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Joint Ventures 101

August 2, 2012 stanczyk Choice of Entity, Joint Ventures, LLCs, Tax

In many industries there are opportunities for individuals or companies to team up with one another to accomplish a mutually beneficial goal. This is most commonly accomplished by way of a joint venture.

A joint venture is somewhat amorphous as a concept as there are no bright line legal rules. It is a contractual arrangement, either through an outright joint venture agreement, an oral agreement, an LLC through its operating agreement or something similar. This post gives a broad overview of what it is and why it may be something that would work in your situation. We’ll look at it in more depth in future posts.

Crowdfunding – Prepare your Company to Crowdfund

July 16, 2012 stanczyk Accredited Investors, Angel Investors, Crowdfunding, Financing Your Business, Investors, LLCs, Private Placements, Securities, Stock, Venture Capital

As I’ve discussed earlier, the SEC is now preparing regulations to allow for Crowdfunding pursuant to the recently passed JOBS Act. These should be done by 2013 (emphasis on should be done by then – we’ll see when they actually come out). As you may have heard, it will allow for true equity sales over the World Wide Web. Companies will soon be able to sell shares of their corporation (or LLC) through online portals to regular persons that are not accredited investors (i.e. not millionaires or otherwise sophisticated).

There are a couple of things to discuss, the first is whether this is something your company actually would want to do. The second item is, if it is something you want to do, then what can you do to prepare your company to do a Crowdfunding raise in 2013 (or whenever the SEC finishes the regulations).

How do I Value my Company?: Startup Valuation

May 26, 2012 stanczyk Angel Investors, Financing Your Business, Investors, Private Placements, Securities, Stock, Uncategorized, Venture Capital

One of the most important issues when raising money from investors is the valuation of the company. This will drive all of the other financial terms of the deal: how many shares will be sold, at what price per share, and how much equity the investor will own in the company after the transaction.

In essence, for early stage (pre-revenue) startups, the company’s valuation is whatever the market deems it to be. I’m not being glib, that’s actually how it works. For example, say that I have a flat screen TV that I want to sell, if someone offers me $800, and then someone else offers me $900. I’m selling it for the $900 and that’s the TV’s market value. If an investor values you at $1M, then that’s your market value. Now he could be undervaluing you, but probably not by a large amount, and if the investment goes forward at that valuation then it’s the de facto market price. Now that doesn’t mean that there is no room to negotiate. That’s why it’s always said that early stage company valuation is an art and not a science.

Pricing Stock Options – IRS Code 409A Treatment @ Paper this Deal

May 17, 2012 stanczyk Employees/Contractors, Securities, Shareholders Agreements, Stock, Stock Options, Tax

We’ve covered the bare basics of stock options on this blog before. Here we will look into something that is all important when issuing stock options – that is the option’s exercise price. The exercise price is the amount an option holder needs to pay in order to exercise the option to receive the share of underlying stock. Most option holders will not exercise their options until the price of the underlying stock has risen higher than the exercise price, so that they can receive the shares and then sell on the open market for a profit. The IRS got keen on the fact that a company could issue stock options with an artificially low exercise price, which would allow the option holder to immediately exercise the option to receive the shares with the greater value and sell those shares, which is in effect as if the company paid cash to the option recipient. Hence Section 409A voted into effect in the American Jobs Creation Act of 2004. The reason stock options can receive beneficial tax treatment is because they are treated as deferred compensation. To get that treatment, stock options should only be granted with exercise prices at or above the fair market value (“FMV”) of the underlying shares of stock on the date of the option grant.

Convertible Debt Financing 101

May 10, 2012 stanczyk Angel Investors, Financing Your Business, Investors, Securities, Stock, Uncategorized, Venture Capital

One way that a startup can take seed or angel investments is by doing a convertible debt financing, sometimes called a bridge loan or bridge financing. It is essentially a loan the company receives which allows the investor to later convert the amount due into a certain number of preferred shares upon the company’s next round of equity financing.

Remember to make your 83 B elections! Here’s why and how to do it

May 2, 2012 stanczyk Employees/Contractors, Intellectual Property, Securities, Startup Formation, Stock, Tax

As I’ve written about in the past, founders of a startup should have their equity vested. There are times when you may not want to, but the majority of the time it is beneficial. Some investors may insist upon it, although its one of the things in the negotiations. If the founder’s stock is vested, they should make an 83-b election. To not do so could turn into a lot of tax due to the IRS over the years the stock will vest. We’ll discuss how it works and how to make the election here. Read more

The basics of Startup Funding

April 20, 2012 stanczyk Accredited Investors, Angel Investors, Crowdfunding, Financing Your Business, Investors, Private Placements, Securities, Stock, Venture Capital

So you’ve got a great business idea, and a team ready to bring it to market (or at least a plan to begin getting it there), but the one thing you don’t have, like a lot of new companies is the capital to begin. This post will walk through the traditional process for a startup to seek and receive funding. Read more

JOBS Act Breakdown – What the New Crowdfunding Law Actually Means for Startups

April 2, 2012 stanczyk Crowdfunding, Financing Your Business, Investors, LLCs, Private Placements, Securities, Stock

This is a follow up to my last post regarding the concept of crowdfunding in general and the progress of the JOBS Act through Congress (full name – Jumpstart Our Business Startups Act). Since then, the Senate revised and passed the JOBS Act in a 73 to 26 vote. The House then, voting on the amendments made by the Senate, passed it by a vote of 380 to 41. This is something that both parties agree on, and were eager to work together to implement. Josh Earnest, the White House Deputy Press Secretary, stated that President Obama will sign the JOBS Act into law this Thursday, with a bipartisan public announcement. The President and Eric Cantor, one of the champions of the JOBS Act, will appear together for the signing of the bill into law.

This post will detail the provisions of the JOBS Act and how they will affect companies going forward. The JOBS Act can be found here if you’d like to take a read. After it is signed into law, the SEC has 270 days to promulgate regulations. Expect the SEC to claim that they need more time, as the JOBS Act is a monumental change, and there are various consumer (i.e. the new investor) protections required, especially to prevent fraud which, unfortunately, could run rampant if left unchecked. Hopefully Congress can put enough pressure on the SEC to get the regulations complete in the actual 270 day time period, and the regulations will actually have some teeth with respect to fraud without stifling startup’s ability to raise money.

Crowdfunding – A Potential New Wave of Startup Financing

March 21, 2012 stanczyk Crowdfunding, Financing Your Business, Investors, Securities, Stock

As you may have heard, Congress is now debating certain bills which would allow startups to raise funds in a new less restrictive manner, i.e. through “crowdfunding”. The lead bill is the Jumpstart Our Business Startups (“JOBS”) Act passed by the House on March 8, 2012. There is fierce opposition from various groups to the House version of the JOBS Act – including most states, the SEC, the New York Times, Bloomberg, accounting groups, AARP (?) and even the the old “Sherriff of Wall Street” himself, Eliot Spitzer. In this post we’ll look at what crowdfunding is, what Congress is proposing and the effects it may have.

Startup Financing – Private Placements 101

March 13, 2012 stanczyk Financing Your Business, Investors, Private Placements, Securities, Stock

Startups need cash, no doubt about it. One of the ways to go about getting it is through a private placement. This post will give an overview of how such a placement works.

For the sale of any stock in a startup corporation, the federal and state securities regulations require registration of such securities prior to the sale, unless there is an exemption from registration that is available to the company. One of the exemptions from the registration requirements is when the securities are sold in a private placement. This is a federal exemption which preempts state regulation, save for certain notification filings and fees to be paid wherever to whatever state the company and investors are located in.