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Choice of Business Entity: Pros and Cons of Corporations and LLCs
Choosing the form of your business entity is one of the first and most important steps toward running a successful business. Three of the most common entity types are C-Corporations, S-Corporations and Limited Liability Companies (LLCs). Each entity type has its own advantages and disadvantages, including with respect to taxation, attractiveness to investors and simplicity. For most companies intending to raise money from venture capital funds, a C-Corporation is the most common choice. However, S-Corporations and LLCs provide tax advantages that may make them more suitable for certain businesses. This article addresses the pros and cons of C-Corporations, S-Corporations and LLCs, and how you can determine which one may be right for your business.
Stock Vesting in Startup Companies
By Alex Civetta and Garrett Galvin
Why “Vesting?”
Building a company from the ground up is a risky (but hopefully rewarding) endeavor for founders. In exchange for the founders’ efforts and devotion to the success of the company, the founders take a significant equity stake in the company, with the expectation that the value of these shares will grow substantially as the company grows. However, where there are multiple founders involved, each founder will want to ensure that their co-founder(s) are incentivized to stay with the business and work hard to make it successful, rather than holding on to a large equity stake and relying on the other founders to put in the lion’s share of the work needed to grow the business. To address this concern, the initial grant of shares to each founder is often made subject to “vesting,” which links a founder’s right to keep such shares (or some portion thereof) to their continued service with the company.
Fiduciary Duties in M&A Transactions
By Page Hubben
The board of directors of a corporation owe fiduciary duties to the corporation and its stockholders under Delaware law. In most general matters, the actions and decisions of the board and the company’s officers are viewed through the standard of the business judgment rule. In a change in control transaction, however, a court reviewing the actions of a board will apply a heightened standard, and the actions and decisions of the board and officers become subject to a greater level of scrutiny. Courts often examine the board’s decision-making process, the reasonableness of actions taken and the information on which decisions are based. To build a strong case against potential litigation during a significant transaction, companies and their boards should be well informed about their duties and follow best practices for evaluating, structuring and approving a deal.
Fixing Void or Voidable Stock Issuances with Section 204 of the Delaware General Corporation Law ("DGCL")
By Paula Valencia-Galbraith
Has your corporation sold stock before having a sufficient number of shares authorized under its Certificate of Incorporation? The DGCL requires that the authorized capital be increased before the sale is consummated because the Corporation needs to create the stock it is going to sell. Without the stock’s creation there is nothing to sell to the investors and failure to increase the authorized capital could deem the sale and issuance void or voidable due to the Corporation’s failure to comply with the technicalities of the DGCL. Before 2014 there was no mechanism that could retroactively fix issuing equity with an insufficient number of authorized capital or any other type of transaction that required certain technical requirements by the DGCL. These types of mistakes led to potentially embarrassing conversations with a corporation’s investors but in 2014 this all changed.
Seed Funding Basics
By Jason Miller
After forming a company and dividing equity amongst the co-founders, a founding team’s next questions are typically about funding. Often among ambitious founders, venture capital first comes to mind. Today, venture capital is well-suited for growing early-stage companies but rarely available for truly starting companies. In recent years, venture capital has been deployed in larger amounts to fewer companies and there has been a corresponding shift toward larger and more frequent seed or angel investments.
Key Considerations: Board of Director Composition and Director Recruiting in Early Stage Companies
By Christina Balestracci
The board of directors governs the activities of a company, overseeing and advising management while upholding its fiduciary duties to the company’s shareholders. A board is tasked with making high-level decisions, approving major policies and supervising performance and company strategy. Given its significant role, there are several important and strategic factors to consider when structuring a board of directors.
IRS Provides Additional Guidance on the Tax Treatment of Cryptocurrency
By Avi Reshtick, David Salamon
Nearly five years after the release of the only published guidance in the area, on October 9, 2019, the Internal Revenue Service (the “IRS”) issued additional guidance on the tax treatment of cryptocurrency. The additional guidance was delivered in the form of Rev. Rul. 2019-24 (the “Crypto Ruling”) and a set of Frequently Asked Questions (“Crypto FAQs”) that applies the principles outlined in the IRS’ previously issued guidance (Notice 2014-21) to an expanded set of situations.
Founder Liquidity: Key Considerations in Secondary Sales
By Soobin Kim
As a founder starts and grows a company, the founder may consider selling her shares in the company prior to an exit via a sale of the company or an initial public offering. Such sale, typically called a secondary sale, helps a founder meet needs for necessary expenditures or reduce her risk tied to the company. In the past, the founder’s sale of her shares was viewed as signaling lack of confidence and misaligning the founder’s interests, and therefore, investors often blocked the founder’s sale of her equity.
Liquidity for Private Company Securities — Rule 144
By Joshua Bergmann
For early stage private companies that need to effectively utilize available capital, often times attracting talent comes at the expense of issuing shares of stock (or options to purchase shares of stock) of the company through the use of an equity incentive plan.
What Lessons Can Investors Learn from SoftBank's Investment in WeWork?
Few investments by venture capital or private equity funds have undergone as much scrutiny as the investment by SoftBank in WeWork.
How to Write Gender-Neutral Contracts
“Men” is not synonymous to “person”, nor does “he” mean “she.” It is important for contractual language to be not only precise but also accurate. Many agreements govern multiple individuals, some of whose gender is unclear or variable.
Patenting Considerations for Artificial Intelligence in Biotech and Synthetic Biology
By Terri Shieh-Newton, PhD, and Marguerite McConihe
Artificial Intelligence (AI) inventions have aided development in nearly every industry, but perhaps none more so than synthetic biology. For synthetic biology researchers, AI has developed into a vital tool to create cutting edge applications.
Recap of Federal Register Notice on Artificial Intelligence (AI) Patent Issues
By Marc T. Morley, Michael T. Renaud, Paul S. Brockland
Artificial Intelligence (AI) is increasingly becoming important across a diverse spectrum of technologies and businesses. As AI grows in importance in business and technology, so too grows the number of patent applications and the potential for uncertainty.
Why You Should Consider Incorporating Your Start-Up in Delaware
By Michael Ginzburg
Start-ups often ask what is the most beneficial jurisdiction in which to incorporate. Most of the time we advise our clients that incorporating in the State of Delaware is the most advantageous for the following reasons:
California Law Impacts All Categories of Independent Contractors – Not Just Gig Workers – What Your Business Needs to Do Now
By Jennifer B. Rubin & Audrey Nguyen
California Governor Gavin Newsom has now signed AB 5 into law, effectively ban nearly all categories of independent contractors – not just gig economy workers. AB 5 will become effective on January 1, 2020 for all businesses that contract with individuals who perform services in California.
Creating a Board of Directors: Key Considerations for Startup Companies
By Keunjung Cho
One of the most important decisions that a startup entrepreneur can make is creating a board of directors that will assist the entrepreneur in growing and governing the business. A company’s board of directors is tasked with overseeing and advising management, making key decisions about the company’s business strategies, and representing the interests of the company and its stockholders.
Five Common Equity Incentive Plan Mistakes
Equity Incentive Plans (aka, Stock Option Plans) are a standard feature in nearly every start-up. Although the basic concept (granting an equity interest to an employee or other service provider) is simple enough, there are a few administrative and legal technicalities that need to be respected. Below is a list of five common mistakes that start-ups make when administering their Equity Incentive Plans.
Does Delaware Corporate Law Permit Director Proxy Voting?
By Ashna Pai
Proxies are common in the world of shareholder voting. But, can directors also vote by proxy at board meetings under Delaware corporate law? No, they cannot. Following relevant Delaware case law, directors are prohibited from voting by proxy at board meetings.
You’ve Got Mail! Emails May Be Subject to Stockholder Books and Records Requests
By Zachary Liebnick and Zane Polston
Delaware corporations have always been required to provide certain information to their stockholders under Section 220 of the Delaware General Corporation Law (DGCL), but the scope and form of that information has naturally changed as technology advances.
Why You Need Proprietary Information and Inventions Assignment Agreements
By Daniel Marden
Protecting your company’s intellectual property rights is essential during all stages of your company’s growth. One of the first steps you can take to protect your company’s intellectual property rights is to have all advisors, consultants, contractors and employees of your company enter into Proprietary Information and Inventions Assignment Agreements (“PIIAs”), also known as Confidential Information and Inventions Assignment Agreements.
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