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AdobeStock_446615933-300x200In December 2020, the Delaware Supreme Court broadened the scope of stockholders’ pre-litigation inspection rights. In a unanimous decision, the Supreme Court reaffirmed the Delaware Court of Chancery’s ruling in Lebanon County Employees’ Retirement Fund vs. AmerisourceBergen Corp.

When reaffirming the court’s decision, the Delaware Supreme Court addressed the circumstances in which stockholders have a right to demand books and records under Section 220 of the Delaware General Corporation Law (DGCL).

How Will the Supreme Court’s Decision Affect Section 220 Demands?

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LLC-300x297As a business owner, one of the first decisions you will make is to choose a business entity type. California recognizes many different types of business entities. Each comes with both benefits and limitations, so it is important to work with an experienced California business lawyer to be sure that you select the business entity type that is right for your unique business. The right business entity type can give you flexibility in running your business, confer tax benefits, and ensure that your new business is run as effectively as possible. Learn more about the flexibility – and limitations – of LLCs and corporations in California.

Flexibility Of LLCs Versus Corporations

Many business owners are familiar with the benefits of an LLC. Because the company is created with limited liability, owners can not generally be held personally liable for debts of the business so long as they continue to meet LLC legal requirements. This means that the business owner’s liability is usually limited to whatever funds are invested in the business. Entrepreneurs are usually familiar with these benefits and instinctively want to form an LLC to avail themselves of these benefits. But an LLC is not the only business entity you can form. In some cases, a corporation might give your business greater flexibility to raise funds and conduct business.

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AdobeStock_423161698-300x200Running a business is complicated in the COVID era, especially if you run a business in California. After California reopened its economy in June 2021, employers have had to make sure they comply with all applicable state laws, local ordinances, and rules to stay open and avoid hefty fines.

Below we have highlighted some of the most significant COVID-related employment laws that apply to businesses and employers in California in 2021.

AB 685: COVID Reporting Requirements

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AdobeStock_87806470-300x200Accredited investors have access to a wider range of investment opportunities under federal securities laws. While there may be more opportunities available to accredited investors, these opportunities can also carry greater financial and legal risks. The law assumes that accredited investors have enough knowledge to protect themselves from these risks. But how does a person or company qualify as an accredited investor? In the United States, the Securities and Exchange Commission operates under the rules of Regulation D, which provides exemptions from securities registration requirements. Businesses and individuals who qualify as “accredited investors” can qualify for a registration exemption under Regulation D. There are two main tests used to prove this accreditation:

Income Test

Rule 501 of Regulation D sets forth specific income requirements for accredited investors. To qualify, an investor must earn at least $200,000 for the two years prior to the investment, with the expectation of earning the same or more income in the following year. (Couples must earn at least $300,000 annually to qualify.) An individual can not qualify by showing a single year of individual income and two years of joint income as a spouse. These qualifications can become complicated – particularly when a person’s marital status changes over the three-year period – so it is important to consult with a securities lawyer prior to making an investment requiring accreditation.

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AdobeStock_279104502-300x200Capitalizing any new company can be a complicated matter. If too much equity is given away, founders can lose control of their own ideas and innovations. On the other hand, if not enough capital is raised, the business could be more likely to fail due to a lack of critical resources. Consult with an experienced California startup lawyer before structuring the capitalization of any new business.

What Is Dual Class of Share Structure?

One popular method of selling equity in the early phases of a business is to create two separate classes of shares of equity. A dual-class structure gives disproportionate voting control to one class of shareholders (usually “Class A” shareholders). Thus, founders can retain control of their companies by selling stock to a concentrated voting block of owners whose judgment is trusted. Other shares can be sold to Class B shareholders, who still provide the capital that is critical to a company’s success, but whose voting rights are limited. This allows founders to retain control over the management and overall direction of the company.

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AdobeStock_360784031-300x200Registration of securities is a legal requirement that costs investment funds time and money. It is important to stay compliant with all applicable securities laws, so if registration is not financially or logistically feasible, be sure that you have a recognized exemption from the registration requirement. These exempt offerings are designated as “EB-5” under United States securities laws. EB-5 is also a designation used for the visa a foreign investor must obtain in order to invest in an EB-5 fund. EB-5 investments are also called private placements or unregistered offerings. Learn more about some of the common legal issues that arise with EB-5 offerings, as well as how investors and offering companies can protect themselves from financial and legal liabilities in relation to them.

Relying On Exemptions From Registration From Securities Laws

SEC Rules 504, 505, and 506 establish exemptions from the registration requirement for certain securities. These rules specify how much equity may be sold by an offering entity in a twelve-month period, how much money may be raised, and whether the investors must be accredited in order to maintain the offering’s eligibility for exemption from the registration requirement. These rules also specify the manner of advertising that may be used for the offering. Each of these rules provides specific legal guidelines that must be met exactly. Failure to meet the exemption requirements can subject a business to fines, penalties, legal liability, and administrative requirements (such as limits of offering securities in the future).

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AdobeStock_309353202-300x199An equal split of shares between founders often seems like the fairest way to split equity in a young business. While this may be the simplest option, it comes with many hidden risks that most entrepreneurs are not aware of until it is too late and the business is in serious trouble. New companies can avoid this problem by working with an experienced startup lawyer from the very start. At Structure Law Group, we help entrepreneurs build a successful business from the ground up. Whether it is making decisions on your business entity type (i.e. choice of entity), your management structure, or your equity compensation, we advise and help design a company that is best suited to your unique needs.

Why Equal Split Of Shares Is the Worst Structure

There are many reasons why an equal split of equity can be the worst structure for the founders of a new business. Often, founders have different ideas about the contributions they will be making to the business. Some envision the creation of intellectual property, while others want to manage marketing and business plans. Some want an active role in the daily management of the company, while others want to invest more passively. These issues cannot be resolved in a single meeting. Often, founders must work together for a time in order to learn each person’s working style, expectations for each founder’s contributions, and vision for the company’s future. It takes partners time to know each other in a business relationship. And just as in a romantic relationship, legal agreements cannot always prevent painful and expensive litigation when the business relationship goes sour.

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AdobeStock_431953977-300x169A stock option pool has become an increasingly popular tool for startup companies. Entrepreneurs seeking to attract talented employees will often offer incentives that give employees motivation to make the company as profitable as possible, and equity compensation is a very popular option. There are different ways to offer these equity options to employees, and stock options pools are a popular choice. A pool allows a company to set aside a given portion of company stock to be issued to employees as stock options. While this is a convenient structure for many businesses, it is not always the best option. Learn more about the pitfalls of using a stock option pool – and the other options that might be better for your business.

The Difference Between Stock Options and Restricted Stock

Both stock options and restricted stock are forms of equity compensation made to employees. There are different restrictions that come with each form of compensation, and it is important for companies to understand these effects before making the choice of how to offer equity compensation. Restricted stock creates a role more similar to a traditional stockholder, and the employee may vote and receive dividends. Employers may also reserve the right to buy back restricted stock (or at least have the right of first refusal) in order to maintain control of the company. Stock options are more limited. Employees are usually limited to the right to buy company stock at a set price in the future. This right can create a windfall if company stock exceeds the set price, but it does not give the employee voting or dividend rights. Because there are no voting rights and no set number of shares, employers generally do not retain the right to buy back stock options. Both restricted stock and stock options can be subject to vesting requirements in order to encourage long-term employment.

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AdobeStock_67958307-300x187Delaware has long been known as a popular state for incorporation of a new business. Some entrepreneurs think this is solely because of tax benefits, but there are many legal and practical benefits to incorporating a new business in Delaware. Here are some of the most common:

Management Friendly

The Delaware General Corporation Law is considered to be friendly toward the management of corporations. There are many specific provisions that help corporations run more efficiently: for example, Delaware corporations have the option of using cumulative voting, while other states make it compulsory for corporations that are not publicly traded. The DGCL also allows for shareholder approval of mergers without separate votes in each class of outstanding stock. Special meetings can be limited to a call by the Board of Directors, which prevents the complications associated with shareholders calling special meetings. Finally, the DGCL embraces new technologies and now allows corporations to use distributed ledgers or blockchains to create and maintain the corporate records required by law. These and other provisions help corporations run more efficiently under Delaware state law.

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AdobeStock_133739956-300x200New technologies have drastically changed the ways in which new startups raise capital. Securities laws and regulations are adapting to these changes to ensure that investors are still protected under federal securities laws when investing via new technologies. Regulation CF (aka Title III of JOBS Act) is a relatively recent rule that took effect in 2016 and recently updated in 2020. It allows new business startups to raise equity through crowdfunding, which means private from all Americans, instead of the richest 2% Americans. More importantly, crowdfunding is typically used for new companies to turn their customers into their investors, which is exciting news for startup founders. Learn more about how crowdfunding works, what its legal limitations are, and how to determine whether Regulation CF is the right tool for your new company’s capital funding, is added to every startup founder’s to-do list.

New Rules Raising Investment Limits

According to the SEC, companies currently may raise an aggregate of $5 million in a twelve-month period through crowdfunding securities. This is a significant increase from the original $1.07 million limit. The new limit greatly expands a new company’s ability to raise capital through crowdfunding. These changes also work to level the inequalities faced by small companies looking for startup funding options. Traditionally, large companies have had a competitive advantage in access to startup funding, but crowdfunding has changed the dynamic considerably.

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