Equity compensation is a well known tool for rewarding and incentivizing teams. But it is not for everyone. Many founders are either unable or unwilling to share ownership of their company but still want to offer their team upside potential in the business. In this scenario, it’s often possible to create a deferred compensation program that mirrors some of the economic benefits of ownership without actually issuing shares. Examples: Transaction Bonus Plans. Companies can grant service providers rights to a share in the proceeds of a liquidity event, such as a Company sale. Profit Sharing ..read more

My general answer to this question is that an early stage ideas will reach a level of “ripeness” where it becomes clear that forming an entity makes sense and is worth the investment. “Ripeness” generally means you’ve reached the point where founders are ready to invest a meaningful amount of capital, time or other resources into the business. Often, in the earliest stages, the future of a project or idea is still murky. There is some potential for a business but many questions remain unanswered. Perhaps there’s a potential product but it’s not clear if it will be economically viable or meet c ..read more

Entrepreneurs are often advised to raise money from accredited (i.e., wealthy) investors only only. It's true that limiting an offering to AIs poses fewer regulatory burdens and probably fewer risks. And many institutional investors prefer to see cap tables without AIs. But not all founders have access to a pool of wealthy investors. In those cases, the bias against non-AIs can keep founders stuck and unable to access needed capital they need to grow their business. Securities laws do require more investor protections when raising money from non-AIs - and for good reason. It’s important to ..read more

I’m sometimes asked whether benefit corporations enjoy particular tax benefits relative to other corporations. The answer is no. Benefit corporations are taxed identically to other for-profit corporations. As such, they can be taxed as s- or a c-corporations and will be subject to the same tax rates, requirements and regulations. Although benefit corporations are required to promote general public benefit, they do not enjoy any of the tax breaks bestowed on tax-exempt charitable organizations like 501(c)(3) non-profits. Some localities are experimenting with local tax credits for benefit corpo ..read more

Benefit corporations enable founders to create an aligned, mission-driven legal structure for their venture. We are regularly asked to convert existing companies into California benefit corporations or Delaware public benefit corporations. This post provides a high-level summary of the process. Specific conversion requirements will vary depending on the entity and jurisdiction in question. But the following basic framework will apply across the board. For convenience, I refer to both benefit corporations and PBCs as “benefit corps” in this article. 1 - Determine What Shareholder and Director A ..read more

WSGR has just published its H1 2020 Entrepreneur Report (link below), it contains some interesting data points with regard to Q2 2020 financings. Some highlights: Q2 VC market strong by historical standards Median amount raised and valuations up significantly Median Pre-Money Valuation @ Series Seed: $12 million Median Amount Raised @ Series Seed: $2.8 million Data points for pre-seed bridge financings -- Median Amount Raised: $830,000 Maturity date: 12 months+ Interest rate: <8% Discount: 80% of deals, vast majority at 20%+ Cap: 64% of deals Median Cap: $8 million (do ..read more

Most private stock offerings are limited to "accredited investors", i.e., wealthy people and entities. This limit is designed to protect the vulnerable from unscrupulous business practices. (There are important and IMO under-utilized exceptions but that's a story for another post.) The AI rule, which dominates private capital raising, can be very frustrating for both entrepreneurs (who want access to more investors) and investors (who don't want to be blocked from good investment opportunities). For years, many have clamored for a more targeted approach to expand the capital base without c ..read more

Covid sucks, but for the sake of optimism, here's something to consider. Lower business valuations make equity grants more feasible and advantageous from a tax standpoint. Here's how. Equity granted in exchange for services is taxable based on the fair market value of the shares or LLC interests. So if your business is valued at $5 million, and you grant 10% in equity to a new team member, that team member will have to report $500,000 in ordinary income on their tax return and fork over roughly $200,000 in cold hard cash to pay income taxes. On top of that, the company will owe employment taxe ..read more

Recently, we completed a partnership agreement where the partners built in a framework for taking creative and personal sabbaticals without being in a breach of their partnership obligations. They're both committed substantially full-time to their partnership. But they also wanted some flexibility to take deep dives into outside creative and personal pursuits, so long as the company would be okay. So we built some parameters and procedures into their partnership agreement enabling them to take these leaves while ensuring their company and partner are protected. I love the approach. What I ..read more

Many of our most successful startup clients use advisory boards to powerful effect, especially in the earlier stages when cash is short. In those early days, building a team of advisors with equity can help a company in many many ways. Advisors bring new ideas and expertise into the mix. They can open up new sales or distribution channels. They can make introductions to key prospective clients or partners. They can help get large projects out the door without burning too much cash. They can help improve your product and get to product market fit faster, as this Techcrunch article suggest ..read more