Tag Archives: Legal

Stock Option Plan Rule of Thumb No. 2

Stock Option Rule of Thumb from The Startup Garage

Stock Option Plan Rule of Thumb No. 2

This article was contributed by William W Eigner, Esq. & Brian Headman of Procopio, Cory, Hargreaves & Savitch LLP.  

Issue Options According To Value Added And Risk Taken

Options are often issued as a reward, either for services rendered or risk assumed by the recipient. Thus, the number of shares and ownership percentage covered by the award to a director or advisor should depend on the value added and risk assumed.

It can be difficult to assess the intangible value of certain directors or advisors, and although a high profile individual is generally awarded a larger option package, the industry credibility and networking opportunities a director or advisor offers are not easily appraised.

However, one can approach this problem from a different angle. Instead of searching for the right percentage, an alternative is to focus on the expected payout. Most true outside directors are looking for an opportunity to make a million dollars over a five year period. Therefore, instead of thinking about the number of shares or percentage ownership, start with the end figure and issue accordingly. As far as advisors are concerned, the same technique is used with a lower payout.

Compensation also depends on the prospects of the company, how far along the company is, and the track record of the founders. This all goes to the company’s likelihood of success—the higher the likelihood of success, the less risk there is to compensate for.

In any event, a director’s take typically falls between one-half of a percent and two percent, and an advisor’s between one quarter of a percent and one percent. In each case, the company’s needs and the qualities of the prospective director or advisor drive the analysis.

Check back Wednesday, September 26, for Rule of Thumb No.3: Subject Director And Advisor Shares To A Two-Year Vesting Schedule.

 

Whether you have a question about Stock Option No. 2, or you’d like to discuss our business plan writing services, feel free to contact us for a free consultation!

Stock Option Plan Rule of Thumb No. 1

Stock Option Rule of Thumb from The Startup Garage

Stock Option Plan Rule of Thumb No. 1

This article was contributed by William W Eigner, Esq. & Brian Headman of Procopio, Cory, Hargreaves & Savitch LLP.  

Reserve 10-20% Of Your Company’s Outstanding Equity For A Stock Option Plan

Equity incentives are a major form of compensation for most emerging growth and technology companies. Without them, most start-ups cannot afford critical labor, let alone a board of directors or advisors. It is critical for a start-up to consider this reality and reserve 10-20% of its outstanding equity for a stock option plan. The exact percentage is often determined on a case-by case basis. The final figure will depend on the client’s situation, including the number of employees of the company and the amount of capital that it hopes to eventually raise.

Whatever the percentage, it pays to plan ahead. Most sophisticated investors will require a stock option pool upon investment, and a company that fails to reserve a sufficient amount of equity up-front runs the risk of being forced to establish a pool at a later date that may dilute the founders’ ownership.

Check back next Monday, September 24, for Rule of Thumb No. 2: Issue Options According To Value Added And Risk Taken.

 

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

Equity Options to Attract Directors and Advisors

Equity Options to Attract Advisors and Directors from The Startup Garage

Equity Options to Attract Directors and Advisors

This article was contributed by William W Eigner, Esq. & Brian Headman of Procopio, Cory, Hargreaves & Savitch LLP.  William Eigner’s bio is available at http://www.procopio.com/attorneys/william-w-eigner and his LinkedIn is available at http://www.linkedin.com/profile/view?id=616218&trk=tab_pro.

A properly selected Board of Directors and Board of Advisors can be an invaluable asset to an emerging company. Building these boards is an early opportunity for a start-up company to gain credibility, industry contacts, experienced counseling and even access to cash. However, the right board members do not always come easily, and although some companies may have their pick of top industry players, many start-ups struggle to recruit board members that are the right fit for their company.

Nearly every start-up has limited cash. This does not, however, have to limit their ability to recruit directors and advisors. A stock option or other equity incentive plan can allow a start-up company to offer prospective independent directors and advisors a financial upside beyond what the company’s cash account can currently afford. Additionally, option-based compensation creates powerful incentives for directors and advisors to work diligently to help drive company growth and success. A stock option plan should be established early, and if administered properly, it can become a company’s top board recruitment tool.

In counseling hundreds of emerging companies through this process, rules of thumb emerge that help provide guideposts for entrepreneurial companies. In the following five-part blog series, built from a series of interviews with attorneys who counsel start-ups in their issuance of stock options, will discuss five of these rules of thumb.

Check back on Wednesday, September 19, for Rule of Thumb No.1: Reserve 10-20% Of Your Company’s Outstanding Equity For A Stock Option Plan.

 

Whether you have a question about Equity Options that Attract, or you’d like to discuss our business plan writing services, feel free to contact us for a free consultation!

Non-Profit Legal Issues: Lobbying

Non-Profit Lobbying from The Startup Garage

Non-Profit Legal Issues: Lobbying

Lobbying is the act of working to influence legislative or administrative decisions.  Any activity by a charity relating to proposed or pending legislation or molding public opinion on legislative matters could qualify as lobbying.  Lobbying can be done either professionally or on a certain issue by passionate members of the community.  There are many organizations that are formed for the purpose of lobbying on behalf of a community or a cause. While this sort of advocacy is often motivated by the same desires to see change that motivate non-profits, the two activities have very little legal overlap.  This is because the actions of a non-profit are meant to benefit the public, not just a segment of the public with a particular political view.  A non-profit that has qualified for a 501(c)(3) exemption is prohibited from all lobbying efforts except for those that are “insubstantial”.  And to be permitted to do so, the 501(c)(3) organization must submit a 501(h) election, available as Form 5768.

 

However, a 501(c)(3) organization is expressly prohibited from  participating or intervening in any political campaign on behalf of, or in opposition to, candidates for public office. If a non-profit wishes to engage in a moderate to extensive amount of lobbying, they can still qualify for tax exemption as a 501(c)(4) action organization.  The downside to being a 501(c)(4) is that donations to a 501(c)(4) organization are not tax deductible to the donor.  For more information about applying for and your lobbying rights as a 501(c)(4) organization, please see the IRS’s web page about Social Welfare Organizations.

*The information contained in this post is provided for informational purposes only, and should not be construed as legal advice on any subject matter.  You should not act or refrain from acting on the basis of any content included in this site without seeking legal or other professional advice. The contents of this post contain general information and may not reflect current legal developments or address your situation. We disclaim all liability for actions you take or fail to take based on any content on this site.

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

Non-Profit Legal Issues: Fundraising

Non-Profit Fundraising from The Startup Garage

Non-Profit Legal Issues: Fundraising

As mentioned in our earlier blog post on State Filing, most states require that you register with the Attorney General for the right to solicit funds within the state, and most states additionally require you to report on your fundraising revenues and expenditures.  Fundraising for a non-profit can take many forms, and below we discuss some of the legal issues that come up in the context of non-profit fundraising.

Wills

  • A possible avenue to secure funds to be available in the future is to get donors to put your non-profit in their will.  The donor can use a legal device called a codicil to amend their will to include your non-profit.  You can offer to draft the codicil for the interested donor so their only step is to complete the codicil.

Planned Giving

  • A planned gift is a major contribution that can range in form between a bequest to a trust, and involves financial advisors, tax attorneys and others who assist in the process of putting the planned gift together.  The gift can include money, stock, insurance, property or other assets, and can either be paid to the organization at the donor’s death or during their lifetime, depending on how the donor wants to structure the deductions.  Setting up a planned giving program is best done under the advice of an attorney.

Telemarketing

  • Placing a telemarketing call from an automatic dialer to a cell phone is prohibited by the FCC, but calls from political organizations, charities or telephone surveyors that aren’t made to sell goods or services.  If you do sell products to raise funds, you may call someone who has made a purchase within the last 18 months, as an “existing business relationship” lasts for 18 months.

Disclosures to Donors

  • For 501(c)(3) tax-exempt organizations, contributors who gave a “quid pro quo” donation (received something in return) of more than $75 must receive certain disclosure information, and donors contributing more than $250 must receive additional disclosure information.  Further information can be found on the IRS’s web site on Substantiating Charitable Contributions.

*The information contained in this post is provided for informational purposes only, and should not be construed as legal advice on any subject matter.  You should not act or refrain from acting on the basis of any content included in this site without seeking legal or other professional advice. The contents of this post contain general information and may not reflect current legal developments or address your situation. We disclaim all liability for actions you take or fail to take based on any content on this site.
 

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

Overview of Common Non-Profit Legal Issues

Non-Profit Legal Overview from The Startup Garage

Overview of Common Non-Profit Legal Issues

There are two categories of common legal problems this post will discuss: the problems that arise by virtue of being a business (contract, employment and personal injury issues) and the problems that are common to non-profits (fundraising, lobbying, profit-seeking).  Here we will explain the former as they are more simple, and will reserve individual blog posts for the latter.

Contract disputes

  • Most of your everyday transactions will be based on a contract, either written or oral.  Make sure you are meticulous with the details of a written contract before you sign it, and try to avoid oral agreements.  A paper trail of your past agreements with their terms enumerated will be invaluable in protecting your non-profit if an issue arises.

Employment claims

  • Employment lawsuits are one of the biggest category of lawsuits against non-profits.  It is important that you are well versed in the relevant employment laws that apply to non-profits.  You can begin your research at the Department of Labor’s web site.  Some of the categories of employment claims include:
    • Wrongful termination: At-will employees may not be fired for an illegal reason, and contract employees must be fired with “good cause”.
    • Sexual harassment: Employers can be responsible for failing to prevent or responding inadequately to an employee’s claim of sexual harassment.
    • Discrimination: When it comes to hiring, firing, pay, shift assignments, promotions or access to training, you are prohibited from using race, color, gender, national origin, religion, disability, citizenship status or age as a criterion. In California, the additional criteria of ancestry, mental disability, medical condition, marital status, or sexual orientation are also protected.
    • Retaliation: If an employee has filed an action against your non-profit or has assisted someone else in doing so, you are prohibited from punishing them by denying them something they were otherwise qualified for.
    • Wage and hour claims: The laws that govern the worker/employer relationship are complex and may necessitate consultation with an attorney.
    • Defamation: The main context for a defamation claim is over an ex-employee’s reference.  Avoid issues by requiring a prospective employer to place a request for a reference in writing.

Personal injury suits

  • Personal injury claims can include physical injuries, property damage, emotional distress or damage to a person’s reputation.  There are many risk management strategies that can be utilized to minimize the risk of personal injury, including purchasing a general liability policy.

*The information contained in this post is provided for informational purposes only, and should not be construed as legal advice on any subject matter.  You should not act or refrain from acting on the basis of any content included in this site without seeking legal or other professional advice. The contents of this post contain general information and may not reflect current legal developments or address your situation. We disclaim all liability for actions you take or fail to take based on any content on this site.
 

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