small business

Major Factors To Consider When Selling Your Business

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Doug was recently quoted in an article on Forbes and about how you need to be wary of potential bad actors when you sell your business “[c]ompetitors often express an interest in purchasing a business merely to gain as much information about that business as possible with no intent of actually completing the purchase. Be… Read More

Doug was recently quoted in an article on Forbes and about how you need to be wary of potential bad actors when you sell your business “[c]ompetitors often express an interest in purchasing a business merely to gain as much information about that business as possible with no intent of actually completing the purchase. Be sure to have a solid mutual non-disclosure agreement in place before you share any of your confidential information, and trust your gut before you share too much of your company’s secret sauce.”

If you are interested in reading the remaining factors to consider when selling your business, feel free to check out the full article on Forbes!

Disclaimer: This article discusses general legal issues and developments. Such materials are for informational purposes only and may not reflect the most current law in your jurisdiction. These informational materials are not intended, and should not be taken, as legal advice on any particular set of facts or circumstances. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction. Bend Law Group, PC, expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this article.

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Essential Legal Tips For Small Business Owners Today

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This article was originally published in Forbes. By: Doug Bend Many business owners are struggling to keep their businesses afloat and are currently making tough decisions about layoffs. My law firm has been advising dozens of small business owners and startups on how to navigate the ongoing fallout from COVID-19. Here are six tips that… Read More

This article was originally published in Forbes.

By: Doug Bend

Many business owners are struggling to keep their businesses afloat and are currently making tough decisions about layoffs. My law firm has been advising dozens of small business owners and startups on how to navigate the ongoing fallout from COVID-19.

Here are six tips that have helped some of our clients weather the storm and may be beneficial to your business:

1. Check in with your insurance broker.

Check in with your insurance broker to see if your policy includes business interruption coverage or other provisions to help your business during this difficult time. In addition, your insurance broker may have recommendations on what type of insurance you should have moving forward.

Your insurance should be customized to your business, which has likely changed dramatically. For example, if you recently laid off employees, you may not need as much worker’s compensation coverage. However, you may need new types of coverage because your business has likely changed how it provides its products and services.

2. Ask visitors to sign a COVID-19 waiver.

If your business has a physical location, consider asking visitors to sign a COVID-19 waiver. The waiver can include provisions such as:

• The guest acknowledges that visiting your business carries with it the risk of exposing themselves to COVID-19, which they voluntarily assume.

• The guest agrees to indemnify and hold your business harmless from any damages that may be incurred from their visit.

3. Consider signage displays.

Check in with your business attorney to see if any new signage might be recommended for your business to display, on the interior and/or exterior of your physical location, to advise guests of new risks and safety precautions that they should take.

4. Check your retainer balance.

While you’re checking in with your attorneys, ask if you have a retainer balance in their trust account. Your attorney is required to return the balance to you, which could be a helpful infusion of cash.

5. Find out if you qualify for PPP loans and tax credits.

If you have not already done so, reach out to your CPA and business banker to see if you might qualify for an SBA grant or loan. At least some of the new SBA loans may be forgiven if they are used for certain purposes, which includes paying your employees’ wages under certain conditions.

Your CPA can also advise you on important tax law changes that could help your business, such as deferring FICA taxes and the employee retention tax credit.

6. Apply for grants.

Check to see if your company might qualify for a grant from another company. For example, Facebook is offering $100 million in grants and ad credits, and Salesforce is offering $10,000 grants to small businesses.

By following these tips, you can not only protect your business moving forward, but also provide your customers with important guidance on how to stay healthy and safe.

Disclaimer: This article discusses general legal issues and developments. Such materials are for informational purposes only and may not reflect the most current law in your jurisdiction. These informational materials are not intended, and should not be taken, as legal advice on any particular set of facts or circumstances. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction.  Bend Law Group, PC expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this article.

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Business Succession Planning In The Internet Age

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This articles was originally published in Forbes. By: Doug Bend Many business owners build their businesses hoping that they will continue to generate income for their heirs after they pass away. However, businesses often die or lose significant value when the owner dies.  When strategizing how to make sure your business continues to thrive, it… Read More

This articles was originally published in Forbes.

By: Doug Bend

Many business owners build their businesses hoping that they will continue to generate income for their heirs after they pass away. However, businesses often die or lose significant value when the owner dies. 

When strategizing how to make sure your business continues to thrive, it is important to know that if you do nothing, your business already has a default game plan in place. If no additional planning is done, your business is an asset of your estate and will be subject to probate. 

There are four problems with this default game plan. First, it can take years for a court to probate your estate. In the meantime, your business can wither on the vine until the probate has been finalized. Second, if you do not have an estate plan, your heirs can fight over who will inherit the business. Third, whoever inherits the business under defaults in the law (intestate succession) might not be the best person to make sure your business will continue to grow and be successful. Lastly, if you have co-owners, they might not like the heir to your estate and could quickly get into disputes with the new owner that harm the business.

Estate Planning Attorney Megan Yip contributed insights regarding business succession, as our law offices are collaborating to provide the best insights into this emerging issue. There are two legal tools to consider when evaluating your options:

1. Buy-Sell Agreement

A buy-sell agreement is a legal contract between the co-owners of a company that addresses a variety of business-changing events, including when an owner dies. Instead of the deceased owner’s equity being a part of the assets that are distributed during probate, the buy-sell agreement can include an agreed-upon amount that will be paid to the estate in exchange for the business repurchasing the equity. Often, the purchase amount is financed with a life insurance policy on each owner of the business.

2. Proper Estate Planning

Instead of allowing your business to be subject to probate, the business owner can work with an estate planning attorney to have the business be an asset of the owner’s trust. This replaces a probate process that can take years with a more seamless transition from the deceased beneficiary to their heirs.

Whether you choose a buy-sell agreement or to include your business interests strategically in your estate plan, make sure you pay attention to the digital assets that are important to the continued operation of your business. Your business’s digital assets may include client lists and data stored in software systems, primary communication channels like email addresses, intellectual property or creative products, and even revenue streams like online stores or websites.

Here are my top three tips on considering your digital assets.

1. Know the policies that affect your tools. 

Most of our businesses today depend on software for managing client data, communicating with clients and keeping track of productivity. As part of your plan and regular course of business, review your software provider’s policies on what happens if your company needs to name a new point of contact, pay bills in a different way or be transferred to a different company in case the unexpected happens.

2. Balance security with redundancy. 

Many business owners focus on the security and safety of information and digital assets used in their business, and rightly so. A business’s success demands that owners and employees alike keep proprietary information and client information secure. However, that concern for safety needs to be balanced with a sort of redundancy that considers which trusted individual or team of people will have access to digital assets and an understanding of what to do with them if the owner or main management team is unable to tend to business as usual for any reason, including death.

3. Include digital assets in your legal documents.

Don’t just discuss digital assets; include an inventory of digital assets in your buy-sell agreement or estate plan. Get specific about who should get access to digital assets, how and at what juncture in case of emergency. Make a plan to review digital assets on a regular basis with your other assets, and keep in mind that they might change more often than traditional assets.

Making a detailed plan about who should have access and who should not have access to your business’s digital assets in the case of you becoming incapacitated or passing away is an important part of succession planning today. No matter what legal structure you employ to ensure your wishes for the continued success of your business come to fruition, developing a strategy for what should happen to the digital assets your company relies on needs to be a part of the process.

No one likes to think about dying. But taking the time to work on your business succession plan now can help ensure your heirs get the most value possible from the business you spent years of your life building long after you are gone.

Disclaimer: This article discusses general legal issues and developments. Such materials are for informational purposes only and may not reflect the most current law in your jurisdiction. These informational materials are not intended, and should not be taken, as legal advice on any particular set of facts or circumstances. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction.  Bend Law Group, PC expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this article

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The Top Seven Things For Which A Business Owner Can Be Held Personally Liable

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By: Doug Bend & David Nied This article first appeared on Forbes. In general, the owner of a legal entity cannot be held personally liable for the liabilities of their business. That being said, business owners should be wary of the following seven items that they can still be held personally liable for: 1. Bank… Read More

By: Doug Bend & David Nied

This article first appeared on Forbes.

In general, the owner of a legal entity cannot be held personally liable for the liabilities of their business. That being said, business owners should be wary of the following seven items that they can still be held personally liable for:

1. Bank Loans

Most bank loans for new business owners require a personal guarantee. If a business owner provides that personal guarantee and the company is unable to meet the loan obligations, the bank can hold that owner personally responsible for the loan.

2. Security Filings

When raising a round of capital, it is important to make sure that any required security filings are made in each state in which there is an investor.

If the proper security filings are not made and the company does not do well, the investor can have their investment rescinded and the owner of the company can be held personally responsible for the investment amount.

3. Contracts

Business owners should make sure that they sign all contracts on behalf of their legal entity and not themselves as an individual. In the first paragraph of each contract, it should be clear that the agreement is being made on behalf of the company.

Similarly, in the signature line, the owner should sign the agreement on behalf of the company and not themselves as an individual.

4. Government Taxes

The government can sometimes come after the business owner for any unpaid taxes. In particular, when a corporation fails to withhold proper payroll taxes, the person responsible for withholding those taxes — in many cases, the owner of the business — can be held personally liable for the unpaid taxes.

5. Wages

At least in California, owners of a business can be held personally responsible for any unpaid employee wages plus late payment penalties. This includes liability for failing to pay minimum wage, failing to pay overtime, failing to provide mandatory meal and rest breaks and other wage violations.

While officers and directors may have a claim for indemnification for such personal liability, that safety net does not apply to the owner of the business.

6. Entity Maintenance

A court is more likely to pierce the corporate veil and allow an aggrieved party to go after the personal assets of an owner if the legal entity is not being properly maintained, such as having annual shareholders and board of directors meetings.

Even though courts weigh many factors to assess alter-ego liability, failing to maintain current, accurate and complete books and records that document required meetings and events is a surefire way to get a judge to look askance at your plea for limited liability.

7. Co-Mingling Funds

In addition, a court may pierce a company’s corporate veil if the business owner is co-mingling personal and business funds. Do not be tempted to use your corporate credit card for personal, non-business related expenses — it may open the door for a creditor to march into your personal bank account.

If properly maintained, a legal entity can provide a business owner with a great deal of legal liability protection. By being wary of the above pitfalls, a business owner is more likely to prevent their personal assets from being put in jeopardy by the activities of their business.

This article was co-authored by David Nied of Ad Astra Law Group, LLP and a member of Forbes Legal Council.

Disclaimer: This article discusses general legal issues and developments. Such materials are for informational purposes only and may not reflect the most current law in your jurisdiction. These informational materials are not intended, and should not be taken, as legal advice on any particular set of facts or circumstances. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction.  Bend Law Group, PC expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this article.

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Five Key Questions To Ask When Creating Law Firm Equity Agreements

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This article first appeared on Forbes. When drafting an equity agreement, partners need to be prepared for many different issues and eventualities. That’s why it is necessary to carefully consider the terms of the agreement, from the allocation of profits and losses to the systems in place when it comes to removing a partner. We… Read More

This article first appeared on Forbes.

When drafting an equity agreement, partners need to be prepared for many different issues and eventualities. That’s why it is necessary to carefully consider the terms of the agreement, from the allocation of profits and losses to the systems in place when it comes to removing a partner.

We have helped set up several law firms, and these are the five key questions that we find partners should consider:

1. How will the profits and losses of the firm be allocated?

Many law firms equally split the profits and losses. An advantage to this approach is that the partners equally enjoy the ups and downs of the firm. For example, if the firm wins a big contingency case, all of the partners benefit.
Other firms use an “eat what you kill” system where each partner gets their net profits, but is also responsible for their losses. A pro to this approach is it may lead to less friction over time between the partners who want to work 70 hours a week and those who want to spend more time with their families, traveling or on the golf course. An eat-what-you-kill item might also create a framework that leads to less resentment if a partner decides to take off more time with a newborn child, to help a sick family member, or if they have expensive spending habits.

2. How will decisions be made?

Partners also need to decide what decisions will require a majority vote of the partners, a supermajority vote (anywhere from 67-90%) of the partners or the unanimous consent of the partners.
For example, if a majority of partners want to promote an associate attorney to be a new partner, is that sufficient?
It is important to be very clear which items require which voting threshold so there is no dispute over whether an item requires a supermajority or unanimous vote, as opposed to merely a majority vote.

3. How will equity be valued when a partner leaves?

Some law firms value a departing partner’s ownership using a formula in the partnership agreement, such as 1.0-1.5 times the prior year’s gross revenue. Other firms have a business appraiser value the ownership interest of a partner who leaves the firm.
It is important to not only plan for how the fair market value of the equity interest will be calculated, but also how the purchase price will be funded to make sure the payments do not overburden the remaining partners.

4. How can a partner be removed?

Some law firms require a majority vote of the remaining partners to remove a partner whereas other firms have a higher bar for removing a partner.

5. What powers will the managing partner have?

Some law firms like to set checks and balances on the powers of the managing partner. For example, any expenditure above $X requires the approval of a majority of the partners.

There is no one-size-fits-all answer to these questions. The key is partners having a clear equity agreement in place that provides a roadmap when these and other issues inevitably occur.

Disclaimer: This article discusses general legal issues and developments. Such materials are for informational purposes only and may not reflect the most current law in your jurisdiction. These informational materials are not intended, and should not be taken, as legal advice on any particular set of facts or circumstances. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction.  Bend Law Group, PC expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this article.

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Should Your Business Be an LLC or a Corporation?

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This post was originally published on Yahoo Small Business Advisor Entrepreneurs can generally choose from a number of different entities when incorporating their business. Due to the fluid nature of businesses, however, the advantages and disadvantages are not always clear at the time of formation. Limited liability companies (LLCs) and corporations are the two most… Read More

This post was originally published on Yahoo Small Business Advisor

Entrepreneurs can generally choose from a number of different entities when incorporating their business. Due to the fluid nature of businesses, however, the advantages and disadvantages are not always clear at the time of formation.

Limited liability companies (LLCs) and corporations are the two most typically attractive options for small businesses considering incorporation. Unlike sole proprietorships and general partnerships, members of LLCs and shareholders of corporations have limited liability and greater protection for their personal assets. Members and shareholders can limit their liability and protect their personal assets from creditors.

But if both options offer owners liability protection, why do some business owners choose to form an LLC instead of a corporation, and vice versa? Below are some considerations to help you decide what type of entity might be the best fit for your business.

1. Corporate Formalities

Unlike a corporation, an LLC does not have to hold regular meetings and keep corporate minutes, which reduces the paperwork of maintaining your entity.

2. Taxation

The tax default for an LLC is treated as a pass-through entity, meaning the profits or losses from the entity pass through directly to the owners. Owners of an LLC can instead elect for it to be taxed as a C or S corporation so they can access certain tax advantages based the company’s income and expenses. The tax default for a corporation is subject to taxation at both the entity and the owner level. A corporation can also elect to be taxed as an S corporation which, like LLCs, allows for pass-through taxation. However, additional restrictions regarding who can be a shareholder of the corporation exist if you elect to be taxed as an S corporation. For example, S corporations can have no more than 100 shareholders and can have only one class of stock.

3. Debt Inclusion

Early on, a startup or small business will often operate at a loss. Corporation shareholders may not deduct losses beyond their basis in their stock or debt obligations. In contrast, LLC owners can include their proportionate share of the debt from the LLC, so they can deduct a larger share of the losses.

4. Management

An LLC’s members or managers can manage the company. In contrast, a board of directors and its chief executive officer are in charge of managing corporations.

5. Distributions

A corporation must allocate its distributions in proportion to each shareholder’s ownership share. An LLC, on the other hand, does not necessarily have to allocate its profits or losses in proportion to each owner’s membership interest. Instead, the LLC’s operating agreement (which is subject to certain IRS restrictions against negative capital accounts) can determine the distributive share of gains, losses, deductions or credits. Additionally, members of an LLC can transfer and withdraw property into the LLC without the recognition of taxable gain by the LLC or the member with whom the property has been distributed. In the case of corporations, property distributions can result in taxable gain.

6. Investment

Entrepreneurs hoping to achieve venture seed funding typically choose the Delaware C Corporation. Venture capital firms won’t automatically screen out businesses that are not incorporated in Delaware, but they prefer it due to their friendly corporate governance benefits and predictable corporate laws.

Selecting an entity that is appropriate for your business will depend on how you plan to run the business and where you hope to take it. One size does not fit all. Crafting a strategic entity can mean a world of difference as your business begins to take off.

By Alex King & Doug Bend

Disclaimer: This article discusses general legal issues and developments. Such materials are for informational purposes only and may not reflect the most current law in your jurisdiction. These informational materials are not intended, and should not be taken, as legal advice on any particular set of facts or circumstances. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction.  Bend Law Group, PC expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this article.

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Top 7 “Gotcha” Provisions For Investors To Watch Out For In Convertible Notes

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Bend Law Group has helped close dozens of seed rounds for startups raising investment capital, the vast majority of which are still completed using convertible notes. Here are the top seven provisions investors should be on the lookout for when negotiating convertible notes with startups. 1.  Prepayment Of The Note Some convertible note documents allow… Read More

Bend Law Group has helped close dozens of seed rounds for startups raising investment capital, the vast majority of which are still completed using convertible notes.

Here are the top seven provisions investors should be on the lookout for when negotiating convertible notes with startups.

1.  Prepayment Of The Note

Some convertible note documents allow the startup to prepay the convertible notes.

An investor nightmare is to pick a winner, but the startup prepays the note before the note converts and the investor misses out on the company’s upside. Instead, the convertible note should provide that it may only be prepaid with the consent of the holders of at least a majority of the outstanding principal amount of notes.

2.  Most Favorable Investor Provision

If the company offers better terms to other investors, you should also benefit from those terms. You can do so by adding in a provision that provides any changes in the terms of the convertible notes that are more favorable to investors shall automatically apply to all of the notes.

3.  Cap On Conversion Price, aka the “Instagram Provision”

Most convertible notes provide a 20% discount if the note converts into equity compared to the price paid by the next round of investors. This conversion discount is intended to reward the risk early stage investors take for supporting the company.

However, if the company really takes off, even after a 20% discount the seed stage investment might not translate into a significant stake in the company. For example, a $25,000 seed stage investment in Instagram without a conversion cap would only have translated into a very small equity stake because the company was valued so highly at the next round of investment.

A conversion cap helps to align the incentives for the founders and the seed investors to seek as high a valuation as possible in the next round. To make sure your seed stage investment still converts into a fair equity stake, the convertible note should include a conversion cap.

4.  Sale Of The Company

Some convertible notes provide that an investor will only be repaid their investment amount plus accrued interest if the company is sold before the note converts.

If you invest in a startup that is purchased before the note converts you should be adequately rewarded.

Instead, you include a provision that provides that the investor will get 1.5 or 2 times a return on the initial investment if the company is sold before the note converts.

5.  Voluntary Conversion

Most convertible notes do not convert by the note’s maturity date. It is important to bake in a provision that provides the investor with the option to still have the note convert into equity at the maturity date at an agreed upon conversion price.

6.  Right to Invest

One incentive to act as a seed investor is to be on the inside of a new company, and hopefully this “insider” status will give you the ability to invest more later if the company takes off. However, these investment rights are not automatically guaranteed, and if a company is hot then there will be plenty of other investors ready to buy during the next round.

Guarantee your right to invest later by adding a Right of First Offer provision into the convertible note, so that you are informed of and given the chance to participate in all equity offerings.

7.  Warranties and Representations

Just as important as the above economic provisions is including strong warranties and representations to kick the tires of the company. You would, for example, certainly want to dig deeper if a company is not willing to include a warranty and representation that there are no threatened or pending actions against the company.

Every set of convertible note agreements is different and so you should consult with your legal counsel prior to making an investment. However, the above list is a good starting point to make sure that the risks of investing in an early stage startup pays off it the startup becomes successful. If you have any questions, give Bend Law Group a call at (415) 633-6841 or email at info@bendlawoffice.com.

By Doug Bend and Luthien Niland.

Disclaimer: This article discusses general legal issues and developments. Such materials are for informational purposes only and may not reflect the most current law in your jurisdiction. These informational materials are not intended, and should not be taken, as legal advice on any particular set of facts or circumstances. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction.  Bend Law Group, PC expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this article.

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