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  • 4 Sep 2015 2:48 PM | Start. Law (Administrator)

    Raising money from non-accredited investors often results in transactional fees as high or higher than the amount of money raised through these investors.

    The Securities Act of 1933 provides companies with a number of exemptions from registration with the SEC. Two distinct but related exemptions, Rules 505 and 506 of Regulation D, permit raising capital from up to 35 non-accredited investors. (Please note, there are separate regulations regarding crowdfunding, I don't recommend that either).

    While legal, non-accredited investors should be avoided because

    Non-Accredited Investors Trigger a Larger Disclosure of Information – If you raise capital from non-accredited investors in a Rule 505 or Rule 506 registration-exempted financing, you must provide a huge amount of information about your startup company. Think IPO-registration huge, thereby leading to larger legal and accounting costs.

    Non-Accredited Investors Statistically Sue More Than Accredited Investors – As an investment from a non-accredited investor often comes from hard-earned savings more emotion is attached and if things go wrong they are more likely to sue.

    Non-Accredited Investors can Hinder an Acquisition – It may be difficult for your startup company to be acquired after it has completed a registration-exempted financing with non-accredited investors. Non-accredited investors trigger additional rules in the context of an acquisition. Sometimes the acquiring entity will require a startup company to buyout the non-accredited investors pre-acquisition.



  • 17 Jul 2015 5:46 PM | Start. Law (Administrator)

    Bylaws cover:

    • the number of directors on the board
    • required notice for stockholder and board meetings
    • the quorum for stockholder and board meetings
    • the required voting thresholds for lawful stockholder or board actions
    • types of officers and their roles
    • allowing actions by stockholders and the board without a meeting
    • electronic methods for meetings
    • indemnification provisions for officers and directions


    Some startups will include a Right of First Refusal provision in their bylaws. A Right of First Refusal provides a startup with the right to purchase and redeem any of its stock prior to such stock being sold to another prospective stockholder.  This is helpful for a startup to maintain its shareholder base, although there are usually exemptions for things like estate planning.

    The Right of First Refusal provision can either be located in each individual Stock Purchase Agreement or it can be in a startup’s bylaws.  It's potentially more convenient having the provision in the bylaws because then you may not have to worry about making sure a Right of First Refusal is in each stock agreement; however, sometimes a Right of First Refusal provision in the Bylaws can cause issues. I’ve seen this a few times when the shares subject to the Right of First Refusal include all securities, as opposed to just common stock. Such a blanket provision includes preferred stock and thus, the investors’ securities. Investors typically do not want their shares so restricted. Therefore, if you include the Right of First Refusal in your Bylaws, preempt any investor issues by restricting the provision in your bylaws to apply only to common stock.  This will prevent you from having to amend and restate your bylaws before funding as well as protect the company as intended with the Right of First Refusal.


  • 6 Mar 2015 1:39 PM | Start. Law (Administrator)

    Par value is the minimum price that a corporation can issue its shares for.  The concept originated in the great depression. Startups want to keep their par value low so that

    • founders don't have to invest a significant amount of cash to gain equity in their company and

    • to keep their Delaware franchise tax bill low.

    As a part of incorporation, you'll determine how many shares to authorize and set par value.

    We typically recommend that a startup authorize 10 million shares and set par value for common stock at $0.00001.



  • 20 Feb 2015 1:37 PM | Start. Law (Administrator)

    By the time a startup compensates an advisor with incentive equity, it is best practice for startups to also have a written agreement typically called an “Advisor Agreement” or “Advisor Letter” in place to protect the startup. The Advisor Agreement also has the side benefit of managing expectations on both sides.

    What is an Advisor Agreement?

    A typical advisor agreement defines the startup-advisor relationship. For example, the Advisor Agreement will typically set forth the advisor’s incentive equity amount and type (i.e. options or restricted stock grant) and a vesting schedule. (Note that the Advisor Agreement is not a substitute for the Stock Option Agreement or Stock Grant Agreement, you'll need one of those as well to actually convey the stock.)

    The Advisor Agreement should include, or have attached, the following terms and conditions.

    Confidential Information Clause

    The protection of confidential information should be addressed. To be useful as an advisor, they will have to know all about your startup including some or all of the confidential information and/or technology you may have. Advisors aren’t in the business of divulging confidential information, but worst case scenario you will have an agreement in place and set the expectation that your startup’s confidential information is not to be disclosed or used for any other purpose. This type of clause is non-negotiable; if a potential advisor will not agree to the confidential information clause, it’s time to find a new advisor.

    Inventions Assignment Provision

    Another essential issue relates to the assignment of intellectual property. While all startup employees should be party to an inventions assignment, the inventions assignment provision in an Advisor Agreement should likely be ‘narrower’ then a typical employee’s inventions assignment clause. And in some cases, it may be deleted.  It does depend on the actual circumstances, including how involved such advisor will be with confidential information and the development of the company’s products or services.  The more involved, the more likely at least a light inventions assignment would be ideal.

    Term and Termination

    Finally, usually, advisor agreements may be terminated by either the startup or the advisor at will (i.e., immediately).  Sometimes an advisor requests a longer termination period, but before you write such into the advisor agreement, ask why he or she is asking for that clause.  Usually, there’s a workaround in their incentive equity grant that is a better solution.


  • 7 Jan 2015 1:35 PM | Start. Law (Administrator)

    An 83(b) election is a letter you send to the IRS letting them know you’d like to be taxed on your equity on the date the equity was granted to you rather than on the date the equity vests.

    If, as a founder or employee, you receive vested stock worth a nominal amount, such as .0001/share, it virtually always makes sense to file an 83(b) Election because your immediate, and overall, tax liability will be less.

    However, if you receive stock valued at a higher amount such as $1.00/share, it may not make sense to file the 83(b) election. For example, if you receive 100,000 shares at $1.00/share, the 83(b) election would immediately cause you tens of thousands of dollars in tax liability. That's quite a hefty tax bill and if the company subsequently fails before your stock vests, you likely would have been economically better off to not have filed a Section 83(b) election.

    The election _must_ be filed with the IRS within 30 days of the date of your vested stock grant.  Failure to file within that time will render the election void.



  • 19 Oct 2014 4:08 PM | Start. Law (Administrator)

    The liquidation preference is the amount that must be paid to the preferred stockholders before distributions may be made to common stockholders. The liquidation preference becomes effective upon liquidation of the company, asset sale, merger, consolidation or any other reorganization resulting in the change of control of the startup.


    It's usually expressed as a percentage of the original purchase price of the preferred, such as “2x.” Thus, if the purchase price of the preferred stock is $5 per share, a liquidation preference of 2x will be $10 per share.


    Alternatively, the liquidation preference can be expressed as a per share amount, as seen in this generic liquidation preference clause:


    The holders of the Series A Preferred Stock shall be entitled to receive, prior and in preference to any distribution of any of the assets or surplus funds of the Corporation to the holders of the Common Stock by reason of their ownership thereof, the amount of $10 per share (as adjusted for any stock dividends, combinations or splits with respect to such shares) plus all declared or accumulated but unpaid dividends on such share for each share of Series A Preferred Stock then held by them.



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