Business Startup

Key Term Sheet Provisions: Conversion

In this post in our key term sheet provisions series, we’re discussing conversion rights.

Optional Conversion Investors’ preferred stock is always subject to an optional conversion into common stock. That is, they can convert their preferred shares into common shares at any time. This is a standard provision that will be found in 99.9% of all term sheets; it’s one of the few terms that are actually nonnegotiable. The conversion is usually on a 1:1 basis, which tends to undervalue preferred shares as they have additional features which make them “preferred” to common stock. Notably, preferred shareholders lose their liquidation preference when they convert to common stock. Once preferred has been converted to common, it can’t be converted back to preferred.

So why would preferred...

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Business Startup

News Roundup 2012 Week Two: Securities Regulations; Executive Compensation; SOPA Protests; Regional News; Koomey’s Law

Hedge Fund Managers Petition SEC to Remove Prohibition on General Solicitation Under current regulations, issuers of securities in private placements are restricted in how they can solicit potential investors. The Managed Funds Association has petitioned the SEC to eliminate the prohibition on general solicitation and advertising in Regulation D under the Securities Act of 1933 (“Securities Act”) for offerings or sales by private funds. In the petition the MFA points out that the regulations prohibiting general solicitation are vague, and argues that the uncertainty surrounding the vague rules is harmful to business. For an in-depth look at the petition check out Jim Hamilton’s blog.

Executive Compensation: Discovery Channel’s New CFO Gets Paid to Join and to Leave The Discovery Channel filed their 8-K...

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Business Startup

It’s Time to Grow Your Business: A Discussion on Franchising and Other Business Expansion Options

Is 2012 the year you’re going to expand your business? If so, have you considering franchising your business? Franchising your business is, arguably, the most successful way to increase your distribution channels. Most business owners understand the idea behind franchising, but many of those business owners aren’t aware of the extensive federal regulations pertaining to franchising a business.  Today’s post discusses some of the legal requirements you should be aware of when deciding whether or not to franchise your business, initial steps you can take to simplify the franchising process, and some other alternatives for growing your business.

What’s a Franchise? It’s important to understand what exactly a “franchise” is. According to the Federal Trade Commission (FTC), a franchise is any continuing...

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Corporate Finance & Securities

A Basic Overview of Stock Registration Requirements

In a reaction to the stock market crash of the late 1920’s Congress enacted the Securities Act of 1933. The primary goal of the ’33 Act was to ensure that investors received complete and accurate information about companies issuing securities. Before Congress enacted the ’33 Act, there was no overarching federal scheme for regulating securities; states were the primary source of securities regulation. The general rule under the ’33 Act is that interstate public securities offerings cannot be made in the United States unless a registration statement has been filed with the Securities and Exchange Commission (the “SEC”). There are a number of important exemptions to these requirements that enable companies to raise money through what are commonly called “private placements.”

Registration...

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Business Startup

Social Media Legal Issues: (Post Number 2): Honesty, Transparency, and the FTC’s Impact on Your Social Media Strategy

“Advertising” and “marketing” via social media are an inherent part of any business’ social media strategy. After all, devoting  your valuable resources (time, money, and talent) to a social media campaign without garnering business is unsustainable. Like those who employ traditional media, companies who employ social media to advertise and market their business must be concerned with the laws and regulations that govern how companies can present information to consumers. But the viral nature of social media and the fact that your employees may be “advertising” and “marketing” without management’s knowledge  can translate to costly mistakes for your company. The Federal Trade Commission‘s (“FTC”) “Section 5” and the regulations promulgated under its authority largely govern how your business must conduct...

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Corporate Finance & Securities

Key Term Sheet Provisions: Drag Along Agreements

After a holiday break last week, we’re back to our regularly scheduled Friday term sheet provision discussions. Today we’re taking a look at drag along agreements.

What is a drag along agreement? Drag along agreements are term sheet provisions which allow a subset of investors to force all other stockholders, including the founders of a company, to consent to a sale of the company. Usually these provisions allow for a majority of preferred stockholders to force the sale, even if a majority of common stockholders oppose the transaction. These provisions generally come into play when the company is being sold at a low price, and the preferred stockholders’ liquidation preference will result in the common stockholders receiving few, if any, proceeds from...

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Contracts

An Important Step to Drafting Clear, Concise Contracts: Understanding “Representations and Warranties”

Think back to the last time you read a contract. You may have noticed the phrase “representations and warranties” or “represents and warrants” a dozen or so times and, perhaps, you thought how do these terms differ, and is it redundant to use both terms? Both representations and warranties are functionally the same, especially in this day and age. In this post we’ll define representations and warranties, and inform you why the traditional use of both terms in your contract may no longer be the best practice.

Understanding the Terms First, let’s explore the legal definitions and examples of each term, representation and warranty.

Black’s Law Dictionary defines “representation” as a statement of fact which was made to induce another to enter into...

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Business Startup

News Roundup 2012 Week One: Consumer Protection, Online Lotteries, Google, Apple, Yahoo!, & Online Advertising

Obama Appoints Head of New Consumer Financial Protection Bureau President Obama appointed Richard Cordray as director of the Consumer Financial Protection Bureau, a new consumer protection agency, which was created under the Dodd-Frank Act. Cordray became famous for aggressive investigations of mortgage foreclosure practices during his tenure as Ohio attorney general. During confirmation hearings Cordray said that if he was appointed he would streamline regulations and use the new agency’s tools to police consumer financial laws. Under the Dodd-Frank bill, the agency cannot write new rules or supervise financial companies without a permanent director. Obama’s appointment of Cordray is controversial as the appointment came during a Senate recess. Obama nominated Cordray over six months ago and because of a Senate filibuster, the potential appointment was yet to be put...

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Business Startup

Bank of America’s Latest Controversial Move: Cutting Back Small Business Lending

The largest bank in Washington state, Bank of America, has made yet another move that is likely to keep customers running away from the banking giant. Bank of America is reportedly cutting its small business lending. The Los Angeles Times reported that Bank of America is severing a number of small business credit lines and is requiring the borrowers to pay off the loans in full. The Times article details a California businessman who received a demand letter from the bank requiring him to pay off his entire loan balance ($96,000) by January 25 or be subject to a 12% interest increase on his payment plan.

Bank of America claims that the current reduction in small business lending is part of the bank’s...

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Business Startup

Social Media Legal Issues: (Post Number 1): How to Effectively Use Sweepstakes as a Promotional Tool While Complying With Applicable Law

Social media platforms are an ideal way for businesses to spread brand awareness through sweepstakes and other interactive promotions. We are starting our series on “Social Media Legal Issues” with a post on sweepstakes, because sweepstakes are fun, they help to illustrate the power of social media, and sweepstakes are a prime example of an old legal issue that is taking a new form as it is applied to the novelty of social media.

Like social media generally, sweepstakes are interactive and frequently shared with others. Despite the usual knock to their odds, people like telling others about offers of free merchandise or services. And people love to tell others about any free stuff they receive. While sweepstakes have been around for...

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