Tuesday, April 24, 2012

Can I pay a startup attorney with stock or options?

So a major issue faced by many startup founders, especially when they are bootstrapping, self-funded, or just watching their cash, is how they can get legal or other services with little to no cash.  The fall back position is to give the advisor or service provider a "piece of the action."  The founder often wants to use stock in the company they formed or stock options to avoid using cash, but still obtain needed advice and guidance.  Here are the main problems you will run into:

1)  Valuation-  You will have a difficult time agreeing on a valuation of the company's stock.  The founder often feels that they have the next greatest invention or idea of all time and the company is already worth billions despite having no business model or revenue (just watch an episode of Shark Tank on ABC).  The valuation is what you use to determine the value of the stock in comparison to what the services are worth.  (e.g. 1,000 shares of stock valued at $1 per share in exchange for $1,000 worth of services)  The service provider or advisor may have a different idea of what your company or idea is really worth.  If you can't come to some agreement on the value of the stock, you won't get them to sign on.

Thursday, April 19, 2012

Why Tech Startups Get Funding, Not More "Meaningful" Ones

I read a good post yesterday from Chris Dixon on his blog about why there aren't more "Meaningful Startups."   In the article and comments, the discussion had to do with why tech companies, more specifically, internet startups get the majority of funding instead of companies that seem to solve a bigger societal problem, such as curing a disease.  He argues that the other what some might call "more meaningful startups" don't get off the ground because they have a hard time getting funded and this is due to time to exit and amount of capital required.

I tend to see that funding and society are major reasons for the tech funding boom.

Wednesday, April 18, 2012

SEC Adopts Rules For Definitions of Terms in Derivatives

On April18, 2012, the SEC, jointly with the Commodities Futures Trading Commission (CFTC), implemented part of the Dodd-Frank Act by adding definitions for use in interpreting what are swaps-related transactions.

The new Rule 3a71-1 under the Securities Exchange Act defines the term “security-based swap dealer” consistent with the criteria set forth in the Dodd-Frank Act as someone who:
  • Holds themselves out as a dealer in security-based swaps.
  • Makes a market in security-based swaps.
  • Regularly enters into security-based swaps with counterparties as an ordinary course of business for their own account.
  • Engages in activity causing them to be commonly known in the trade as a dealer or market maker in security-based swaps.
There is an exception for those who are only involved in a de minimis quantity of these transactions to not be held to this rule.  The rule will go into effect 60 days after the rule is published in the Federal Register. 

You can read the entire release and rule through the SEC's website at:

Monday, April 2, 2012

What Do the JOBS Act, Reg D Change, and Crowdfunding Bills Actually Say? Which bill is right? Read H.R. 3606

I have noticed quite a bit of confusion in blogs when discussing crowdfunding, the JOBS Act, and other recent legislation regarding small business, startups, and emerging growth companies.  Even respected news organizations don't get the specifics exactly right about what this legislation actually says, so I thought I would set the record straight.

President Obama is set to sign H.R. 3606 this week.  The best way to know exactly what this bill says is to read it, despite the somewhat dense language and references to other parts of U.S. law.  Here is a link to the actual PDF format of H.R. 3606.  For an overview and summary of this bill and its history you can read here.  These are links directly to the information provided by Congress.  Some of the confusion has been that the legislative process involves a very confusing system where bills are introduced, amended, and sometimes added to existing bills.  That was the case with the JOBS Act and the crowdfunding provisions.  H.R. 2930 was the original crowdfunding bill that passed the U.S. House and went to the Senate, but did not actually pass the Senate.  After adding and deleting portions from various amended versions similar to H.R. 2930, the crowdfunding and other provisions were all put into one bill called H.R. 3606.  This passed the Senate and then went back to the U.S. House after amendments to be passed.  It has passed and was forwarded to the President for signature on March 27, 2012.  He is expected to sign it this week.