Business Startup

What Kind of Startup Investor is Right for Your Company?

While not all startups have to raise money to scale, most startups will need some investor money to grow. When it’s time to fundraise, there are many potential sources of funding for your startup. Today’s blog post will discuss different kinds of startup investor and explore other ways startups find the financial support they need to be successful.

What is an Angel Investor?

Angel investors are usually individuals, or groups of individuals, who invest their own money into early stage companies. “Seed funding” from angel investors is usually one of the first sources of financing a startup company will pursue (generally after raising initial funds from the founders and their friends and family). This seed funding is generally used to support the...

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Business Startup

Incorporating in Washington Versus Delaware: What’s Best for Your Startup?

One of the first steps when forming a company is to decide which state is best to “register” your company. Today’s post highlights some of the reasons why you may want to considering incorporating in Washington versus Delaware.

I heard Delaware was the best state to incorporate my company, is that true?

It is true that Delaware has a specialized court that handles corporate disputes (the “Court of Chancery”) and is recognized as the nation’s preeminent forum for determining internal corporate and other business disputes. Delaware also has friendly corporate statutes and a well-developed, widely understood, and closely followed body of corporate law. But Washington state also offers advantages unmatched by Delaware (and many other states).

Two of these advantages are the simple incorporation...

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Corporate Finance & Securities

The Low Down on Valuation Caps and Discounts in Convertible Notes

It is common for startups to raise early rounds of financing through convertible debt. Convertible debt, generally called a “convertible note,” typically converts into equity when the company raises another round of financing. In anticipation of the conversion, many investors will negotiate for valuation caps and discounts. In today’s post, I’ve highlighted the basics of valuation caps and discounts in convertible notes.

What is a Valuation Cap?

A valuation cap provides that the convertible note holders will convert their debt into equity at the lower of the valuation cap or the price in the subsequent round of financing. Without a valuation cap, the note holders would generally convert their debt into equity at the same price as the shares issued in the...

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Business Startup

Why a Repurchase Option Matters to Startups

Most founders are concerned about making sure each of the co-founders are invested in the company. Founders often ask about protecting against a co-founder leaving the company, taking his or her equity, and sharing in the potential future upside value of the startup without continuing to work for that right. To protect against this, startups often have a “repurchase option” to buy back shares from the departing founder.

When Can the Company Exercise the Repurchase Option?

While terms can vary, the shares issued to the founders are often subject to a vesting schedule that requires the founder fulfill certain obligations—e.g. to stay with the company a period of time, achieve certain milestones, or any other creative requirements the founders agree on— in...

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Corporate Finance & Securities

What You Should Know About Reselling Private Stock

If you purchased stock from a startup in a “friends and family” round, can you sell it to someone else without violating securities laws? The answer to that question probably depends on whether you’re in compliance with Rule 144, which provides requirements that if satisfied, allow people to re-sell privately issued stock.

Background

There’s a general rule in the Securities Act of 1933 that if you sell a non-exempt security to another person, the sale must be registered unless an exemption from registration applies.

There’s a few things to unpack here. First, what is a non-exempt security? Second, what does it mean for the sale to be registered? Third what are the exemptions from registering the sale?

Exempt Securities Section 3 of the Securities Act...

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Litigation & Dispute Resolution

Website Leverages the “Crowd” to Finance Lawsuits with Crowdfunding

A few weeks back a new website was unveiled that uses crowdfunding to finance high-value commercial lawsuits. According to the Wall Street Journal and the company’s press release, LexShares connects accredited investors with plaintiffs in commercial lawsuits.

“Invest in Justice”

The company’s slogan suggests a novel idea in the crowdfunding world, and breaks away from the “traditional” reasons for raising capital through crowdfunding, which is raising operating capital to fund startups and small businesses.

LexShares’ staff of securities professionals review the lawsuits and only post suits that have “strong merit.” The target lawsuit for the company is one with $10 to $40 million in claim value. According to the press release, if the plaintiff wins the case, then the investors will recover an...

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Corporate Finance & Securities

SEC Advisory Committee Issues Accredited Investor Recommendations

The SEC recently release advisory committee recommendations for updates to the definition of “accredited investor,” other issues related to accredited investors, and recent updates to the securities laws. For years, there has been concern over the definition of accredited investor—specifically whether the financial thresholds are outdated—and whether changes to the definition would narrow the number of accredited investors, which could significantly reduce access to capital for startups and established private companies. The committee’s most recent recommendations do not include a higher financial threshold, but they do include a number of other recommendations and propose analysis of whether the threshold should be increased.

Highlights from the Committee’s Recommendations: Does the definition of accredited investor accomplish its goal?

The first recommendation looks at whether the...

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Mergers & Acquisitions

SEC Gives Thumbs Up for Company Announcements Through Social Media

The SEC issued a report that makes it clear that companies can use social media platforms, e.g. Facebook and Twitter, to announce key information to investors to comply with Regulation Fair Disclosure (Regulation FD) so long as the investors have been alerted about the announcement and which social media outlet being used.

The SEC’s report confirms that Regulation FD applies to social media and other emerging means of communication used by public companies the same way it applies to company websites. In 2008, the SEC issued guidance that clarified that websites can serve as effective means of communication to announce information to investors so long as the investors are aware of where to find the information.

Regulation FD requires companies to distribute...

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Corporate Finance & Securities

FINRA Authorizes Collection of Information from Funding Platforms

The frustrations have been loud and clear from funding platforms, investors, and bloggers alike regarding the SEC’s failure to implement rules governing online fundraising under the JOBS Act. The SEC has been dragging its feet and has missed just about every deadline that was set for it to enact the regulations that will allow investors and fundraisers to connect via online funding portals. However, in early December FINRA took a small step in the right direction.

The FINRA Board of Governors met to discuss a number of regulatory issues, including funding portals and the JOBS Act. The result? The Board authorized FINRA to create a form that is geared towards obtaining information from funding platforms that are intending to register with...

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