This morning John Cook of GeekWire reported on the Q1 2011 DowJones VentureSource study indicating that US venture-backed company M&A activity is dropping. Here is a comment that I left on John’s post regarding our perspective on such trends:
Continue Reading M&A market trends; Seattle contrarian or lagging?
Financing Your Startup: Understanding Control and Voting Issues (Part 2, Shareholder Controls)
This post is part two of a two-part series and will focus on shareholder controls. Here is our prior post that focused on board of director controls.
Shareholder Controls: There are a number of mechanisms available to increase the control of one or more groups of shareholders, such as the founders or all holders of a certain series of stock (e.g., Series A Preferred shareholders). The most common ways are set forth below. Note that they are often used in combination.Continue Reading Financing Your Startup: Understanding Control and Voting Issues (Part 2, Shareholder Controls)
Financing Your Startup: Understanding Control and Voting Issues (Part 1, Board Controls)
When negotiating a term sheet for an angel or venture capital investment, there is often tension between the founders and investors with respect to allocation of control over various future company actions and decisions. There are many different ways for a founder to retain, or a new investor to obtain, control over a startup. Below is a brief, but not exhaustive, outline of some of the most typical control features found in early stage financings.
Continue Reading Financing Your Startup: Understanding Control and Voting Issues (Part 1, Board Controls)
Financing Your Startup: How to Sell Stock without Going to Jail
(in collaboration with Megan Muir)
We recently guest posted the below article on TechFlash. At the end of this post, we have added some supplemental information in an effort to respond to a few questions we received from TechFlash readers.
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As the founder of a startup, one of the first issues you need to address is how to finance your company’s operations. If you are lucky enough to be able to fund your startup out-of-pocket, or through generous family members, congratulations. You can probably skip the rest of this post and get back to building your business. However, if you are like most founders, you won’t be able to self-fund your company entirely and your revenues won’t exist yet, or won’t be adequate to grow the company. In some instances you may be able to obtain government grants or if you have some type of hard asset or significant accounts receivable to use as collateral, you may be able to borrow from a bank.
This post addresses a common method for financing the growth of a tech startup – by selling stock in your company. What type of investor is right for your company – family and friends, angel investors, venture capitalists, or some combination of these – is something you will want to consider carefully. We’ll save that discussion for another post as it’s an interesting topic on its own.Continue Reading Financing Your Startup: How to Sell Stock without Going to Jail
Section 83(b) Election, A Founder’s Best Friend
CONTRIBUTED BY
Kevin Criddle
kevin.criddle@dlapiper.com
Successful founders that fail to affirmatively make a Section 83(b) election may face staggering tax consequences years down the road.
The Internal Revenue Code (the “Code”) generally requires founders (or employees) that are granted restricted stock for services to report income as the stock vests. Accordingly, any increase in stock value beyond the purchase price is recognized at vesting, regardless of sale, and taxed at ordinary rates.
Section 83(b) of the Code, however, allows founders (or employees) to affirmatively elect to be taxed on the value of restricted stock at grant rather than vesting. Because the purchase price of stock at grant is often equivalent to its fair market value, an 83(b) election typically results in zero recognizable income. What is more, the election advances the beginning of the one-year capital gain holding period, often resulting in preferential capital gain rather than ordinary tax treatment upon sale. For an 83(b) election to be effective, it must be filed with the IRS within 30 days of the purchase date.Continue Reading Section 83(b) Election, A Founder’s Best Friend
Financing Your Startup: Understanding Pre-money Valuation
photo © 2010 Mike Hammerton | more info (via: Wylio)In the world of startup financing, the term “pre-money valuation” is used to describe the value of your company prior to a financing. The pre-money valuation is used to calculate the price per share of the stock that will be sold in the proposed financing (the “Offering Price”) using the following formula: (x) pre-money valuation divided by (y) the company’s share denominator (prior to the financing) equals (z) the Offering Price.
While the pre-money valuation is usually the centerpiece of valuation discussions, it is also important to understand how the “(y)” share denominator figure can play a significant role in ultimate dilution of the company’s existing shareholders from the proposed financing. (more after the jump)Continue Reading Financing Your Startup: Understanding Pre-money Valuation
Incentive Stock Option Plans – considerations when creating your first plan
CONTRIBUTED BY
Tyler Hollenbeck
tyler.hollenbeck@dlapiper.com
At formation, founders often ask us for recommendations regarding terms and structure of their companies’ incentive stock option plans. When making these recommendations to new companies, I generally advise that founders choose relatively “standard” and “straight-forward” terms, which have the dual benefit of keeping legal costs in check at formation and signaling to potential investors going forward that the company’s “house is in order.” Although individual circumstances may dictate deviation, below are the high-level recommendations that I typically give regarding equity incentive plan structure:Continue Reading Incentive Stock Option Plans – considerations when creating your first plan
** UPDATED** ‘Qualified Small Business Stock’ tax break – Extended through 2011
**UPDATED December 18, 2010 at 9:00 a.m.** The proposed legislation referenced below that would extend the 100% tax for capital gains (and alternative minimum tax) on QSBS was signed by the President on Friday. Accordingly, the 100% QSBS tax break now runs through the end of 2011. Here is a good summary of the various items included in the Tax Relief Act of 2010.
Continue Reading ** UPDATED** ‘Qualified Small Business Stock’ tax break – Extended through 2011
When is a term sheet binding?
CONTRIBUTED BY
Anthony Kappus
anthony.kappus@dlapiper.com
Is the term sheet you just signed an enforceable agreement, or is it simply an “agreement to agree?” The Delaware Court of Chancery took up this question in a recent decision, Pharmathene, Inc. v. Siga Technologies, Inc. The full opinion is available here.
The court, addressing whether a term sheet for a licensing agreement was binding on the parties, set out a two part test:Continue Reading When is a term sheet binding?
Delaware vs. Washington: Where should I incorporate my startup?
When working with startups, I am often asked where the founders should incorporate their company. I’ve also had this discussion with public (and pre-public) companies considering whether to reincorporate from or into Delaware. In my opinion, too many Washington entrepreneurs don’t give enough consideration to this decision, and merely choose Delaware by default.
There are widely recognized benefits to being a Delaware corporation, including its flexible, business-friendly corporate statute, its well-developed and widely understood body of corporate law and its sophisticated Court of Chancery (a special court that hears only Delaware business entity cases). However, there are also some compelling reasons to choose Washington, most notably the substantial cost savings.Continue Reading Delaware vs. Washington: Where should I incorporate my startup?