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Summertime has come and passed. It was a busy August in terms of news, with Hurricane Irene soaking the New York area, Steve Jobs relinquishing the CEO position at Apple and an ugly jobs report.  Hopefully you escaped to a sunny destination or traveled to a far off land.

Since we are all back at work, now is an ideal time to look at what is really important for your business. If you are starting a new business you need to have goals.  Goals are a vital to the success of any business. A goal is an outcome that you wish for that is measurable, actionable and specific.

If your goal is to have the best business in the world, you know that you need a first class product, great design and productive employees. A world class company also has their legal house in order. Do you?

1. REVIEW YOUR INTELLECTUAL PROPERTY. Is the name of your company trademarked? If you created a YouTube video did you copyright it?
2. REVIEW YOUR CONTRACTS. I have drafted many agreements for my clients that they use over and over again. Since laws change, your contracts may be outdated. If the services you have provided have changed, an inaccurate description in your agreement can cause headaches down the road.
3. EMPLOYMENT LAW REVIEW.  If you recently increased the hours of your tech consultant to over 30 hours, she may be considered an employee rather than an independent contractor. How about OSHA regulations, employment taxes?
4. IS YOUR ADVERTISING IN COMPLIANCE WITH THE LAW? If you have an ongoing advertising campaign, be aware that there are rules you need to comply with. Under the FTC act
   • Advertising must be truthful and non-deceptive;
   • Advertisers must have evidence to back up their claims; and
   • Advertisements cannot be unfair.
5. BUSINESS SUCCESSION PLANS.  Whether you run your business alone or have partners, you need to have a business succession plan in place. What happens to your business if you become incapacitated? If you have a business partner, what happens if she wants to leave the company?

This is an opportunity for you to make a difference in your entire life. You don’t need to be hit by a Honda Accord in order to focus on what is legally important for your business. Each time that you  implement just one of the above legal goals, you will make a difference in your business.

The Law Office of Frederic R. Abramson represents businesses in New York. You can reach me at 212-233-0666

If you are looking to raise funds you are going to encounter a term sheet.  A term sheet is a legal document prepared by venture capitalists that states the important terms of a proposed investment.  If you receive one, don’t celebrate too hard by acting like a rock star by recklessly smashing your old Macbook pro. Its time to contact an experienced attorney (yes that is yours truly) and negotiate the terms.

There are a couple of points that you will have to negotiate with your investors before placing your John Hancock on the dotted line.

• VALUATION.   When you receive the term sheet for the first time, you will likely focus on what the company is worth. You will see the terms pre-money and post-money valuations. As you can probably guess, pre-m0ney valuation is the price of the company before investment and post-money is after investment. If you are an entrepreneur, your goal is to have your pre-money and post-money valuations to be as close as possible. These means that you get to claim more of your company.
  

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• PREFERRED STOCK. When you start your company, the shares you create are called common or founders stock. Investors do not like common stock. They want preferred stock, which grants them a number of protections.
• LIQUIDATION PREFERENCES. If a liquidity event occurs you need to know how money will be shared. A liquidity event can include a variety of scenarios, including bankruptcy and a sale of the assets. Your goal as an entrepreneur is to limit any liquidation preferences.
• NO-SHOP PROVISIONS. Toward the end of the Term Sheet, there is usually a provision that will not allow you to obtain additional funding. You should limit this provision to 30 days.
• FOUNDER VESTING.  Once you learn about this concept, you may jump out of your seat.  You actually have to earn your shares. With reverse vesting a certain amount of shares are put aside and are earned over a period of time. Basically the founders want to ensure that you don’t leave the company.
• ANTI-DILUTION. This provision is used to protect the investment if the start-up obtains additional financing at a rate lower than the previous round. As Brad Field explains, there are two types: weighted average anti-dilution and ratchet based anti-dilution.
• OPTIONS.  Usually, the term sheets will reserve some stock for stock options. This will be used to compensate employees.  You may dicker with your investor whether the size of that pool is determined using the pre-money or post-money valuation.

The Law Office of Frederic R. Abramson represents both entrepreneurs and investors in New York. If you have a question regarding term sheets, contact me at 212-233-0666. 

You made the first step and decided to start a new business. You have two business associates who are interested in taking the plunge.  If you plan on setting up shop in New York, read on.

Starting a new business with partners could be risky.  Before you do anything, you are going to need either a Membership agreement (applicable to LLC’s), a Shareholder agreement (for S or Corporations) or a Partnership Agreement drafted. This Agreement cover the duties and obligations of each partner. This document is vital.

To ease your pain, I have created a questionnaire that will help you focus on how you will be conducting business with one another.  Since this questionnaire is part of series, make sure to check back in the coming days for more valuable information.

• What is the name of your company? Legally, your company must have a name. Beyond searching through Google, you should check the New York Corporation and Business Entity Database  and the United States Patent and Trademark (USPTO) database. Be aware a search on the USPTO is not a substitute for a complete trademark search.
• Social Security numbers. When you apply for a tax identification number with the IRS, you need to provide the social security number of one of the managing owners.
• Address of the proposed company.  New York State requires that the business have an address. The registered address could be different than the actual business address. You should also obtain the addresses of all of your partners.
• What type of business are you in?  If you or your partners own different businesses, you may not want to compete with them.
• List all the professionals the business has hired. For example, it is really important to list the name of your accountant so that your lawyer can obtain tax records.
• Contracts.  Has the business entered into any contracts? In the alternative, does the company expect to enter into any business relationships?
• Permits. Some businesses, such as restaurants, may need permits to operate.
• Intellectual Property. Does the company own any trademarks or copyrights? Does a trademark search need to be completed for the names of any products?
• Insurance. There are many types of insurance that a company can obtain. If you plan on hiring employees, you are going to need to purchase workers compensation insurance.
• Bank Account Information.

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When you start a new business or start-up in New York, there are some major legal hurdles you’re going to encounter. It’s important to examine these issues carefully because they’re often confusing. Each issue should be discussed with an attorney because they can affect your business costs, tax structure, business organization, and liability. In forming a new business you need to choose a business entity type. There are four general types of business entities in New York: sole proprietorships, partnerships, S-corporations, and LLCs.

• Sole Proprietorship: This is a type of business where one person owns all the assets of that business. In a sole proprietorship those assets that belong to you as an individual and not a single shareholder or a corporate parent. With this type of business entity there are low start up costs, there’s less paperwork involved, and there are no corporate taxes. The big problem with sole proprietorships is that you are personally liable for all your debts. Creditors can go after your personal bank account or even your house to absolve your debts.

• Partnerships: A partnership is where two or more people jointly own and carry a business for profit. Under this type of entity, those entered in the partnership agree to share the business’s profits and/or losses. Unlike corporations, the company does not itself pay any tax, but the partners pay through their income or losses on their individual tax returns. In a partnership both partners are jointly and severely liable for business debts. Creditors can go after you for the debts of your partnership.

• S-Corporations must make sure there are no more than 100 stockholders, and each must have consent. S-corporations are taxed through the owner’s income without taxing the entity itself, much like in a partnership.  All profits pass on to the owner without any tax from the shareholder to the owner, unlike in a corporation. The stockholders must be a U.S. citizen or a resident and can only have one class of stock. The owner of an S-Corporation can potentially use this structure to pay himself a smaller salary and pay less in taxes, however this can pose significant problems with the IRS. In a case in Iowa the head of an S-Corporation paid himself far less than his qualifications suggested. The IRS filed a case and succeeded in their suit.

• Limited Liability Corporations (LLC) are a hybrid business entity where its members are treated as shareholders of a corporation but for tax purposes the members are treated as if they’re in a partnership. In LLC’s the owners are not personally responsible for the debts as they are in sole proprietorships and partnerships. Under certain circumstances an individual may be liable: if a member personally guarantees a debt, if the personal funds are intertwined with the funds of the LLC, if there is little capitalization or insurance, or if it fails to pay taxes or violates a state law. A major issue with LLCs is their cost that include formation fees, filing fees, and annual state fees. There are, however, lower insurance costs.

The Law Office of Frederic R. Abramson represents start-up businesses in New York State. If you have any questions about choosing a business entity in New York, contact me at 212-233-0666

If you are starting a new business, everywhere you go you hear people tell you that you must incorporate in Delaware or Nevada. I have some news for you. They are probably wrong.

As a business law attorney, day in and day out, savvy, smart entrepreneurs like yourself actually speak into their shiny new iPhones 4  and proudly proclaim that they registered their business in Delaware. I’m thinking that the lawyer who defended Kato Kaelin’s housemate who now earns his living by hawking do it yourself legal services  just earned another fast buck.

You probably think because all of your favorite big companies are incorporated in Delaware, you should too. But these large corporations have specific reasons why they should incorporate in two states.  The primary reason why you should incorporate is because you can protect your personal assets. Incorporating in Delaware will not afford you any additional layer of protection. You may also incorrectly believe that you can save money in taxes.

Here are some more reasons why you shouldn’t incorporate in Delaware or Nevada:

• It’s Less Expensive Fallacy. True, it is less expensive to initially incorporate in Delaware. Nevertheless you have to register to do business in New York.
• Failure to Register Your Business in New York Could be Deadly. If you fail to register do business in New York and your business becomes subject to a lawsuit, your personal assets may become exposed.
• You Still Have to Pay Taxes. Simply  because Delaware and Nevada do not have personal or corporate taxes doesn’t alleviate your duty to pay taxes in New York.
• The Less Litigation Fallacy. Some attorneys would argue that since most Delaware corporations do not end up litigating disputes because their professional advisers examine volumes published opinions and construct deals to avoid lawsuits.  In New York the caselaw on corporations is voluminous.
• The No Jury Fallacy. In Delaware, your case would be tried by a judge, not a jury. But the simple fact is that 99 percent of the cases settle before trial.  In my experience, it is very rare to hear of a runaway jury in New York County.
• Privacy. In the past, many people decided to incorporate their business in Delaware because they do not require director or officer names to be listed in the incorporation documents. However, the IRS have become aware of this and the rules governing privacy or much more strict. Since you need to register your business in New York, you are going to have to disclose your CEO anyway.

The Law Office of Frederic R. Abramson practices Business Law and Civil Litigation in New York. If you have any questions regarding Incorporation, feel free to contact me at 212-233-0666

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The New York Law Journal reports that the New York court system may have to cut “hundreds” of non-judicial employees due to a $70 million in budget cuts. These budget cuts come on top of recently announced $100 million of cuts, which include dropping hardworking retiring judges.

These retiring judges often work as judicial hearing officers and serve an important role. In New York Supreme Court, early settlement conferences are held before Judge William Leibovitz. I have appeared before Judge Leibovitz on numerous occasions. These early settlement conferences actually save time and money, as many cases are settled before Judge Leibovitz rather than going straight to trial.  It now appears likely that the already overworked judges will have to take over the burden.

Judge Lippman stated that he could not locate where additional layoffs would occur. He said it will depend on where court workers are situated and how crucial employees are to everyday court operations.

Judge Lippman said he remains adamant about keeping open court buildings to everyone, despite the state’s fiscal woes.

I would suggest that the court system should increase the filing fees on cases in the commercial division were the amount in controversy is over $100,000, along with an additional increase in cases over $500,000.  In addition, there should be an additional fee on cases deemed complex, which is fair because these cases take an inordinate amount of the courts time.

Many parts also waste an inordinate amount of time conferencing cases during discovery conferences were there are no issues between the parties. Clerks should be given the authority to stamp orders on consent without meeting with the judge or court attorney.

What do you think Judge Lippman should do to cut costs?

The Law Office of Frederic R. Abramson practices civil litigation in New York State.  If you have a question regarding civil litigation, call me at the Law Office of Frederic R. Abramson at 212-233-0666.

You have this great business idea and perhaps you are short on funds. You know that you should speak to a lawyer. So you decide to call my office looking for some advice.  The first question that you will probably ask is if you should incorporate your business.  My answer is nearly always yes.  Here’s why:

1. You own assets. Corporations are great because if play by the rules, your personal assets will be protected.  If you decide to sell a Amigurumi Zombie Panda on Etsy and it turns out that your cute toy is defective, you can be personally sued if you fail to incorporate. The lawsuit itself could take five years and a judgement is good for 20 years. Even if you don’t have any assets now, if you have faith in your idea (you should) your   For under a grand in legal fees, you could establish your company as a  S Corporation in New York.
2. You have a partner. If you have a business partner, you are absolutely crazy if you don’t incorporate. You are certifiable if you don’t have an operating agreement.  There are millions of things that can go wrong. What happens if you are the one who has the great idea and your business partner is the money guy and you have a falling out? Who has ownership of the business?
3. You want to borrow money. If you want an SBA loan, you are required to incorporate.
4. You want to sell to the government or a large company. Many government contracts are only open to corporations. Due to the crackdown by the IRS on independent contractors, large companies rather hire a corporation rather than a sole proprietor.
5. You want investors. Do you really think that an angel will be willing to invest your unincorporated business? How are they suppose to get a piece of the action?

For more reading: Top Ten Legal Mistakes Made by Entrepreneurs.

If you have a question regarding incorporating your business in New York, contact the Law Office of Frederic R. Abramson at 212-233-0666.

The SEC is looking into secondary stock trades of private companies.  According to Fortune, SecondMarket now has received a formal inquiry from the SEC.

What follows is an official statement from SecondMarket spokesman Mark Murphy:

“We have now received a voluntary request for information from the SEC regarding ‘Pre-IPO Pooled Investment Funds.’ We are fully cooperating with the SEC in this inquiry. SecondMarket is a registered broker-dealer, fully regulated by FINRA and the SEC. We do not intend to comment further on this matter.”

It appears that the SEC is only looking into pooled investment funds, often setup to circumvent the 500 investor requirement where a company must go public.  Facebook announced today that they have received one such investment from Goldman Sachs.

The Law Office of Frederic R. Abramson represents business in New York. I can be reached at 212-233-0666

Commuting to work today, after refreshing my NY Times Droid app for the first time in a week, the #2 article of the day was that Goldman Sachs, recipient of TARP money and a Russian investor, invested $500 million in Facebook.

It is well known that Mark Zuckerberg, values his autonomy and will do anything within his power to put off the day of reckoning when he will have to run a public company.

However, this move has chutzpah written all over it. You see, the SEC has certain requirements regarding the number of investors a company may have before it goes public. That number is 500, and Facebook will do whatever it takes before it will reach that number.

Goldman will create a fund where it is the sole investor of Facebook shares. Even though potentially thousands of people will invest in this new fund, Facebook will be able to circumvent the 500 investor number by pooling assets. The wealthy who invest with Goldman will come out as potential bandits, while the general public will be locked out.

With the emergence of private exchanges such as Secondmarket, shares of private companies can be bought and sold without the regulation of the SEC. Wait until one of these unregulated companies goes belly up.  You will see our tax dollars bailing them out.  Goldman can’t loose here.  I don’t know about you, but I’m going to call my broker and find out how I can get in on a piece of the action.

What do you think of these unregulated private exchanges? Should they be banned or is it a fair way for employees to cash out on difficult to sell shares?

For more reading:

The New Yorker:  Facebook-Goldman: Where is the SEC?

Wall Street Journal: Facebook IPO: Could Zuckerberg Be a Permanent Holdout?

New York Times: Goldman Invests in Facebook at $50 Billion Valuation

The Law Office of Frederic R. Abramson represents businesses in New York.  If you have questions about business law, call our office at 212-233-0666.

The life of a start-up can be like riding the Taconic State Parkway, a single mistake can cause serious damage.   Many entrepreneurs try to “play lawyer” to try to save money.  I don’t really understand the concept.  Simply because you know how to change the oil in your car does not make you a mechanic.

Recently Harvard Business School professor Constance Bagley made  a list of the most frequent legal mistakes made by entrepreneurs, everything from hiring the wrong lawyer to puffing up the business plan. I bring you his list, along with my 2 cents.

1. Thinking any legal problems can be solved later. If you are an entrepreneur, you don’t need me to tell you that you are probably engrossed by your idea. You think night and day about bringing your business to market. I see it all of the time. But when it comes time to thinking about the legal implications 0f your ideas, you procrastinate. “We don’t have enough money.”  ”Let’s focus on producing the best product and we’ll deal with the legal issues later.”  Huge mistake.  Legal issues not addressed at the start, such as an inexpensive contract with a web developer can result in expensive litigation later.
2. Promising more in the business plan than can be delivered and failing to comply with state and federal securities laws. In your business plan that present to potential investors, you have to be honest about valuating your business. If your valuation has no reasonable basis, you can be sued for fraud.  Be aware that there are securities laws that protect your grandmother’s friend Matilda from investing in your venture.
3. Disclosing inventions without a nondisclosure agreement, or before the patent application is filed. Non-Disclosure Agreements also known as NDA’s are surprisingly cheap for a lawyer to draft. For less than an iPad 3G you can protect your business from someone stealing your ideas.
4. Waiting to consider international intellectual property protection. First off, my firm handles only trademarks so I won’t discuss the legal ramifications of patents.  However, if you have any inkling that you want you brand to go global, do an international trademark search and register.  You don’t need the headache of dealing with a trademark infringement suit with a company from China.
5. Negotiating venture capital financing based solely on the valuation. Valuation is not the be all and end all when it comes to financing.
6. Issuing founder shares without vesting. Some entrepreneurs are great at creating ideas, but hate running a business. If you are planning to start your company with a number of founders, especially a serial entrepreneur, you must protect the founders who stay.  If a founder exits the venture early, then you can get back the shares.
7. Failing to make a timely Section 83 (b) election. Your eyes are probably glazing over this one.  But the Section 83(b) election is vital for tax purposes, especially if you plan on paying the founders shares rather than a salary. An 83 (b) election allows the tax computation to be made based on the value at the time the shares are issued, which is often minimal.
8. Failing to incorporate. Without incorporating, your personal assets would be put at risk.
9. Starting a business while employed by a potential competitor, or hiring employees without first checking their agreements with the current employer and their knowledge of trade secrets. Your employer can argue that the company is theirs, especially if you worked on your project on company time.
10. Hiring a lawyer not experienced in dealing with entrepreneurs. It is amazing how many entrepreneurs contact my office and only focus on price. “How much do you charge to review my contract.”  Business law is a specialty and requires experience.  Many lawyers don’t understand the 83(b) election, which if improperly drafted, could cost you hundreds of thousands of dollars.  A Venture Capitalist will have a seasoned attorney representing them and they will provide you paperwork that may contain traps. Why risk it?

The Law Office of Frederic R. Abramson represents entrepreneurs and start-up companies. Contact me at 212-233-0666.

Related articles

• Top 10 mistakes of start-up entrepreneurs (holykaw.alltop.com)
• 4 common mistakes in picking a co-founder (venturebeat.com)
• The Y Combinator Library for Startups (ycombinator.com)