Articles Tagged with California corporate lawyer

AdobeStock_431953977-300x169A stock option pool has become an increasingly popular tool for startup companies. Entrepreneurs seeking to attract talented employees will often offer incentives that give employees motivation to make the company as profitable as possible, and equity compensation is a very popular option. There are different ways to offer these equity options to employees, and stock options pools are a popular choice. A pool allows a company to set aside a given portion of company stock to be issued to employees as stock options. While this is a convenient structure for many businesses, it is not always the best option. Learn more about the pitfalls of using a stock option pool – and the other options that might be better for your business.

The Difference Between Stock Options and Restricted Stock

Both stock options and restricted stock are forms of equity compensation made to employees. There are different restrictions that come with each form of compensation, and it is important for companies to understand these effects before making the choice of how to offer equity compensation. Restricted stock creates a role more similar to a traditional stockholder, and the employee may vote and receive dividends. Employers may also reserve the right to buy back restricted stock (or at least have the right of first refusal) in order to maintain control of the company. Stock options are more limited. Employees are usually limited to the right to buy company stock at a set price in the future. This right can create a windfall if company stock exceeds the set price, but it does not give the employee voting or dividend rights. Because there are no voting rights and no set number of shares, employers generally do not retain the right to buy back stock options. Both restricted stock and stock options can be subject to vesting requirements in order to encourage long-term employment.

AdobeStock_73458159-300x157Venture capital is a critical source of capital for any new startup. However, venture capital does not need to come with overly draconian conditions. Venture capital may be contingent on the funders receiving Board seats, and funding is typically offered in exchange for equity. But just how much equity should venture capital investors receive? If too much is given away, founders may lose control of their own business. Founders must understand how to use equity strategically in order to get the maximum benefits.

Typical Apportionments or Dilution At Each Round Of Funding

Funding must account for the competing interest of founders, the initial seed investors, venture capital investors, and employees who receive equity compensation. This can make it difficult – if not impossible – to come up with a split that everyone considers to be “fair.” While each company has different needs, here is a common scenario at a Series A round of funding with venture capital:

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_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.