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.

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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.

 

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.

Critical Questions for Co-Founders

12 Feb

As the wave of startups continues to heat up, many entrepreneurs are entering into companies without asking the right questions.  Often, they don’t know what questions are absolutely critical in order to move forward on solid footing.  We at New York City’s startup focused law firm, SLF, sat down and pulled together the 3 top questions co-founders should ask.

how will shares be divided

This comes down to the basic architecture of ownership: who own’s what percentage of the company.  Deciding this early on prevents ownership problems from arising as the company grows. The answer is not always easy, because it’s rarely ever going to be divided equally down the middle.  So have the hard conversations.

co founders leave startup

This is another difficult question, because: (1) no startup co-founder wants to admit that they would leave; and (2) it’s hard to imagine why anyone would want to leave an innovative idea.  The unfortunate truth is that it does happen, and it happens often.  In fact, it’s better that a co-founder that is not fully committed to the startup takes his/her leave instead of holding the company back.  Map out the steps that can be taken if a co-founder decides to exit.

co founders salary

Even though co-founders may not be drawing a salary at the inception of the company, there should always be a plan for when salaries will be drawn and how much each co-founder will get paid.  There should also be a frank discussion about who can change compensation, and when compensation can be increased/decreased.  This should include salary, benefits, commission, etc.  The more thorough you are at the outset, the less ambiguity will exist years from now.

More questions?  Come to the Startup Fundamentals class with Sardar Law Firm.
startup basics class nyc legal fundamentals

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Startup Basics Seminar: legal fundamentals

11 Feb

startup basics class new york city

Instagram’s New Policy: Yes, it does mean what you think.

19 Dec

You do have the rights to your Instagram photos, but you share the rights to your photos.  That means when someone pays Instagram to use your photos, you can’t do anything about it (like litigate.)

There’s been a lot of talk on the web about two issues related to Instagram’s newest policy updates:

The fact is, both are pretty correct.

instaface-facebook-instagram

Yes, the terms are not that different. But what does that mean exactly?

It means that from the get go, Instagram reserved the right to use your photos in the public space.  Those Instagram users that are not private are aware that almost anyone can access their photos, either through the app or the web version.  That’s the idea behind the “open-web” theme propagating by companies like Instagram and Facebook.  Their concern is not user privacy, and to their credit they never pretend that it was their number one priority.  They are focused on bringing you an open platform to be social and create new social ties; if you are concerned about your privacy on social media sites, you can do one of two things: (1) get off the interwebs; or (2) memorize those privacy settings so you know what to do and not do to keep your data safe.   (Yes, we said all of the interwebs, because even Google tracks your searches in order to give you a better user experience).

While Instagram has always reserved the right to use your personal photos in their own advertising campaigns, what’s got everyone in a tizzy is that the new language seems to indicate that Instagram can now sell your photos to third parties.  That’s where it gets interesting.

Instagram, technically, does have a right to “sell” your photos.

We read this great article yesterday in The Verge that said, No Instagram does not have the right to sell your photos – except that it does.  The article pointed out that companies can’t take a picture of you and slap their logo on it because that goes beyond “displaying” the photo into the world of modifying the photo.

But what advertisers can do is pay Instagram to take user photos and display them on their own site or advertising real estate.  This means, if you take a photo of your baby wearing Baby Gap, then Baby Gap can pay Instagram to use your photo and display it on their site.  They can say something like, “Look at the cute babies wearing Baby Gap!”  There are deeper rules as to whether they can modify that photo (which they can’t), but that’s not enough to make parents feel safe about using Instagram to take pictures of their families.

Here’s the biggest issue: people don’t want their personal photos displayed on a company’s site/ad real estate because, well, people don’t like to be used without getting paid and without consent. In addition, many users post pictures of their families to Instagram –  they don’t quite fancy having their 12-year-old’s picture on a company’s advertising.  This isn’t the generation that sees their picture somewhere and thinks, “Oh my God that’s awesome!”  This is the generation that says, “That’s not okay.”  We’ve had clients file complaints with multinationals based on these scenarios.  It’s not good for anyone, really.

So why the outrage?

The most interesting argument we’ve heard is, “Well you are consenting because you signed up for Instagram.”  Yes, that’s true.  Absolutely.  But people are angry because they either have to agree, or they can’t use the service.  That’s because it’s not a free market contract; you cannot call up Instagram and negotiate your own contract terms with them.  It’s boilerplate and that’s that.

And when you take away a real choice, people get upset.  It happens more often than not with web startups – because it’s a tension between how to make money and how to keep users.

What now?

Instagram has come out and try to do damage control.  They are saying that they will not be selling user photos; but until they release an actual policy stating this, it’s still up in the air and the terms stand where they are.

For us – ours is an office divided.  I, as a litigation attorney, am pretty positive I’ll be deleting my Instagram account.  As for our corporate partner that knows all things tech-startup, he says he will be keeping his account.

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
 
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

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.

 

 

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