About 10 years ago, during the Web 1.0 dot-com boom, I co-founded an Internet start-up. For 3 years I raised capital, hired employees, developed web applications, and did everything else necessary to operate the business. My experience as an Internet entrepreneur has been invaluable for the portion of my practice that focuses on Internet start ups. I am a firm believer that specialized experience prior to practicing law allows an attorney to provide real value to clients - beyond just rendering legal advice. My Internet start-up clients also seem to appreciate the "been there - done that" aspect of my background.
My solo business and technology law practice is almost completely dependant on SaaS - I run very few applications on my laptop other than a browser - which of course is how I access the many SaaS applications that I use. The heart and soul of those SaaS applications is Clio - a super slick practice management tool that saves me all kinds of time keeping tabs on my practice. I am a big fan of the people at GoClio - but it goes beyond just the fact that I love the Clio application. The Clio blog has an excellent series of postings that anyone (lawyers, non-lawyers...anyone) interested in the ever growing SaaS field should read. Below is a listing and summary of each post in the 10 part series on SaaS:
- Part 1: What is Software-as-a-Service?A discussion of what exactly Software-as-a-Service is, and how it compares to the more traditional desktop computing model.
- Part 2: Why (Or Why Not) Choose a SaaS Solution?Why SaaS offers compelling advantages over traditional desktop software solutions, and some of the compromises that have to be considered.
- Part 3: Why Web-Based Practice Management?Why Software-as-a-Service is a perfect fit for practice management, particularly for solos and small firms.
- Part 4: Security.An outline key concepts and terminology for web-based security, including SSL, server security, client security, and password security.
- Part 5: Privacy.What you should be looking for in a web site’s privacy policies.
- Part 6: Data Availability.An outline of the answers you want to be hearing when you ask your SaaS provider “What are you doing to ensure that my data remains available, even in the event of a natural- or human-induced disaster?“
- Part 7: Total Cost of Ownership. An explanation of how to compare costs of SaaS to traditional desktop software via a Total Cost of Ownership calculation.
- Part 8: Terms of Service.What to look for in the legal agreement describing the services your SaaS provider will provide you.
- Part 9: Data Migration.How you can migrate your data from existing desktop software application to the web.
- Part 10: Offline Access.Why offline access is important, and an outline of some of the technologies that make offline access to SaaS applications possible.
One question I get from quite a few start-up clients of my business start-up law practice, is whether they should hire employees or independent contractors. After a brief discusion, those clients usually will opt to classify new workers as independent contractors instead of employees. This is mainly a cost saving decision. The costs attributable to hiring employees can be substantial, including workers’ compensation, unemployment insurance tax, social security tax and withholding and local payroll taxes.
A good start to identifying workers as independnt contractors vs employees is to have a properly drafted agreement signed in writing by the company and the worker, although simply identifying a worker as an independent contractor, even in a signed agreement, does not mean that the law will recognize the worker as such. The law will look to factors such as the degree of control and direction the company has over the worker. Misclassification of a worker can lead to obligations to pay back taxes, penalties, and interest payments.
If you are a start-up and have questions about how to classify your workers as independent contractors, make sure you seek the legal advice of a good business start-up attorney.
The Small Business Administration has a new loan program for certain established small businesses that provides interest free loans - America's Capital Recovery Loan Program. The new SBA loan program, according to the SBA:
ARC loans can be used to make payments of principal and interest, in full or in part, on one or more existing, qualifying small business loans for up to six months. ARC loans provide an immediate infusion of capital to small businesses to assist with making payments of principal and interest on existing debt. These loans allow borrowers to redirect cash flow from making loan payments to investing in their businesses, to help sustain the business and retain jobs. For example, making loan payments on existing loans with proceeds from an ARC loan can allow a business to focus more funds on core operations, such as buying inventory or making payroll.
ARC loans are interest-free to the borrower, carry a 100 percent guaranty from the SBA to the lender, and require no fees paid to SBA. Loan proceeds are provided over a six-month period and repayment of the ARC loan principal is deferred for 12 months after the last disbursement of the proceeds. Repayment can extend up to five years.
The best candidates for ARC loans are small businesses that in the past were profitable but are currently struggling, yet have been making loan payments or are just beginning to miss loan payments due to financial hardship.FAQs for Lenders and Borrowers.
ARC loans are made by commercial lenders who are SBA participants. The SBA will pay these banks a monthly interest rate throughout the term of the loan. Lenders can find more information here. Non-SBA lenders can easily become SBA participants by working with their nearest SBA district office. Businesses interested in applying for an ARC loan should first contact their current lender.
In order to qualify, a small business must be an established business, have financial statements demonstrating it was profitable in one of the past three years, and be able to project sufficient cash flow to meet current and future loan payments over a two-year period from loan approval. If your business does not meet these criteria, you can discuss your eligibility with your lender. ARC loans are not designed for start-up businesses.
You should always consider consulting a corporate finance attorney prior to taking out any sort of business loan to help you understand and receive favorable terms.
One of the exemptions from the federal securities laws regarding the registration of securities offerings comes in Rule 504. Rule 504 provides an exemption for the offer and sale of up to $1MM of securities in a single twelve month period. In general, an issuer may not use public solicitation or advertising to market the securities. Purchasers must receive restricted securities, meaning that the securities may not be sold without either registration or an applicable exemption. Unlike some other exemptions, Rule 504 allows for a private sale without any specific disclosure requirements, although care should be taken to provide sufficient information to investors to avoid violating the anti-fraud provisions of the federal securities laws - as I mentioned in an earlier post - disclose, disclose disclose. Make sure there are not only no false statements, but no misleading statements either, and no omissions that might make what you have disclosed misleading.
As always, make sure you get the advice of a securities attorney with private placement experience. There are lots of complicated regulatory requirements to comply with, both on the state and federal level. A private placement attorney can help you navigate the regulations and to draft your private placement memorandum.
Martin Zwilling over at Startupprofessionals.com has a nice post regarding why start-ups should consider incorporating / organizing their business in their home state. The post can be found here, but here is a brief summary:
- Don't automatically flock to incorporating in Delaware. Sure there might still be some advantages to doing so, but they don't really apply to start-ups.
- In Indiana, where I practice law, the filing fees for incorporating a business are inexpensive and the process is relatively straightforward - not the case in popular states such as Delaware and Nevada.
- Attorneys in your home state, if you are using an attorney (hopefully you are), will be more familiar with your state incorporation laws.
- Your company may qualify for an intrastate securities law exemption in the event it offers securities for sale.
- There is no need to register as a foriegn entity in your home state - and added expense if you incorporate elsewhere.
As he points out, there are many other concerns that should be addressed when determining in what state you should incorporate - concerns you should address with a corporate attorney in your home state.
If you are looking to raise capital for your business, a private offering of securities might be one avenue for you to consider. Selling securities, whether it be to friends and family, or to angel investors, is an excellent way to raise capital if you are prepared and do it the right way. But beware, as the sale of securities (i.e. stock, notes, LLC interests...etc) is a highly regulated area on both the state and federal level. The following is intended to provide a basic understanding of raising money through a private placement. You should retain the services of a private placement attorney to advise you through the entire private placement process.
The SEC created Regulation D, which sets forth certain rules for private offerings. By following these rules, an issuer (i.e. a company selling stock or other form of security to raise capital) generally may raise up to $5,000,000 without a public offering.
Generally, a private offering may have no more than 35 investors. On the federal level, though, certain high-net-worth investors defined as "accredited investors" may be excluded when calculating the number of investors. There must also be NO general solicitation for investors by the issuer - no advertising, no seminars. Just this weekend I came across someone soliciting the "private" sale of securities on Twitter - definitely not a good idea if you are trying to comply with the registration exemptions under Regulation D.
The federal securities laws for both public and private offerings are based on the premise that investors in securities are best protected by the disclosure of all relevant information regarding the securities and the issuer. The underlying guideline in this respect is Rule 10b-5, which requires the issuer to disclose to investors anything material that a reasonable investor would want to know prior to making a decision to invest. This is why PPMs are stocked to the brim full of material facts, disclaimers, and lots and lots of risk factors. Failure to properly include these and other items may subject the issuer to serious liability, including being forced to buy back the securities from the investor, as well as damages. If you want to avoid liability, overdisclose, do not hide anything, and do not mislead (among other things of course).
Keep in mind that there are also state "blue sky" laws to comply with - and they will need to be complied with in every state that a security is offered and/or sold.
Make sure to consult a private placement attorney / securities law attorney before you raise capital for your business.
The Law Office of Brian V Powers can help your business raise capital and help draft a private placement memorandum (PPM). Contact us today.
Raising venture capital / private equity requires more than just pitching your idea and business plan to a group of people with money to invest - although your pitch is obviously a crucial component. There are lots of documents that will be required, and those documents will usually require the careful scrutiny of a venture capital attorney. Below is a short, but not inclusive, list of what you might expect:
- Venture Capital Term Sheet - These are typically non-binding outlines of the terms of a venture capital deal. Don't let the "non-binding" portion fool you, though. Terms laid out in a term sheet serve as the basis for all future negotiations, and any attempt to deviate from those terms will not be met kindly during deal negotiations.
- Stock Purchase Agreement - This is the definitive agreement setting forth the terms of the venture capital investment, such as the purchase price, the closing date, and the conditions surrounding the issuance of stock - which more likely than not will be preferred stock. There will also be numerous representation and warranty provisions, among other provisions, that will need to be carefully crafted by a venture capital attorney.
- An Amendment to the Bylaws - Assuming the company is a corporation and that the VC is conditioning its investment on the receipt of preferred stock (which it likely will), the bylaws of the corporation will need to be amended. This amendment will create a new class of preferred stock and will include anti-dilution provisions. dividend rights, liquidation rights and conversion rights. Some states require a "Certificate of Designation" to accomplish this, rather than an amendment to the bylaws.
- Right of First Refusal / Voting Agreement - This agreement will grant the VC a right of first refusal to purchase any shares in the company that come available for sale. It will also likely contain a number of restrictions on the transfer of common stock, as well as tag-along rights allowing the VC to participate in the sale of any common shares. Finally, there will likely be a voting agreement requiring that the common shareholders elect the VC's nominee(s) to the company's board of directors.
- Consulting Agreement - Often times a VC will require payment of a monthly fee by the company in return for certain management services provided by the VC.
These are just a few of the documents that a company might normally expect to see during the process of raising capital. As always, you should consult an attorney with knowledge of the venture capital process.
If you are starting a business, there are a number of things you need to consider when you are in start-up mode, beyond what you might normally think of (i.e. the business name, business location, sales and marketing...etc). From a legal perspective, here are some of the things you should carefully consider with the help of a business start-up attorney:
- What form of business entity should you choose? There are multiple entries on this blog dealing with the various forms of entity a start-up can choose from.
- If there will be multiple owners (i.e. shareholders, partners or members), how will control of the business be structured?
- How much and how often will the business owners be paid should the business turn a profit?
- What record keeping methods will the business employ?
- Will the business hire employees, contractors, or a mix of the two?
- What type of liability insurance will the business need? How much will it need?
- Will the business enter into a lease for space? Or will it buy and develop its own real estate?
- If the business will have employees, will it provide benefits? How will the business handle payroll?
- What types of banking relationships will be necessary?
- Will the business need to raise capital? If so, will it be through debt or private equity?
- Will any sort of license or permit be required to conduct business?
It is no secret that a great deal of modern business is conducted via email. What most people don't realize is that an email exchange can be construed as creating a valid and enforceable contract, sometimes inadvertently.
If an e-mail or chain of e-mails clearly states an offer to enter into a transaction with all of the material terms, and the recipient / offeree responds by email accepting the terms, then it is entirely possible that an enforceable contract has been formed — without any printing or actual exchange of signatures.
With the adoption of the Uniform Electronic Transactions Act (“UETA”) in most states and the passage of Electronic Signatures in Global and National Commerce Act (“ESIGN”) by the federal government, the stage was set to allow contracting via email. Each of these acts is based on the principle that electronic signatures carry the same legal effect as handwrittten signatures.
Both laws accomplish this by establishing a procedural approach to meeting “writing” and “signature” requirements:
- A document or signature cannot be denied legal effect or enforceability solely because it is in electronic form;
- A contract cannot be denied legal effect or enforceability solely because an electronic record was used in its formation;
- If a law requires that a record be in writing, then an electronic record satisfies the law; and
- If a law requires a signature, then an electronic signature satisfies the law.
Under ESIGN and UETA, parties must agree to use electronic signatures and records. Between businesses, consent to do business electronically can be established either explicitly or by implication based on the parties’ interactions
Federal and state law specify certain types of documents that cannot be signed electronically, including wills, trusts and estates; marriage, divorce, adoption, and other family agreements; court documents and filings; utility service terminations; eviction, foreclosure, and repossession notices; health and life insurance termination notices; documents referring to the handling or transportation of hazardous materials, real estate purchase agreements and deeds. While this list will vary from state to state, generally these types of agreements require a writing, signed (in ink)by the parties.
What does all this mean? Be careful in your email exchanges that contain the material terms of an agreement. If all you intend is to negotiate the terms and issues leading to a formal written and signed contract accepted by both parties, make sure that you explicitly say that in your e-mails. On the flip side, if you are trying to enter into a contract via email, there are safeguards to take to make sure you have a complete and enforceable agreement - which you should consult with your attorney about. You could also check out an electronic document services such as DocuSign.
My technology law practice can help you deal with issues like this, along with other technology law issues including licensing agreements, e-commerce, and click-wrap agreement for websites.