Formation of a Business Entity and Development of a Parent and Subsidiary Relationship.

It is often difficult for a business owner, entrepreneur, startup, and technology venture to decide how to organize itself and acquire the capital and funds the owners and executives will need.  Another important consideration is the need for equity or sweat equity as a method of incentivizing and ensuring that each employee has the motivation needed to be able to grow and develop as a professional.

Also, each individual investor must be provided assurance against the risk of loss from investing in the venture by a method that satisfies the owners, executives, without dilution of the employee’s sweat equity, and the investor’s ability to offset the gains or losses and the tax consequences of how the company is organized.  One of the methods of quickly organizing a company and still having the ability and flexibility of reorganizing or restructuring the Company is either, as a Corporation, a Limited Liability Company, and electing to be taxed as a partnership or an S-Corporation.

Without understanding the business plans of an individual, the entrepreneurs, the clients, or the individuals participating and undertaking the venture there is no way for any corporate Attorney to advise counsel or guide a client on the proper method of organizing a company and how to structure the first company.   Once, the first company is created it can be reorganized into a holding company and an operational entity, or a spin off and a subsidiary for purposes of testing a new market, product or service that may allow your clients to continue to grow and develop their own business, retain key employees, provide a return on investment to the first and/or key investors, and foster loyalty and trust among the key parties.

Making sure that each individual is allowed to have the most flexibility to grow, acquire the professional guidance, mentorship, develop key business, professional and personal relationships of their own without inhibiting or stifling the growth of the company, key employees, officers, and contribution from investors with additional capacity to provide capital or funds the business is merely setting itself up for failure in the long run.  To find out more about the Chicagoland entrepreneurship community see: www.eebrunchclub.com, www.bipeblawg.com or www.vrplawgroup.com, or www.vrplaw.com

Raising funds for your new ventures-is Kickstarter right for you?

In 2013, Kickstarter was able to acquire over 1 billion dollars in pledges and funds for new projects and ventures. Not bad for a site and service that is primarily used to help artists, muscians, film producers, game developers, designers and other creative types to acquire funds for their projects!

The pledges provided can be as small as 100 dollars, and there is a very good opportunity for artists to engage their fans with innovative methods of connecting fans to creative types.  However, if you are a retailer, manufacturer or tech start up looking for that 250000 dollars or more in funding, then Kickstarter may not be the best route for raising funds.

In addition, to concerns about registration of your offering of investmet opportunities or securities with the Securities and Exchange Commission-SEC, qualifying for a Reg D exemption and the need for a private placement memorandum-PPM; there is a disconnect between Kickstarter’s subscribers and the entrepreneurs for these types of projects.  Many individuals on Kickstarter are not interested in getting equity or a percentage of the profits from the atists, game developers, authors, musicians or film producers for their new projects.

Also, if you lose a 100 dollars on a failed project and you may just be happy to walk away. You lose a 1000, 10000, or a 100000 dollars and it may be harder to walk away. Quite simply, there is a different mindset for individuals providing pledges for projects on Kickstarter: a) they are not as concerned with ROI, b) they are concerned with encouraging and supporting the crative arts, and c) they are looking for projects that inspire them and resonate with their creative and artistic preferences.

As a startup and venture capital attorney, I often get clients telling me that they will get funds from Kickstarter to fund their new projects, and I have to bring a dose of reality to their business plans. So, consider your audience, your ability to engage Kickstarter’s audience or subscribers and the social or creative contribution to the arts, film, books, music, and entertainment industries before making a pitch for funds on Kickstarter. For more on funding your startup or new venture try www.startupbusinessattorney.com or www.chicagoentrepreneursattorney.com

Commercial Agreements, Escrow Provisions, Conditions for Payout and Liquidated Damages Provisions, Really?

In a recent First District Court Of Appeal’s Decision that seems to be more of a policy based decision than anything else-A buyer was prevented from enforcing an escrow provision, because it was viewed as an unreasonable liquidated damages provision.   In this case, the Buyer had entered into a construction contract that provided for an escrow provision that paid out funds based on the Defendant’s completion of different stages of the construction contract.

In esence, the entire purchsae price of $4.3 Million dollars was placeed in an Escrow Provision and was subject to satisfaction of certain conditions.   One required that construction permits be acquired, another required the complete project to be completed.  However, there was no difference in the amounts of the Payouts based on the type of delay or the stage of completion of the project.  Thus, the First District Court of Appeals throughout the entire provision as an unreasonable liquidated damaqges.

The First District Court of Appeals found that since the full 4.3 million dollars would not be paid out if, any condition was not satisfied, it was deemed to provide with Plaintiff with too much of a windfall.  A hard lesson learned by the Buyer, sometimes when you try to overreach another party may be able to invalidate what you thought you were able to neogtiate and drat for a client.  Thus, it pays to make sure that you have your agreements reviewed to ensure that they are enforceable and to make sure that you are attempting to cover a legitimate risk, as opposed to acquire a windfall.

This is a common mistake in drafting agreements, often, in trying to draft bullet proof agreements what is standard in the industry and what Courts routinely enforce is ignored to impress a client.  However, often, that bullet prooft agreement or contract may not be as enforceable as you thought.  See:  Commercial Construction Contract_010214

Of Course, if you have any concerns or questions, then please feel free to contact us at: www.vrplawgroup.com

The ADA, Heart Conditions, Blood Pressure Spikes, Strokes, and other Transitory or Controllable Medical Conditions–Are They a Disability or Not Under the ADA?

In an interesting opinion, the Seventh Circuit, recently declared that transitory or medical conditions that can be controlled with medication may still qualify as a disability.  The Seventh Circuit overruled and reversed a District Court Opinion finding that the Employee’s blood pressure, stroke and heart conditions were not a disability, because they were transitory.  The District Court stated that the spikes or fluctuations would ebb and flow, thus were not a disability, as defined, under the Americans with Disabilities Act (“ADA”).

Moreover, the District Court found that the conditions can be controlled by medications and do not qualify as a disability.  However, the Seventh Circuit, reversed and found for the Employee and stated that the circulatory problems, blood pressure spikes and periodic vision loss, may qualify as conditions that substantially limits or impairs the major life activities of blood circulation and eyesight.  The Seventh Circuit further held, that the Plaintiff’s Chronic Blood Pressure Condition could qualify as a disability, if, the Employee could demonstrate that without medication the condition would substantially limit a Major Life Activity.

In making its Ruling, the Seventh Circuit relied heavily on the 2008 Amendments to the ADA.  However, now, Business Owners or Employers have to be careful about the impact that stress may have on blood pressure, poor circulation and/or its related symptoms to their Employees.  Even if, such conditions are treatable with medication, the Seventh Circuit’s recent Ruling allows the employee to claim a disability, if, they suffer from circulatory problems, poor vision or similar debilitating ailments.   For more please see the following: Blood Pressure Condition a Disability_121913

Of Course, if you have any concerns or questions, then please contact us at: www.vrplawgroup.com

Breach of Contract in Loan Agreements and Subordination Agreements with Corporate Creditors!

The Seventh Circuit reversed a Ruling by the District Court granting Summary Judgment in favor of the Plaintiff relating to a breach of contract action based on a subordination agreement.  The District Court held in favor of the Plaintiff, because there were funds that were transferred from the Individual Defendant to the Corporation.

However, the Corporation had accepted the funds and returned them to the Defendant.  But, the Corporation had noted that the funds were received from the Defendant and listed them on its corporate books. Moreover, there was some evidence of use of the funds provided to the Corporation to pay some of the Corporation’s liabilities prior to return of the funds to the Defendant.

As a result, there was a triable issue of fact relating to whether the loan from the Defendant to the Corporation amounted to a breach of the subordination agreement–the Defendant entered into with the Plaintiff.   Based on this Ruling Creditors or Lenders should ensure that the subordination agreement proscribes transfers of funds or loans from an individual debtor to a company that he or she creates.   Thus, the funds loaned by the Creditor are not siphoned into a corporation that is not liable to repay the funds to the Creditor.

If you have any concerns or questions, then please contact us at: www.vrplawgroup.com For more go to:  Wells Fargo v. Hindman

Negotiating and Drafting Commercial Leases for Tenants: What should I know? What are some common traps? The importance of Lease Review!

One of the biggest mistakes that many Business Owners, Entrepreneurs, and Start-Up Companies make is signing whatever lease that is put in front of them.  Figuring out where you are going to office involves not just the location, but the terms to expand, add office space, sublease, renew at market rates, allow for moving and relocation expenses, renewal rights, build outs, payments for electricity and gas during non-office hours, advertising and signage, phone and internet routing, and a variety of other provisions that most Tenants do not consider.

Working with a Commercial Broker is advisable to make sure you understand what is customary and standard in the industry, but do not accept a lease, because the Landlord says that is what they have all Tenants sign.  The reality is there is no such standard lease that all Tenant’s sign. Each business and each Tenant’s business plan and spacing needs are different.  Before you sign or agree to that two hundred percent (200%) holdover penalty make sure you try to negotiate a lower amount.  Otherwise, your renewal rights can expire and you may become a holdover tenant that pays a lot more than it bargained for.

Moreover, renewal provisions that do not have any process for defining or coming to an agreed upon Fair Market Rental Rate are very difficult for Tenants to enforce.  Quite often, the Landlord is not willing to accept the Tenant’s Fair Market Rental Rate analysis and increases the rate to higher than the Fair Market Rental Rate for the Tenant to renew the same lease. However, at this point, the Tenant may incur, significant relocation costs, so the Tenant may be forced to accept a higher than Fair Market Rental Rate to stay in good standing with its prior lease.  In these situations, an egregious holdover penalty will also give the Landlord significant negotiating leverage to force the Tenant to accept its Fair Market Rental Rate that it sets to renew.

So, before you sign that commercial lease make sure an attorney that understands Tenant’s Rights and represents Commercial Tenants reviews your lease.   It could be the difference between meeting your monthly operating budget or finding yourself having to reduce operating expenses to renew and stay where you started out three (3) or five (5) years ago. Of course, if you have any concerns or questions, then please do not hesitate in contacting us at www.vrplawgroup.com

The Value of Business Relationships: Clients, Contractors, Employees, Landlords, Vendors and Competitors!

Every business and business owner must understand the intrinsic value of its ongoing operations and business relationships.  The longer that you have done business with someone, the more likely that you can rely on them for integrity, loyalty, trust, payment, a high quality of products and services.  All too often, we undervalue these intrinsic elements of our business relationships.

A business owner that does not understand the value of these intrinsic elements may, often run into operational challenges that can be readily avoided. The law recognizes the value of these types of intrinsic relationships in many ways, such as, the following: intentional and negligent interference with business relationships, intentional and negligent interference with contractual relationships, breach of fiduciary duties of good faith, loyalty, and care, usurping a business opportunity, goodwill and trademarks, non-competition and non-solicitation agreements, trade secrets, and a variety of other methods of protecting your business relationships.

However, all too often, business owners are willing to allow their relationships to be subverted by competitors, unscrupulous employees, vendors, or competitors.  A business is going to have the characteristics and traits of its owners–thus, if, you do not have integrity and value your work, your contractors, your employees, your vendors, your competitors, then neither will your clients, colleagues or competitors.   Taking the time to work with good people in all aspects of your business, can mean the difference between a business that fails and a business that succeeds.

Make sure you develop and protect your business relationships, otherwise, you may find that you are constantly trying to retrain individuals and recreate your operational efficiencies.  If you have any concerns or questions about any of the above, then please let us know.

Selection of a Business Entity? What should I choose for my business?

Selection of a  business entity is an important part of any business plan.  However, before you consult an attorney take the time to prepare a business plan or executive summary.  This will help you and your attorney decide issues, such as the following: a) need for capital calls; b) partners or additional investors; c) preferred or common stock or units; d) number of authorized shares; e) need for a board or advisors; f) need for employee stock ownership plans; g) tax planning to avoid a higher effective tax rate; h) restrictions on transfer of stock or units; i) need for a manager, officers, or directors; j) need for restrictions on authority of managers, officers or directors; and k) need for angel or venture capital investment.

In addition, to the above some of the most important considerations relate to need for protection of personal assets, other investments, or other assets.  This should be a part of more complete risk management strategy that covers situations, such as the following: a) disability; b) life insurance for key officers or employees; c) death of shareholders or key investors; d) commercial liability policy or general property and casualty insurance; and e) need for licenses and certifications (MBE, WBE, import or export licenses).

Before you even consult an attorney, you should try to think about many of these issues, so that the attorney is able to properly advise and guide you to protect your interest.  Although often times, owners try to have a single attorney advise them, it is better for each owner, investor or partner to have their own counsel.  If you have any additional concerns or questions, then please let us know.