Articles Tagged with Silicon Valley startup

Budget-Planning-300x200Starting a new business can be an overwhelming proposition for any Silicon Valley startup business. An experienced business startup attorney can help you build a profitable business from the ground up by finding appropriate financing, effectively forecasting your business expenses and helping you budget effectively.

Finding the Right Financing

The first step to an effective financial plan is putting in place the right startup capital for your particular business. Venture capital is among the most popular financing options for Silicon Valley startups, but it is not right for every business. VC deals often contain onerous terms for profitability, repayment, or reinvestment. Not every business can meet these demands. Accessing venture capital also brings in more stakeholders who have a greater say in the operation of your business. This is the very situation that many startup business owners are looking to avoid.

Venture capital (VC) is a form of financing that is provided to early-stage companies that have been deemed to have high-growth potential by venture capital firms or funds.  Typically, venture capital financing is attractive to smaller, newer companies that do not have access to traditional forms of funding such as issuing stock or applying for a loan through a bank.

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Venture capital firms generally provide capital to companies in return for equity shares, which they then sell back to the company for a profit after a specific event, such as an initial public offering (IPO).

While obtaining venture capital financing has many benefits, it has drawbacks as well.  As a result, entrepreneurs should fully explore their options and discuss them with a Silicon Valley venture capital lawyer before entering into any binding agreements.  Some of the common pros and cons of venture capital financing are discussed below.

Contracts are an integral part of conducting business and the necessity for certain contracts can arise from the very start of your company. The following are only some examples of important contracts for startups in California.

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Founders’ Agreement — If you are going into business with one or more people, having a comprehensive and clear founders’ agreement is imperative. This agreement can be likened to a premarital agreement: it foresees and addresses potential issues that may arise and sets guidelines for dealing with those issues. A solid and enforceable founders’ agreement can prevent a lot of legal conflict and costs down the road.

Nondisclosure Agreements — If you have the idea or formula for a unique product or process, you want to keep information confidential so others do not try to misappropriate your idea. However, it will be necessary to share information with co-founders, employees, investors, contract developers, and others involved in the project. In such cases, you may have others sign a nondisclosure agreement to ensure they will not disclose confidential information to other parties.

Reputation can help make or break a startup. Startups rely upon a positive reputation to grow, develop, and maintain a strong customer base. Glowing reviews help startups strengthen their brand equity; at the same time, they help support and influence a customer’s decision to use the startup’s product or service.

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A startup that develops a negative reputation will not have the same luck. Customers that leave negative reviews weaken the perceived value of the startup’s product or service. Potential future customers may find themselves less inclined to use the product or service as a result of negative reviews. Too many potential reviews could spell a startup’s demise.

Startups want to succeed. Whether the ultimate goal is to grow and expand or to be bought out, startups want to ensure that their success is not derailed through customer disparagement. In order to combat potential negative reputation, some startups began including non-disparagement clauses in their purchase or licensing agreements.

Too many startups fail to successfully get off the ground because of decisions that result in inadequate financing. As a founder of a startup, you can have a completely viable idea and still fail due to financing mistakes. For this reason, it is important to understand the different types of financing appropriate at different stages of your business. Financing can be complicated and it is always helpful to consult with a skilled business attorney who can evaluate your financing needs and provide valuable advice.

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One type of financing used by startups is called “mezzanine financing.” The name is appropriate because this type of financing is in the middle between equity and traditional bank debt. Your business is less leveraged because there is no hard collateral to mezzanine investors, though many charge more interest than a bank loan. On the other hand, you will give up less control of your company than you will if you pursue additional equity funding.

When is mezzanine financing appropriate?

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.

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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.

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.

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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.

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.

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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

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