisticated investor knows that angel investing is high-risk, high-reward.

(4) Due Diligence on the Angel.  The hardest thing to do when someone across the table wants to write you a check that can breath life into your idea is to step back, take a moment and think “why are they handing me this money?”  The most common mistake entrepreneurs make in these financing deals is the failure to investigate the person(s) offering to give them money.  The angel isn’t just in the picture for the moment of handing over a check; he or she is essentially married to your company for years to come.  Check references, see what else they  have invested in, and talk to those startups as well.  Make an informed decision as to whether this angel is the right type of investor for your company.  You don’t want to end up with an angel who is a controlling jerk with a bad reputation in the investment world; it could have an impact on future investments, and the future of your company.

For more information on startup legal services, email us at sardar@sardarlawfirm.com or join us for a class taught by Benish Shah and Sheheryar Sardar.

Upcoming Classes:

Pitching Your Company: Hands On Workshop (July 25 7:30-9:00) – Register HERE 

What past students have said:

“Great personalized and relevant advice! Made me and my partner see things in a whole new way. ” – Mike Abadi

Fundamentals of a Startup (August 1 & 8 7:30-9:00 pm) – Register HERE

What past students have said about this class:

Benish and Sheheryar provided many useful insights about the startup world and launching a company. I thought I knew the best way to launch before the class, but they helped fill in the gaps in my knowledge about forming a corporation, raising capital, and other various legal considerations. Highly recommended.” – Chris Macke 

“This is a great class to understand the basics of how to establish and grow a startup from the legal/investment perspectiveBenish and Sheheryar are both passionate about the startup world and are able to provide an angle that most entrepreneurs would not naturally consider.” – Ashek Ahmed

Great breakdown of legal advice for a startup– the information was personalized, relatable and clearly presented. My partner and I expected to walk away confused, but we left knowing the right moves for our business.” – Sisi Recht

 

 

 

 
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