Category Archives: Legal & Accounting

5 Excellent Startup Tips on Securing a Bank Loan

Bank Loan Tips From The Startup Garage

5 Excellent Startup Tips on Securing a Bank Loan

It’s no secret that securing bank funding for your startup is difficult these days – but it’s not impossible.

Give yourself better odds with these 5 simple
Startup tips:

Write a clear and convincing business plan.

Business owners must build a strategy from the very beginning around being “lendable,” so a business plan helps lay that proper foundation. Focus especially on the financial estimates and offer well-researched documentation for those estimates.

In addition, be sure to illustrate in your plan how you will generate revenue, how
much you’ll generate and how long it will take to get to positive cash flows. (Side tip: you may
want to have a CPA look over your financials beforehand).

Boost your credit rating.

A solid credit score lends legitimacy to your request and shows you’re less of a financial risk to the bank. They’ll want to see that you have a history of paying bills on time, as well as your history of minimizing outstanding debt. Have a less than desirable credit score?

Seek out smaller, more local banks, since large banks typically are pickier as to the kinds of businesses they want to work with. Smaller ones may be more forgiving of new businesses and may have less stringent credit requirements for opening accounts and lines of credit.

Launch your business in a solid industry.

Certain industries, such as food service and apparel,are considered extremely risky by potential lenders. Thus, if you are determined to get bank funding, consider an industry that doesn’t depend on fluctuating resources (such as oil prices) and has a relatively large profit margin.

Once selecting that industry, be sure to demonstrate your experience in it: offer real, measurable examples of your expertise in your chosen industry or of your experience of running successful businesses. Banks back those with a track record of success, so you’ll have to convince them you have the skill set, drive and experience to make their lending decision a successful one.

Owner’s equity.

If you expect lenders to put their “skin in the game,” they’re going to expect
you to do the same. As a general rule, you should personally invest 20% of the total projected
loan request. Your willingness to risk a sizeable portion of your own capital (and not just capital from their bank loans) shows your commitment to the venture.

Relationships are key.

Ultimately, securing a bank loan is about building a relationship with your bank, and if done correctly, your banker can become your biggest ally. If the banker knows you, your business operations and that you have good employees and a stable customer base, they
will be more likely to go out on a limb for you.

Having a good relationship with your bank can
make running your business a lot easier, so don’t underestimate it!

If you have a question about your raising capital for your Startup or you’d like to discuss our business plan writing services, feel free to contact us for a free consultation!

Why To Take Caution With Investor “Finders”

Why To Take Caution With Investor “Finders”

There are many service providers that offer to help startups with attracting investors, colloquially referred to as “finders.”

While they prefer to be called business brokers or consultants, most finders are either CPAs, insurance brokers, retired executives, or former entrepreneurs. They mostly operate in the Angel landscape, targeting deals between $100K to $2M.

Typically, they will either require a large retainer, an upfront fee, a percentage of capital raised, or some combination of all three.

The service they provide ranges from screening investors and setup meetings to developing a list of high-net-worth prospects for entrepreneurs to call on.

Unfortunately, there is a lot of controversy when working with finders. First, a sizeable majority of finders are not actually licensed as a securities broker by FINRA and are therefore in violation of federal and state security laws, whether they know it or not. Second, many finders are not capable of delivering on their promises or simply disappear as soon as you hand them a retainer check.

How This Affects You:

The issue that Startups face when working with unlicensed finders is that their legal problems can quickly spread to the startup as well. Payments to an unlawful finders can cause an entire transaction to violate securities law, giving investors a right to undo the deal as well as sue the Startup for damages.

Even if an investor does not undo the deal, these unlawful transactions can come back to haunt the company if and when the company decides to sell or go public as it may be forced to disclose the violations, thereby jeopardizing the pending deal. On the other hand, working with less than honest finders will clearly be a waste of time and money.

Advice:

Retain a good corporate securities attorney before you engage with a finder. Your securities attorney should be able to:

A) help you understand the full scope of risk of using finders in financing transactions.

B) help you verify that your potential finder is licensed with FINRA and your local state’s regulators.

C) ensure that your finder does not have any substantial complaints against them.

If you have a question about raising capital for your Startup or you’d like to discuss our business plan writing services, feel free to contact us for a free consultation!

The Importance of Bookkeeping for a Startup Business

The Importance of Bookkeeping for a Startup Business

Bookkeeping, by definition, is the process of recording a company’s financial transactions and history.

It is the first step in the broader accounting process which involves reporting and analyzing data to make business decisions.

Many entrepreneurs find that they are wearing too many hats as it is and they just
don’t have time to dedicate towards proper bookkeeping.

However, bookkeeping is crucial for any startup for several reasons:
First and foremost, it helps companies make better financial and management decisions. Proper bookkeeping can help you understanding the key financial benchmarks that determine whether your company is operating successfully or not. Bookkeeping also helps with managing cash flow and answering questions such as: who owes you money, who do you owe money to, when should you send an invoice, when are your bills due, etc.

Second, consistent bookkeeping will help minimize the headaches when it comes to preparing your annual taxes. If you can provide your accountant with a well maintained balance sheet, cash flow statement, and profit and loss statement he/she will be able to dedicate their time towards making sound tax decisions rather than fixing problems with the financial statements.

Third, sound books will help you with planning your business’ next steps. By understanding key benchmarks such as cost to acquire a new customer and cost of goods sold you can begin to make educated decision about the best way to grow your business.

Fourth, investors require solid books. The frequency of which you report financial records will be determined by you and your investors. In any case, the more automated and uniform your financial reporting systems are for reporting crucial financial information the happier your investors will be. It will show to them that you understand your cash flow needs and the business key performing indicators that will allow the business to scale.

Furthermore, when raising capital, sound records will instill confidence in your investor and significantly increase your likelihood of receiving a check.

Now that you are on-board with the important of bookkeeping for a startup, let’s look at 10 of the most common types of bookkeeping accounts for a startup or any business for that matter:

Cash:

This is your most basic account and it tells you exactly how much cash you have in your
bank. Many businesses will monitor their cash account by separating cash receipts and cash
disbursements.

Accounts Receivable:

Not all companies will have accounts receivables. Receivables represent
money that is due from customers and is therefore only applicable to companies that sell
products or services prior to collecting payment or a portion of the payment upon the time of
sale. Tracking receivables will help you understand cash flow and keeping a detailed list of your various receivable accounts will help you stay on top of billing and invoices.

Sales:

The sales account is closely tied to cash and accounts payable but provides slightly
different insight. Sales is where you track anticipated incoming revenues from what you sell.
Tracking sales accurately will help you understand whether your business is on track to meet
predetermined metrics and benchmarks.

Accounts Payable:

Similar to accounts receivable, accounts payable represent money that you
owe to your suppliers and vendors for products and services that you did not pay for entirely
upfront. Tracking your payables will help you with managing cash flow, ensuring that you don’t
pay your bills twice, and may even make you eligible for discounts if you are able to pay early.

Inventory:

While inventory is not equivalent to cash or accounts payable it is certainly an asset on your balance sheet that needs to be carefully accounted for and tracked. Properly managing your inventory will help with understanding cash flow and anticipated production runs.

Loans Payable:

You loans payable account tracks the amount of capital that you’ve borrowed, how much you still owe, and how much is due in the next billing cycle.

Purchases or Cost of Goods Sold:

This account helps you understand the cost of delivering your product and service and when subtracted from your Sales account you end up with gross profit.

Payroll:

Payroll is the biggest expense for most businesses and should be monitored closely. Maintaining an accurate payroll account will pay dividends when it comes to tax and
government reporting requirements not to mention understanding your personnel expenses.

Retained Earnings:

Retained earnings are simply profits that are not paid out to owners or shareholders. Retained earnings are cumulative, or a running total, and demonstrate the profits that are reinvested back into the business.

Owner’s Equity:

This account simply tracks the capital investment that the owners’ have put into the business. This account is particularly pertinent if there are multiple owners who have put in disparate amounts of capital.

If you have a question about your Startup business idea or you’d like to discuss our Book Keeping Management Services, feel free to contact us for a free consultation!

7 Common Tax Mistakes Made by Startup Businesses

7 Common Tax Mistakes Made by Startup Businesses

A common misconception among many entrepreneurs is that their startup will not face any tax filing requirements while in the early stages of the business.

However, this is not the case.

If you incorporate your business or form an LLC you have tax and other government filings that are due, even if you had little to no financial activity.

As a result, it is important to understand the tax laws associated with your startup’s legal entity as they may differ depending on whether you are a sole proprietor, a partnership, or some form of corporation.

There is no “right” type of entity that can be applied to all startups. Rather, there is the type of entity that is right for you and your startup.

Below are a few common startup tax related mistakes that can save you time and money in the long run:

1.Proper Record Keeping

It is important for a business, no matter how big or small, to have its own set of books. If the startup team lacks a solid bookkeeper or someone with financial expertise it can be very inexpensive to hire a bookkeeper on a part-time basis. You can also hire a consultant or accountant to help you setup a system that you can maintain going forward.

2.Quarterly Taxes

While you are exempt from paying quarterly taxes in your first year it is still a good habit to get into. First and foremost, you don’t want to get sticker shock when it comes time to pay taxes and you haven’t been setting aside cash every quarter. Secondly, you are going to have to start getting in the habit of paying quarterly taxes sooner or later so you might as well start now.

Additionally, set up separate accounts for anticipated taxes like self-employment and employee withholding. The biggest problem for many business owners when it comes to tax season is having enough cash on hand to pay for taxes.

3.Record Your Startup Costs

Almost every cost you incur when starting your business is eligible for a tax deduction – think market research, travel, customer surveys, prototypes, advertising, branding, etc. All startup costs up to $5,000 are deductible in full in the first year. Furthermore, if your costs go over $5,000, you
can potentially roll out the deduction for up to 15 years.

4.Track Expenses Correctly

While many of your startup costs are deductible be sure that you are recording these expenses correctly to ensure protection if audited. For travel and entertainment expenses over $75 you need to maintain receipts and a recorded reason for the expense. When using your personal credit card be sure to write an expense report to the business shortly after incurring the expense. Track your miles if you plan to deduct car travel to and from your office.

5.Know How To Classify Employees

Many startups think they can avoid paying payroll taxes by classifying their employees as independent contractors. However, the IRS is cracking down on this misclassification and this is one penny that is not worth pinching.

There are a lot of nuances surrounding the differences between an employee and an independent contractor. The biggest factor has to do with how you control this person’s time. If you are telling them when and how to work they are most likely an employee.

6.Blending Business and Personal Finance

Many entrepreneurs make the mistake of neglecting to claim certain expenses as business expenses, such as a home office. On the other hand, many entrepreneurs fail to separate their personal finances from their business finances and often get sued or are forced to pay additional taxes. Be sure to maintain a clear line between your business and personal finances.

7.The Difference Between Equipment and Supplies

Typically, equipment expenses are amortized over the lifetime of that piece of equipment and therefore face unique deduction eligibility requirements. Supplies on the other hand, such as pens, notepads, and printer ink, have a lifetime value that expires far more quickly. In order to get the most out of your deductions be sure to track your expenses accordingly.

If you have a question about your Startup or you’d like to discuss our business plan writing services, feel free to contact us for a free consultation!

Avoidable Legal Dilemmas Every Entrepreneur Should Know

Avoidable Legal Dilemmas Every Entrepreneur Should Know

Although the verdict is still out whether or not entrepreneurship can be taught there are a few legal problems that all entrepreneurs can avoid with some proper foresight.

8 Startup Situations Every Entrepreneur Wants to Consider

1) Founder’s Agreement: Most co-founders will have some simple planning conversations at the beginning of the venture. However, it is important to take these conversations one step further by developing a Founder’s Agreement. The agreement should outline what each partner brings to the business, his/her roles, and how the business and its assets is distributed when the agreement is terminated. It should also demonstrate how and when the business will be terminated as well as methods for resolving disagreements among the founders. A Founder’s Agreement formalizes the initial planning conversations to ensure that there isn’t any confusion down the road when one party remembers the conversations differently than the other.

2) Non-Compete: It is important that you check your contract with your current employer for any non-compete clauses prior to transitioning full time in your startup, especially if your startup is in the same industry. Similarly, be sure to place a non-compete clause in your employees contracts to ensure that they cannot steal your trade secrets and become your competition.

3) Incorporation: Be sure to incorporate prior to raising capital as it will reduce the amount of tax that you pay when issuing yourself shares. If you delay incorporation until after you’ve raised a seed round your business will very likely have a much higher valuation and thereby holding you accountable for the increased value of those shares.

4) Social Media: Social media can be a business’ best friend or worst enemy. Remember that all posts on social media are public and permanent, so be careful what you post. Create a company social media policy to help ensure the proper use of social media among your personnel. Always handle online criticism with positivity, transparency, and professionalism.


5) Crowdfunding: Crowdfunding is becoming a rapidly growing method for raising capital. As a result, there are a lot of schemes that the government is trying to crack down on. Don’t put yourself at risk by overpromising and under delivering. Be sure to deliver on exactly what you promise. Also, be sure to read the terms and conditions for each site that you start a campaign on as they might be different from site to site.

6) Website: If you sell products on your website there are a few very simple compliance issues that you need to be aware of. For example, you are required to list your terms of service, terms of use, terms and conditions, and privacy policy on the bottom of the page. Don’t catch yourself in a legal quandary because you didn’t take the time or money to consult with a lawyer upfront.


7) Provisional Patent: Don’t wait until you start selling your product to protect your intellectual property. File for a provisional patent (or better yet, a utility patent) and protect yourself from day 1. Be cautions when speaking about your product to anyone outside of the company and do not share any trade secrets. Use non-disclosure agreements when appropriate, but realize that many parties, such as investors, will not sign them. Lastly, it is important to realize that, in most cases, you can discuss your startup/product/service without giving away anything that is truly proprietary.

8) Unpaid Interns: State and federal guidelines dictate whether an intern should be paid. Should they determine that you hired an unpaid intern that should be paid you could be liable t pay back pay, back taxes, and penalties. Be sure to learn your local laws and abide by them.

If you have a question about your Startup Funding or you’d like to discuss our business plan writing services, feel free to contact us for a free consultation!

How To Write a Term Sheet For Your Startup

How To Write A Term Sheet for your Startup from The Startup Garage

How To Write a Term Sheet For Your Startup

Before we discuss how to write your term sheet, let’s start by defining a term sheet and explaining why it’s useful.

What’s a Term Sheet?

Technically speaking, a term sheet is a non-binding agreement that demonstrates a basic set of terms and conditions under which an investment is made, typically by either an angel or venture capital investor.

AS A NON-BINDING AGREEMENT, THE TERM SHEET SERVES AS AN OUTLINE OR A TEMPLATE FOR MORE DETAILED LEGAL DOCUMENTS TO BE DEVELOPED LATER IN THE NEGOTIATION.

Once the terms and conditions laid out in the term sheet have been agreed upon by both parties, a contract (or binding agreement) can be drawn up to confirm the details of the term sheet (typically in the form of a Private Placement Memorandum or PPM).

In layman terms, you can think of the term sheet as the prenuptial agreement between the entrepreneur (or current owners) and potential investors.

How Do I Write a Term Sheet?

Term sheets typically consist of three sections: funding, corporate governance, and liquidation.

When preparing your term sheet for negotiation with potential investors, it is wise to consider their goals and motivations as well as your own.

Investor’s Considerations

  1. Investors are looking to maximize the return on their investment.
  2. They are also looking to protect their investment in the instance that the company does not meet its expectations.
  3. Many investors enjoy the ability to force management to make decisions (such as when to liquidate) and/or retain veto rights to overturn certain action that could affect their ownership position.
  4. Lastly, many investors like to establish restrictions that ensure founders and key management remain committed to the longevity of the company and its performance.

Entrepreneur’s Considerations

  1. As an entrepreneur, you are trying to raise as much capital as possible while giving up as little of the company as possible.
  2. You want to ensure that you have not given up too much of the upside potential or assumed too much risk on the downside potential.
  3. You want to give up as little control as possible while protecting your position as a manager should the board not deem your performance inadequate.

Negotiation the Terms

What many first time entrepreneurs (and even unseasoned investors) don’t understand is that they have many tools for negotiating beyond the amount of capital requested and the amount of equity given in exchange.

As mentioned above, some of the following terms can help you sway a potential investor to compromise with some of the terms that you strongly desire:

  • Offer to vest your shares at a later date upon completion of milestones. This not only reassures investors that you are committed to the longevity of the company, but it removes some of their downside risk.
  • Similarly, offer to defer any potential salary or reward until the completion of certain milestones.
  • Provide veto rights on specific areas of corporate governance that would be of interest to a potential investor (such as, when to sell the company or making key hires).
  • Offer to include IP assignment agreements or non-compete agreements to show that you are committed to this company and will not take the technology or IP elsewhere.

Why Should I Write My Own Term Sheet

Traditionally, investors would propose a term sheet to you as an entrepreneur after you’ve pitched them, they’ve expressed interest, they’ve done their due diligence, and you’ve done some high level negotiation.

But, it doesn’t always have to work this way. There are several reasons why it is beneficial for you to write the term sheet as outlined below:

    1. Unless you are raising capital from VCs or sophisticated Angel Groups, many investors don’t fully understand that there are many other terms to consider beyond deal price and equity reimbursement (as outlined above).
    2. Many companies fail down the road or go through an expensive legal restructuring if they’re initial investment had the wrong capital structure. Don’t leave it up to your potential investors to make sure you have a sound capital structure for the current and subsequent rounds of funding.
    3. By presenting a reasonable term sheet with the typical terms and conditions and a fair valuation, you are not only showing investors that you are rational, professional, and serious, but you are also eliminating a lot of unnecessary back-and-forth with either flippant or “shark” investors.
    4. Similar to the point above, offering a term sheet will dramatically reduce the amount of time it would take for an investor to put together a term sheet and make you an offer. By presenting the term sheet, you can enter negotiations right away.
    5. Lastly, by presenting the term sheet to an investor it applies an implicit deadline, thereby preventing them from treading water and, more-or-less, forcing them to make a timely decision as the round may soon close.

Whether you have a question about your Startup or you’d like to discuss ourbusiness plan writing services, feel free to contact us for a free consultation!

Hiring the Right Startup Lawyer

Hiring the Right Startup Lawyer from The Startup Garage

Hiring the Right Startup Lawyer

You own a young company that is seeking VC, angel or perhaps even seed funding.  You want to protect yourself with the right legal documents, ensure that you are taking the right steps and perhaps gain some legal counsel along the way.  You turn to your network circles for a recommendation on a good lawyer.  Before you know it, you are inundated with firms and you don’t know where to begin or which to choose.  Start with these basic criteria to begin eliminating those that aren’t right for you: startup focused, firm size and local.

Right Sized

For the most part, you’ll want to avoid working the large, national law firms.  The one caveat is if they have internal practices that focus on startups.  Otherwise, you’ll find yourself competing for attention with the larger clients that the firm represents.  On the flip side of the scale, make sure you do your homework with any local or smaller firm to ensure that they really have the startup expertise that you need.

Startup Focused

As in nearly every field of service providers, you’ll want to identify a specialist.  You wouldn’t hire a commercial real estate agent to find your next home.  You wouldn’t hire an action sports sales rep to push your medical device.  You wouldn’t hire a back-end software engineer to develop your user friendly website.  Similarly, don’t hire a lawyer that doesn’t specialize in startups.  Keep in mind, the entire firm doesn’t have to be startup focused, just make sure your lawyer is.  Furthermore, many lawyers that work with startups are open to working on a deferred payment schedule.

Local

Whether you are working with a local law firm or the local branch of a national firm, be sure to go with a local lawyer.  A local lawyer, especially one that is startup focused, can help tap you into their key networks where you may find potential funding sources, strategic partnerships or mentorship relationships.

In conclusion, do your homework and stick with local, startup focused lawyers that aren’t looking for bigger fish to fry and will give you the time of day that your company deserves.

 

Whether you have a question about Hiring a Startup Lawyer, or you’d like to discuss our business plan writing services, feel free to contact us for a free consultation!

Convertible Note Transaction Documents

Convertible Note Transaction Documents from The Startup Garage

Convertible Note Transaction Documents

Many business owners who are unfamiliar with the convertible note process are unaware that of the legal documents needed in convertible debt financing.  In addition to the convertible note itself, a startup will need two additional documents: a convertible note purchase agreement and written consent of the startup’s board of directors authorizing the convertible debt round.
 

Whether you have a question about Convertible Note Transaction Documents, or you’d like to discuss our business plan writing services, feel free to contact us for a free consultation!

The Importance of Copyright Assignments

The Importance of Copyright Assignments from The Startup Garage

The Importance of Copyright Assignments

A copyright isn’t a single right; it is a combination of rights. Copyright owners can transfer some or all of the rights. A full transfer of rights is called a copyright assignment. It’s important for start-ups to get a full copyright assignments for their logo, website, software, etc that is created for the company by independent contractors or service providers.

If you have not received a full transfer of rights from the original copyright owner, the author of the work, you most likely do not own the copyright. Think of it like buying a CD. You own the CD, but the band or record label owns the copyright to the book and you are not able to copy and sell it.

If you do not own the copyright to your website or software for example, the developer of that material can resell it or use it as they please. It is critical that you receive a written copyright assignment from the owner of the copyright or its agent as you will need to present this when registering for your copyright.

Whether you have a question about Importance of Copyright Assignments, or you’d like to discuss our business plan writing services, feel free to contact us for a free consultation!

What You Need To Know About Starting a Non-Profit

What You Need To Know About Starting a Non-Profit from The Startup Garage

What You Need To Know About Starting a Non-Profit

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Corporations usually acquire funds from government agencies and private foundations. They use these funds to achieve goals that aim at improving social benefits. If you want to fund a non-profit corporation and effect positive changes to the community, check out the following list. It will enable you to gain better understanding about the benefits and the drawbacks of non-profit corporations.

Non-Profit Qualifications

Many types of groups can seek non-profit status. The following ones may be eligible: childcare centers, shelters for the homeless, community health care clinics and hospitals, museums, churches, synagogues, mosques, and other places of worship, schools, performing arts groups, and conservation groups.

Tax Exemptions

Non-profit groups can gain tax exemptions when they obtain corporate status. Non-profit corporations usually get their tax exemptions from Section 501(c)(3) of the Internal Revenue Code. It not only enables a non-profit to be free from paying taxes, but also allows people and organizations that donate to the non-profit to take a tax deduction for their contributions.

Shielded From Personal Liability

Forming a non-profit corporation can protect its staff from the corporation’s debts and liabilities. If any employee obtains a judgment against the non-profit, this judgment can reach only the non-profit corporation’s assets. Personal assets of all the people working in the non-profits are shielded from personal liability.

Roles and Salaries

The board of directors run a non-profit corporation and they hire management team members. They oversee the financial area and do strategic planning. A board member can also be a payroll member working for the organization.

Profits and Exit Strategy

Profits cannot be divided among corporation members beyond reasonable salary payment. A non-profit corporation cannot be sold for money. If its board of directors decided to dissolve it, its debts and liability have to be paid off, and all its assets need to distributed to another non-profit corporation.

The government provides non-profit organizations with many benefits, but they also post some regulations to limit certain behaviors. It is necessary set up a consultation with a lawyer and know the benefits and drawbacks for a non-profit. Your strategy should take advantage of the laws and should be documented in your business plan.

 

Whether you have a question about Starting a Non-Profit, or you’d like to discuss our business plan writing services, feel free to contact us for a free consultation!