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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

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B the Change You Wish To See: Is a Benefit Corporation Worth It?

8 Oct

benefit corporations

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?

Why Bother Obtaining B Corp Status?

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.

Have more questions?  Email Sheheryar Sardar of Sardar Law Firm LLC.

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



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.

Starting a New Company? Here’s Your Checklist.

29 Apr

starting your own company lawyer new york

Ever wonder what’s required or recommended to set up a new company? Yes, incorporation is an obvious first step, but there is much more to delineating a company as a separate legal entity than just filing registration papers with a state.  Depending on the type of entity you want to set up and the industry you’re in, some aspects may change, but the checklist below should be fairly universal and standard.  Check it out:


1.  Choose Entity Type.  Are you a sole proprietor or partnership? Either way, you’ll then need to decide whether to choose an LLC or a C Corporation, the two most common types of entities. An LLC is a hybrid between a partnership and a corporation, with limited liability, and is easier to maintain.  A corporation can issue shares/stock and may be a better fit if you are in the tech space, but it does have many compliance features.


2.  Choose State of Incorporation.  Where do you live or work? Will your company have offices? Will it look to seek outside funding (angel/venture capital)? Or will it be a small brick-and-mortar business? While Delaware is the top destination for incorporation, it should not be considered the de facto state of incorporation without a thorough review of your goals.


3.   Designate a Company Name.  Irrespective of what name you choose, you need counsel to conduct due diligence on any existing trademarks and domain names.  Failing to do so may result in serious adverse legal consequences. The last thing you want is to be dragged down in court when what you really should be focused on is your company’s growth.


4.  Identity Founders, Ownership Percentages.  If you have partners or “co-founders,” you will need to memorialize this.  You’ll also need to designate ownership percentages, with corresponding founders shares if the entity is a C Corp.  If you are issuing shares, are there vesting proscriptions applicable to those shares? Many founder teams seek to incentivize their performance over a specific duration of time with a vesting schedule so not all stock is transferred at once.


5.  Founders Roles, Responsibilities and Expectations.  The number of instances partnerships have gone to court over these issues (often under breach of fiduciary duties) is astounding.  What are the founders’ roles and expectations of each other? What titles and work commitments are in place? Is there a hierarchy (there should be)? Are any founders financing the new company? How does this impact expectations?


6.  Articles of Incorporation/Formation and Bylaws.  You will be filing with the state of your choice, articles or certificate of incorporation/formation, designating the name of the new company and the number of shares authorized to issue with a par value per share (if C Corp). Often, you’ll need a registered agent to serve as a local designee in that state. You will need bylaws, in addition to organizational consents.  All of these documents serve two purposes: (1) provide for clarity in terms of management and operations of the new company; and (2) comply with state law to show the world the new company is a separate legal entity and not a mere extension of your personal conduct and activities.  On this note, you should create an annual budget for entity registration/registered agent and annual report expenses that will come up once a year in the state of incorporation. This also includes franchise taxes payable to the state.


7.  Founder’s Stock Purchase Agreement (SPA) and Option Pool.  If C Corp., presumably you will be issuing shares to yourself and your co-founders. This is subject to an SPA, which should comply with or be exempt from, state and federal securities laws.  You would be purchasing the shares from the company, either through a monetary payment or the assignment of technology.  If you want to issue shares to early employees or key individuals to incentivize their work, you are required to have an option pool that designates a portion of the authorized shares for this purpose; the same goes for investors.  Don’t forget that 83(b) election under IRS rules which allows for taxation at par value of shares issued as restricted stock. A strict 30-day rule applies for mailing an 83(b) election notice after the date of restricted stock issuance.


8.  Operating or Shareholder Agreement.  If an LLC, you need an operating agreement. If C-Corp, a shareholder agreement.

9.  Intellectual Property.  You will very likely need to file a trademark for your name and any tagline, and patents for any differentiated technology, software or methods.  The U.S. is essential, and depending on your goals, Europe and other regions as well.  You may need a Proprietary Inventions Agreement to protect your inventions from yourself and your co-founders, and to assign them to the Company.

10.  Employment or Independent Contractor Agreements.  If you’re hiring employees or seeking services from independent contractors (ICs), you need contracts.  For employees: role/title, compensation structure, expectations, termination (New York is an “at-will” state), and any unemployment benefits/workers compensation compliance.  For ICs, you would outline the services to be rendered and expectant results, compensation, disclaimer of any tax or unemployment liability, among other critical provisions.  Non-disclosure and non-competition covenants should be standard and included.  ICs will often include consultants and advisors.


12.  Accounting and Tax Requirements.  You do plan on making money, right? Then you need an accountant and likely a bookkeeper. All those federal, state and local tax requirements will creep up on your soon enough. You may need to make quarterly payments.


13.  Conducting Business. Plan on operating in one state or multiple states? You may need to separately register your company in different states to conduct business.


14.  Insurance and Risk.  This is highly dependent on the industry your company operates in.  If you’re a boutique hedge fund or law firm, you should absolutely make sure any insurance requirements are met, in addition to any risk mitigation procedures and protocols.  If you’re a retail or restaurant establishment, other insurance procurements may be necessary.

15.  Secure a Federal EIN and a bank account.  For tax purposes, the federal government requires an EIN. The EIN will also enable you to open a bank account.


While your new company may have other legal matters and requirements to address, this checklist should serve as the basic architecture to get started.  Starting a new company can be one of the most exhilarating and rewarding experiences of your life, but knowing the practical nuts and bolts of setting it up and protecting yourself will be a key feature of your new enterprise’s success.



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 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**

American Investors & Middle East Private Equity

29 Jun

The current economic climate has forced American investors to reassess their general investment strategies in the Middle East private equity market (MEPE). Legal protections are becoming more pronounced due to the tightening of credit. Vested parties are conducting critical due diligence, assessing both the creditworthiness of the debtor parties and Return on Investment (ROI).

In this capacity, legal conditions have become more nuanced than ever. Investors want iron-clad financing contracts, which are affecting the increased use of vendor financing and earn outs. Vendor financing refers to a loan from one company to another which is used to buy goods from the company providing the loan. The benefits to the vendor include increased sales and earned interest, while the risk involves potential payment delay or default. Earn outs, by way of example, involves the acquiror company paying 60–80% of the purchase price up front, with the remaining 20–40% structured as an earn-out and paid out over time as the acquired company achieves certain levels of sales or profitability.

In both vendor financing and earn outs, financial sponsors are seeking to increase value-added investments in tight debt markets. One solution may involve larger equity checks and the use of mezzanine financing, although both will result in higher transaction costs and decreased leveraged returns.

Incorporating legally accurate and umambiguous definitions and provisions is therefore highly encouraged, particularly when defining the parameters of measuring future financial performance. This will minimize disputes, present and future costs, while preserving strict contracting.

Improving Corporate Governance

Corporate governance refers to a set of processes, customs, policies, and institutions affecting the way a company is directed, administered or controlled. It also includes the relationships among the many stakeholders involved and the goals for which the corporation is governed.

Applying the concepts behind corporate governance to the Middle East private equity market, companies and institutions serving as investors must continue to provide meaningful minority protections, enhanced risk management systems and timely and reliable information flows. In this financially volatile climate, private equity must manage working capital and cash flows, while focusing on the operating results of portfolio companies.

Financial sponsors will therefore pay greater attention on contractual rights to facilitate leadership and oversight, thus ensuring prompt financial reporting.

However, investors should be cautioned that insolvency laws in the Middle East are poorly understood and rarely tested. The learning curve remains steep, with sponsors and investors continuously seeking guidance on various alternative scenarios. The widen breadth of such analysis may impact the structuring and documentation of deals. The investor will need to pay strict attention to contract rights regarding exits, deadlocks, dispute resolution and rescue funding.

Increasing Value-Added Legal Services

Value added advisory legal services in these difficult times are highly recommended due to the need for thorough documentation and advice regarding new private equity structures. The Middle East has seen a sharp increase of legal services over the past decade due to the increasingly sophisticated private equity client base. International best practices and industry standards have been adapted to a region characterized by family ownership, minority investments, carve outs and foreign ownership restrictions.

This year has presented a new set of legal challenges for private equity. While deal pipelines and investment risk may have weakened, private equity should gradually emerge into a formidable force for Middle East financing, particularly in sectors that are relatively recession resistant such as healthcare and education. Depressed sectors such as hospitality and real estate may allow for bargains. As long as price volatility and credit tightening continues, private equity players should continue to retain legal services as an integral component of their business strategy.

By, Sheheryar T. Sardar, Esq.
Sardar Law Firm LLC
New York, New York

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