A near-constant theme in my interactions with clients and other attorneys is the relative merits of various modes of communication — email, phone or in-person meetings. After a long email chain, someone will get frustrated and say, “Why don’t we just get on the phone and figure this out?” But those same people will, on another occasion, dial into a conference call, quickly get bored, and hone their skills at computer Solitaire.
In preparing a stockholder agreement or operating agreement for a startup (for a corporation or LLC, respectively) with multiple owners, the section of the agreement that generally requires the most thought and discussion with the client relates to share transfers. While it’s possible to punt on all of these questions by having the agreement simply say that no transfers are permitted except as may be agreed by the owners, it’s advisable to at least consider the various scenarios and include appropriate provisions in the agreement. The following are some common ones:
- Permitted Transferees – Share transfers may be made to related persons (like a trust for the benefit of a family member) without consent of the company or other owners.
- Right of First Refusal/Offer – With a right of first refusal (ROFR), if an owner receives an offer from a third party to purchase the owner’s shares, the owner must first offer to sell the shares to the company or existing owners on the same terms. A right of first offer (ROFO) requires the owner to first solicit offers from the company or existing owners, and then the owner can sell to a third party if a deal is not reached. [Read more…]
The best attorney mentors I had in my early years of practice emphasized that law is a service business. Attending to the basics like responding promptly to emails and calls is at least as important, to this way of thinking, as being able to come up with an ingeniously complicated transaction structure. While I therefore have a “the customer is always right” orientation, I’d be lying if I said that it doesn’t matter whether the client was similarly responsive, organized, etc. With that in mind, here are a few tips for how clients can make the attorney-client relationship run smoothly:
Generally, the terms “public offering” and “private offering” have the meanings that the words imply: a public offering of securities is made to hundreds or thousands of investors who may have no connection to the company, and a private offering is made to a select group of investors known to the company or its broker. Historically, private offerings made under widely-used SEC Rule 506 (part of Regulation D) were required to be completed without the use of any “general solicitation or general advertising.” However, a provision of the federal JOBS Act, enacted in 2012, blurred the lines between private and public offerings by permitting general solicitation or advertising in Rule 506 offerings, subject to conditions imposed by the SEC. The SEC has now done its imposing, establishing rules to become effective in September 2013.
With limited liability companies (LLCs) having become a widely-used form of business entity for new private companies, I am often asked by LLC clients about compensating employees and other service providers in company equity.
The basic tax planning goal in setting up these equity grants is to avoid triggering an immediate tax to the recipient prior to any distribution of cash to pay this tax. This is not a practical issue with true startup companies that have no or very limited value, since there is not a significant tax. However, if the company does have value, and it makes a simple grant of equity to a recipient, there is taxable income to the recipient equal to the fair market value of the equity.