Finding Money for Your Business in Unique Places

DISCLAIMER: First Venture Legal does not intend to endorse any of the companies or organizations mentioned in this article, but offers them for example purposes only.

2012 may be a difficult years for entrepreneurs to raise capital from the traditional sources of commercial bank loans and venture capitalists. While some in the startup financing industry are optimistic, some surveys shows that both banks and VCs intend to give out less money in the coming year. However, this shouldn’t discourage entrepreneurs with a good idea from getting started in 2012. The following is a short list of new and innovative funding sources for entrepreneurs who are looking for seed capital.

Local banks and credit unions

Although standards for business loans are still very tight, normally requiring significant assets for collateral or a longer track record of solid cash flow and growth, entrepreneurs who require larger sums of seed funding can try local banks and credit unions for traditional loans. Because community banks and credit unions are not exposed to troublesome toxic assets or sovereign debt, they are less jittery about granting loans to small businesses. Entrepreneurs looking for a bank loan to start a business can still expect to likely have to make personal guarantees on the loan, but with community banks and credit unions they may find a more willing lender.

In addition, start-ups may look into negotiating a revenue-based payment plan on their loan. This can be particularly helpful for start-ups whose revenues vary seasonally or are sensitive to economic conditions.

Although you are likely to get more favorable terms from a local bank or credit union, you should always still take the time to have the agreement reviewed by an attorney and consider whether the loan is one your business can afford and the terms are ones your business can handle.

Private and public grants

Entrepreneurs can also apply for public and private grants. Despite budgeting difficulties in many states and localities, governments are looking to stimulate their economies by encouraging the growth of small businesses. There are also organizations on the private side that also provide grants to start-up businesses. Some grant organizations are focused a specific category of venture, while others are general in nature.

Venture competitions

Similarly, numerous public and private groups and business schools hold venture competitions. Most competitions are organized by theme or business sector, or by the stage the business is at (whether it be the planning stage, seed funding stage, or Series A funding stage, etc.). Entrepreneurs are usually asked to make presentations to judge panels composed of experienced entrepreneurs, attorneys, or venture capitalists; the presentations range from detailed explanations of the business plan and record to a simple 30-second “elevator pitch”. The competition prizes include cash amounts ranging from several hundred to tens of thousands of dollars, or free business equipment or professional services, or, like organizations such as MassChallenge, provide assistance more similar to that provided by incubators and accelerators.

Peer-to-peer lending and crowdfunding

The newest trend in funding of small businesses is peer-to-peer lending/crowdfunding websites. Peer-to-peer lending and crowdfunding involve groups of individuals connecting with entrepreneurs to lend or donate small sums of money. Examples of peer-to-peer lending sites include Prosper and Lending Club. Some sites are targeted towards social or artistic ventures, such as the crowdfunding sites 33needs, FansNextdoor, and IndieGoGo. Some sites require the entrepreneur to set a funding goal and only release the money to the start-up if the goal is met, while others allow the start-up to keep whatever money is raised; virtually all of the sites charge a transaction fee.

I’ll be going into more detail about peer-to-peer lending and crowdfunding, particularly the legal aspects, in a future article. However, entrepreneurs who look to get involved with peer-to-peer lending and crowdfunding organizations that exchange equity or debt for the financing should be extremely cognizant of legal issues, particularly securities issues when equity is exchanges.

Equipment leasing and vendor financing

If your business requires significant and expensive equipment it may be worthwhile to look into the possibility of leasing equipment or having the seller finance the purchase, or if you purchase significant amounts of supplies and goods on a regular basis your business may consider establishing an open line of credit with supplies. It goes without saying, of course, that you should not lease or finance equipment and goods your business cannot afford, and that the agreement contains terms agreeable to your business. If you intend to get into a leasing or financing agreement, you should have an attorney at least review any proposed agreements to help you understand your rights and obligations; or, if desirable, have an attorney in the process to negotiate more favorable terms for your business — it’s likely that other party has an attorney working on their side of the deal.

As always, feel free to leave your comments in the comments box below, or go to our Contact page to send us your questions or suggestions for future articles. Thanks for reading!

Further reading:
http://www.openforum.com/articles/4-ways-to-inject-cash-into-your-business
http://www.openforum.com/articles/where-to-turn-when-your-bank-doesnt-love-you-anymore?extlink=sm-openforum-tw
http://www.huffingtonpost.com/2011/12/23/startup-funding-7-ways-to-raise-money-in-2012_n_1161801.html#s570214&title=Friends_And_Family

Who owns the Twitter Feed? Why your business needs a social media policy.

The intellectual property series will be back next week; today I’d like to discuss a story that’s been in the news recently…

You may or may not have already heard the story of Noah Kravitz, a man from Oakland, CA who worked at a mobile phone website start-up, Phonedog.com, until October 2010. While working at Phonedog.com, Kravitz opened a Twitter account under the handle Phonedog_Noah, eventually gaining over 17,000 followers. When Kravitz left Phonedog.com in October 2010, he claims he and the company agreed that Kravitz could keep the Twitter account so long as he tweeted on behalf of the company from the account from time to time. Kravitz changed the handle to NoahKravitz and continued tweeting from the account, until eight months later when Phonedog.com sued Kravitz for control of the Twitter account, claiming it represented a customer list that the company was entitled to.

Based on what I’ve read of the case, I do not believe Phonedog.com’s argument that the Twitter account represents a customer list holds up — not only is it likely untrue that every follower on the feed is also a customer or potential customer of the company, but in order to protect against disclosure of customer lists the law requires that companies protect the lists as well, taking reasonable steps to keep them private and secret. In this case, Twitter accounts’ followers lists are publicly viewable, so the customer list argument must fail.

The better argument, and what I believe is truly at the crux of the Phonedog.com case and ones like it currently in courts around the country, is whether a Twitter feed operated by an employee, wholly or in part for the benefit of the company, is part of the company’s goodwill (in the accounting/business sense) and therefore belongs to the company, or whether the account truly is the personal property of the employee operating it. A number of factors can go into analyzing this issue, including: whether the individual who created and is operating the account does so at the direction of the company, whether other employees not operating the account have or can gain access to the account, whether the handle includes part or all of the company name or the look and image of the account is otherwise identifiable with the company (for example, using the company’s logo in the avatar or website background), whether the content is dedicated wholly or in part to the company, and whether users consider the content to be the official message of the company or otherwise coming directly from the company. Under this analysis, I believe Phonedog.com may have a better argument that the account belongs to it and not to Mr. Kravitz.

This story and others like it should serve as a warning to start-ups, most of which rely heavily on social media and networking as part of its marketing and public relations strategy. When companies direct or encourage employees to create company-related social media accounts, they should have written agreements in place that clearly state such accounts are the property of the company. In addition, businesses should also consider taking steps to ensure they maintain control over the company’s social media message by reasonably limiting employees’ ability to post social media content relating to the company — for example, prohibiting employees, without prior authorization, from making accounts with the company’s name or logo, or posting content that claims to be or can reasonably be inferred as the official message of the company.

As always, if you have comments, please feel free to leave them in the box below, or head on over to our Contact page to send your questions or suggestions for future articles. Thanks for reading!

Getting Good Deals on Commercial Space in the Down Real Estate Market

The November 2011 issue of the ABA (American Bar Association) Journal ran an article (http://www.abajournal.com/magazine/article/lets_make_a_deal_small_firms_find_big_deals_on_office_space/) that spotlighted a Florida law firm that had taken advantage of the down real estate market, particular in the commercial sector, to purchase office space at a steep discount, drastically lowering what it had been paying in rent in its previous space, while upgrading to a much more functional and aesthetically pleasing space in a prime location. The article also highlighted other firms who had similarly used the down market to not only move to better office space at a lower price, but also negotiate perks such as reducing the space (and the rent!) to match the size of the firm, upgrading the facilities and providing custom build-outs, or even something simple such as free parking.

Although the the article focused on law firms, it points out a trend that start-ups in the market for commercial space can take advantage of. Entrepreneurs can leverage the slow commercial real estate market to negotiate with commercial landlords to obtain prices that can be very helpful to the bottom line of a start-up, or cover the cost of upgrading a space to meet the business’s needs (for example, installing a high-speed internet connection or a specific floor layout), or perks such as free utilities, parking, or coffee!

Of course, in order to obtain the best deals, businesses must be willing to commit to the space for an extended period — a landlord isn’t about invest in upgrades for a tenant that will only occupy the space for months, not years. It also goes without saying that a brand new start-up isn’t going to have nearly as much leverage as a start-up with a proven track record of several years (or more) of viability — a landlord is also not about to invest in upgrades for a tenant that may be out of business in six months! Nevertheless, there is room for negotiation for businesses at all stages of development. Don’t be afraid to shop around, or consider space that may not fit all of your criteria, especially if you can get the landlord to agree to provide you at low or no cost with most or all of what you need. And of course, it goes without saying that if you get a landlord or seller to agree to a favorable term, make sure it is written down in the lease or purchase & sale agreement, and that you’ve agreed to and written down your remedies if the terms are not fulfilled!

For the start-ups that may not be at the stage where they are ready to commit to leasing or purchasing commercial space, there are still budget-friendly options. The first is the sublease or office sharing option — many firms have space that they rent but do not use, and sublease that space to other businesses to cover the cost of that space, and with economic pressures affecting everyone, rents in commercial subleases are often negotiable. Such arrangements often come with perks, such as included utilities, use of common areas like office kitchens, conference rooms, or copy/fax rooms, or the use of the office’s receptionist staff — if such amenities are not included in the rent, they are often offered at very reasonable rates.

This practice is very common among law firms, but it is possible to find firms in a wide variety of industries that do it. It is often desirable and beneficial to find a sublessor in the same or similar industry as you who is willing to serve as a mentor, resource, or referral source. Of course, you should take great pains not to do anything that could be construed as interfering with your sublessor’s business or customers; and, most importantly, you and the other party should have an agreement that requires each party to make it clear to their clients that the parties are not in a joint venture or partnership together — too often do clients get the wrong impression regarding an office sharing arrangement or sublease and add hapless Firm B as a defendant to litigation over a transaction between Firm A and its client!

Another option for start-ups not ready to move into office space full-time is the virtual office option. Virtual office companies offer services that allow businesses to use the virtual office company’s center as its business address where the business’s mail can be sent. The virtual office company’s center will also have offices and conferences rooms that businesses can rent for the hour, day, week, etc., and where businesses can utilize receptionist, audio/visual, or copy/print/mailing services. Most virtual office companies offer these services both in packages and a la carte to meet the specific needs of each business; in either case, for businesses that don’t yet need a full-time office, virtual offices are significantly cheaper than having a full-time office. There is a mixture of international, national, and local virtual office companies in every city; the international and national brands often allow their clients to utilize their services at any of their locations, which is beneficial for the entrepreneur who does business on the road.

As always, please feel free to leave your comments in the field below, or head over to our Contact page to send us your questions or suggestions for future blog article topics. Thanks for reading!

How “limited” is “limited liability”?

One of the primary benefits of incorporation or formation of a limited liability partnership or company is the feature of limited liability — the liabilities of the business are the business’ alone, and the scope of owners’ exposure is limited to whatever capital they have invested in the business, keeping their personal assets safe. But in practice, how limited is the limited liability shield of corporations and unincorporated business organizations?

The fact of the matter is, limited liability shields, especially for new small businesses, may not provide all the protection you think it does. As a new small, start-up business with no proven track record of customers or cash flow, many persons or organizations that the new business will deal with may likely require the owners to personally guarantee the liability of the business. Once an owner personally guarantees a business’s liability, in the event that the business cannot satisfy those liabilities, the obligee may pursue the guarantor to satisfy the liability.

While many smaller liabilities, such as supplies, utilities, or a corporate credit card may be kept solely in the business’ name, owners of start-up businesses may be required by commercial landlords to guarantee leases for office or retail space, or required by banks to act as sureties for commercial loans. Third parties a start-up business owner will deal with may likely only accept the business as the sole liability holder, if at all, once the business has established itself as viable, with good cash flow and/or sufficient assets.

In addition, a limited liability shield does not shelter owners from liability they personally incur, in particular tort liability, even if such liability is incurred in the course of business operations. For example, an owner getting into an car accident in a company-owned car, driving on company business, is nonetheless personally liable for the damages and injuries he or she caused. And because owners of start-up businesses are generally directly involved in the day-to-day management of their businesses, including hiring and supervising of employees, even if tort liability is accumulated by employees, owners may nonetheless be liable under negligent employment/entrustment theories.

Furthermore, owners of small businesses must be careful not to undertake actions that can jeopardize the limited liability shield in a process known as “piercing the corporate veil”. Business organizations are considered, to one extent or another, entities separate from their owners — corporations especially are considered to have legal “personhood”. In the event that owners fail to recognize corporate formalities by, for example, not holding organizational meetings required by law or co-mingling personal and business funds, a plaintiff in a civil suit may ask the court to “pierce the corporate veil” and subject the personal assets of some or all of the owners to satisfy a judgment. Although courts have mostly applied the “piercing the corporate veil” doctrine to corporations, the general consensus among lawyers is that a court would also apply the same doctrine to unincorporated business organizations, with a legal standard reflecting the more informal management structure of many unincorporated business organizations.

Practically speaking, there are many kinds of liability that business owners cannot be protected from by limited liability shields, but can be mitigated against. Personal liability for commercial leases or loans can be minimized by careful planning and negotiation; personal tort liability can be minimized by a good insurance policy. And of course, owners should be careful to remember to treat their businesses as separate legal entities to avoid the risk of a court “piercing the corporate veil” in a civil suit.

The question then becomes — it is worth the time and expense to set up a limited liability business organization? Limited liability is relatively easy to obtain — corporations and limited liability companies automatically have limited liability shields, and is easy for partnerships that are eligible for limited liability to obtain it. Unless business considerations exist that dictate the selection of a business for not automatically endowed with limited liability, such as a general partnership, or ineligible for limited liability, such as a limited partnership (in Massachusetts; in some other jurisdictions limited partnerships are eligible for limited liability), there is no reason why start-up business owners shouldn’t take advantage of any protection that a limited liability shield can afford. Those owners should, of course, remain cognizant of the practical limitations of the limited liability shield.

I want to start a business, now what? (legally speaking)

So you (and your team, if you have one) have decided to start a business. You’ve got an idea, you probably have a business plan, have some start-up capital (or have a plan to obtain capital), you may even have customers already lined up. You’ve handled the business issues, and now you’re wondering what else you might need to do to get started with your business? Have you considered the legal aspects of your business?

First and foremost, have you considered legally organizing your business (e.g.: incorporation, or formation of a partnership or limited liability company)? Some of the considerations that go into the decision to legally organize your business include liability protection, management structures, and tax considerations. If your business may incur liability, especially tort liability, forming a corporation, LLP, or LLC may be highly desirable. Otherwise, your personal assets and the personal assets of everyone who may be deemed an owner of the company could be reached to satisfy the liabilities of the company. Of course, liability shields are not perfect, especially for small businesses where owners are often also managers and employees — as a small business owners are often asked to personally guarantee debts and other liabilities of the business, and owners who are managers/employees of the business are of course personally liable for any tortious conduct they perform (and could also be liable for tortious conduct of employees under negligent entrustment/employment theories!)

Because, starting out, business owners are often managers/employees of their businesses, when there are two or more owners it is necessary to have a comprehensive agreement that describes the rights, responsibilities, and authority of each owner in regards to each other and to the business. Not only is it preferable to have the operating structure and procedures spelled out while the business is running, but it is also critical to have everyone’s rights and responsibilities written down if and when things get tough for the business.

There are other legal issues that all businesses face. Does your business need office or commercial space? A commercial loan? Are you negotiating contracts with suppliers and/or larger-scale customers? The party on the other side probably has a legal professional reviewing the terms of the deal, at the very least. Commercial space leases, commercial loans, and vendor/buyer contracts may represent significant and long-term liabilities for your business; it is important to consult with a legal professional on any deal your business does, so as to at least understand the terms of the agreement, such as the extent of warranties in a vendor agreement or the nature and terms of a “go-dark” provision, for example, so as not to be surprised by any costly terms that can represent a significant financial burden to a new or small business.

Before starting up a business, it may be necessary to consult with an attorney to discuss the legal issues of starting up a business. Retaining an attorney to handle your incorporation/business organization and the legal aspects of your business deals can free you and your team up to focus on strategic planning, designing, marketing, and actually selling your products or services to your customers. Of course, not all new businesses have the capital initially to spend on legal services; a good attorney should be able to help you decide whether or not retaining an attorney is within your business’ budget or necessary. Very small businesses with a single owner who is the sole employee may not need to create a legal business organization, or may be organized simply enough that a well-informed entrepreneur may be able do it himself or herself. Even if you decide not to retain an attorney to handle your start-up needs, it doesn’t hurt to make contact with one for future reference.

Thanks for reading, and if you have any questions or topics you would like to see covered in future blog articles, don’t hesitate to leave a comment or head over to the Contact Us page to send us an email!