Some high-volume portals use a crowdfunding vehicle for every offering, and in each crowdfunding vehicle have a “lead investor” with a proxy to vote on behalf of everyone else. This is a very bad idea. Lead investors are a transplant from the Silicon Valley ecosystem. Having proven herself through  successful investments, Jasmine attracts a following of other investors. Where she leads they follow, and founders therefore try to get her on board first, often with a promise of compensation in the form of a carried interest. A lead investor makes sense in the close-knit Silicon Valley ecosys ..read more

A bunch of websites, including websites of large law firms, advise startup founders to make an election under section 83(b) of the Internal Revenue Code. They shouldn’t have relied on ChatGPT! For almost all startups and almost all founders, a section 83(b) election is unnecessary and foolish. Section 83 is captioned “Property Transferred in Connection with Performance of Services.” Section 83(a) states the general rule:  if you receive any kind of property in exchange for performing services you have to pay tax on the value of the property. The property could be anything, an old car, a 1 ..read more

The securities of private companies are illiquid, meaning they’re hard to sell. Since 2017 I’d guess a billion dollars and a million person-hours have been spent by those who believe blockchain technology will create liquidity for private securities. Joining that chorus, a recent post on LinkedIn first noted that trillions of dollars are locked up in private securities, then claimed that blockchain technology (specifically, the technology created by the company posting) could unlock all that value. This is all wrong, in my always-humble opinion. All that money and all those person-hours are mo ..read more

Convertible notes and SAFEs often make sense for startups because they don’t require anyone to know the value of the company. Instead, the company and early investors can piggyback on a later investment when the value of the company might be easier to determine and the size of the investment justifies figuring it out. Which raises the question, when should the convertible note or SAFE convert? In the Silicon Valley ecosystem that’s an easy question. Per the Y Combinator forms, a convertible note or SAFE converts at the next sale of preferred stock, which necessarily involves a valuation of the ..read more

Like COVID, the questions around choosing a limited liability company or C corporation for startups never seem to go away. For lots of details see the article I wrote here. Except for making you the center of attention at the party, however, those details don’t matter very much. So I’m offering this short version. In Silicon Valley successful startups are funded by venture capital funds. Indeed, the most common measure of “success” in Silicon Valley is which venture capital funds have funded a startup, for how much, and how many times. Venture capital funds are themselves funded, in part, by d ..read more

I often see Subscription Agreements asking the investor to promise she’s not a “bad actor.” This is unnecessary. The term “bad actor” comes from three sets of nearly indistinguishable rules: 17 CFR §230.506(d), which applies to Rule 506 offerings; 17 CFR §230.262, which applies to Regulation A offerings; and 17 CFR §227.503, which applies to Reg CF offerings. In each case, the regulation provides that the issuer can’t use the exemption in question (Rule 506, Regulation A, or Reg CF) if the issuer or certain people affiliated with the issuer have violated certain laws. Before going further, I ..read more

Reg CF is off and running, on its way to becoming the way most American companies raise capital. Still, there are three things that would improve the Reg CF market significantly. Revise Financial Statement Requirements Financial disclosures are at the heart of American securities laws, I understand. The best way to understand an established company is often to pore over its audited financial statements, footnotes and all. But that’s just not true of most small companies, whether the micro-brewery on the corner or a new social media platform. For these companies, reviewed or audited s ..read more

Who says inflation is all bad? The SEC just published these new, inflation-adjusted limits and thresholds for Reg CF: These changes are effective on September 20, 2022, even for offerings that are already live. Questions? Let me know ..read more

I attend church and think of myself as a kind person, yet I discourage issuers from giving investors voting rights. Here are a few reasons: Lack of Ability:  Even if they go to church and are kind people, investors know absolutely nothing about running your business. If you assembled 20 representatives in a room and talked about running your business, you would (1) be amazed, and (2) understand why DAOs are such a bad idea. Lack of Interest:  Investors invest because they want to make money and/or believe in you and your vision. They aren’t investing because they want to help run yo ..read more

The Inflation Reduction Act of 2022 promises big changes to how America responds to global warming, aka climate change. But if enacted in its current form, it will also change how real estate sponsors and hedge fund managers are taxed on carried interests. A “carried interest” or “promote” is what the sponsor gets for putting the deal together. In a typical hedge fund, the manager receives a 2% annual management fee plus 20% of the profits. In the syndication of an apartment building, the deal sponsor might receive 30% of the profits after investors have received a preferred return of 7% and a ..read more