by Fred Abramson on September 8, 2011 · 0 comments
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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?
- REVIEW YOUR INTELLECTUAL PROPERTY. Is the name of your company trademarked? If you created a YouTube video did you copyright it?
- 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 Since laws change, your contracts may be outdated.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.
- 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?
- 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.
- 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.
Term sheets are complicated and this discussion is by no means complete. It is vital to understand the nuances of specific clauses within the term sheet as it could make a huge difference in the final sum that you earn when you cash out.
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You started a new business and hired a web developer to design your website. Who owns the website design? The determination is dependent on whether the site design is a work for a hire.
If you own a business that deals with any type of intellectual property, you have to understand the concept of work for hire.
In the above example, which I encounter frequently, the web developer will often claim in the contract that they own all intellectual property rights to the design. They are technically correct. If you fail to enter into a contract, the copyright belongs to the web developer. That’s why it is vital to have a contract with a web developer stating that it is a work for hire and assigning all intellectual property rights to you.
There are other instances were work for hire comes into play:
- An employee develops an intellectual property right. If you are a Google employee and you develop a new algorithm improving search results, clearly Google would own the ip. It doesn’t matter whether or not there is an employee agreement.
- You are owner of company and you have a work for hire agreement. You may be an owner of a start-up and have a separate consulting business. If the work for hire agreement is silent about ownership of the intellectual property rights, the separate consulting business would retain intellectual property rights.
You need to be very careful regarding intellectual property when you start a new business. If you are developing a new app and one partner is involved in marketing and business development while your partner is busy creating the app itself, who do you think owns the app if your partnership fall apart? If you failed to establish a company, then app developer. It may surprise you that even the idea of building the app was yours, you will be left with nothing.
The golden rule here is that if your company creates intellectual property rights, a contract is essential.
In New York State, only approximately 3 percent of all cases filed in Supreme Court are disposed of after a trial. If you have a business dispute, your goal is to come to a resolution as quickly and as inexpensively as possible. If you have been involved in a lawsuit before, I am sure you know why this makes sense.
As an attorney, one of my responsibilities is to discuss with you the costs of a lawsuit. The basic costs of a lawsuit may include the following:
- Court Costs
- Attorney Fees
- Expert Witness Fees
- Court Reporters
There are emotional and economic costs to you and your company as well. You are going to have to come to my office and meet with me. If you have an employee who has intricate knowledge of the case, they need to be available. Your time is finite. The meeting that you could have conducted regarding a new marketing initiative is now centered on litigation. Let’s face it, litigation is not kind on your nerves.
After doing a basic cost benefit analysis, eventually you will likely settle. Litigation could take years. Key witnesses may be unavailable. The costs of a lawsuit may simply be too high.
That’s why it is vital to have a discussion with your attorney to discuss strategy. This would include an analysis of what would be best theory of the case so you can position your argument in a way that we can settle your case for the right price.
You should start the process as early as possible. Here a couple of items to get your thought process flowing:
- Put pen to paper (if you still use paper) and simply write the facts of the case. Think of all of strengths and weaknesses of your case.
- Identify anyone who has knowledge of the case. Anyone means anyone. From your secretary to the salesperson who executed the agreement.
- View your adversary. Does your opponent have deep pockets? If so, it would be wise to settle early.
- Think about your true intentions of starting a lawsuit. Are you looking for money or is it personal?
- Estimate the correct amount that you think that you are entitled to. If you are being sued, think about how large a verdict can you expect.
Be aware that settlement is not a sign that you are caving in. You are doing yourself a disservice by not giving it a thought from the start.
The Law Office of Frederic R. Abramson represents plaintiffs and defendants in commercial litigation in New York. If you have a question, feel free to call me at 212-233-066.
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.
Coming next on my series of questions to ask before entering into a partnership: Management, Capitalization and Distributions.
The Law Office of Frederic R. Abramson represents start-up businesses in New York. If you have a question regarding New York Business Partnerships in New York, feel free to contact me at 212-233-0666.
