AdobeStock_239826817-300x200The Board of Directors is a critical factor in the success – or failure – of any new startup company. Entrepreneurs must therefore be strategic about if and when they give Board seats to investors. Entrepreneurs must also be cautious of the total number of seats that are given away. Board seats represent voting power, and if investors create a voting block, they could change the entire direction of the company. They could even vote the founders out entirely.

The Difference Between the Board Of Directors and an Advisory Board

The key difference between a board of directors and an advisory board is the authority to make binding decisions on behalf of the company. An advisory board provides strategic – but non-binding – advice about the management of a company. The Board of Directors has the authority to make binding decisions of a company. Some investors may be satisfied to receive a seat on an advisory board and simply consult about the direction of the company. Others may require a seat on the Board in order to retain the authority to make binding decisions. This is especially common in when financing from venture capitals. Because venture capitals usually involve a larger investment than angel or seed money, finance professionals want to protect their investment by staying directly resolved in the management of the startups.

AdobeStock_299947443-300x162It is important to structure a business entity that will best meet your needs before starting a new business. Even once you have selected a corporation over a partnership or LLC, there are still choices to be made. S corporations and C corporations have some similarities. There are also critical differences, and it is important to understand how each type of corporation functions before selecting the one that will best meet your business needs. 

Only One Class Of Stock

There are several key differences in how ownership may be held in S corporations and C corporations. S corporations may issue only one class of stock, while C corporations can have multiple classes. S corps are limited to a maximum of one hundred shareholders – all of whom must be United States citizens or lawful residents. C corporations have no such restrictions on ownership. S corporations also cannot be owned by other S corporations, C corporations, LLCs, partnerships, or trusts. These stock and ownership restrictions make an S corporation unsuitable for many corporations. Be sure to consult with your business lawyer about your specific plans for issuing stock and apportioning ownership in your new business.

AdobeStock_238077911-300x200A private placement memorandum (PPM) is used to offer security in a private company to specific groups of qualified investors. It is used as a marketing tool to provide information and generate interest, but it also serves to meet the requirements of SEC regulations. It is therefore important to be sure that your company’s PPM is reviewed by an experienced investment attorney. An incomplete or vague PPM can expose your business to liability or SEC fines. While investment bankers usually prepare these memos, they may not be qualified to provide legal advice. A small investment of attorney’s fees now could save your business significant fines, penalties, and legal fees later on.

United States Investors Versus Overseas Investors

Regulation S of the Securities Act of 1933 allows private securities offerings to be made to foreign investors. These offers can, however, bring up other complicated legal issues. For example: if the offer is made directly to foreign investors in another country, the offeror could be subject to that country’s securities laws and regulations.

AdobeStock_414492192-300x169Secured creditors use collateral to protect their investments. Collateral can be a good form of financial protection, but the security only exists if creditors follow all legal requirements. If all legal requirements are not met, a secured creditor might not have priority over other creditors – or have no legal rights to the collateral at all. An experienced securities lawyer can help your business protect its assets by securing your transactions appropriately.

There are many ways that a creditor can gain priority over other creditors. Mortgage lenders, for example, file specific legal documents along with the recorded deed to ensure that they have a secured interest in the home if the borrower stops making required mortgage payments. These documents are made publicly available by the county recorder. As a result, the mortgage lender is able to claim priority over other claimants to the home and even secure priority in any bankruptcy proceedings the borrower might file.

The same principles apply to businesses that have a secured interest in collateral to protect their investments. Documents are drafted to conform to the Uniform Commercial Code. These “UCC filings” are then sent to the office of the Secretary of State to be recorded. These public records serve as notice to other creditors. Like a mortgage recorded at the county recorder’s office, the security is protected because other creditors have been notified that the secured creditor has priority.

AdobeStock_278805688-300x200Term sheets are, by design, made to be simple. They are supposed to give a general overview of a proposed investment in very broad terms. Despite this, a term sheet can contain provisions that could create complications for your business in the future. An experienced investment lawyer can help you fully understand the implications of all term sheet provisions in order to protect your business from future problems.

Investment Amount

The amount to be invested is usually the most important provision of a term sheet. Many investors, especially new investors, get distracted by the overall amount of the proposed investment, which can distract an entrepreneur from other important investment terms. The investment could be contingent on the business being valued above a set amount. It could come in installments. The installments could also be contingent on the business meeting certain goals by certain dates. Business owners must thoroughly understand the terms of any such contingencies and how they could impair the company’s ability to secure the full amount of the proposed investment.

AdobeStock_224157473-300x200Convertible notes are a popular method used by startup companies to raise capital for a new business. There are, however, different types of convertible notes, and it is important for new business owners to understand the pros and cons of each. It is also critical that business owners understand the long-term consequences of convertible notes on their future business operations and financing.

Maturity Date

SAFE (a Simple Agreement for Future Equity) is a convertible note in which an investor converts his or her investment into equity in the company. With a SAFE agreement, the investment converts to equity at any future equity financing. There is no maturity date. Thus, the investor could convert the debt to equity the very next day if an applicable equity financing is completed. KISS is a different type of convertible equity that may or may not have a maturity date.

AdobeStock_312736469-300x200There are many ways to capitalize a new business. Angel financing, venture capital, and private equity are popular methods of raising capital, but it is important for business owners to understand the difference. These different methods are appropriate at different stages of your business life cycle. Successful entrepreneurs know when and how to use them effectively. 

Stages of the Business Life Cycle

Before a business starts any operations or has a single customer, it will need startup capital. It is at this beginning when angel financing (or “seed investors”) comes in. These initial investments of “seed money” allow entrepreneurs to take their initial idea and turn it into reality. The earliest phase of the business cycle, however, is also the riskiest. There is a high chance that angel financiers will lose their entire investment. But angel financing typically has the highest returns on investment to compensate for this risk.

AdobeStock_392233450-300x200Cryptocurrency has become a critical issue for many California business owners. These new forms of currency can be convenient, but they can also create legal obligations for the businesses that use them. It is important for all business owners to understand the legal implications of cryptocurrency offerings before engaging in any transactions. Some cryptocurrency transactions can fall under the SEC requirements, and business owners can face liability for failing to register their offerings or meeting other legal requirements.

Security Versus Utility

Cryptocurrency can be either a security or a utility, depending on how it is being used. A security is a fungible and negotiable financial instrument with some type of monetary value. When discussing securities, many investors immediately consider stock certificates. This is a classic example of a traditional security. They are not, however, the only item that can be used as a security. Cryptocurrency can also be used as a fungible, negotiable financial instrument, and often these instruments hold significant monetary value.

AdobeStock_257476584-300x200Litigation is a costly enterprise for any business owner. It is important to work with an experienced business litigator who knows how to mitigate litigation expenses wherever possible. New statutes – such as the one that creates informal discovery conferences – can be used to help resolve discovery disputes and mitigate the over cost of business litigation.

What is an Informal Discovery Conference?

Recently, the California Code of Civil Procedure was amended to allow civil litigants to request an informal discovery conference. While the discovery process is governed by clear rules and procedures, the parties are often expected to resolve differences amongst themselves. If they cannot, they must let the court decide their differences. This is traditionally done by discovery motions. If, for example, one party refused to procedure a document requested by the other, the requesting party could file a motion to compel with the court. The attorneys would then prepare written motions to the court, make arguments at the hearing, and wait for the judge’s ruling. All of this results in added attorney’s’ fees.

AdobeStock_377846636-300x225Shareholders have important legal rights under California law. These rights protect a shareholder’s ability to make informed financial decisions about their ownership rights in a company. If you do not understand these legal rights, a company can try to get around them and benefit itself at the expense of its own shareholders. The experienced shareholders’ rights attorneys at Structure Law Group can help you protect your legal rights in order to shield your financial interests. Learn more about your shareholder rights – and the limitations placed on these rights.

Statutes

The California Corporations Code provides shareholders with the specific legal right to inspect corporate documents. The statute allows for the inspection of the accounting books, records, and minutes of proceedings of the shareholders and the board and committees of the board (or a true and accurate copy if the original has been lost, destroyed, or is not normally physically located within the State of California). This inspection can be made with a written demand on the corporation by any shareholder (or holder of a voting trust certificate) at any reasonable time during usual business hours. The statute requires that the demand be made for a purpose reasonably related to the holder’s interests as a shareholder.