So a major issue faced by many startup founders, especially when they are bootstrapping, self-funded, or just watching their cash, is how they can get legal or other services with little to no cash. The fall back position is to give the advisor or service provider a “piece of the action.” The founder often wants to use stock in the company they formed or stock options to avoid using cash, but still obtain needed advice and guidance. Here are the main problems you will run into:
1) Valuation– You will have a difficult time agreeing on a valuation of the company’s stock (see Section on Valuation). The founder often feels that they have the next greatest invention or idea of all time and the company is already worth billions despite having no business model or revenue (just watch an episode of Shark Tank on ABC). The valuation is what you use to determine the value of the stock in comparison to what the services are worth. (e.g. 1,000 shares of stock valued at $1 per share in exchange for $1,000 worth of services) The service provider or advisor may have a different idea of what your company or idea is really worth. If you can’t come to some agreement on the value of the stock, you won’t get them to sign on.
Not quite sure based upon your question what you are looking for to be done, but the JOBS Act has yet to be implemented. Until we know the rules set by the SEC in the next several months, it is hard to know for sure how to deal with the new legislation or structure transactions based upon what may be the rules down the road.
This type of work is handled by securities lawyers. You usually should find one licensed in your state because there are federal and state securities laws and the attorney should be familiar with your local regs. As a securities lawyer, we are already familiar with Reg A financing and other types of structuring finance transactions, but the changes from the JOBS Act are yet to be seen and will involve securities laws (which is primarily what the JOBS Act include) and rules from the SEC.
I read a good post yesterday from Chris Dixon on his blog about why there aren’t more “Meaningful Startups.” In the article and comments, the discussion had to do with why tech companies, more specifically, internet startups get the majority of funding instead of companies that seem to solve a bigger societal problem, such as curing a disease. He argues that the other what some might call “more meaningful startups” don’t get off the ground because they have a hard time getting funded and this is due to time to exit and amount of capital required.
I tend to see that funding and society are major reasons for the tech funding boom.
On April18, 2012, the SEC, jointly with the Commodities Futures Trading Commission (CFTC), implemented part of the Dodd-Frank Act by adding definitions for use in interpreting what are swaps-related transactions.
The new Rule 3a71-1 under the Securities Exchange Act defines the term “security-based swap dealer” consistent with the criteria set forth in the Dodd-Frank Act as someone who:
- Holds themselves out as a dealer in security-based swaps.
- Makes a market in security-based swaps.
- Regularly enters into security-based swaps with counterparties as an ordinary course of business for their own account.
- Engages in activity causing them to be commonly known in the trade as a dealer or market maker in security-based swaps.
There is an exception for those who are only involved in a de minimis quantity of these transactions to not be held to this rule. The rule will go into effect 60 days after the rule is published in the Federal Register.
You can read the entire release and rule through the SEC’s website at: