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Lean Start-up – How to Save Money

Entrepreneurs Suffer Credit Problems In Economic Hard Times

Many small business owners or other entrepreneurs start out with a great idea for a new product or service.  They start a business and focus on doing whatever it takes to make the company successful.  Many don’t take the steps necessary to properly protect the business from creditors or don’t really pay much attention to what they sign when they are making deals.  The ones who do read the fine print may just have the attitude that they are so confident in the business’ success, who cares if they use their own personal credit to get some working capital.  With the economic downturn over the last few years, many business owners have had to close their doors because they couldn’t get the funds they needed to even cover the simple things like payroll or rent. Use of Personal Credit Many entrepreneurs feel that they should put some ‘skin in the game’ by contributing some of their own money into the business.  In fact, the Small Business Administration backed loans often require the founders to contribute at least a certain percent of their own assets or some other major contribution in order to qualify for a business loan.  When the owner doesn’t have available cash, they look to other sources to get the money to contribute.  That can lead to things like taking out a home equity line of credit or using personal credit cards to help fund the business.  Obviously that is pretty risky, but often necessary to get early access to this seed money to start and grow.  The banks that issued the credit did so based upon the owner’s personal credit rating.  Just because the credit card may have the business’ name on it doesn’t mean the bank hasn’t covered their bases by making sure they can sue the owner personally if the business defaults in payment. The other area where founders often don’t take the time to understand the agreements they are making is in the area of personal guarantees.  In the majority of start-up or new business loans or other forms of credit, the bank or whoever is granting credit will require a personal guarantee.  Within the stack of forms the founder signs, it will clearly state that the founder is responsible for payment if the company cannot pay.  Forming a corporation or LLC does not protect you from a personal guarantee.  The contract or...

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Can I pay a startup attorney with stock or options?

So a major issue faced by many startup founders, especially when they are bootstrapping, self-funded, or just watching their cash, is how they can get legal or other services with little to no cash.  The fall back position is to give the advisor or service provider a “piece of the action.”  The founder often wants to use stock in the company they formed or stock options to avoid using cash, but still obtain needed advice and guidance.  Here are the main problems you will run into: 1)  Valuation–  You will have a difficult time agreeing on a valuation of the company’s stock (see Section on Valuation).  The founder often feels that they have the next greatest invention or idea of all time and the company is already worth billions despite having no business model or revenue (just watch an episode of Shark Tank on ABC).  The valuation is what you use to determine the value of the stock in comparison to what the services are worth.  (e.g. 1,000 shares of stock valued at $1 per share in exchange for $1,000 worth of services)  The service provider or advisor may have a different idea of what your company or idea is really worth.  If you can’t come to some agreement on the value of the stock, you won’t get them to sign on. 2)  Risk–  Beyond the actual valuation of the company is the risk inherent in a start-up business.  The majority of new businesses fail and often quite quickly.  If the company doesn’t perform what they say they can or will, the value is going to drop even before the company goes out of business.  The advisor needs to factor in the risk associated with the company when agreeing to equity.  In the prior example, 1,000 shares of stock for $1,000 worth of services is a little to simple of an example.  The advisor faces risk that the stock will be worthless down the road and has to factor that in beyond the actual valuation. 3)  Transferable– Any stock granted for services or after exercise of an option for services is typically going to be what is called restricted stock under state and federal securities laws.  That generally means that the holder of the stock has to keep the stock for a holding period (usually 1 year) before they can sell it.  There are some exceptions and it is...

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What do I look for in a business or startup attorney?

One of the biggest questions small business owners or founders have when it comes to early stage business issues is when do they need to hire an attorney and how do they pick one.  I will explain what I think are important qualities and how an attorney can be invaluable, even before the company is formed. A good startup (some people spell start-up, some use startup) or business attorney needs to be able to see a wide variety of potential issues the company may face and be able to address those with the company or founders.  If they simply form a corporation and provide some initial shareholder agreements, bylaws, resolutions, or other initial documentation, that is a valuable service, but there is much more to be examined and addressed in an early stage business. There are many legal or business issues, such as what intellectual property protection is or needs to be in place (e.g. patents, trademarks, non-disclosure agreements), advise the founders about securities laws relating to issuing stock or raising money, preparing for human resources and hiring (e.g. explaining that you can’t just call someone an independent contractor or 1099 and avoid payroll tax withholding obligations), and when to get someone involved in drafting or reviewing contracts.  While it is true that “startup law” is really mostly about basic formation and protection of business entities and possibly help with closing initial rounds of funding, the attorney should have a wide general knowledge of many aspects of business and law. I boil it down to having a good business sense to be able discuss the company, its plans, evolution, and future.  I feel that the best startup or small business attorneys provide quality legal services plus the business judgment to know what questions to ask and advice on guiding the company.  That is where the advisor role comes into play.  If someone brings me a contract and says to review it, I can read it and tell them if it is legal and if any additional clauses need to be added to protect the client; however, the better approach is to not only review it for contractual legal issues, but to find out about the transaction and business relationship.  In my opinion, if you don’t know what your client intends to do with the contract or the interplay between the two parties or any other parties that could become...

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