What are the legal issues with starting a new business?
Discussion About Legal Issues in New Business Venturing
To manage the relationship with any lawyer we feel it is important to know what they do, how they can help you, and how they think. This Article is merely intended to help guide you and to prepare you for your discussions with any legal specialist.
The basic legal steps before doing business are:
– handling issues with your prior employers
– choosing a company name
– filing all the documents with the secretary of the chosen state
– paying all the required fees with the chosen state
– working on the capital structuring of the equity
– drafting employee agreements
– legal documents for incentive stock options
We know that you will need legal help in the following areas:
– contracts and agreements
– personal needs of the venture team
– real estate and leasing agreements
– employee stock ownership plans
– franchising and licensing
– formal litigation
– delinquent accounts
– liability protection
– merger and acquisitions
– employee benefit plans
– tax planning and review
– government and regulatory reporting
Note: If you have plans to raise money from Venture Capitalists, Angel Investors, Strategic Investors you will need to have your new company incorporated.
New Employees and Issues with Intellectual Property
More than ever, potential investors are looking for ventures that are run and operated by professional entrepreneurs and domain experts who are specialists in their respective fields. Likewise, it is assumed that most will have existing or prior relationships immediately before joining the new business venture. It is important that during this formation process that all such potential members of the venture team, and employees that are to be hired directly following the launch, do not misappropriate the intellectual property we discussed in previous Articles.
If you plan to leave a company and intend to compete with that company through your new business venture, be very careful with the solicitation of fellow employees, business accounts, and even professional service providers. Check with your legal representatives because IP laws are different for each state and are changing each year. Bottom line, be very careful in hiring employees from competitors, how you hand out and expect employees to sign non-compete agreements, how you will handle non-solicitation clauses, and how you will manage intellectual property issues in your new venture.
One of the key issues you must resolve at the outset of your new venture concerns the legal structure of your venture. There are three basic legal forms of business: sole proprietorships, partnerships and LLCs, and C Corporations. The right legal structure for your business can save you money, help you get more money, and save you from future headaches. The wrong one can take years to unwind, especially if the corporate documents are not in order.
Since our main thrust is helping you raise money for your venture, your decision on entity selection should be driven by the financing strategy of your business. The corporation, because of its advantages over the two other forms with respect to personal liability, is the form of business we recommend for raising capital. The modern corporation has been around for the last 160 years, and its capital-raising advantage is ensured by corporate law. It allows people to invest their money in a corporation, and to become owners without imposing unlimited liability or management responsibility on themselves.
Ann Winblad, a venture partner from Hummer-Winblad, simply states, “If you’re serious about pursuing professional capital in your company you ought to learn how you should orchestrate the stock structuring of your company on day one.” Because, she adds, “More often than not that the capital structure is a train wreck that makes it uninvestable by venture capitalists.”
Equity capital, which we discuss here, is the money invested in fixed or hard assets, such as building, equipment, land, machinery, and fixtures. The excess cash, or working capital, which we discuss in previous Articles, is money used to pay ongoing expenses, such as your payroll, supplies, marketing costs, and rent.
In exchange for equity capital, every corporation issues equity securities, of which there are three basic types.
– Common shares are most often issued to those who manage the corporation, bear the major risks of the venture, and yet stand to profit the most if it is successful.
– Preferred shares have liquidation and dividend preferences over common and may be converted into another class of shares, usually common shares.
– Debentures are long-term, unsecured debt securities. It is not uncommon for debentures to be convertible into one of the other securities.
Securities Laws and Private Financing Issues
Be advised that it is illegal to offer for sale, or even solicit investors for, any type of security without registering your offer with federal and state agencies that control such offerings, or filing your offer under a federal or state exemption from such registration. The most serious consequence of violation of the securities laws is potential civil liability that may be incurred by anyone deemed to have violated such laws or to have aided and abetted violations.
Like many areas of the law, securities regulations are a complex, ever-changing territory fraught with many pitfalls for the entrepreneur in the race to get funded. And the consequences of violation not only affect the individuals, but also the officers, and they also can preclude present and future business financings.
A good securities attorney will be able to steer you clear of the land mines and misconceptions. For example, these statutes apply to issuers of all “securities,” not just the issuance of stocks we defined above. All securities include common and preferred stock, notes, bonds, debentures, voting-trust certificates, certificates of deposit, warrants, and options subscription rights. In fact, the definition is broad enough to encompass just about any financing transaction you may plan to do through your venture.