How To Structure Your Company And Raise The Cash …. Legally
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Transcript of How To Structure Your Company And Raise The Cash …. Legally
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HOW TO HOW TO STRUCTURE STRUCTURE
YOUR COMPANY YOUR COMPANY AND RAISE THE AND RAISE THE
CASH …. LEGALLYCASH …. LEGALLY
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PART I:PART I:HOW TO STRUCTURE HOW TO STRUCTURE
YOUR COMPANYYOUR COMPANY
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Choose the Right Choose the Right EntityEntityWhen Should You Form an Entity?•Initiation of Business Operations•Asset Protection•Capital Raising•Multiple other factors ….
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Choose the Right Choose the Right EntityEntity• Sole Proprietorship• General Partnership (GP)• Corporation
– C-Corp– S-Corp
• Limited Partnership (LP) • Limited Liability Company (LLC)
http://www.sos.state.tx.us/corp/index.shtml
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Sole Proprietorship Sole Proprietorship •Default entity •NO liability protection• Insurance coverage is only option for liability protection
•A DBA filing is NOT entity formation
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General Partnership General Partnership • Definition: Association of 2 or more persons
to carry on a business for profit – whether they intend to create a partnership – and whether they call their association a partnership, joint venture or other name
• Factors indicating a partnership:• Right to share of profits• Expression of intent• Right to control business• Contribution of money or property
• NO liability protection, partners are jointly and severally liable for all partnership liabilities
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Officers: President, Vice President,
CEO, CFO, Secretary, Treasurer
Employees/Operations/Contracts
Board of Directors
Shareholders Ownership
Strategy/Direction
Implementation/ Signing Authority
Liabilities
CorporationCorporation
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ProsPros• Limited liability for
shareholders• Centralized
management • Flexible capital
structure • Most well-known
and easily understood
• Growth-oriented
ConsCons• Expense of formation
and maintenance• Double taxation for
the C-Corporation • S-election restrictions
– 100 shareholders or less
– One class of stock– Only U.S. residents or
citizens
• Corporate formalities
CorporationCorporation
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Officers: President, Vice President,
CEO, CFO, Secretary, Treasurer
Employees/Operations/Contracts
Board of Directors
Shareholders Ownership
Strategy/Direction
Implementation/ Signing Authority
Liabilities
Officers: President, Vice President,
CEO, CFO, Secretary, Treasurer
Employees/Operations/Contracts
Managers
Members
Limited Liability CompanyLimited Liability Company
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Limited Liability Limited Liability CompanyCompany
ProsPros• Flow-through
taxation • Limited liability
for members• Flexibility of
Company Agreement
• Easy to form
ConsCons• Different
terminology (i.e. Managers and Members instead of Board and Shareholders)
• Some investors may insist on corporation structure
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Employees/Operations/Contracts
General Partner
(LLC/Corp)Limited Partners Ownership
Strategy/Direction
Implementation/ Signing Authority
Liabilities
Limited PartnershipLimited Partnership
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Limited PartnershipLimited PartnershipProsPros
• Flow-through taxation
• Liability limited for limited partners
• Restricted participation of limited partners in management
ConsCons• Must have a general
partner who is liable for all partnership obligations
• Limited partners have to agree to no say in management (can be less attractive to investors)
• Limited partners who participate in management of business become liable as GPs
• Expense of maintaining multiple entities
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Entity TypeEntity Type Fees and Other CostsFees and Other Costs TimingTiming
Corporation Filing Fee: $300Legal Fees: $700-$1200
• SOSDirect•Basic documents (may also do shareholders agreement)
Limited Liability Company
Filing Fee: $200Legal Fee: $1000-$5000
•SOSDirect•Documents can be complex
Limited Partnership
Filing Fee: $750Legal Fees: $2000-$5000
•SOSDirect•Documents can be complex•Requires 2-tier filing
Cost and TimingCost and Timing
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Biggest Concerns Biggest Concerns • Taxation: How the entity will
be taxed?• Liability: Who will be liable for
its obligations?• Management: Who will manage
the entity?• Ownership: Who will be the
owners of the entity?
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TaxationTaxation• Levels of Taxation:
– Federal Tax (IRS)– State Tax (Texas Franchise Tax)
• http://www.window.state.tx.us/taxinfo/franchise/margin.html
• Taxation by Entity Type:– C-Corp: Double taxation at corporate level and again
at shareholder level upon distribution of dividends – S-Corp: No corporate level tax imposed – corporate
level income treated as received by shareholders– Limited Partnership: Non-taxable “flow through”
entity – taxation imposed only at ownership level– Limited Liability Company: See Limited Partnership
above
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LiabilityLiability• Entity Liability: Entity will be liable to extent of its
assets - question is who will be liable, if anyone, if the entity’s assets are not sufficient to satisfy all claims?
• Owner Liability: – Generally shareholders, limited partners and
members will not be personally liable for debts and obligations of the entity in excess of their investment
– Exceptions • Piercing the Corporate Veil factors include
perpetrating fraud, formation to avoid legal obligation or statute, protection for crime
• Debt guarantees
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More Liability More Liability • Fiduciary Duties:
• Who has them? Directors in corporations, general partners of limited partnerships, managers of limited liability companies
• What are they? • Duty of Loyalty: Act in good faith and not allow
personal business interests to prevail over interests of corporation.
• Duty of Care: Take care that an ordinarily prudent person would exercise under similar circumstances
• Duty of Obedience: Obey law and certificate of formation
• Indemnification by entity available if so provided
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ManagementManagement•Partnerships and LLCs do “not”
have Presidents and Directors
•Who will have control over/vote on what decisions? Owners or Management?
•Generalization:– Corporations = defined by law (modified by
agreement)
– Partnership and LLC = defined by agreement
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Joint Ownership Joint Ownership Issues Issues • Not only your co-owner, but also your
cousin, brother-in-law, roomate… • Shareholder/Company/Partnership
Agreements – What if I want to sell? – What if my partner dies? Gets divorced?
Files for bankruptcy?
• Issues are always easier to resolve before money is a factor
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Respect the Entity Respect the Entity FormForm• Keep the Personal Personal
– Do not pay personal bills with corporate checks. – Do not pay corporate expenses with personal
checks. • Keep Records, “Minutes” or Written Consent
– Action taken by owners or management?– Major corporate actions such as voting in
management and big transaction • Assets transferred out of the corporation – PAPER
IT• Assets transferred by anyone to the corporation –
PAPER IT.• Business Operations in Entity Name
– Business insurance (e.g. public liability, disability, group medical, hazard) in entity name
– Contracts in entity name
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Respect: SignaturesRespect: Signatures• Corporation or Limited Liability Company
MY COMPANY, a Texas ___________
By: ____________________Name: __________________Title: ____________________
• Limited Partnership
YOUR PARTNERSHIP, L.P., a Texas limited partnership
By: ABC CORPORATION, its general partner
By: ______________________Smart E. Entrepreneur, the President
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Respect: Books & Respect: Books & RecordsRecords• Accounting Books: Income
Statement, Balance Sheet, etc.
• Corporate Books: Certificate of Formation, Bylaws, Minutes, Written Consents, Ledger, Partnership Agreement, Company Agreement, etc.
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PART II:PART II:RAISING THE RAISING THE
CASHCASH
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Debt: LendersDebt: Lenders
• Most major traditional banks do not lend to startups or do so only rarely
• Comerica, Square 1 Bank, Silicon Valley Bank lend to entrepreneurial companies
• Will want to see accounts receivable, inventory, assets
• Very sensitive to market conditions – this last down turn caused them to become risk adverse
• Terms may include: fees, collateral, agreement to pay for AR audits, monthly reporting, audited financial statements, financial covenants plus all banking relationships – checking, credit cards, investments, etc. must be with lender
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Equity: Stock and Ownership Equity: Stock and Ownership InterestInterest• Corporation: Common Stock or Preferred Stock to
Stockholders
– Understood by typical investors – “Can I buy stock in your company?”
– Allows for flexibility (redemption rights, conversion rights, preferences)
• Limited Partnerships: Partnership Interest to Limited Partners and General Partner
• Limited Liability Companies: Membership Interest to Members
– Units v. Percentage Interest
– Class A, Class B
• Voting Rights
• Waterfalls
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Equity: Potential Equity: Potential Investors Investors • Co-owners • Friends and Family• Angel Funding
– Wealthy private individuals, with background in business, usually smaller than VC’s ($25K - $250K).
– Prefer to deal directly with the entrepreneur
– Like local deals– Limited in the number of investments they
will do concurrently
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Equity: Potential Investors Equity: Potential Investors • Venture Capital
– VC’s often are prepared to invest in continued rounds as the business grows and achieve its milestones
– Bring valuable skills, contacts, experience and discipline to your business
– Exiting usually in the form of a Public Offering or Sale to a larger business after reaching certain milestones.
– Demanding, costly, time consuming.– Due Diligence process can be brutal – background
checks, justification of your business plan, legal review, patent review, financial forecasts, etc.
– Entrepreneur may lose control after 2nd round of financing to marquee CEO, CFO, etc.
– Management reporting to the VC’s is often onerous
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Securities Law Securities Law • Starting Place: Registration with the SEC IS
required • All securities offerings must be registered with
the SEC– Offer triggers compliance requirements -
compliance must happen before selling process starts
• Unless, that offering is exempt from registration
• Doesn’t matter if small private sale or an offering which is immediately listed on the NYSE
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Private Offerings = Private Offerings = ExemptExempt• Privately-
negotiated sales
• Must not involve any general solicitation or general advertising
• Section 4(2)* - the private-offering exemption - “transactions by an issuer not involving any public offering”
* Securities Act of 1933(the “Securities Act”)
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Reg DReg D• Rule 504: Exemption for the offer and
sale of up to $1 million of securities in a 12-month period
• Rule 505: Exemption for offers and sales of securities totaling up to $5 million in any 12-month period.
• Rule 506: Exemption for sales of securities under Section 4(2) with no dollar limit.
http://www.sec.gov/answers/regd.htm
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Rule 506Rule 506• Permits unlimited dollar amount of
sales• Without a PPM• To Accredited Investors• Preemption from Blue Sky Laws• So long as Offers and Sales are made to
Accredited Investors with whom the issuer (or its broker-dealer) has a Substantial Pre-Existing Relationship
http://www.sec.gov/answers/rule506.htm
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““Accredited Investor”Accredited Investor”• A bank, insurance company, registered
investment company, etc.• An employee benefit plan• A charitable organization, corporation or
partnership with assets ≥ $5 million• A director, executive officer or general partner of
the company selling the securities• A business in which all the equity owners are
accredited investors• A natural person with a net worth of at least $1
million (not including house)• A natural person with income exceeding $200,000
in each of the two most recent years or joint income with a spouse exceeding $300,000
• A trust with assets of at least $5 million
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Why Only Accredited Why Only Accredited Investors?Investors?• Private placement memorandum that meets Reg
D requirements = $$$$$
• If more than $1 million is raised in a 12-month period, Rule 504 is not available
• Under Rule 505 and 506, a PPM would be required to offer securities to non-accredited investors
• NOTE: Even if not required, delivering a PPM or at least a detailed business plan is probably advisable for liability and marketing reasons, particularly in fulfilling the antifraud requirement.
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JOBS ACT 2012 JOBS ACT 2012 • TITLE I—Reopening American Capital Markets
To Emerging Growth Companies • TITLE II - Access To Capital For Job Creators • TITLE III — Crowdfunding• TITLE IV — Small Company Capital Formation • TITLE V — Private Company Flexibility And
Growth• TITLE VI — Capital Expansion
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Title III: Crowdfunding Title III: Crowdfunding • What is it? Issuing small amounts of stock to a large
number of investors.• Exemption under Title III
– Offering exempt from registration – Through a registered broker or registered funding
portal– Allowing sales to accredited and unaccredited
investors– Provided that such sales comply with the
requirements of the exemption• Benefits of Exemption
– Exemption from Blue Sky Laws– Non-accredited investors
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Crowdfunding Crowdfunding Complications Complications • Must file with the SEC and provide to investors:
– Description of the offering, business or business plan, financial condition, ownership and capital stock
– Risk Factors– Financial statements
• Issuer must file with the SEC and provide to investors (at least annually) reports of the issuer’s results of operations and financial statements
• Issuer prohibited from advertising
• Obligations of intermediaries – File with SEC and FINRA– Obtain questionnaires regarding risks in startups etc.
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Questions?Questions?
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Nicole M. Gewinner, Esq.Nicole M. Gewinner, Esq.Jackson Walker L.L.P.Jackson Walker L.L.P.
100 Congress Avenue, Suite 1100Austin, Texas 78701
www.jw.com