A founders’ (or shareholders’) agreement defines the relationship between key people in the startup, usually the founders and first shareholders.  The agreement can do a variety of things, but often includes: 1) allocating each founder’s equity stake; 2) defining each founder’s responsibilities in the company: 3) establishing transfer restrictions on founder shares; 4) setting vesting schedules and/or acceleration provisions; and 5) explaining what happens to a founder’s interest in the company if the founder leaves voluntarily or is fired.

The process of creating a founders’ agreement can be very helpful to a startup , as it allows the founders to brainstorm potential problems and set policies to prevent those problems from arising.

Once you have a founders’ agreement in place, you may find that it helps your startup to stay focused on its growth and investment plan.  Also, investors like to see founders’ agreements as such agreements demonstrate that founders have considered and resolved critical questions for the startup.

Protecting your most important assets

Of particular concern to startups is intellectual property law, or IP, for short. The advent of internet- based businesses has made novel ideas very valuable, and disputes about who “thought of it first” could result in legal battles of hundreds of millions of dollars. One only need to think of the well-publicized dispute between Facebook founder Mark Zuckerberg and his Harvard classmates Cameron and Tyler Winklevoss to see what can be at stake in an IP dispute; after the Winklevoss twins sued Zuckerberg for allegedly stealing their idea and source code for Facebook, Zuckerberg settled out of court with the twins for $65 million.

The best way to avoid such disputes is to anticipate any issues and put into place legal mechanisms that will protect intellectual property and clearly define the relationships between parties to a business venture. In turn, the best way to achieve this goal is to consult with an attorney who understands the unique legal needs and concerns of startups. In the first of a two-part blog on IP issues important to startups, we will examine two ways in which ideas not yet in the public domain can be protected from theft or misappropriation by other people or parties.

Non-disclosure agreements

At its most basic, a non-disclosure agreement (NDA) is a contract that exists between parties that identifies certain material, knowledge, or information that the parties to the contract share with one another but may not share with third parties. NDAs are important for parties considering doing business with one another to protect any ideas they need to share while evaluating a potential business venture. For example, if you had an idea for an iPhone or Android app, but needed to solicit bids for the app development, you could use an NDA to ensure that your idea was not stolen or disseminated to other parties.

Another way that a business can use an NDA to protect ideas is by having employees sign an agreement to keep them from disclosing company information or trade secrets to third parties. These types of NDAs are particularly important to tech startups who hire individuals who have intimate knowledge of a product or service being developed.

Trade Secrets

Trade secrets are defined by federal law in 18 USC §1839, as information, for which reasonable measures have been taken to keep confidential, that has independent economic value because it is not publicly known. Methods of protecting trade secrets include NDAs (discussed above) and non-compete clauses. In addition to preventing employees from disclosing information, employers may also require that employees assign any intellectual property produced in the course of employment to the employer. These types of agreements allow employers to invest in research and development without fear that their employees will walk away with the fruits of their investment.

Trade secrets are regulated by both state and federal law, which generally make theft of trade secrets a crime.

Protect your intellectual property from the start

These are just a few of the intellectual property issues that can arise when starting a small business or a startup. To best avoid any future disputes, it is important to consult with an attorney experienced in intellectual property law. As an entrepreneur, your ideas can be your most valuable asset, and protecting them from the start is the best way to go.

Sole Proprietorships

Sole proprietorships are the most simple business formation to create and may well be the most common. In fact, you may be a sole proprietor and not even be aware of it; if you conduct business for yourself selling a product or a service, you are already a sole proprietor. There is no filing requirement for a sole proprietorship, unless you are doing business under different name than your given name, in which case you need to file for a fictitious name or “doing-business-as” (DBA) certificate with the county in which you are based.  While inexpensive and easy to form, a sole proprietorship is not a separate legal entity from its owner, meaning that the owner and the business do not need to file taxes separately and that there is no liability protection for the sole proprietor’s personal assets if the business gets sued.

Partnerships

A partnership is a business that two or more people own. General partnerships are the equivalent of sole proprietorships, in that there are few filing requirements and no liability protection, even for actions of the other partners.  For this reason general partnerships are very risk. A safer form of partnership is a limited partnership, which is similar to a partnership but have increased filing requirements and limit the limited partners’ liability to the amount of their investment.  However, these limited partners may not participate in the management of the business. General managing partners still have unlimited personal liability in a limited partnership.

Corporations

Corporations are a common business form for companies that wish to have personal liability protection for owners.  Corporations are popular choices for startups that wish to attract investors and share ownership by selling shares or ownership stakes in the company. Corporations provide the strongest shield against personal liability for its shareholders and directors. The main disadvantages to forming a corporation are the formalities required, meaning that there are extensive filing and record-keeping requirements, as well as operating requirements such as the election of a Board of Directors, the adoption of bylaws, among others. Depending on the type of corporation formed (S or C), a corporation may be taxed as a separate entity from its shareholders or be a pass-through entity, like a partnership.

Limited Liability Companies (LLCs)

Relatively new to the business entity scene, LLCs are a hybrid between partnerships and corporations, and attempt to combine the liability shield of a corporation with the flexibility offered by partnerships. Members of LLCs may be individuals or other LLCs, and may participate in the management of the company while maintaining liability protection. In addition, LLCs may elect to be taxed as a corporation or as a pass-through entity, making it one of the most flexible business forms for tax purposes. LLCs are relatively easy to form, and usually are not subject to stringent filing requirements. Another aspect of LLCs that is attractive to small business is the fact that they allow for flexibility for distributions and allocation of cash and other assets.

The Bottom Line: Consult an Attorney

The choice of a business entity is very important in starting a business and can have implications on the way you are taxed and your personal liability for business debts and liabilities. Each of these business types has different advantages and disadvantages, and the one that is right for you is largely dependent on the specific circumstances of your situation. In order to determine which entity would best suit you needs, it is best to discuss your options with an attorney who specializes in the issues that are most likely to affect small business.

As most entrepreneurs know all too well, one of the most difficult challenges to overcome for a small startup is raising capital to get an idea off of the ground. Last year, amidst much excitement and with broad bipartisan support, President Obama signed the Jumpstart Our Business Startups (JOBS) Act into law (I wrote about the JOBS act here), purportedly making it easier for entrepreneurs and startups to harness the power of the internet and crowdfunding to raise investment capital.  However, we have yet to see crowdfunding put into action.  Why is the government taking so long? How might the JOBS Act affect entrepreneurs when it is finally implemented?

The Problem with the SEC

The Securities and Exchange Commission (SEC) is now in charge of moving the JOBS Act forward, as it attempts to write regulations that will set forth how the law with be implemented.  The agency is concerned with the potential for fraud or abuse through crowdfunding; through the anonymity of the internet, one could easily image a scenario in which a straw-man company, complete with a website, social media presence, LinkedIn contacts, and mailing address could open up shop, solicit capital investment, and then disappear without a trace in a matter of days. However, the SEC’s concerns are preventing the agency from issuing the necessary regulations, and the agency has already fallen behind its January 2013 deadline.  The latest word is that we may not see regulations until 2014.

How Might Crowdfunding Help Startups

The idea of crowdfunding as it relates to startups is simple: using the internet to pitch an idea to millions of potential investors and selling small amounts of equity to raise capital. Up until now, there have been regulatory barriers, aimed at protecting small investors from unscrupulous and shady investments, that have made it impossible for entrepreneurs to use crowdfunding to raise capital. The JOBS Act, which creates a new exemption to the Securities Act of 1933, will allow entrepreneurs to directly solicit investment from the general public through an accredited crowdfunding platform.

Both investors and entrepreneurs stand to gain from the increased opportunities that crowdfunding can potentially provide. If everything operates as intended, crowdfunding will allow innovative entrepreneurs to raise capital quickly and cheaply, and remove barriers that kept middle-income people from investing in small companies. Where small startups formerly had to navigate the increasingly tight-wallet vetting process of traditional venture capital firms or had to have a “rich uncle,” they now will ostensibly have access to millions of potential small investors with even more millions of dollars.

Of course, there is the risk of fraud and abuse, and until the regulations are promulgated it’s impossible to tell how crowdfunding will affect entrepreneurship .   However, most agree that crowdfunding has the potential to revolutionize the process of securing investment for a startup, and whether and how effective it will be remains to be seen.

Microfinance, a cousin of crowdfunding, is an economic model in which small-scale lenders extend credit to borrowers that usually are unable to access credit.  Generally, microfinance services target poor populations in developing countries, and the impetus behind the movement is the idea that providing access to financial services will help people out of poverty and stimulate developing economies.

Access: an economic problem

The fundamental issue that microfinance attempts to solve is that it does not make financial sense for Bank of America or CitiBank to do business in the places and with the people that microfinance targets. Whether these banks are making a $1,000 loan or a $1,000,000 loan, there is a set cost with servicing a loan, and of course the lender will make a higher rate of return on the larger loan. For instance, if a lender makes either one-hundred $1,000 loans or one $100,000 loan – the costs associated with managing one-hundred smaller loans is 100 times greater, but the bank does not stand to make any more money from the same amount of investment.

Microfinance aims to bridge this gap and bring traditional financial services to people who would otherwise lack access.  The first large scale microfinance institution to gain widespread attention for its success was the Grameen Bank in Bangladesh.  Originally started as a research project in 1976 by a Vanderbilt educated economist, the Bangladeshi government established the bank as an independent bank in 1983.  The idea came to founder Muhammad Yunus when he loaned 42 families $27.00 during the Bangladesh Famine of 1974 so that they could make small items to sell. The success of Grameen has led to similar microfinance projects throughout the world.

Direct lending through the Internet

One such project is Kiva.org.  Meaning “unity” in Swahili, Kiva matches lenders with borrowers in developing economies through its network of “field partners.” The site allows prospective lenders to browse through profiles of qualified local entrepreneurs who have been submitted by the field partners, who ultimately service the loan (and charge the interest). Kiva does not charge interest on the loans, and operates solely on loans, grants, and donations. Kiva has lent over $394 million in loans and has a repayment rate of 99.02%. The organization operates in 69 different countries and has 183 microfinance field partners. Kalia Law Group is a proud supporter of Kiva and the principles of economic equality and access that Kiva promotes.

Seminar Location: SCCBA Seminar & Conference Center

31 North Second Street, 4th Floor
San Jose, CA 95113 United States

For more information and to register, go to https://m360.sccba.com/event.aspx?eventID=63398&instance=0

-       if you have less than fifty full-time employees, you don’t have to provide your employees with health insurance

-       if you are a small business and you provide your employees with health insurance, you may qualify for an increased tax credit of up to 50% of your contribution to their premium

-       if you currently have an insurance plan for your employees and it has been in place since 2010, it may be “grandfathered” and be subject to fewer coverage requirements under the ACA

-       if you are on the market for a new plan, the plan you choose must guarantee coverage regardless of health status, and must allow young adults to stay on their parents’ plan until age 26

-       if you have fewer than 100 employees you may be eligible for a grant to start a workplace wellness program

The ACA is a complex and new area of law, but there are many resources out there to help business owners.  A good starting place is here: http://www.healthcare.gov/using-insurance/employers/small-business/index.html.

As with any other business, opening a restaurant requires writing a business plan, finding a location to set up shop, and prudently investing your time and money into the venture. In addition to those basic but crucial first steps, opening an eatery—whether it’s a brick-and-mortar restaurant or a food truck—has additional challenges in the form of regulatory requirements that you have to comply with in order to stay in business.  Below are a few things to consider.

Brick-and- Mortar Restaurants

Once you have found the location for your restaurant, you should apply for a zoning permit from your local department of zoning and planning. This permit will allow you to alter your space in order to make accommodations for equipment and seating.

You should also contact your local health department in order to learn how to obtain a license from them. In California, for example, you must receive a license from the Health Department stating that you are in compliance with all sanitary regulations and food safety laws before you can open your eatery. All food service facilities and restaurants that store food for human consumption are also required to register with the FDA. The FDA’s website contains all the guidelines and forms for registration. You should also apply for a liquor license if you need one, obtain a certificate of occupancy, and arrange for garbage removal.

Food Trucks

Food trucks are the latest trend in eateries, and many cities are still adapting to their presence. In addition to conventional restaurant requirements such as licenses from the health department and FDA registration, you may need a permit that allows you to park your truck on a street or other public property. You also need to designate a permanent, non-P.O. box address to represent your place of business for official government mailings.

Your food truck business may also be subject to municipal regulations that don’t apply to brick-and-mortar restaurants. For example, you may need to obtain special insurance to cover your truck and the drivers. Your city may also have regulations that limit where, when, and how long you can park your food truck—the distance you can park from schools, other food trucks, and brick-and-mortar restaurants serving similar fare are examples of the regulations that some cities impose on food trucks.

Remember, government entities impose these regulations on restaurants, cafes, and other eateries to ensure that they are safe and healthy for employees and the general public. If you stay on top of the latest regulations and follow the applicable codes, operating your eatery can be a rewarding experience.

A convertible note works like this: an investor provides the startup with a loan, say $50K.  If the startup gets funded during the term of the loan (usually 1-2 years), the investor gets repaid his or her $50K in preferred stock of the company, offered at a discount to the investor.  If the discount is 20%, the investor will end up with $62.5K worth of preferred stock.  If the startup does not get funded before the loan matures, the investor gets repaid the $50K plus interest.

What are the benefits of convertible notes?  They are relatively simple to set up.  For investors, convertible notes provide an opportunity to get a significant stake in the venture, if it is successful.  For startups, convertible notes offer much-needed capital with little downside.

Takeaway is this: For startups that can persuade an investor to part with a relatively small amount of cash (generally upwards of $10K), convertible notes can be a great way to tide them over until they get Series A funding.