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Credit Report Use Limited In California Employment Decisions per AB 22

Credit Report Use Limited In California Employment Decisions per AB 22

A common question asked by start-ups or even just average average businesses is what information they can ask or use in vetting their potential employees.  Some common forms used may be background checks, drug screening, and reference checks.  Due to the economy creating many credit problems for average citizens (even more so with entrepreneurs who often use their own personal credit to bootstrap their company), I will take a look at the use of credit reports in making employment related decisions. Existing federal law provides that, subject to certain exceptions, an employer may not get a credit report without prior disclosure of that the employer wants to obtain one and the employee consents. Existing federal law further requires, subject to certain exceptions, an employer, before taking any adverse action based on the report, to provide the consumer with a copy of the report and a written description of certain rights of the consumer. California enacted AB 22 which amended California Civil Code Section 1785.20.5 to provide additional protections in this state to protect the potential employee when dealing with similar uses of credit reports.  This law went into effect January 1, 2012.  In addition the California Labor Code added Chapter 3.6 to include additional requirements.  The law provides that the employer needs to follow the same federal requirements of disclosure that they want to obtain a credit report, but also requires the employer to state why they want it.  The law goes on to further indicate that credit reports can only be requested for the following certain categories of types of positions (except by certain financial institutions): (1) a position in the state Department of Justice, (2) a managerial position, (3) that of a sworn peace officer or other law enforcement position, (4) a position for which the information contained in the report is required by law to be disclosed or obtained, (5) a position that involves regular access to specified personal information for any purpose other than the routine solicitation and processing of credit card applications in a retail establishment, (6) a position in which the person is or would be a named signatory on the employer’s bank or credit card account, or authorized to transfer money or enter into financial contracts on the employer’s behalf, (7) a position that involves access to confidential or proprietary information, as specified, or (8) a position that involves regular access to...

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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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I hired a developer and they now claim they have a copyright on the code, how did this happen?

In this day of a new app being developed every day, how does the company owner or management know who owns the code developed and when they could lose control over it? Most issues of ownership for software code fall into areas of copyright (a form of intellectual property or IP), since they are usually “written works of authorship” and primarily covered by US copyright law.  Copyright protection provides the author with protection from reproduction by others.  There are times when works can be reproduced without violating a copyright under things such as the “fair-use doctrine,” such as when sample pages from a book are reprinted in a blog with commentary by the blog author about their thoughts or criticisms about what is being said in the book.  The rights for copyright protection are generally given to the original author of the work for long periods of time (anywhere from 70 years to over 120 years depending upon all the facts).  After that amount of time has passed, the work is considered in the public domain and others can copy it without worrying about infringement. When an existing tech company or startup hires someone as a developer to work for them, they need to be cautious regarding who will own the code the developer is writing.  One of the first questions to be answered is whether the developer was hired as an independent contractor or employee.  Many people think that just because you call them an independent contractor, even in a written contract, or “1099” them by paying compensation hourly without deducting payroll taxes, the person is, in fact, an independent contractor.  That is not the case for several reasons.  The IRS has its main test for determining what classifies as an independent contractor and they don’t simply look at how you pay them or what you call them.  Their are a number of factors involved such as who determines when they work, where they work, and how they work.  Generally, the more control the company has over them, the more likely they will be an employee under the IRS test.  There are other tests as well, such as in California, employees must be provided workers compensation insurance coverage by their employer.  California tends to go beyond what the IRS requires to impose the added costs and obligation of getting workers comp coverage for what many would consider a...

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Double-Edged Sword of Control for Startup Founders- “Isn’t it MY company?”

When someone starts a company, they usually have an idea or vision and a passion to bring that idea or vision to market.  Many founders get stuck in a difficult spot that most commonly comes up in the process of raising money.  This is what I call a double-edged sword for startup founders, i.e. ownership and control of the company. Many founders start to form a deep bond with their ideas and visions that are embodied in their new company.  They take ownership of those ideas and the company.  During the growth phase, they are asked to slowly give up some control of that company, usually through dilution of their ownership % by private sales of stock.  One major identified reason that startups face major problems and may result in the company failing is the inability to give up control when the company starts to grow.  New investors are coming in to get an ownership stake at a very risky stage in a pre-revenue company in exchange for potentially very high rewards.  Part of what investors look for in investments are the ideas or vision, management team, and the passion of that team to drive the company to growth. If the founders are only focused on an exit where they go public or are acquired and retire early rich, investors will be put off by those founders who seem to care more about their own personal wealth than having a successful company.  If Mark Zuckerberg would have pitched to investors that he was going to take Facebook public and make the company’s stock worth billions within two years, he would probably not have gotten many of those early investors, at least the experienced ones. The most common example of investors slowly taking control away from the founders is when a venture capital firm comes in with an investment.  Commonly venture capitalists take a large stake in the company, take seats on the board of directors, get certain voting and other preferential rights, and sometimes want to put some of their own trusted management team into the company at some point, such as a new CEO with years of business experience raising money, going public, or running a public company.  Many technical founders don’t understand any of those aspects of the business, but feel like they are losing control of “their company.” So whose company is it anyway?  If the...

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