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

When it comes to building your brand, there is some confusion around what it takes to establish trademark rights. Clients ask, is filing a federal trademark application enough to protect me? What about posting on social media?

These are great questions often without clear answers.

To understand how to best protect your trademark rights, it is important to understand the purpose of trademark laws in the first place. Trademark law, codified under the Lanham Act, is fundamentally a consumer protection statute. It was created to protect consumers from companies that try to steal the goodwill of popular brands to sell their products or services (think of those guys selling purses in NYC with interchangeable brand names). Trademarks are used as a source identifier. They allow consumers to differentiate between certain types of goods and their sources.

When it comes to establishing your brand, trademark rights are fundamentally based on the first to use the mark. That means, filing an application alone generally isn’t sufficient to protect your rights to a mark against someone who may have used the name earlier than you. Establishing legitimate use is critical.

But, what is legitimate use, you ask? Great question.

Legitimate use of a trademark that amounts to commercial use that would cause the public to associate your mark with your goods or services. It could be social media posts, a website, products, or apparel. Legitimate use also varies based on what you are selling. If you are selling goods, generally, you need to show the use on the good in a way that shows your goods are in interstate commerce and can be purchased. For services, proper use amounts to advertising the services, among other types of use.

When it comes to establishing priority over another company regarding a possibly infringing mark, the party that can show the earliest legitimate use of the name along with the strongest engagement with the consuming public will most likely win a dispute. A federal trademark application is important to protect your rights and establish your rights federally against later users in other locations. But to protect your rights locally and early, make legitimate use as early as possible.

Key Takeaway: when it comes to establishing priority, make sure you are gettings your goods or services in commerce early and effectively.

As any entrepreneur or business owner knows, building a website or online storefront to advertise, promote, or sell goods or services can be a detailed, time-consuming, and expensive process. The goal of attracting even the most discerning consumer on the internet makes those extra hours and expense worth it, especially when general marketing and branding goals include repeated visits, contact, and impressions to finally engage a customer or user. All successful businesses similarly understand that protecting the logos, content, design, functionality and, most importantly, the integrity of the website. An attorney-drafted “Terms of Use” or “User Terms and Conditions” page is extremely important because it provides, among other benefits, a mechanism 1) to prevent competitor copying or intellectual property infringement, 2) to legally bind users of the website, 3) to limit the business liability in certain contexts, and 4) to comply with federal law.

1. Prevent intellectual property infringement.

Valuable dollars and hours are spent building a website for goods or services, but the failure to secure or enforce proprietary intellectual property rules can nullify all of that value. A valid Terms of Use will enumerate the myriad of intellectual property present on the business website, and will make it clear to all users (guests or registrants) that the copying, stealing, scraping, or unauthorized use of proprietary information is grounds for termination of any user account, a claim for breach of contract, and claims of copyright, trademark, or trade secret infringement, and any other remedy available at law to the business. While the deterrent impact of a Terms of Use may be debatable, failing to have a Terms of Use removes any enforcement mechanism for a business owner against a rogue user.

2. Legally bind users of the website.

Having a Terms of Use section on the business website is not required by law in the United States, but consider that it has been (and may solely be) a binding agreement enforceable by a court between any user or abuser on the internet and the business (even if no transaction of money for goods or services occurs). Because the website is the property of the business, businesses may set user standards for use of the site as well as the penalties for failing to comply, including to terminate a user account or ban future use. Having this ability is extremely important for any online business to ensure smooth user engagement and process management.

3. Limit the business liability.

A legally binding contract may include disclaimers against liability – and in certain cases, even where liability would normally be imputed by law. This includes common issue situations like outdated or incorrect marketing materials (especially those quoting prices or fees), governing the interactions between users (especially in the context of harassers or trolls), and updating the features or functionality of applications or other products. Note that by failing to disclaim against liability in these scenarios, a business may become an easy target for traditional lawsuits over small errors.

4. Compliance with privacy laws and the “privacy policy.”

If the site collects personal data that may identify an individual (e.g., a user’s email address, first or last name, physical address, or social security information), legislation like the Americans with Disability Act (ADA), Children’s Online Protection Act (CIPA), and more mandate privacy policies according to these Federal Trade Commission guidelines.

From our experience, while every business and proposition is unique, businesses should consider the following broad issues when either self-drafting or having an attorney draft the Terms of Use:

  • Privacy policy (if collecting personally identifying information)
  • How the user accepts the Terms of Use
  • Account security
  • Intellectual property rights (trademarks, copyrights, licenses)
  • User-posted content and content standards
  • Infringement
  • Social media integration

For more information or guidance on your online business practices, or if you are ready to prepare a terms of use and privacy policy, please call our office at (323) 543-4453 to schedule a consultation and speak with our savvy attorneys.

Most entrepreneurs look at legal issues as an expensive and burdensome cost of doing business, but with the right guidance you can use the law as a tool to further your goals and position your business for success. You can ensure your entrepreneurial dreams don’t hit any roadblocks by avoiding these five common legal mistakes.

  1. Picking the wrong (or no) corporate structure

By choosing the corporate structure that best serves your company’s individual needs, you can take advantage of different benefits like minimizing your tax liability and protecting your personal assets from any liabilities incurred by your business. Many entrepreneurs whose businesses are a one man shop skip out on forming a corporate entity all together because it looks like an unnecessary and confusing obstacle, but even solo entrepreneurs have a lot to gain from forming a corporate entity.

  1. Forgetting the importance of IP

So much goes into building a new company from scratch, and for many entrepreneurs, Intellectual Property (IP) isn’t their top priority. But what entrepreneurs need to remember is that IP isn’t just about protecting your own brand and product, it’s also important to check if someone else has IP protection for similar work. After all, what would happen to your business if one day you found out someone had already trademarked the product or brand you have put so much time into developing.

  1. Not defining key roles and responsibilities

If you have any business partners it may seem like you’re all on the same page, but if you don’t clearly define the roles each of you has in the company, it’s a recipe for conflict. You and your business partners should have a written partnership and shareholder agreement that makes everyone’s rights and obligations clear.

 

  1. Not having an exit strategy

How you and your partners would go about a business breakup probably isn’t the first thing on your mind as you start your company. But all too often business partners grow apart or have different goals as the years go by. Knowing how and when you and your partners can sell your stakes in the business is crucial, and having your attorney prepare a buy-sell agreement that addresses this up front will make for a much easier transition in the event anyone wants to leave the business.

  1. Tackling legal issues on your own

As an entrepreneur, it may feel natural to take things into your own hands when it comes to your business. Don’t let the seemingly easy DIY legal forms temp you into being your own lawyer. Filling in the blanks on some preprinted forms doesn’t take care of your specific needs and can leave you with a number of problems that could have been avoided had you had the help of an experienced small business attorney.

If you are looking to learn more about protecting your new business, feel free to email us at [email protected] or set up an appointment.

 

Business Licenses

The first thing you will need to acquire is your business license.   When you file your license application, the city planning or zoning department will check to make sure your area is zoned for the purpose you want to use it for and that there are enough parking spaces to meet the codes.

If you’re planning to start a business in your home, you should investigate zoning ordinances carefully. Residential neighborhoods can have strict zoning regulations preventing business use of the home.

 

State Licenses

In many states, people in certain occupations must have licenses or occupational permits. Often, they have to pass state examinations before they can get these permits and conduct business. States usually require licensing for auto mechanics, plumbers, electricians, building contractors, insurance agents, real estate brokers, and anyone who provides personal services (i.e., hair stylists, cosmetologists, doctors, and nurses).

 

Federal Licenses

In most cases you will not be required to obtain a federal license. However, there are a few types of businesses that do require federal licensing, including meat processors, radio and television stations, and investment advisory services.

 

Sales Tax License

If you are selling any taxable goods, before opening your doors for operation it will be important to obtain any necessary sales tax licenses. It’s important to know the rules in the states and localities where you operate your business because, if you are a retailer, you must collect state sales tax on each sale you make.

 

Fire Department Permit

You may need to get a permit from your fire department if your business uses any flammable materials or if your business will be open to the public.

In some cities, you have to get this permit before you open for business. Other areas don’t require permits, but will schedule periodic inspections of your business to ensure you meet fire safety regulations.

 

Air and Water Pollution Control Permit

Many cities now have departments that work to control air and water pollution. Environmental protection regulations may also require you to get approval before doing any construction or beginning operation.

 

Sign Permit

Some cities and suburbs have sign ordinances that restrict the size, location, and, sometimes, the lighting and type of sign you can use outside your business. Make sure to check regulations and secure the written approval of your landlord before you invest in having a sign designed and installed.

 

County Permits

County governments often require the same types of permits and licenses as cities. If your business is outside any city or town’s jurisdiction, these permits may apply to you.

 

Health Department Permits

If you plan to sell food, either directly to customers (i.e. a restaurant) or as a wholesaler to other retailers, you’ll need a county health department permit. The health department will want to inspect your facilities before issuing the permit.

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  1. Not understanding the tax consequences.

It is important for you to understand the pros and cons related to the different types of business entities. If you do not already understand them, check out (include link to previous newsletter).

  1. Not Establishing a Formal Business Entity.

If your business is a sole proprietorship, you and your business are one and the same. That means that your personal assets are at risk if your business is sued or can’t pay its debts.

If you form a business entity such as a corporation, LLC, or limited liability partnership (LLP), your business becomes legally separate from you. If there is a judgment against your business, you may lose the money you have invested in it, but you won’t lose your house, car, or personal bank account. Not forming a business entity can be a big mistake if you have partners or have a solo business with significant financial obligations or legal exposure.

  1. Assuming Your Personal Assets Are Not At Risk.

One of the main reasons for forming a business entity is to protect your personal assets in the event that there’s a lawsuit or judgment against your business. A business entity does offer important safeguards, but it won’t protect you against everything.

A business entity won’t protect you if you are sued and accused of being negligent or intentionally doing something wrong. It won’t help you if your business suffers because of a fire or storm. That’s why it’s important to have business insurance in addition to forming a business entity.

  1. Not having an agreement between you and your business partners.

In the early days of a business, the owners tend to get along with each other and assume that, no matter what, they will be able to work things out. But it’s a mistake to think that things will always be that way. Businesses evolve, and so do their owners’ goals, visions, and relationships with one another. Eventually, there will be conflict and, without an agreement between the owners, that conflict can be very expensive and emotionally draining.

  • Sole Proprietorship:
    • The owners of these businesses report business income and expenses on their personal tax returns, and pay tax on any profit.
  • Corporations:
    • ‘C’ Corporation: A ‘C’ corporation pays corporate income tax on its profits. If a C corp. pays dividends to its owners (shareholders), they report those dividends on their personal tax returns, and pay taxes on them. Many small businesses end up paying more taxes under this “double taxation” system.
    • ‘S’ Corporation: You may be able to avoid double taxation by being taxed as an ‘S’ corporation. An S corp. does not have to pay corporate income tax. All of its profits “pass through” to the shareholders’ personal tax returns, and the shareholders pay personal income tax on them.
  • Limited Liability Company: A limited liability company is taxed the same as a sole proprietor (if there is one owner) or a partnership (if there are multiple owners). However, an LLC can choose to be taxed as a C corporation or an S corporation. This can sometimes allow LLC’s owners to minimize self-employment taxes, or to deduct expenses that would not otherwise be deductible.

Need help with your taxes? Do you already have your business entity established and need help understanding what expenses are considered tax write-offs? We can help. Ask us, and we can refer you to one of our recommended tax accountants. Some of the things they can help you with are:

  • Explaining deductible start up costs
  • Organizational deductions
  • How much you can deduct
  • What is considered the “start-up” phase
  • How to claim your deduction

1) Making your business name so obscure, customers won’t know what it is.

It is important to keep the name of your business simple and straightforward.  It is also important to be creative and unique with your new business name, so that it stands out.  However, this doesn’t mean that the name should be so obscure people won’t be able to tell what type of business you have – or know how to pronounce it.  As a rule of thumb, if your business name requires you to explain what it is (or means), it is too obscure.

2) “Creative Spelling.”

It can be challenging to find a business name that has an available domain name.  As a result, many businesses purposefully misspell the businesses name.  Although staying up night after night searching for available domain names can be daunting, try not to solve this problem by replacing the letter “K” with a “Q”.  Misspelling your business name will make it that much harder for customers to find your website down the road.

3) Being “Cliché.” 

You want to avoid choosing overly cliché words for your business name such as peak, summit, and apex. Clichés often go hand in hand with pop culture, and can easily date your company name. Make sure to avoid them and choose a name that is timeless.

4) Using a Name that is Already Being Used.

It seems obvious, but you want to make sure you choose a name that no one else is currently using in your area of business.  Do not get your heart so set on a name that you overlook how critical being different is.  You do not want to end up driving customers to someone else’s business.  Stand out and choose a name that is unique to your business.

5) Putting the “Secret Sauce” in Your Name.

You want to avoid putting your area of focus into your name.  An example of this is RadioShack.  As the market changed and MP3 players became available, RadioShack had difficulty rebranding and adapting because the name of the company became outdated. Give yourself the flexibility to grow and expand your company by choosing a name that isn’t too narrowly focused to a specific offering.

Step 1: Register the Business with the State.

The first thing you will need to do is to register your business with the state. You have many options, but most new ventures start out as either a corporation, limited liability company (LLC), partnership, or sole proprietorship (with a DBA) — and the decision is often based on a variety of factors we can help you understand.

Step 2:  Get a Tax ID Number.

A Tax Identification Number (TIN) or Federal Employer Identification Number (EIN) is a number that the IRS uses to track your company’s transactions. It is similar to your social security number, but for your business. You will need these ID numbers to open a business bank account.

Step 3: Research any Necessary Licenses or Permits, and Apply.

After you have registered your business with the state, you need to research and determine whether your business needs to apply for any licenses or permits you might need to operate the business in the state and city you intend to operate.

The types of permits you need will vary based on where you’re located and what type of business you’re starting. You can find out which licenses and permits will be necessary by using an online search tool, or by asking us!

  • Every city has a database with a list of addresses that fall within that municipality. Search online for your city’s name + its business license division to find the correct webpage.
  • You can also find the right information by way of the US Small Business Administration (SBA)’s website. Their page on permits offers information about where to get licensed, with details specific to your locale and your industry.

Step 4: Know your Business Code.

Different business types have different codes, and require specific application processes which vary based on the city your business resides in. Check your city’s business license site for information or check the SBA website for a list of necessary forms and useful information.

Step 5:  Get help from a Professional.

It may be a good idea to have a professional help you with the license and permit process, as the requirements vary by the city and the type of business you are operating.  The worst thing you can do is not do your homework, and begin operations without the required documents.

Carbon Law Group excels at helping small businesses identify and obtain the correct tax permits and licenses.  Need help?  Ask us how we can simplify the process and work with you to file and complete the right forms. Click here to schedule an appointment.

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