Private Placement Memorandum (PPM) Templates- Why To Beware Most DIY, Discount or Free Forms

A common issue faced by entrepreneurs, founders, start-ups, and other small businesses is how to get documents when they need to raise money for their venture or enter into various agreements, hire employees, or protect their intellectual property.  The cash strapped individuals often look to discount or free services online to help them do things like obtain sample templates, incorporate, or get other form documents they can use.  There are definitely times you can use these sample form templates or online services and there is a link to some document / forms websites, term sheet resources, and sample financing documents on my Top Startup Resources page.  There are private placement memorandum (commonly referred to as PPM) templates online that can give a starting point and I go over what a PPM is, why you need one, and what should be in one on this page.

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Flat Fee Lean Start-Up Business Legal Package Guide

Many entrepreneurs and founders are hesitant to talk to an attorney for fear of the dreaded hourly billing or unknown costs.  The other concern is that many people fear or don’t want to deal with lawyers, either because they don’t know what to expect or there have been bad experiences they have experienced or have heard about.  That is why many people avoid getting initial legal work complete when they are working on a startup idea.  I have discussed in a recent article about some of the problems and reasons why founders need to get quality business, financial, and legal advice very early on in the process (See Business Start-Up Toolkit- A Guide to Lean Startup Legal & Advisors).  I have also discussed in a separate article what to look for in a startup attorney.  People often resort to online document templates or avoid putting things in writing or use online incorporation/document services.  These things can have their use and can save money; however, there are ways to get these things done properly and avoid mistakes that can end up being much more costly in the long run (also discussed more in the Guide to Lean Startup Legal above).

I put resources and educational material up to help people make wise decisions on when to save money on my websites and blog; however, I also try to put things together to help entrepreneurs at a reasonable price when they need to spend the money to get their legal work performed.

I offer a variety of flexible payment terms for start-up legal services and offer a flat fee start-up package for a total of $5,000 that includes all the following early and formation stage legal service/documents:

Incorporation / Organization

  • Reserve a corporate name
  • Incorporate or form a limited liability company
  • Prepare necessary bylaws or operating agreement to provide how the company is managed
  • Prepare all formation corporate consents and resolutions by shareholders and/or board, corporate records, and minute book
  • Prepare and file Form SS-4 Application for Employer Identification Number
  • Prepare and file a qualification to do business as a foreign corporation in the state in which the company is located (if applicable)
  • Prepare form of Indemnification Agreement for officers and directors

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Business Start-Up Toolkit- A Guide to Lean Startup Legal & Advisors

I was reading an article in this month’s (June 2012) Entrepreneur magazine by Ann C. Logue entitled “Beyond the Handshake- Having a business partner can be valuable.  Having the wrong-or no-partnership agreements can be disastrous.”  It details the experiences I hear every day by founders, entrepreneurs, and startups.  Most know they need quality legal and business advice in the early stages of their growth, but don’t want to spend the money on it.  With the advent of online document and template sharing, discount legal document prep companies, and companies out there like LegalZoom and RocketLawyer offering low-cost or free legal documents, I very often hear and see the impact that is having.  I have worked both in the trenches of many a cash-poor startup and also as an attorney advising these same type of companies or founders and wanted to give some additional guidance and solutions from both perspectives.

Education and information are some of the most critical areas for any start-up.  They need to know their product, know their market, learn how to commercialize their product or service, and how to go from idea to a functioning business.  I put together a handbook with some of the common areas operationally, administratively, financially, and legally in my Startup Bootcamp 101 e-Book (Click to download free pdf) to provide some basic education on those aspects of business start-ups.  There are web resources that I have tried to compile as well at this Blog, but there are tons of resources in the form of books and online materials.  Some recommended books are Venture Deals by Brad Feld, the Lean Startup by Eric Reis, and the Startup of You by Reid Hoffman.  I will discuss some of the do’s and don’ts when trying to stay within a “lean startup” mentality, but also when you do yourself a disservice by trying to cut corners to save money.

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Paul Walker Death A Reminder About Preparing For The Unlikely – Estate Planning & Asset Protection

With the continuous media coverage over the recent tragic death of the actor Paul Walker, it should be a reminder to think about planning for your eventual passing, no matter what your age.

Many people come to estate planning lawyers or think about getting a living trust or a will when they are getting close to retirement; however, most everyone should think about the one event in your life that you can bet will happen, your eventual passing.

With Mr. Walker, several issues come up that it is too early to know the answer to.  Even though he was only 40, how did he prepare for the eventuality that has now happened?  His daughter moved to California from Hawaii to be near him.  Since she is only 15, who is her legal guardian and where will she live now that he is gone?

I don’t know how much Mr. Walker was worth, but I am sure he had substantial assets and probably life insurance in place.  Were those assets to pass directly to his daughter, to his parents, to the mother of his child?  If he didn’t have a trust or will in place, the State of California would make those decisions.  Good planning can involve preparing a trust to avoid the costs of probate court and set out exactly what should happen to your assets.  In this case, a typical trust would have things in it to say how much money goes to his daughter, when, and under what conditions.  Maybe that includes only giving half when she turns 25 and the other half when she turns 40.  Maybe it includes provisions so that she can’t get anything if she starts abusing drugs or alcohol.  These are just some of the concerns, even for a relatively young person planning for the “just in case.”

In terms of asset protection, if Mr. Walker was driving (although it sounds like he wasn’t) and was driving recklessly or under the influence, his estate would probably face a potential wrongful death suit from any passenger in the vehicle’s family.  If his assets are not properly protected, all of the money and property he has earned could be open for a contingency lawyer to go after and his daughter or family could be left with nothing.  Some early steps could help transfer some assets away from potential creditors and toward family, charities, or other places someone would want their money to end up after their death.  A common misconception is that if you get a living trust online or even through an attorney, that you are protected.  That is not the case.  A living trust is a revocable agreement that provides no protection of your assets from potential creditors.

This is just another tragic situation that should remind people to be sure their affairs are in order for that “just in case” moment.

Do companies ever do anything for employees in terms of helping them purchase options when they leave the company?

I agree with Damion below, cashless or net-issue exercise options and notes can be used, but you have to determine fair market value of the stock.  One of the biggest issues for the employee also has to do with their own tax consequences.  I don't want to get into all the specifics as those depend upon all kinds of variables, but employees often feel they are being cheated by not being able to actually get the stock and the option expiring.  If they do exercise, there can often be tax consequences to them that they don't realize and may not want to exercise if they company doesn't have a way for them to liquidate the stock they end up with.

There are alternatives to the traditional stock option plans, such as SAR, phantom stock, ESOP, restricted stock purchase plans, and other plans that may provide incentives, but there are usually restrictions built in to those as well. 

Unless you have cash to pay bonuses or other comp in place of options or you give a direct stock grant, those 90 day restrictions are pretty common and the employees need to understand that going in.  Once the employee realizes the tax issues to them and their likelihood of being able to sell the stock down the road, they may reconsider just how valuable those options may be.  I have seen clients go public with former employees holding stock options or warrants allowing several years to exercise their option and never doing so because even with a public company, the tax implications and low stock price do not make it worth doing so.

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Who are the top ten lawyers in Silicon Valley who are set to become experts in equity based crowdfunding?

Thanks for asking me to answer, but I can't really give an answer either.  Any "crowdfunding" involves securities, finance, and corporate law, but is just a new name to what startups have been trying to do for years.  The only change has been the economy resulting in new legislation and an online push for startup funding.  Businesses used to try to do the same thing with small amounts of cash from lots of investors, but regulations were put in place to protect investors and the market.

It will take some time before anyone really knows the full extent of new SEC rules and other changes, but any securities lawyer who deals with start-ups, venture capital, angel investors, emerging growth, entrepreneurs, and related issues have to stay up on this topic.  My take is that no lawyer feels this is such a huge area that they would try to become an expert.  I would rather wait until the hype dies down on this to see what happens as this trend may not end up being as great an opportunity after regulatory agencies crack down or shareholder/investor lawsuits start kicking in.  The problem of minority shareholders and their rights has been a major area of concern for years with small and growing companies and this creates the potential for even more of those issues to arise with so many investors.

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What are the best practices for managing Terms of Service (ToS) for a SaaS company?

You should also keep up to date with E-sign and other laws or potential legislation related to online contract formation and retention of records.  TOS don't mean much if you can't legally prove they have accepted the terms (and which TOS they agreed to, which is why version control/retention is critical so you can tie which TOS applies to that consumer and show they accepted those terms).

The nature of SaaS and its recent evolution has changed what may be recommended for TOS, resulting in longer versions.  New issues pop up that may not have been thought about before, new lawsuits, new cases, new security breaches, data privacy leaks, new ways or platforms to use the service, new accounting rules on how to recognize revenue, etc. 

The use of the word "software" is somewhat misleading because they are treated as a subscription to a service, instead of a license to use software, which is how you use things like Word or MS Office.   They may need to include a limited license with the subscription to download and use any software code to access the service from things like tablet, mobile, or desktop apps. 

There have been some changes over the last few years, but maybe down the road there will be a push to make more uniform rules or case law will establish how the issues in TOS will be handled more definitely.  For now, lawyers spend their time thinking about all possible ways to cover your butt, resulting in long forms.  Eventually shrink-wrap licenses held up in many courts (although not always) as valid agreements even though many of them only state that by opening the box/shrink-wrap, you agree to the terms, which are often not all listed on the outside of the box, but incorporated into it.  With a few courts saying that is not enough to have a valid contract unless the person reads the whole thing before agreeing, it is best to retain an attorney to over your specific facts or use the full/comprehensive version.

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Is Funder’s Club in violation of current securities laws with their investment-based crowdfunding model?

Although I don't know all the specifics of how they structure everything, since I was asked to answer, I will put in my two cents based upon what I know about their company/structure (like most frustrating attorney answers, the jist of it is "it depends").

The use of only accredited investors has to do with which securities exemption they are claiming to rely upon in the offer and/or sale of securities to avoid registration and other requirements (usually under Reg D).  You lose certain exemptions if you use unaccredited, so you can have some unaccredited under some exemptions, it is usually safer to stick to all accredited, which is probably why they are using that requirement.  It is too complex to get into here, but the different exemptions relied upon address issues like number of certain types of investors, exemption/raise amount within a period of time, and disclosure requirements.  It appears they are selling securities in a fund setup to invest in specific companies (or group of companies in the same industry).  The offer and sale of the securities in the fund must fall under an exemption from registration or be registered with the SEC (and possibly receive state approval or clearance).  They discuss the funds being LLCs, so the units or interests in the individual fund's LLC are the security being sold.

Currently (Pre-JOBS Act full implementation), there are some limited ways to solicit and offer securities privately or provide certain general public information that may not be considered a solicitation or offer to sell.  They may or may not be going beyond what may be allowed for such private offering of unregistered securities, but post-JOBS they will have much more leeway to structure offerings as a web funding portal.  As David mentions, they are not soliciting or offering to sell a specific fund or security (at least on the initial pages), they are describing the process.  I assume once you get into the process further, the review and decision to invest in a specific fund would get into some specific offering materials or disclosures.  They may have gotten there without a pre-existing relationship, but then it is a matter of source or form over substance on whether there was general solicitation and offer versus pre-existing/private relationship for a private placement. 

If you put up a website that tells people about your new LLC startup, its business plans, and in order to execute on its business plan, it projects it will need $500,000 from some source that could include through investors, that may not be considered an offer to sell LLC units as a security through general advertisement or solicitation.  The problem is that there are grey areas that I think this company is in where any zealous SEC staff may decide they want to fight for more investor protections and claim what they are doing violates securities laws. 

As with many laws, you may not know or be sure that you are breaking it until after a prosecutor decides to go after you, you are convicted, and an appeals court interprets the law to say you broke the law.

The biggest problem I see is the broker-dealer issue.  Obviously they will get paid at some point and I can see a clear case of showing how the money trail leads back to the sale of the security/LLC fund investment.  Unless they are registered broker/dealers or register under post-JOBS implementation as a funding portal, I think there is a lot of potential liability as an unlicensed broker/dealer, basically a finder getting a commission or success fee, even if it is through a pass-through type entity and down the road.  Perhaps they have thought through all these issues and are willing to assume the potential risk, but I can't see how this does not bring a slight risk of being a public offer to sell or unlicensed broker/dealer activity.  If they use proper exemptions and the website process is not determined to be a general solicitation of securities in their fund LLCs, they may be compliant.

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