News and Articles

Another Tool for the New Entrepreneur: Non-Qualified Stock Options

Kyle Carraro - Friday, October 02, 2015

Many entrepreneurs, especially those who are new to running a business, often find themselves low on cash reserves while desiring to retain the services of industry experts. When a business owner does not have cash to pay for services, a useful alternative is to offer equity instead. While exchanging equity in lieu of cash can be a wise, necessary business decision, it does come with its risks. When one purchases equity in a company, she is entering into a relationship that binds her to the company and can grant her certain rights as a shareholder.

This type of arrangement can be mutually beneficial, but business owners are rightfully reluctant to offer equity to an outside professional without having an opportunity to test whether the expert is a good fit for the business. Likewise, an expert may not want to be tied to a company before first seeing its inner workings for herself. But stock options—specifically non-qualified stock options—can assuage the concerns of both parties and offer a great solution for the business owner and expert advisor.

Non-Qualified Stock Options Defined

Generally speaking, an option is the right to buy or sell a security or other asset at an agreed-upon fixed price. A non-qualified stock option (“NQSO”) gives the holder of the option the right to purchase shares in a company at a fixed price, usually for a specified period of time. In exchange, instead of cash, the party receiving the option can offer services to the issuer of the option (the company). If the option-holder believes the value of the business is bound to increase, or the stock price does in fact go up, she can buy the stock at the fixed-price and reap the difference in profit.

For example, Smith & Assoc. engage Ms. Johnson to work in an advisory capacity. In exchange for agreeing to provide advising services on a part-time basis, Ms. Johnson receives the right to purchase up to 50,000 shares in Smith & Assoc. at a fixed-price of $0.10 per share. If Ms. Johnson believes the stock price will increase or actually sees the price increase, Ms. Johnson can exercise her right to purchase the Smith & Assoc. shares at $0.10 per share and enjoy the profit.

While this arrangement is at the core of the relationship between the parties, there are additional restrictions and limitations involved that are designed to protect the interests of both parties.

Vesting

The primary concern for a business owner offering equity is that the holder of the option might exercise her purchasing rights and then quit providing services. To mitigate this possibility, non-qualified stock options are made subject to certain “vesting” periods during which time the option holder’s right to purchase stock accrues. Typically, option holder will not have the right to purchase stock for a certain period of time, after which the amount of stock she may purchase will accrue in increments, up to the maximum amount under the option contract.

In our example above, it would not benefit the company to allow Ms. Johnson to purchase any shares in Smith & Assoc. on the first day she began providing services; rather, the option contract would ideally be crafted to allow Ms. Johnson to purchase equity only after advising Smith & Assoc. for a substantial period of time. Additionally, even when Ms. Johnson gains the right to purchase stock, she might only be able to buy a small percentage of the 50,000 shares contemplated by the agreement. Although each company’s needs will differ, in this example, the parties could agree that Ms. Johnson be permitted to purchase 5% of the total shares after the first six months, and then each month after that up to 5% more, so after 20 months she would be “fully vested” and able to buy up to 50,000 shares at the fixed price of $0.10 per share.

Vesting allows an entrepreneur to vet an expert before giving up equity in her business. If the relationship appears to be mutually beneficial, the business owner should be happy to exchange equity for the value that the expert advisor brings to her business. In the end, the exact vesting schedule is a major point of negotiation, and the exact terms will depend on the circumstances of each party.

Don’t Forget About Taxes

When an option holder decides to exercise her rights to purchase shares, she must also be careful to consider the tax consequences. The difference in option purchase price and the stock price when the option is exercised generates income on which taxes must be paid. For example, if Ms. Johnson purchases 50,000 shares at $.10 per share but the value of the shares increases to $.50 per share, she will have paid $5,000 for shares worth $25,000. The difference, $20,000, is generally treated as taxable income. Of course, any further increases in stock price after exercising the option could also be subject to long-term capital gain taxes.

Because of these tax consequences, the party exercising the option will need to plan ahead to make sure she has enough cash to cover the taxes she will owe. While this is primarily a concern for the receiver of the option, it might also be a point for negotiation. All individuals considering such financial transactions should obtain advise from a well-qualified tax advisor to understand the full consequences.

Conclusion

Overall, offering non-qualified stock options in exchange for expert services can be a great tool for the entrepreneur, especially one whose cash flow is limited. While this article is intended to provide a basic introduction to non-qualified stock options, it does not cover every facet of non-qualified stock options and is not to be construed as legal advice. As with any major business decision, owners are best advised to speak with an attorney to make sure their needs and obligations are being fulfilled, and to review other potential provision to include in a stock purchase agreement. To consult with one of our attorneys, please contact us here.

July 2015 NEWSLETTER

Yogi Patel - Tuesday, June 30, 2015

Dear valued clients and supporters: This month's newsletter will focus on: (1) proposed changes to the overtime rules by the U.S. Department of Labor that could potentially extend overtime protection to 5 million white collar workers; (2) New York City's passage of the The Fair Chance Act impacting an employers ability to inquire about a job applicants criminal history prior to hiring and (3) a closer look at selling a company or buying back shares in the context of our continuing series of articles on start-up entrepreneurs.

Proposed changes to overtime rules

The U.S. Department of Labor announced today that it was proposing a rule change that would effectively make millions of white collar employees who are currently considered "exempt" from over-time - eligible for overtime. One of the many factors that currently determines whether an employee is exempt or not from overtime is the total amount of wages earned annually. Today, certain professionals and managers are exempt from overtime if they make more than $23,660 a year and perform specific duties. The proposed rule would now set the overtime threshold to $50,440.00. Additionally, the proposed rule would simplify the identification of nonexempt employees, thus making the executive, administrative and professional employee exemption easier for employers and workers to understand and apply. Both employers and employees are advised to consider the implications of these changes in the event the rule is adopted and implemented as proposed.

The Fair Chance Act

New York City's newly passed Fair Chance Act (the “Act”), which will go into effect on October 27, 2015, prohibits employers from inquiring about a job applicant’s criminal history, including arrest and conviction records, during interviews before a conditional offer of employment is made. In addition, the Act prohibits employers from conducting pre-offer searches of public records and certain consumer reports that contain criminal conviction information. Once a job applicant is given a conditional offer of employment, the employer can do a background check and ask for information about convictions that may be relevant to the job. For more information about the Act, please visit our article here.

Start-up ventures and selling or expanding the business

We invite you to read our last article in the three-part series of articles on start-up ventures and entrepreneurs now posted here. The last article focuses on decisions an entrepreneur who has successfully grown a company and is looking to retire, cash-out, or start a new venture may make. The entrepreneur who is looking to sell should consideration whether the sale should be structured as a stock sale or an asset sale. There are tax and control ramifications that the seller must consider, depending on what they decide to do. The entrepreneur may also decide to buy back the shares that are were issued during the capital raising stage and consolidate control before selling to a third party or simply holding on to the company for a future sale after the buy-back occurs. We invite you to read the full series of articles: Attracting Investment for the Amateur Entrepreneur Part IAttracting Investment for the Amateur Entrepreneur Part II: Additional Capital, and Attracting Investment for the Amateur Entrepreneur Part III: Selling the Business or Buying Back Stock

Attracting Investment for the Amateur Entrepreneur Part II: Additional Capital

Yogi Patel - Friday, June 05, 2015

Intro


After an entrepreneur has used her initial “seed” money to start her business and begin operations, she may find that seeking out an additional capital infusion is necessary or desired to continue her company’s growth. While there are many avenues through which additional monetary resources can be sought, this article will focus on the means briefly discussed already in Part I, namely preferred shares of stock. 

Preferred stock is a class of shares that by definition entitle their holders to priority payment on dividends and their asset value in the event of liquidation over holders of common stock. Preferred stock typically give investors a fixed, prioritized return, but they do not necessarily come with voting rights or a proportional share in the value of a company when it is sold. However, the specific attributes of the preferred shares that a company sells are variable, and a major aspect of negotiations with investors is designing the shares in a way that meets the needs of both parties. 

This article will discuss three of the most important negotiable attributes of preferred stock: liquidation preferences, conversion rights, and voting rights. The article will also briefly discuss the federal and state registration requirements entrepreneurs must follow when executing such transactions. 


Liquidation Preferences: Participating v. Non-Participating Shares


Non-participating preferred stock entitles its holders upon liquidation of the company to the return of their investment plus any accrued dividends prior to the distribution of any proceeds of the sale to the holders of common stock. A liquidation event typically refers to the sale of the company.

Participating preferred stock entitles its holders to the same returns as are granted by non-participating preferred stock as well as their proportional share in the remaining proceeds of a liquidation event. 

Clearly then participating preferred stocks are more desired by investors whereas non-participating preferred stocks are preferred by companies, making this designation a key point of negotiations. While the financial needs, valuation, and potential return on investment of a company will in great part dictate whether preferred shares sold to a particular investor are participating or not, companies can offer a higher dividend rate or a liquidation multiplier as an alternative to proportionate participation in the proceeds of a sale. 

Offering to pay a higher dividend to an investor is enticing in that it presents a fixed, prioritized return that is of greater value than a dividend paid on common stock. This scenario may be enough to sway negotiations in the entrepreneur’s favor, but if it is not, she may also offer a higher liquidation multiplier to the investor.

While preferred stock entitles its holder to the return of her entire investment upon liquidation, this value may be augmented by a multiplier that is negotiated by the parties. A multiplier also gives the investor a fixed return that is prioritized over common shareholders, which in turn gives the entrepreneur an additional negotiating tool to avoid issuing participating shares of stock.


Conversion Rights


A related but distinct, variable attribute of preferred stock is whether or not the holder of the stock has the right to convert her shares to common stock, i.e. has conversion rights. If the holder of preferred stock has conversion rights but the shares are non-participating, she has the choice between receiving her fixed liquidation preference or giving it up and converting her shares to common stock and thereby receiving her proportional share in the proceeds of a liquidation event. The following example illustrates when each choice would be more beneficial to an investor:

An investor purchases a 10 percent interest in a company for $100,000 in the form of non-participating preferred stock. The price is $1 per share, granting the investor 100,000 shares of non-participating preferred stock. The remaining 900,000 shares are all common stock.

If the company is later sold for only $900,000, the value of the common stock would go down, but since the preferred stock price is fixed, the investor would still receive $100,000 first and the remaining $800,000 would be distributed the common stockholders. Under this scenario, had the investor chosen to convert her shares to common stock, there would be $900,000 to divide over 1 million shares of common stock, resulting in a price of $0.90 per share and just $90,000 to the investor. 

Alternatively, if the company sells for $2,000,000, the value of the common stock would significantly increase. If the investor does not convert, she would still receive her $100,000 first, but if she were to convert, her 10% stake would be worth $200,000, so clearly she would exercise her conversion rights here. 

Conversion rights are another great negotiation tool for entrepreneurs and can create a mutually-agreeable middle ground where the company will not have to issue participating shares and allow an investor to “double dip,” and an investor gets the benefit of choosing between the greater of two potential outcomes, the worst of which is her prioritized, fixed return. 


Voting Rights


Preferred stock does not typically come with voting rights because it is generally offered to investors to whom the company does not want to extend any control over its operations; the arrangement is strictly financial. However, circumstances may warrant that an entrepreneur offer preferred stock that comes with either full or limited voting rights. By presenting the investor with the opportunity to have a voice in the operations in the company and potentially even representation on the board of directors, the entrepreneur may be able to receive more favorable financial terms from the investor or to persuade a desired investor who otherwise might not be interested. 


Entrepreneurs should take note that while they may not explicitly offer preferred shareholders any voting rights, some states expressly provide that all shareholders, including preferred shareholders, possess particular minimum voting rights and be permitted to vote on certain matters. 


Securities Registration Relating to Preferred Stock Sales


One of the main differences between this round of investing and the initial, seed round is that at this point the entrepreneur is most likely going to be working with experienced, savvy investors rather than friends and family. Because of the obvious, practical differences between the two types of investors, the law imposes different requirements for transactions with each classification.

The professional or experienced investor to whom the entrepreneur should seek to sell preferred stock is defined as an accredited investor, which we defined in Part I of this series. An entrepreneur may file for registration exemption with the Securities and Exchange Commission (SEC) much like she did during the friends and family round under Regulation D, but instead of applying under rule 504, the entrepreneur should use rule 506. Rule 506 allows an investor to raise an unlimited amount of money provide she meets one of two exceptions. 

The first exception falls under rule 506(b), where the company: (1) Must not solicit generally or advertise the securities; (2) May sell securities to an unlimited number of accredited investors and up to 35 non-accredited purchasers who demonstrate they possess a certain level of knowledge and experience to be able to asses the risks and rewards of the investment; (3) Must give non-accredited investors the same information they give to accredited investors; (4) Must be able available to answer prospective buyer’s questions; and (5) Provide certain financial statements certified by an independent public accountant. 

The second exception falls under rule 506(c), which allows the company to broadly solicit and generally advertise the offering but still be deemed to be undertaking a private offering if it (1) Only offers to accredited investors; and (2) Takes reasonable steps to verify the investors are accredited. 

While one of the advantages of Rule 506 exemptions is that it pre-empts state registration and qualification requirements for offerings, it does not pre-empt state laws with respect to registering as a broker-dealer, so entrepreneurs should not assume that a 506 exemption precludes them from needing to take action on a state level.


Conclusion


Entrepreneurs who reach this phase of investment have generally already navigated the financial, legal, and other obstacles they faced in setting up their company and beginning operations, and they should exercise the same diligence and effort in negotiating and transacting with accredited investors. Having an understanding of the various negotiation tools and potential arrangements with investors gives entrepreneurs vital knowledge and leverage for reaching financial terms that are of a maximum benefit to their companies.  

As with any major financial transaction, entrepreneurs are encouraged to consult with an attorney before taking any official action, as each state has its own particular requirements that must be followed, and entrepreneurs should be confident that they are in good standing on both a state and federal level. The above article is not intended to be legal advice or a complete procedural manual for accepting capital from accredited investors. Additionally, every business has its unique requirements and speaking with an attorney is the best way to know that the needs of your business are being met in compliance with the law.

June 2015 NEWSLETTER

Yogi Patel - Thursday, June 04, 2015

Dear valued clients and supporters: This month's newsletter will focus on: (1) the treatment of household employees under Internal Revenue Code and state statutes; and (2) a closer look at raising capital through preferred shares in the context of our continuing series of articles on start-up entrepreneurs.

Household Employees


While it is not impossible to lawfully employ a household employee, it can be tricky. A household employee is a person who generally does such domestic work as housecleaning, cooking and/or child care. The implications of hiring a household employee often surface when the employee files for unemployment or disability insurance or if the employee simply goes to a reputable accountant to file their yearly income taxes - thereby triggering what is known as the "nanny audit" in the accounting and legal industries. Employers should be mindful that the Internal Revenue Code requires a household employee to be treated similarly to any other employee. Thus, besides the wages paid to the employee, the employer is also responsible for social security, medicare, and unemployment insurance (under both State and Federal Law) contributions on the employee's behalf. The employer must also withhold taxes and pay the employee as a W-2 employee and make timely payments to the IRS for any withholdings. In addition, New York law requires employers to obtain a Workers' Compensation policy as well as a disability policy. Employers are also advised to comply with the minimum wage and overtime provisions of the labor law as household employees are not exempt from these laws. Failure to adhere to these regulations under Federal and State law subject the employer to personal liability. Both employers and employees are advised to consider the exposure in back-taxes to the IRS, as well as the possibility of criminal prosecution for willful failure to comply. 

 

Start-up ventures, raising money and legal obligations


Last month's newsletter rolled out the first article of a three-part series on start-up ventures and capital. The first article, focuses on corporate structures, corporate formalities and applying for securities registrations exemption prior to the "seed" money or "friends and family" stage of raising capital. The second article , focuses on issues faced by a start-up entrepreneur that has already used the initial “seed” money to start the business, but is now at the stage requiring additional capital infusion to fuel the company’s growth. While there are many avenues through which additional capital can be raised, the second article in the series considers the issuing of preferred shares of stock in the company as the mechanism for raising capital. 
      

Preferred stock is a class of shares that by definition entitle their holders to priority payment on dividends and their asset value in the event of liquidation over holders of common stock. Preferred stock typically give investors a fixed, prioritized return, but they do not necessarily come with voting rights or a proportional share in the value of a company when it is sold. However, the specific attributes of the preferred shares that a company sells are variable, and a major aspect of negotiations with investors is designing the shares in a way that meets the needs of both parties. 

The article on our site  discusses three of the most important negotiable attributes of preferred stock: liquidation preferences, conversion rights, and voting rights. The article also briefly discusses the federal and state registration requirements entrepreneurs must follow when executing such transactions.

Attracting Investment for the Amateur Entrepreneur Part I

Yogi Patel - Thursday, June 04, 2015

Intro


With access to information and the ability to share resources at an all time high, it seems easier than ever for anyone with an idea and a plan to create her own business. Amateur entrepreneurs across the country are finding new ways to attract capital and technology for developing their ideas in ways that are evolving the modern economy and changing how business is conducted. Still, for many of these new business owners, their first “seed” money comes from friends, family, and other casual investors, and they may not be aware of the state and federal laws and regulations that apply to such seemingly informal transactions. 

For any transaction in which a business is accepting money as an investment, there are registration requirements and other restrictions imposed by both the Securities Exchange Commission (SEC) and state law. There are even actions that a business owner must take before even offering securities or other equity in exchange for capital, and a failure to comply with federal and state requirements could leave the uninformed entrepreneur inadvertently facing charges as serious as security fraud. 

Of course, with the right planning and guidance, there should be nothing for the entrepreneur to fear, and she should be able to attract the investments she needs to start and grow her business. 

This article is the first in a series intended to provide the amateur entrepreneur with a general idea of how to form a business, accept investment capital at various stages of growth, and ultimately sell the company and distribute the profits if that should be the desired outcome. The articles will focus primarily on business owners whose initial investments will come from friends in family and who are operating in New York, but the general principals covered will be useful to anyone looking to start a business in most states. While each article should give the amateur entrepreneur a solid understanding what steps she will need to take, it is not intended to provide legal advice and anyone seeking investment in her business is strongly encouraged to speak to an attorney before taking any action.

So, let’s start from the beginning. You have an idea you want to turn into a business, you are confidant you can get friends and family to invest, and you are wondering what you should do. Here is what we suggest, using New York State as an example:  


Step 1: Incorporate Your Business


Before you can do anything, you need to officially create your business. Pick a name (make sure it is available), the entity type, and the state in which you are incorporating. While the scope of this article is not intended to cover step-by-step how to incorporate, for its purposes, New York entrepreneurs seeking to sell shares in exchange for investment funds should file as a corporation. This can be done online by filing with the New York Department of State.  


Step 2: Initial Corporate Formalities


After your corporation is established, there are formalities you must follow in order to operate the business and have shares of stock to sell to investors. These include, but are not limited to, appointing at least one director of the corporation, creating the corporation’s bylaws, opening a bank account in the corporation’s name, holding an organizational meeting, and issuing stock certificates to the initial owners of the corporation. While there is no legal requirement that you have a lawyer prepare any of the documents necessary for carrying out any of these steps, because they create enforceable rights and responsibilities, it is always encouraged that you consult with an attorney prior to executing any legal documents. 


Step 3: Applying for Securities Registration Exemption


Once your business is operational and you have shares of stock to sell to investors, which are classified as corporate securities, you need to register your securities with the SEC or file for an exemption. Small business owners seeking investment from friends and family should consider filing for exemption from the registration requirements of federal law (Securities Act of 1933) under Regulation D, rule 504 and under their local state law.

Regulation D, rule 504 allows a corporation to receive up to $1 million from investors over a 12-month period. The advantage of applying under Rule 504 is that the investors are not required to be accredited. An accredited investor, as the term applies to individuals, is defined as someone (a) whose individual net worth, or joint net worth with his or her spouse, is over $1 million; or (b) who had an income of over $200,000 or a joint income over $300,000 in the two most recent years and who has a reasonable expectation of reaching the same level in the current year. Many amateur entrepreneurs are not fortunate enough to have such wealthy friends and family, Rule 504 provides a welcome exemption.

One limitation of Rule 504 as compared to some other exemptions is that it requires that all such non-accredited investors be preexisting contacts of the business owner issuing the stock and that no general solicitation is therefore permitted. This is likely not an obstacle for amateur entrepreneurs in that they typically are seeking investment from friends and family, but it is important to note that they should not also seek to advertise or solicit generally and to people they do not already know.

Additionally, under Rule 504, issuers of stock are still subject to their state registration requirements. It is essential that when applying for a federal exemption under Rule 504 that business owners check and comply with their state laws. In New York, issuers of stock can apply for an exemption to registration with the Attorney General if the securities are to be sold in a limited offering to no more than forty people. Note carefully: the language of the New York Statute limits the number of offerings, so it is not enough that you issue stock to fewer than forty people; you can only offer the shares to that many. 

Finally, while awaiting approval from Attorney General, making offers is prohibited. New York entrepreneurs should abstain from making any offer, even to friends and family, until they have received official approval of the exemption from the Attorney General.


Step 4: Issuing the Securities (Stock)


Now that your corporation has been formed and formalized, and your securities exemption has been approved both federally and on a state level, your corporation is now free to sell the shares of stock to investors. Naturally, your internal, corporate documents must have been duly executed in a manner authorizing the type and quantity of stock you wish to sell, particularly your bylaws and your articles of incorporation. 

The two main types of stock are common and preferred. Common stock is what most people think of when they imagine stock: it is a security that represents ownership in a corporation that comes with certain rights, powers, and duties, including certain voting rights. Preferred stock gives the owner a priority when it comes to being paid and can also come with a higher dividend, but it does not typically come with voting rights and the return on investment is fixed, so there is no share in the overall sale price of the business. 

Typically for this first “seed” round, amateur entrepreneur wish to issue preferred, non-participating stock to their friends and family, with the option to convert them to common, participating shares. This offers the amateur investor a more secure investment in the short-term, and offers the entrepreneur’s friends and family a greater reward should the venture turn lucrative. In exchange, the entrepreneur is getting investment money she might not otherwise have received, particularly with low to no interest, and she can retain control over the operations of the business. The overall goal at this stage is to give friends and family back the percentage they put in, hopefully when the business has grown and everyone makes a profit.

The next article in this series will discussed more nuanced forms of investment that may take place at subsequent stages, when the business is up and running, proven to be a viable concept, and is seeking an additional capital injection. 


Conclusion


The time is truly ripe for amateur entrepreneurs to take advantage of the current climate and start their own businesses, but they must take steps to ensure that they are in compliance with all applicable federal and state laws, particularly those that govern the sale of securities. In particular, those looking to start and grow a business should not ask for seed investment money until they are properly setup and have received registration exemption approval from the federal and state governments. 

There are many, detailed steps to follow along the way, and while retaining an attorney is not a requirement, it is highly recommended that you have a legal expert guide you along the way. The information contained in this article is not intended to be legal advice and there are certain parts of the overall process discussed above that were not included, so this should not be used as a step-by-step guide either. Overall, Working with an attorney who not only knows what she is doing not only will make the process go faster, but it will give you the peace of mind that you are doing everything you are supposed to be doing.

May 2015 NEWSLETTER

Yogi Patel - Friday, May 01, 2015

Dear valued clients and supporters: This month's newsletter will focus on (1) recent developments in the law with regards to the use of LinkedIn by ex-employees and violations of a pre-existing non-compete or non-solicitation agreements and (2) legal considerations for start-up ventures that are raising money.

LinkedIn and Violation of Separation Agreements

It is not uncommon for employers to require an employee to enter into a separation agreement upon termination or resignation of their employment in exchange for a severance payout. The benefit to the employer in entering such an agreement often includes clauses restricting who that employee works for (competitor, etc) and who they can take with them to the new employer (co-workers, clients, etc.), among other benefits. And the reality now is that many employees maintain social media accounts such as LinkedIn that includes professional connections made through their employment, whether it is co-workers or clients/vendors of the employer. The question that has arisen in several jurisdictions is whether an employee who signs such an agreement and then announces that they are leaving the employer on LinkedIn has breached the non-solicitation and non-competition clauses. Courts have found both ways on this issue in different jurisdictions. And the analysis Courts appear to be engaging in when presented with this question is focused on a few factors. First, what was the exact content of the message by the employer on the social media site. Did it encourage defection or competition? Second, what policies did the employer maintain regarding the use or restriction of social media during the course of employment and did the separation agreement specifically make reference to the use of social media with regards to non-solicition and non-compete clauses? Ex-employees subject to such clauses are advised to tailor the message about their departure or future plans on social media sites with this in mind. Employers that have concerns about how their businesses might be impacted as a result of the use of social media by an ex-employee are advised to implement policies restriction the use of social media, while keeping in mind federal labor law protections protecting employees' ability to engage in concerted activity, should they impose such restrictions.

Start-up ventures, raising money and legal obligations

The current state of the capital markets appears to have set the stage for entrepreneurs to start their own businesses. But entrepreneurs are cautioned to take steps to ensure that they are in compliance with all applicable federal and state laws, particularly those that govern the sale of securities. For any transaction in which a business is accepting money as an investment, there are registration requirements and other restrictions imposed by both the Securities Exchange Commission (SEC) and state law. There are even actions that a business owner must take before even offering securities or other equity in exchange for capital, and a failure to comply with federal and state requirements could leave the uninformed entrepreneur inadvertently facing charges as serious as security fraud. Over the course of the next several months, we intend to post a series of articles on our website intended to provide the start-up entrepreneur with some general guidance on issues related to business formation, accepting investment capital at various stages of growth, and ultimately selling the company and distributing the profits, if that should be the desired outcome of the venture. Please see our series of articles here: I, II, and III .


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