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:
- 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
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.
A common question asked by start-ups or even just average average businesses is what information they can ask or use in vetting their potential employees. Some common forms used may be background checks, drug screening, and reference checks. Due to the economy creating many credit problems for average citizens (even more so with entrepreneurs who often use their own personal credit to bootstrap their company), I will take a look at the use of credit reports in making employment related decisions.
Existing federal law provides that, subject to certain exceptions, an employer may not get a credit report without prior disclosure of that the employer wants to obtain one and the employee consents. Existing federal law further requires, subject to certain exceptions, an employer, before taking any adverse action based on the report, to provide the consumer with a copy of the report and a written description of certain rights of the consumer.
California enacted AB 22 which amended California Civil Code Section 1785.20.5 to provide additional protections in this state to protect the potential employee when dealing with similar uses of credit reports. This law went into effect January 1, 2012. In addition the California Labor Code added Chapter 3.6 to include additional requirements. The law provides that the employer needs to follow the same federal requirements of disclosure that they want to obtain a credit report, but also requires the employer to state why they want it. The law goes on to further indicate that credit reports can only be requested for the following certain categories of types of positions (except by certain financial institutions): Continue reading
Many small business owners or other entrepreneurs start out with a great idea for a new product or service. They start a business and focus on doing whatever it takes to make the company successful. Many don’t take the steps necessary to properly protect the business from creditors or don’t really pay much attention to what they sign when they are making deals. The ones who do read the fine print may just have the attitude that they are so confident in the business’ success, who cares if they use their own personal credit to get some working capital. With the economic downturn over the last few years, many business owners have had to close their doors because they couldn’t get the funds they needed to even cover the simple things like payroll or rent.
Use of Personal Credit
Many entrepreneurs feel that they should put some ‘skin in the game’ by contributing some of their own money into the business. In fact, the Small Business Administration backed loans often require the founders to contribute at least a certain percent of their own assets or some other major contribution in order to qualify for a business loan. When the owner doesn’t have available cash, they look to other sources to get the money to contribute. That can lead to things like taking out a home equity line of credit or using personal credit cards to help fund the business. Obviously that is pretty risky, but often necessary to get early access to this seed money to start and grow. The banks that issued the credit did so based upon the owner’s personal credit rating. Just because the credit card may have the business’ name on it doesn’t mean the bank hasn’t covered their bases by making sure they can sue the owner personally if the business defaults in payment.
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.