Business Startup

Entrepreneur Access To Capital Act Passes House

On November 3rd, the House passed the Entrepreneur Access to Capital Act with overwhelming approval: 407-17. This Act would enable businesses to raise capital through crowd funding. Crowd funding is the contribution of small equity investments from many individuals.

Currently, federal and state laws governing the sales of securities restrict public solicitation of investors and limit fund-raising to sophisticated investors, or require a registration process that is cost-prohibitive for many entrepreneurs.

The Act restricts individual investments to $10,000 or ten percent of their annual income, whichever is lower. Businesses can raise up to $1 million dollars using this method without registering their securities unless they provide audited financial statements, in which case they can raise up to $2 million.

The Act includes a...

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Business Startup

Key Term Sheet Provisions: Price, Valuation and Dilution

An $8 million premoney valuation with a $3 million investment would result in the company owning 73% of the stock, and the investor owning 27% of the stock.

Price per share is one of the most important terms to nearly every entrepreneur. Price is inextricably tied with valuation. How much an investor will pay per share depends on the value the company is calculated to be worth.

An $8 million postmoney valuation with a $3 million investment would result in the company owning 62% of the stock, and the investor owning 38% of the stock.

Premoney valuation is the value of the company before the investors’ contributions are factored in. Postmoney valuation is the value of the company after the investors’...

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Corporate Finance & Securities

Key Term Sheet Provisions

Within the context of angel investing and venture capital financing, you will often hear the phrase “term sheet” thrown around. A term sheet typically includes the conditions under which an angel investor or venture capital firm will finance a startup company. The term sheet outlines the material terms of a business agreement, but it is not a substitute for a proper agreement. Instead, it records the intentions of the parties to the transaction that will become a part of a future agreement. The term sheet is one of the first and most important documents that will help to define the relationship between investor and entrepreneur. Important term sheet provisions include: liquidation preference, participation, drag along agreements, antidilution, conversion, and many...

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Business Startup

Personal Liability for corporate transactions after dissolution

In a recent Court of Appeals decision*, the honorable judge Laurel Siddoway reiterated the Supreme Court’s stance on applying the theory of promoter liability to post-dissolution corporate acts. This means, for purposes of individual liability, any acts occurring on behalf of the corporation after dissolution, whether voluntary or involuntary, must be made solely for the purposes of winding up the corporate affairs and business. A corporation’s key personnel may be held personally liable if they carry on any business that is not necessary to wind up and liquidate its business.

In Equipto Division Aurora Equipment Co. v. Yarmouth, the Supreme Court determined that RCW 23B.02.040 of the Washington Business Corporation Act applies to both prior corporation acts and post-dissolution transactions that...

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Business Startup

Privacy Policies in the U.S.

A privacy policy discloses some or all of the ways a company gathers, uses, discloses and manages customer data. Businesses that collect personal information from customers should adopt a comprehensive privacy policy in order to maintain full disclosure.

There is currently no specific federal regulation establishing universal implementation of privacy policies in the United States (U.S.). However, the Federal Trade Commission (FTC) enforces terms of privacy policies under Section 5 of the FTC Act which prohibits unfair or deceptive marketing practices. The FTC’s Fair Information Practice Practices provide details relating to critical issues that should be covered by a company’s privacy policy, including notice, choice, access, security, and enforcement.

Notice: data collectors must disclose their information practices before collecting personal information from...

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Intellectual Property

End User License Agreements

As part of our continuing series on basics of technology contracts, today we’ll take a look at end user license agreements.

What is an end user license agreement? An end user license agreement is an agreement between a software provider and a software user. The provider allows use of the software, but retains ownership of the software.

What do end user license agreements do? An end user license agreement should clearly explain the rights granted to the end user. Specifically, the agreement should address the permissible uses and the ability to reproduce the software.

For example, the provider may wish to limit use by subsidiaries or parent companies. Another approach is to limit the number of designated users (often called “seats”). And if the recipient...

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Litigation & Dispute Resolution

US Supreme Court Rules on Materiality in 10(b)(5) Context

The Law at Issue

To demonstrate a claim in a securities fraud case under section 10(b)(5) of the Securities Exchange Act of 1934, a plaintiff must  demonstrate (1) deceptive practices (2) in connection with the purchase or sale of securities, (3) materiality, (4) scienter, (5) loss causation, (6) damages, (7) reliance, and (8) standing.

Case Background

In Matrixx Initiatives, Inc. v Siracusano, the Plaintiffs alleged that the Defendants’ committed fraud when they failed to disclose reports that their pharmaceutical product (Zicam) had been linked to the loss of smell. Matrixx, the manufacturer of Zicam had been made aware of a number of reports that patients using their product had suffered from asomnia (the loss of smell). Multiple lawsuits had been filed against Matrixx...

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Business Startup

NY Times Highlights Seattle’s Economy

This NY Times article focuses on Seattle’s economic growth. The 2010 Census data is being released, and while some are focused on the growth of Texas and Florida, this Article focuses on Seattle. In an effort to understand why Seattle is growing while most other cities are shrinking in population, the article traces Seattle’s economy from 1880 to today. Edward Glaeser, the author, hypothesizes that key to Seattle’s growth is having highly educated workers. He also suggests that Seattle helped itself when it allowed taller buildings to be built in the downtown area.


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Business Startup

LLC Operating Agreements – Economic Structures

The economic structure of a limited liability company determines the amount and timing of the distributions of cash and property to the members (remember that in an LLC owners are called “members”). Distributions may occur periodically during the operation of the organization and at the time when the organization either redeems the member’s interest or liquidates.

Washington law provides a default rule that members will receive distributions and allocations of profits and losses in proportion to the amount of capital each member contributed to the company (RCW 25.15.205). (A distribution is something a member actually receives from the LLC. An allocation of profit or loss is a tax and accounting concept that relates to the division of profits and losses for...

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Business Startup

LLC Operating Agreements Series Intro

One of the most appealing attributes of the limited liability company and why it has been so widely adopted is the flexibility it affords the owners with respect to management. LLC operating agreements are for an LLC what bylaws are to a corporation. The operating agreement can be thought of as providing the “laws” of the business, laying out how the company will be managed. The operating agreement provides the rights and obligations of the members, including members’ management abilities and economic interests. Without an operating agreement, limited liability companies are governed by the default provisions (in Washington, they are provided in Chapter 25.15 of the Revised Code of Washington). This inVigor Law Group blog series includes insight into some...

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