NOVEMBER 19, 2014

13 Startup Company Legal Pitfallsand how to avoid them

Max R. Masinter, Esq.

Presented to Uber Offices

Pitfall #1 – choosing the wrong entityLLC is not always the best for small businesses

S corp. tax savings on profits in the form of dividends (15%) and avoids: FICA tax of 6.2% on the first $117,000 wages paid. The Medicare tax rate is 1.45% on the first $200,000 and 2.35%

above $200,000. S corp. disadvantage is that no entity can be an owner,

one class of stock, state level taxes, proportionate dividends, etc.

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Pitfall #2 – protect yourselfService providers need to make 83(b) electionsWill you have a tax bill and no cash to pay it?Operate as your entityUnderstand the form of entity and who has authority to act for the company

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Pitfall #3 – a founder moved onBuy sell agreement

If the service provider stops providing services to the company, then there needs to be a mechanism to buy the departing founder out

If a founder dies, you could be in business with the dead founder’s spouse

If the founder goes to jail, becomes disabled, etc. there should be ways to buy out the founder

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Pitfall #4 – chasing the wrong fundingVenture capitalSBA

Decent credit Guaranty (possible 2nd lien on your home) You continue owning your business without other shareholders A good business plan and an application is all that is needed

Friends and familyKickstarter or crowdfundingTedco/DBED

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Pitfall #5 – Ignoring Economic Inclusion Benefits and RequirementsPrograms available for:

Minority owned businessVeteran owned businessSmall business

Benefits of programs:Small business set asides in government contractsMinority vendor status from larger companies

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Pitfall #6 – having no IP strategyDo you need a patent? Why? Have you protected trade secrets?Assignment of inventions from contractors and employees?Confidentiality agreements with vendors, employees, contractors, potential business partners.Is your brand yours?

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Pitfall #7 – using contracts effectivelyWhat is the value of the transaction to your company, and what is the risk if the transaction goes wrong?Shift risk to the other partyLimit your riskSet expectations of services and payments

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Pitfall #8 – working with workersEmployment agreements Tax withholdingIndependent contractor vs. Employee statusKnow when you have extra compliance and risk

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Pitfall #9 – use equity compensation Options Stock Appreciation RightsRestricted Stock

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Pitfall #10 – having bad recordsMaintain final signed versions of all contractsGet the terms on paper, even if the terms are simpleKeep records of company ownershipAvoid over issuing stock

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Pitfall #11 – restrictive covenantsNon-competeNon-solicitation of customersNon-solicitation of employeesConfidentiality

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Pitfall #12 – not preparing for exit Focus on earnings Push off large capital investmentsWork with an investment banker before you are ready to sell to get your house in order and maximize value

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Pitfall #13 – skimping on professionals find an accountant that knows your industry and works with startup businesses find a business lawyer who works with startup companies

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Questions?

Max R. Masinter, Esq.mmasinter@tydingslaw.com

410.752.9751

Presented to Uber Officeswww.tydingslaw.com