Your business is doing well and your profit is growing – Great! But this also means that there are some new legal concerns that your growing business must face now. 

 

When Hiring New Team Members…

As your business grows, you will likely need to hire more people. Hiring can raise many potential legal concerns. 

First, while often overlooked by many small businesses, it is extremely important to clearly distinguish “independent contractors” from “employees.”  In California, we have a stringent “ABC” test for determining whether a worker is an employee or an independent contractor and it applies retroactively. The ABC test, an employment-classification test in California that presumes workers are employees rather than independent contractors, was first adopted in April by the California Supreme Court in Dynamex Operations West, Inc. v. Superior Court. Under this test, anyone hired by a business is presumed to be an employee and the burden is on the employer to demonstrate that every worker is not an employee. The punishment of misclassification is steep, which includes a fine for each person misclassified and penalties for failure to withhold income taxes (1.5% of the wages, plus 40% of the FICA taxes (Social Security and Medicare) that were not withheld from the employee and 100% of the matching FICA taxes the employer should have paid). Criminal penalties of up to $1,000 per misclassified worker and one year in prison can be imposed as well. In addition, the person responsible for withholding taxes could also be held personally liable for any uncollected tax. All it takes is one disgruntled person to cause a huge thorn in your business.

Second, it is important to have an employment handbook to set the policies, procedures, working conditions, and behavioral expectations your business has on its employees. A handbook tailored to the way you do business helps ensure that managers across the organization handle issues consistently and provide a framework for your employees to follow. In case the need arises, a well-written handbook is the first step of a successful defense of unemployment or other legal claims because these cases often require the employer to prove that the terminated employee was on notice of a certain rule and had been warned that violating the rule would lead to disciplinary action up to and including immediate termination.

 

Stop Relying On Informal Agreements…

As your business grows, you should start to always put your business agreements in writing and stop relying on informal, verbal agreements. Having written agreements are helpful in ensuring that everyone keeps their promises and gets what they want. You should start using customized written agreements that accurately when working with business partners, lenders, and other businesses.

 

Intellectual Property Protection Issues…

When your business first started, it was probably hard to imagine that you’ll potentially later face issues with people infringing on your intellectual property assets (or vice versa). As your business grows, it becomes more and more worthwhile of the investment of time and money to get your copyrights, trademarks, patents and trade secrets legally and properly registered so you don’t have to worry about it if, and when, an issue arises.

 

Non-Disclosure Agreements…

It is crucial for your business to maintain its competitive advantage by keeping working projects, innovative ideas, or exciting new products secret and away from potential competitors. A non-disclosure agreement is a legal document that keeps the lid on such sensitive information. When working with investors, creditors, clients, or suppliers, you should use Non-Disclosure agreements to protect your intellectual property because these outside entities will have access to business information that you may want to keep private.

If you need legal help to guide your business’s growth, feel free to schedule a consultation with an attorney using this link or calling our office at 323.543.4453.

CLG Founder Pankaj Raval shares some tips to consider when looking for a business attorney.

Transcript:

Hey guys, Pankaj Raval here, founder of Carbon Law Group back, talking about what to look for in a business lawyer.

Here are three things to consider when picking the right attorney. And don’t worry; this is not a shameless plug for Carbon Law Group.

First, do they understand your industry? Are they familiar with the nuance regulations of your industry? If not, are they willing to learn?

Second, are they interested in learning about your goals? You want to avoid a lawyer that has the answer to every question. Real issues are often complicated and require a thorough analysis. You want to make sure you have a lawyer willing to say they don’t know and look things up when necessary. Not all questions are easy to answer.

Third, are they responsive? You’re hiring a professional to act as an advisor. That means you want to make sure they’re communicating with you. Sure, lawyers are busy people, but so are you. Just make sure the expectations are clear at the outset of your relationship. Also, if you’re a text person over an email person, make that known.

Okay, I’ve got a confession. Of course this was a plug. Do you seriously think I was going to spend time and money recording a video not to plug Carbon Law Group? We sincerely believe we have the unique industry expertise, care about our clients’ objectives and are extremely responsive to our clients’ needs. So if you’re interested learning more about our services, call, text, DM, whatever it takes, let’s start that conversation.

The almighty dollar is a tool for creation and destruction. From concept to execution, how money comes in and how money goes out is at the forefront of every entrepreneur’s conscious. For both Fortune 500 companies and startups, understanding the key features of different sources of capital is critical to successfully funding a company.

Companies can raise capital in either of two ways: debt, or equity. Debt is when a company borrows money and has an obligation to pay money back over time with interest, e.g., a loan. Equity is when money is invested into the company in exchange for ownership rights, e.g., founders investing their own money in a startup. Early-stage companies rarely raise money by incurring debt because it is unclear whether or not the company will be able to pay back any borrowed money (the exception being convertible notes which will be discussed in a separate blog post). With this in mind, it is critical for owners of early-stage startups to know where they can find sources of equity funding, in addition to their own investment. Here are some of the most common sources of equity funding to get your company up and running.

Sources of Equity Capital

     1. Friends and Family 

Friends, family, and professional networks of founders are common grounds for early-stage sources of pre-seed and seed financing. When founders seek capital from these sources most or all of the investors in the business have some close personal connection to the founders for better or for worse. On one hand, close personal connections can allow for greater flexibility in negotiations, lower equity stakes and the potential for investors to become trusted advisors in the startup. On the other hand, close personal connections can bring about unnecessary conflicts due to personal matters, unwarranted requests for higher equity stakes from inexperienced investors and the untimely loss of personal connections as a result of unsuccessful ventures. Friends and family rounds can range from $1,000 to $150,000 – sometimes reaching $300,000 and more. However, don’t be tricked by the label of “Friends and Family” – you still need to treat these people as legitimate passive investors. These people are still entitled to certain rights depending on the type of the instrument used to raise funds (SAFE, Convertible Note, or Series Seed Preferred Stock) and they must still comply with federal and state securities laws. Hence, seeking the guidance of an experienced startup attorney is always a great idea when navigating these complex regulatory waters.

     2. Incubators and Accelerators

Incubators and Accelerators are a great way to transform ideas into businesses. Both programs provide capital, operating resources, help with management and valuable networks to help businesses grow. Some incubators look more like accelerators and some accelerators look more like incubators understand more of the difference between the two here. The goal of an accelerator program is to help a business do roughly two years of business building in just a few months. Accelerators are intense 3-6-month commitments which require startups to give up 4-6% equity in exchange for typically $10,000 to over $120,000 in seed money, in-depth training and access to a valuable network of investors, financial advisors, successful startup executives and industry experts. One of the most well-known accelerators in the industry, Techstars, accepts around 1-3% of startups for its program each year and contributes $20,000 in exchange for 6% equity of the company until the company raises a priced equity financing of $250,000 or more. Incubators rarely require equity but will grant you space and supportive services to help your startup grow. 

     3. Crowdfunding

Crowdfunding involves a type of social platform on the internet to attract a large number of people to each invest relatively small amounts to reach fundraising goals. Crowdfunding platforms are registered with the SEC and allow entrepreneurs to pitch their business ideas, generate public interest, and reach a specific community of investors or people willing to support their ideas with relatively little cost. With crowdfunding, entrepreneurs are not forced to use traditional methods of capital markets and venture capital fundraising. Entrepreneurs can focus on a specific community of people in the crowdfunding sphere and access the traditional methods of fundraising at a later time when their idea has gained more traction. But raising funds through crowdfunding is not easy. The crowdfunding market is competitive, and the funds raised through crowdfunding cannot exceed $1.07 million in any rolling 12-month period. And even if you succeed in raising the maximum $1.07 million, which is not an easy thing to do, it can result in a messy cap table with numerous minority stockholders and future VC’s might not like that. 

     4. Angel Investors or Angel Investor Groups

Angel investors are a rapidly growing part of startup private equity markets. Angel investors are a collective class of roughly 300,000 high-net-worth individuals in the United States who are willing to invest their own money into risky startup ventures. Their motives for investing may range from a passion for a specific industry, professional interest, or a more traditional return on investment. In any event, angel investors collectively inject over $1 billion dollars quarterly in US startups. The average size of contributions per investors may vary, but a successful seed round can reach up to  $1 million, especially if it is led by an angel investor group. Angel investor groups are collaborative angel networks that share information about potential investment opportunities for other angels. In addition to individual investors and groups, super angels are well known, full-time investors that often have their own investment funds. Here is a list of some of the top angels around Los Angeles: Talmadge O’Neill, Mihir Bhanot, Anthony Saleh, Clark Landry, Jim Brandt, Ashton Kutcher – Tech Coast Angels, 12 Angels, Angel Vision Investors. These investors are more sophisticated than friends and family investors and often have their own lawyers and accountants. So, it is critical to be prepared for their due diligence requests, conduct your own due diligence, and have your startup’s legal structure and financial statements in order. Not hiring an attorney to assist you with fundraising, risks the loss of potential capital and reputation, advice and other ancillary benefits to be gained from an angel investment.

     5. Micro-Venture Capital Firms

Micro-venture capital firms (“Micro-VCs”) are institutional investors that specialize in early stage financing. Institutional investors like Micro-VCs invest using funds pooled together by LPs like pension funds, corporations, wealthy individuals, or governments looking to stimulate the startup ecosystem. Micro-VCs often have access to large funds but are very careful with where they choose to invest and so fewer deals are made each year. Here is a list of some of the top Micro-VC’s around Los Angeles: Arena Ventures, Canyon Creek Capital, Mucker Capital, Noname Ventures, Wavemaker Partners. The size of early seed rounds led by Micro-VCs may well be in the hundreds of thousands or even millions of dollars and are a sign of a rare success in early startups.  This said, founders should be careful not to give up more control and economic rights than necessary in exchange for a Micro-VC investment. Of course, dilution of the founders is inevitable in priced rounds, and you should be prepared to lose full control over your board of directors. But founders must fully understand the ramifications of dilution and that there are no hidden provisions in VC term sheets that can cost you your job as the CEO or a board member of your own startup. This is why it is critical for startups to work with an attorney that can bring both parties together and verify that both parties are on the same page regarding the terms of the investment and how to protect against future problems.   

     6. Strategic or Corporate VCs

Strategic or corporate VCs are typically subsidiaries of large corporations like Intel, Google, and SBI. Corporate VCs use corporate funds to invest in external private companies. The sole purpose of these strategic or corporate VCs is to invest within their core businesses to achieve financial or strategic returns, e.g., capture technologies that may be important to their business, or acquire critical in-house expertise. Here is a list of some of the most active strategic or corporate VC’s this past year: Google ventures, Salesforce Ventures, Intel Capital, Baidu Ventures, Legend Capital, SBI Investment, Alexandria Venture Investments.

     7. Investment Bankers and Mergers & Acquisitions

Investment bankers, brokers, or financial advisers can assist founders connect with financing sources. But, investment bankers are primarily concerned with providing growth capital to relatively mature companies looking to expand, restructure operations or enter new markets. Investment bankers also tend to be intermediaries for private placement of securities. In other words, investment bankers can help you sell securities to funds and other investors. But be warned, regulatory issues and banking fees are usually associated with intermediaries like investment bankers. Read more here. A merger or acquisition with a company rich in cash can be a viable source of capital. But any merger or acquisition triggers a myriad of legal, structural and tax issues that must be evaluated carefully before making any decisions. For early-stage startups, we recommend waiting a couple of years before selling the company to achieve a higher valuation rather than selling your potentially great idea at a much lower valuation.

Legal Considerations

Raising capital from any of the sources mentioned above is a great way to potentially grow your business. But with that growth comes a multitude of legal issues from proper due diligence and compliance with securities laws to tax considerations and corporate governance structures. The almighty dollar is a tool for creation but without proper legal counseling it can be a tool for destruction. 

If you need help with your questions about funding your business, feel free to schedule a consultation with an attorney using this link or calling our office at 323.543.4453.

 

By Ryan Urban, Loyola Law School

Today’s workplace has become increasingly regulated and complex. Employers have started to recognize the importance of complying with misclassification statutes, and are trying to educate their executives on the process.

In determining whether a worker is an employee or an independent contractor, courts in California generally apply the common law test under which the employer’s right to control the manner and means by which the employee’s work is accomplished, rather than the amount of control actually exercised, is the principal factor in assessing whether a plaintiff is an employee or an independent contractor.

On September 18, 2019, California Governor Gavin Newsom signed Assembly Bill 5 (“AB5”) into law. Thus, California businesses will soon face new challenges in their use of independent contractors. AB5 raised the bar for companies that otherwise might rely on freelance or contract workers. The new law establishes stricter criteria, known as the “ABC test”, to maintain a worker as an independent contractor. Specifically, a business must prove that:

  1. The worker is free from the company’s control.
  2. The duties performed by the worker are not central to the company’s core business.
  3. The worker is customarily engaged in an independently established business, trade, or industry.

Workers that do not satisfy all three criteria will be reclassified as employees, which could allow them to start earning a minimum wage and qualify for overtime pay, paid sick leave, and health insurance benefits.

AB5 is landmark legislation for gig economy workers and employers in California. Yet, the passing of AB5 does not mean that gig economy workers in California who were categorized as independent contractors are now automatically employees. They will still need to challenge their employers in court to apply the ABC test and reclassify them. 

If you need help with your questions about employee and independent contractor categorization, feel free to schedule a consultation with an attorney using this link or calling our office at 323.543.4453.

A Master Services Agreement (MSA) is an agreement between the two parties to a service contract that details the expectations for both parties of their work together. MSAs are not project-specific contracts, instead, MSAs state the general agreement between the parties regarding all their work together. This means that the parties may use the same MSA with different project-specific Statement of Work (SOW) for each different future projects they have together. MSAs will allow the parties to negotiate future agreements efficiently, as they will only need to focus on negotiating the project-specific terms such as the scope of service, time of service and payment terms for each project. 

What is included in an MSA varies depending on the parties using the MSA, but it usually addresses: 

    • Dispute resolution policies if conflicts arise, including whether arbitration of mediation should be used. 
    • Jurisdiction is the law that will govern the agreement.
    • Forum is the place where the hearing or meeting will take place.
    • Limits on warranty to address the agreement on the scope and coverage of the warranty.
    • Limits on liability to address who is the responsible party in the event of a lawsuit. 
    • Confidentiality to prevent the parties from sharing any confidential information with outside parties. 
    • Termination policies to address when and how the agreement may be terminated. 
    • Intellectual Property Rights, including decisions on how the parties want to handle the ownership and regulation of all copyright, trademark, patents, and trade secrets. 
    • Insurance, to address the parties’ agreement on how to handle all insurance coverage and expenses.
    • Taxes, to address how and who is responsible to pay the applicable taxes.
    • Indemnification, to address how the parties will compensate each other for losses caused by each party to the other, i.e. when a third-party sues.
    • Risk allocation, to address which party bears the risk at different stages of the transaction.
    • Force Majeure, to address the parties’ obligation and liability when things that are not within the control of the parties happens, such as issues that arise due to acts of God, flood, fire, earthquake, explosion, governmental actions and war.
    • Attorneys fees, and whether the parties bear their own costs or the loser pays.

Many small businesses use the same contract template for all clients rather than negotiating from scratch for each client before they begin work. A well-drafted MSA can serve as a good template for similar services a small business performs for different clients and reduce the chance of litigation between the parties. And by using the same MSA with different project-specific SOWs, businesses can save significant cost on drafting detailed, customized contracts from scratch every time for a new transaction. 

If you need help with your MSA, feel free to schedule a consultation with an attorney using this link or calling our office at 323.543.4453.

Forming your corporation is the first step to limit your personal liability and to ensure the protection of your personal property. However, we are often asked, “Is forming a corporation sufficient to achieve such protection?” or “Is it sufficient to resolve any issues that may arise between me and my partners down the line?”

The short answer is – NO.

After forming a corporation, there are several considerations that startup founders should take into account to mitigate their risk and to adopt a corporate structure that is in line with their expectations.

The below summary describes the initial documents necessary to ensure your corporation is legally compliant and to create effective asset protection mechanisms. Note: many of these principles can be applied to LLCs as well, but for the purposes of discussion here, we are focusing on corporations.

Director Resolutions

Director Resolutions are how you make important decisions for your corporation during the meetings of the Board of Directors. The basic initial resolutions include:

  • electing Directors and appointing Officers, such as the CEO, CFO, and Secretary;
  • approving Bylaws and Shareholders Agreement (discussed next);
  • obtaining authorization to open a separate bank account for your startup; and
  • issuing shares to shareholders of your corporation, etc.

Following such corporate formalities is essential to prevent your business creditors from reaching your personal assets. In the event of an audit or lawsuit, it provides evidence that you keep your personal and business assets separate, treat your corporation as a distinct entity, and cannot be personally liable for corporate actions.

Bylaws

Bylaws provide a governance structure and procedures for your startup. Adopting Bylaws is mandatory in California and many other states. The Bylaws address the following questions:

  • how to manage the corporation, and elect the Directors and the Executives;
  • how to make important decisions, such as approving major transactions; or
  • how to accept new investments or investors into your business, etc.

Adopting and following your Bylaws regularly is crucial in shielding shareholders’, directors’ and executives’ personal assets from corporate liabilities. This is why you should have well-structured Bylaws for your corporation that is is easy to understand and follow.

Shareholders Agreement

A Shareholders Agreement is helpful when your business has more than one founder or new investors join your startup. This Agreement memorializes the understandings and intentions of shareholders and can introduce significant protections for you and your partner(s), such as:

  • the right to buy existing shares before non-owners (Right of First Refusal);
  • the right to sell your shares back to the corporation (Put Option/Buy Back);
  • the right to buy newly issued shares before non-owners (Pre-emption Rights); and
  • the right to buy other owners’ shares in case they breach their duties (Buy-Sell Rights).

Having those provisions in place will allow you to tackle finance and governance disputes efficiently without impairing your regular business operations.

At Carbon Law Group we can help you to negotiate, draft, and incorporate these documents into your new business structure. This will shield your personal assets from your business creditors’ claims and will set clear paths for dispute resolution between you and your partners.

If you have any questions about how to draft governance documents for your startup or need assisting with setting up your corporation, do not hesitate to reach out to us. You can use this link to schedule an appointment to speak with an attorney today.

This blog article is published for educational purposes only. Its sole purpose is to give you general understanding of the law and not to provide specific legal advice. By using this website you understand that no attorney client relationship has been established between you and the publisher. Please contact an attorney licensed in your state for competent legal advice.

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