San Jose Business Lawyers Blog

Articles Posted in Start-Ups & Financing

Many startups in the tech sector are idea-rich and cash-poor, meaning that their most valuable (and often only) asset is their intellectual property that may have the potential to be worth a substantial amount of money. While some startups are able to move their ideas from concept to deployment with relatively little labor involved, many of these ideas require the assistance of developers, programmers, engineers, and marketers, all of whom are skilled professionals who can easily command salaries well into the hundreds of thousands of dollars per year.

For this reason, many startups are faced with the issue of how to pay their employees during the development and launch phase, before they are generating any revenue. Of course, one option is to borrow the money or to seek investors – a solution that has significant pros and cons which should be considered. Another very popular option is to offer employees equity shares in a company in lieu of cash compensation. In some cases, this may take the form of equity for a lower salary than they would normally expect, while in others an equity share may be the only compensation they receive.

There are many issues that tech entrepreneurs and founders should consider when offering equity as compensation. These include the following:

  • How to issue equity – Equity in a company can be issued in a variety of ways, including common stock, preferred stock, stock options, or even being made a limited partner. These options all have different tax and legal consequences which should fully be explored with legal counsel prior to deciding which one to use.
  • A vesting schedule – In many cases, the success of a particular employee’s contribution to a venture requires a long-term sustained effort, and people have been known to grow tired of working when they seemingly are receiving nothing in return. To solve this problem, founders can issue equity shares that only vest after a certain period of time, ensuring that employees are incentivized to see the project through.
  • Dilution of current ownership – It is important to remember that every time the owners of a company give up equity, they are diluting their ownership stake in their own company. While this may not be an issue for some time, it is an important thing to consider as more and more employees start to receive equity as a form of compensation.
  • Resale restrictions – Many startups will not want employees that receive equity as compensation to sell their shares to a third party. For this reason, it may be necessary to have employees enter into contracts that require them to sell the equity back to the company upon the occurrence of certain events.

Call Structure Law Group, LLP today to discuss your options with a San Jose startup lawyer

Entrepreneurs and business owners who are considering using equity shares as compensation should fully explore potential legal consequences of doing so. The San Jose startup attorneys of Structure Law Group, LLP are qualified to advise tech startups at any stage of their growth regarding a variety of issues, including corporate formation, governance, equity compensation, and preparing for acquisition, just to name a few. To schedule a consultation with one of our lawyers, call our office today at 408-441-7500. Prospective clients can also reach us via email through our online contact form.

According to an article published by Forbes in late 2014, 42 technology startups potentially looking at a 2015 IPO had raised venture financing of at least $1 billion. With the potential for the creation of significant wealth in a relatively short period of time, it is no wonder that many people are seeking to enter the tech marketplace with new ideas that have the potential to impact the way that millions of people conduct their daily lives.

Incorporation is one of the major steps involved in the growth of a tech startup and involves creating a distinct business entity that can own intellectual property, issue stock, raise capital, and is subject to rules of corporate governance. Incorporation can be a complicated process and involves filing paperwork with the Secretary of State’s office in the jurisdiction in which you wish to incorporate.

What are Bylaws?

Simply put, a corporation’s bylaws are the internal rules that apply to the way that a corporation will be managed on a day-to-day basis. Bylaws provide the corporation’s principles, framework and policies for the overall governance of the organization. Although bylaws are not required to be filed with the State of California, it is perfectly possible to incorporate without having bylaws. However, it is not advisable to forgo having Bylaws for your company. Some of the more common issues that are addressed in corporate bylaws include the following:

  • The organization’s name, address, and purpose
  • Shareholder ownership rights
  • The process through which officers and directors can be removed
  • The issuance of stock
  • The composition of the Board of Directors
  • Job descriptions of corporate officers
  • The frequency, location, attendance requirements, and quorum requirements for Board meetings

Bylaws are Important to Even the Smallest Tech Startups

Part of the reason that tech startups are attractive to many entrepreneurs is the potential for explosive growth. One only needs to look at examples such as Facebook, Instagram, Twitter, or Google to see how quickly significant fortunes can be made in a matter of months in the tech sector. For this reason, and also due to the fact that many tech entrepreneurs are not seasoned business professionals, it is critical to put clear organizational rules into place that address how a tech company is to be internally managed. While friendships and aligned mutual interests may be sufficient to keep a tech startup conflict-free in the development stages, significant disagreements can and do often arise when millions or even billions of dollars are at stake.

Contact one of the experienced Silicon Valley startup lawyers of Structure Law Group, LLP today

Individuals who are considering incorporating their tech startup should retain legal counsel as soon as possible. In many instances, the advice of a Silicon Valley startup lawyer can help avoid significant issues related to corporate governance before they even arise. To schedule a consultation with one of the skilled attorneys at Structure Law Group, LLP, call our office today at 408-441-7500 or send us an email through our online contact form.

Very generally stated, the Board of Directors of a California corporation is responsible for the way in which the corporation is run. California law requires every corporation in the state to have a board of directors and, according to the text of the law, “all of the activities and affairs of a corporation shall be conducted and all corporate powers shall be exercised by or under the direction of the board.” While this may make is seem as if a company’s board of directors participates in the everyday management of the business, this is usually not the case, and corporate boards regularly delegate management of a business to individuals who may or may not be a member of the board.

How is a Board of Directors Formed?

When a company incorporates, it is required to file a document called “articles of incorporation” with the Secretary of State’s Office. This document establishes much of the basic identity about a corporation, including its name, how much stock it will issue, and the way in which the board of directors will be chosen.  California law requires that every board of directors has a chairperson or a president (or both), a secretary, and a treasurer or chief financial officer (or both), as well as any other named officers that may be required by a corporation’s bylaws.

Boards of Directors Generally Appoint a Chief Executive

While California law provides that the board is responsible for the management and operations of the company, in practice it would be difficult and onerous for a multi-member board of directors to make the decisions required for day-to-day operations. As a result, a board usually appoints a chief executive to run the company and whose performance is evaluated on a regular basis by the directors.

Boards of Directors and Fiduciary Duty

In publicly traded companies, boards of directors have a fiduciary duty to the shareholders of the company. A fiduciary duty is the highest that can be imposed by law and requires the party who owes the duty to act solely in the interest of the party to whom the duty is owed. For this reason, members of a corporate board of directors must always be careful to not engage in conduct that may place their own interests above those of a corporation’s shareholders.

Call a Silicon Valley business law firm today to schedule a consultation with an experienced attorney

Issues related to corporate law and governance can be extremely complicated and have a significant impact on the success of a business. For this reason, it is important for anyone that is considering incorporating to meet with an attorney to discuss his or her situation and ensure compliance with California’s Corporations Code. The lawyers of Structure Law Group, LLP are committed to providing startups and existing business with solution-oriented legal counsel and representation. Call our office today at 408-441-7500 to schedule a consultation with one of our San Jose corporate law attorneys. You may also reach the firm by email by submitting our online contact form.

Starting a business entity is a complicated issue that can be compounded by things such as founder’s stock and each founder’s respective contribution. Equity considerations can be extremely important in starting a business, especially when one founder contributes intellectual property (IP) rather than cash or labor.

What is Founder’s Stock?

Awarding a company founder stock is a relatively common practice in business formation, particularly in situations in which a startup is new and not yet generating income.  Doing so gives the contributing founder a measurable property interest in the newly formed entity. Typically, these stocks have a very low face value so that the founder receives a large amount of stock respective to his or her contribution.

Stock Can Be Paid For In Either Cash or Intellectual Property

At the time of issuing founder’s stock, each founder may be capable of contributing different assets to the newly formed entity. The assets contributed can be either cash or intellectual property. In fact, it is possible for a founder to contribute both cash and intellectual property.

The term “intellectual property” is very broad and includes a non-exhaustive list of assets such as business plans, novel technology, patents, trademarks, and copyrights. Because of the potential importance intellectual property may be to the entity, contributing intellectual property may be necessary. In 2012 alone, companies in intellectual property-intensive industries added five trillion dollars to, or 34.8 percent of, U.S. gross domestic product (GDP).

Potential Issues When Contributing Intellectual Property

Contributing Intellectual Property to a newly formed entity can be problematic. The majority of issues caused by contributing intellectual property deal with valuation and assignment.

Founders contributing intellectual property will want to confirm that the intellectual property is properly assigned to the newly formed entity. This means that the founder will want to ensure that he or she has completely transferred the title pertaining to the intellectual property to the company. Failure to do so can cause future legal complications due to reasons such as uncertain ownership of the intellectual property. Moreover, licensing the intellectual property as opposed to assignment, results in the contributor retaining ownership. This, in turn, can affect the overall valuation of the entity.

Perhaps most important to founders are the complications that can arise from the difficulty in attempting to determine the valuation of intellectual property. Since intellectual property is often a non-tangible process, technology, or idea, assigning a valuation can be difficult. Auditors may determine the value of the assigned intellectual property to differ from the original valuation. This could ultimately affect future stock pricing.

Potential tax ramifications are also of concern to founders contributing intellectual property. In order to be considered tax free, contributions to the entity must comply with Section 351 of the United States Tax Code. To comply, transfers made to the entity meet the following two conditions:

  • The intellectual property may be transferred only for stock (the transferor may not receive cash); and
  • After the intellectual property is transferred, all founders must collectively own the stock that comprises at least 80% of the voting power, and 80% of the total number of shares of each class of stock.

Failure to adhere to these requirements will not allow the contribution of intellectual property to be considered tax free. Instead, the contribution of intellectual property will be taxed as if this transaction was a sale to the entity.

Contact a Silicon Valley business attorney today for a consultation

If you are considering contributing intellectual property to a newly formed entity in exchange for stock, you should consult an attorney to ensure that your contribution is done correctly so as to best benefit you and the entity to which you are contributing. The lawyers of Structure Law Group are experienced Silicon Valley lawyers who advise entrepreneurs and business owners on a variety of topics. Call our office today to schedule a consultation, or send us an email through our online contact form.

Enforceable contracts that accurately describe an agreement between the parties are essential to any business, regardless of industry. Contracts arise in many relationships, including with partners, businesses, suppliers, employees, and client or customers, and a company of even moderate size could easily have thousands of contracts with various parties. For this reason, implementing a system to manage contracts and ensure compliance can significantly improve efficiency, improve compliance, and reduce the risk of incurring legal liability that can arise from contract disputes. In addition, an effective contract management system can help automate certain tasks, significantly reducing the risk of human error resulting in a costly dispute. Below are 4 ways in which implementing a contract management system can help businesses in every aspect of the contract lifecycle management process.

  • Keep all contracts in a central repository – This benefit may seem simple, but consider the inefficiency involved in an employee searching through files upon files for a contract that may have been executed years ago. An effective contract management system can keep a copy of the contract itself while also summarizing key facts regarding the agreement in a way in which they are easily accessible to those searching.
  • Create a database of standard agreement and pre-approved substitutions – There is no need to reinvent the wheel every time your company enters into a new agreement. Creating a standardized contract for use in recurring situations as well as standard substitutions that are pre-approved for use can significantly improve efficiency in contract drafting and execution.
  • Send out alerts to appropriate parties when certain triggering events occur – Many contracts have provisions that trigger significant obligations or forfeitures on a certain date or in the event of a particular occurrence. A sophisticated contract management system can alert the appropriate party to the existence of a deadline, renewal, payment error, or terminating event.
  • Provide insight into corporate obligations – An effective contract management system will be able to provide clear data as to a company’s obligations, whether they are being met, their performance in meeting obligations, and a more comprehensive view of the company’s performance as a while. In addition, it can provide legal counsel with insight as to areas in contract management that may benefit from changes.

Contact a San Jose business law firm today to schedule a consultation with an experienced lawyer

A comprehensive and well-maintained contract management system can increase efficiency and reduce costs for businesses of all sizes. In addition, automating certain tasks associated with the life-cycle of a contract has the potential to reduce contract disputes and legal liability. For this reason, it is advisable for business owners to discuss their contract management options with an attorney familiar with contract management systems and their implementation. To schedule an appointment with one of our experienced San Jose business attorneys, call the Structure Law Group today at 408-441-7500.

Many individuals who are citizens of foreign countries want to take advantage of the economic market in the United States. More specifically, California is a particularly popular state in which to start a business as a foreign national due to the close connections with the tech industry and the large and diverse population, among other reasons. If you are a foreigner considering conducting business in California, there is good news for you—neither residency nor citizenship is required to do so. Instead, you need only go through very similar steps as a U.S. citizen starting their own business with the state.

hand opens empty room door

The following are some important steps that you must take to start your California business:

  • Choose your business entity – This is an important decision with many implications and your options, including corporation, limited liability company, limited liability partnership, or limited partnership, should be carefully weighed. An experienced business attorney can assist you in choosing the correct entity for your type of business and your goals.
  • Choose a registered agent – You can serve as the registered agent yourself or select another person if needed, however, whoever serves as the agent must have a physical address in the state of California where they can accept legal papers.
  • File the necessary paperwork to qualify/register with the Secretary of State – The paperwork required to qualify/register with the SOS depends on the type of business entity you chose and a qualified business lawyer can help ensure you meet all filing requirements to avoid delays in the formation process.

 Generally speaking, there is not much additional red tape for foreign nationals than for U.S. citizens when starting a business. There may be certain additional requirements when opening business banking accounts or similar tasks, however, the formation of the business itself can be relatively simple with the assistance of an experienced business lawyer in California.

Contact an experienced San Jose business attorney today

There is a dearth of reliable resources on which foreigners can rely to ensure they start their business is in full compliance with California laws and that they have the best chance of success. An experienced business lawyer in Silicon Valley can evaluate your needs and goals in order to best guide you through the process of starting a successful business in our state. If you are considering starting a company or investing in an existing California company, your first call should be to the Structure Law Group at 408-441-7500. Our skilled business attorneys can assist your whether you want to start your business in California, Delaware, or another state, so please contact us for a consultation today.

Start-ups are popping up all around the country. As our society continues its shift towards a strong, tech-driven economy, more and more individuals are looking to find the “next big thing,” especially in the tech industry. Entrepreneurs are more and more motivated by success stories such as those of Uber, Facebook, and Airbnb.

But tech start-ups, while popular, are just one of the types of businesses that are appearing in the commercial landscape. 514,000 people became new business owners in 2012. As the US economy continues to improve, that number continues increasing.  Venture financing is a driving force behind the dynamic growth of small businesses such as start-ups. The National Venture Capital Association estimates that venture capital firms manage nearly $193 billion in total capital.

Vesting Schedules

Individuals starting new business entities, especially those looking towards future venture financing, must be aware of financial and legal considerations. Founders invest in their business entity by contributing either cash and/or intellectual property. In exchange, founders receive what is known as “founder’s stock,” a form of stock in the entity which comes with voting rights.

Start-ups with more than one founder and with plans to either be acquired or receive venture financing will typically have vesting schedules respective to the founders stock issued. Vesting is a process in which an equity interest (here, founder’s stock) becomes no longer subject to forfeiture or to repurchase from the business entity. If vesting has not yet occurred, an individual may forfeit his or her founder’s stock upon departure or for some other cause delineated in the company’s governing documents.

With a vesting schedule in place, the founders will not receive all of their founder’s stock on Day 1. Instead, the vesting schedule will determine at what time(s) the founder’s stock will vest. It is very common that there is a predetermined “cliff” – a length time before the stock vests. Prior to reaching the end of the cliff, there is typically 0% vesting. (This is dependent on the vesting schedule and any conditions set forth in the governing documents.) Once the length of the cliff passes, the stock will partially vest; the stock will continue to vest in accordance with the vesting schedule.

Why is the Vesting Schedule a Useful Tool?

By implementing a vesting schedule, the various founders are not only incentivized to remain with the business entity through such a critical period but also to strive towards maximizing its value for potential venture financing. Moreover, the terms in the vesting schedule provide a clear understanding as to those procedures should a founder leave the entity or stop working towards its growth and development.

It is not uncommon that founding teams fail to stay together. Complications may arise if the founder’s stock vests on Day one and the founding team separated prior to being acquired or receiving venture financing. Were one from the founding team to leave early, he or she would leave fully vested stock with voting rights, and this scenario could very easily complicate the approval process for an entity to receiving venture financing or to become acquired.

Call a Silicon Valley business law attorney to discuss your circumstances

The legal issues related to vesting are often very complex, and it is highly recommended that entity founders obtain legal counsel in order to better protect founders’ interests relative to vesting. Call Structure Law Group today to schedule a consultation.

When a person is considering starting a business, one of the first questions that often arises is which state to incorporate in. Many people simply choose the state in which they live and plan to do business, as it often seems to be the easiest and simply makes sense. In many cases, the decision to incorporate in your state of residence is perfectly fine and has no real long-term impact. It is important to note, however, that the choice of jurisdiction in which a business is incorporated has the potential to have a significant effect on a company’s tax liability and the way in which the business is run on a day-to-day basis. For this reason, anyone who is considering forming a business should discuss his or her options with an experienced Silicon Valley startup attorney familiar with corporate law throughout the United States.

Why does it matter?

Corporations and Limited Liability Companies, two of the most popular business formations that can shield owners from personal liability, are created by state law. As a result, there are 50 different sets of rules that apply to business formation and corporate governance. Furthermore, each state has a separate state taxation scheme that can result in significant differences in tax liability. Some of the issues that will depend on where you choose to incorporate include the following:

  • The formal requirements associated with incorporation
  • Reporting requirements
  • Tax liability
  • Record keeping
  • Corporate governance
  • Business licensing
  • Regulatory oversight

As this list above should make clear, where a company chooses to incorporate can have an impact on almost every aspect of the way a business is run. For this reason, it is important to thoroughly understand the laws of the state in which you may incorporate and to retain counsel that will advise you as to how state law will affect you. Two of the most popular states in which to incorporate are Delaware and Nevada, largely due to their favorable tax codes and the flexibility of their residency requirements for owners and shareholders.

Contact a Silicon Valley business law firm today to schedule a consultation

Individuals that are considering starting a business should carefully consider the state in which to incorporate. While the laws regarding incorporation and the tax treatment of businesses can seem very similar to the untrained eye, there are often significant differences that can have a direct impact on the success of your business venture. The lawyers of Structure Law Group, LLP are skilled and knowledge San Jose business attorneys that are dedicated to meeting the legal needs of businesses of all sizes and in a variety of industries. To schedule a consultation with one of our lawyers, call our office today at 408-441-7500. Prospective clients can also reach the firm by using our online contact form.

More and more startups are issuing stock and other forms of equity as a form of compensation for work, especially in the early stages of a venture. This arrangement allows a business to recruit talent that they otherwise wouldn’t be able to afford and, if the company is successful, can result in a significant windfall for people who worked to get a company off the ground without a guarantee of compensation.toad-river-brown_3737_990x742

Generally speaking, when you are transferred equity in a company it is necessary to pay taxes on the fair market value of that equity as you would with any other type of income. In many cases, however, a grant of equity is subject to a vesting agreement, which means that the equity is not actually owned by the grantee until a certain period of time passes. As a result, at the time of the grant, nothing is actually owned, so there is no tax liability associated with the initial grant. When the stock vests, however, that income becomes realized, meaning that there may be significant tax liability, particularly if the company has done well.

83(b) elections can minimize tax liability associated with grants of equity

The Internal Revenue Service (IRS) has given taxpayers another option, however, in 26 U.S.C. § 83(b). Under this section, a person who has been granted equity that is subject to a vesting agreement can elect to be taxed on the entire amount of the stock’s present value. This election must be made within 30 days of the date that the equity was granted to you.

As a practical matter, it makes most sense for people to use this election if they have been granted stock in a new company that has little actual value. Because the stock is basically worthless at this time, your tax liability will be fairly low, and you will not need to pay taxes on the shares that vest each year as their value increases. The only time that you will have to pay taxes on the value of the stock you have been granted is when you liquidate it in some way, at which point it will be subject to the lower long-term capital gains tax, so long as the liquidation occurs more than a year after the state that the stock was initially granted.

Contact a Silicon Valley startup law firm today to schedule a consultation with an experienced attorney

Receiving stock or other securities in exchange for your work can raise significant issues related to your tax liability. For this reason, it is critical for anyone who is either considering issuing stock as a form of compensation or accepting a grant of stock to discuss their circumstances with an experienced attorney. To schedule a consultation with one of our Silicon Valley business lawyers, call the Structure Law Group today at 408-441-7500.

 

Many companies issue stock options as a form of compensation or as an incentive to various parties. At their most basic, stock options are the right of a party to buy company stock at a predetermined price for a period of time. Generally, the agreed-upon price is similar to the market price at the time at which the option is issued. Two of the most commonly issued types of stock options are Incentive Stock Options (ISOs) and Nonstatutory Stock Options (NSOs). The information below provides some basic information about each type and highlights some of the differences between the two. For specific information regarding these types of stock options and how they may affect your business, call the Structure Law Group today to speak with a qualified business attorney.

hands

Incentive Stock Options

Incentive stock options can only be issued to employees, which means that members of the board of directors or independent contractors cannot be granted ISOs. These options are not subject to federal income tax when they are granted or exercised, but alternative minimum tax
may be imposed upon exercise in certain cases. Importantly, a company issuing an ISO can take a deduction for compensation paid if an employee chooses to engage in a disqualifying disposition of an ISO, such as an early sale. ISOs must be exercised within 10 years of the date that they are granted.

Nonstatutory Stock Options

NSOs can be issued to anyone, making them an attractive incentive to some companies. Unlike ISOs, however, federal income tax as ordinary income is imposed on the exercise of an NSO to the extent that the NSO is above market value of the stock at the time of exercise. Like ISOs, they are not taxable at the time of a grant, but unlike ISOs, they are subject to employment tax at the time that they are exercised. There is no annual limitation on the value of NSOs that can be issued (there is a $100,000 cap on ISOs), and unlike ISOs, the Alternative Minimum Tax is not applicable to the exercise of an NSO.

Contact a Silicon Valley business litigation law firm today to discuss your case

Any corporation considering issuing securities options to employees, directors, consultants, or other interested parties should consult with an attorney familiar with the tax consequences of both ISOs and NSOs. In many cases, issuing the appropriate form of stock option can result in favorable tax treatment for both the company as well as the parties receiving the option. The Silicon Valley business attorneys of the Structure Law Group are skilled lawyers who are dedicated to providing solution-oriented legal advice and representation to companies of all sizes. To schedule a consultation with an attorney, call our office today at 408-441-7500.