Should We Raise Capital Through Equity Crowdfunding?

Lots of people are excited by the potential for equity crowdfunding ever since the federal government passed the JOBS Act. Many new businesses are popping up to exploit the new model, and there is a lot of buzz about equity crowdfunding these days. Of course, it is still not legal yet, and won’t be until the SEC finishes writing the rules. But I still hear the same question over and over: Should my company raise capital through equity crowdfunding? Unfortunately, in the case of most startups I don’t think it makes sense. Here’s why: [Read more…]

How Entrepreneurs Can Save on Legal Bills

VentureBeat has a terrific article up today on how entrepreneurs are saving tens of thousands on legal bills. Their suggestions:

  • Use smaller firms, solo practitioners, and virtual services;
  • get it done right the first time; and
  • take care of legal stuff sooner than later. [Read more…]

Limited Liability Company – LLC

What is a Limited Liability Company (LLC)?

The LLC is a relatively new form of business entity offered by most US jurisdictions that aims to provide the separate entity and limited liability benefits of a corporation while preserving the pass-through tax benefits of a partnership or sole proprietorship. In addition, it offers more flexibility in management than a corporation does.

[Read more…]

Introduction to Corporations

In kicking off my series on different business entity structures, I’ll start with corporations.

What is a corporation?

A corporation is a limited liability entity that exists separately from its legal owners. One or more owners hold shares of stock in the corporation that grants them certain economic rights to the profits and residual assets of any business operated by the corporation, as well as certain voting rights as to the management of the corporation. The corporation is able to enter into its own contracts and legal relationships with other parties, which is part of what protects the shareholders from liability. Except as described below in regards to an “S” corporation, a corporation is taxed separately and in addition to its owners, meaning that when a corporation earns a profit that amount is taxed by certain states and by the federal government. In addition, once the corporation takes those profits and distributes them to shareholders as dividends, the shareholders will also be taxed on that income (which is often colloquially referred to as “double taxation”).

[Read more…]

Considerations in Business Formation – Part II (Initial Capitalization)

I’ve been covering the steps involved in the Business Formation process. To recap, the steps are:

  • Planning
  • Entity selection
  • Filing
  • Initial governance matters
  • Initial capitalization matters
  • Initial agreements among stakeholders

My last post covered the Planning, Entity Selection and Filing steps, which takes us to the point where the state has returned stamped documents establishing a new entity. Now we are at a complex stage: establishing how the business will be managed, initial capitalization, and what the rights of all stakeholders will be going forward.

[Read more…]

Considerations in Business Formation – Part I

In keeping with my promise to start at the beginning, my next few posts will be on business formation and subsequent posts will be on the different business entity types. Today I will focus on a few basic questions surrounding business formation, and the first few steps in business formation.

What does business formation mean in the legal context?

In a legal context, business formation is the process of planning and documenting the initial formal relationships among stakeholders that will govern the ownership and management of the business as it moves forward.  It encompasses planning and executing choices regarding entity structure, governance, capitalization, and tax strategies for the business as well as its founders and investors.

[Read more…]

Start at the Beginning

For the first post in my blog, the immediate question was “Where should I start?” Should I write an analysis of negotiation strategies in subsequent rounds of VC financing?  What about methods for organizing stockholder, debt holder and optionee documentation? Or maybe my plan for listing companies on the NYSE?

Of course not. I should take the advice I offer entrepreneurs: start at the beginning! I know that sounds pat, but it is something we all need to remember. It’s great to think big, but first you have to execute the details. In a start-up, entrepreneurs need to focus their plans on developing a Minimum Viable Product, not on dethroning Facebook.

So for my first post, here are two very basic questions entrepreneurs should ask themselves when they are just cooking up a plan for a new business.

[Read more…]