Category Archives: Corporate Law

Startup Companies Mistakes to Avoid and Tips to Keep In Mind

Jun 01 2018

It’s hard to believe that companies such as Uber, Amazon, and Netflix began their incredibly successful journeys as startups. Many other services Americans use on a frequent basis probably began as startups, too—Postmates, Dropbox, and Slack, to name a few. These companies are examples of strategic funding and marketing decisions made with the advice of great corporate lawyers that eventually led to the creation of large corporations.

Startup companies obviously have the potential to grow into largely profitable publicly held companies. However, many startups fail to appreciate the legal issues that can make or break them. If you are thinking about getting into the startup industry or are currently involved in one, be sure to consult with an experienced corporate and securities lawyer to advise you on conforming to the many legal requirements the industry presents.

Navigating the Path to Becoming a Successful Startup

Whether you are new to the startup industry or a startup guru, there are several legal issues you should keep an eye out for. Being proactive in assessing these issues will set your company on the right path to becoming profitable and marketable.

  •  Selecting the Right Type of Legal Entity from Early in the Company’s Development

Corporate formation is one of the most important steps in ensuring a startup’s success. The company and its founders need to assess their goals and choose the type of legal entity that best helps to further those goals. Further, the type of entity that is chosen must be able to insulate founders from personal liability and allow the business to issue equity compensation or receive venture capital funding. These are among the many factors that must be taken into consideration when deciding which legal entity is best suited for the startup from a legal, tax, and investment perspective.

  • Agreeing on and Properly Documenting Founders’ Roles and Responsibilities

Startups are often founded by a close group of colleagues, family, or friends. However, a casual nature of conducting business should be avoided. Each role and relationship within the company should be formalized in writing, including each person’s title and responsibilities. Decision-making protocols, dispute resolution mechanisms, and ownership and exit strategies should also be put into effect in policies and handbooks, as well as maintaining a company minute book with written resolutions that have been signed off on.

  • Complying with Securities Law when Raising Capital

Again, do not let the seemingly casual nature of a startup get you in trouble with securities laws. Federal and state securities laws and regulations are difficult to comprehend and failure to abide by them can lead to the downfall of any startup. Capital-raising and finding suitable investors for your particular business are both critical to the success of your startup and involve securities laws. An experienced securities attorney will identify any potential securities issues that your startup may face, and address them accordingly.

  • Properly Structure any Equity Plan for the Benefit of Executives and Employees of the Company

Establishing equity and incentive plans carries legal implications and tax consequences that must be adequately addressed. Some of the issues to consider in this area include how much equity should be designated for employees, and the consequences of an equity plan for future investors. These actions also implicate securities laws, meaning that a startup company is best advised to keep abreast of these issues through the advice of a corporate lawyer.

  • Properly document Customer, Supplier, Employee, and Other Key Third-Party Relationships

It is best practice to create forms and agreements that properly memorialize arrangements with customers, suppliers, and employees. Also important are well-drafted commercial contracts, which should include provisions that address indemnification and limitation of liability.

Successful Startups have Great Lawyers

The success of your startup company depends on a myriad of factors. Don’t let the legal and regulatory issues that arise in the startup formation process keep your company from reaching its full potential. The most effective way to navigate the many legal issues and requirements is to consult an experienced corporate and securities law attorney who can identify and address any potential issues and opportunities for growth. Taking this proactive measure will serve to further your startup’s goals and create a solid business foundation.

Bitcoin and Cryptocurrencies – Great Opportunity or Risky Business?

Apr 03 2018

Chances are that you have heard the terms “Bitcoin,” “Ethereum,” “virtual tokens,” or “cryptocurrency” at some point within the last couple of years. Someone has probably even told you to invest in them. Or maybe you’re an entrepreneur that wants to jump on this new wave of alternative capital raising for your venture. But first, what are they?

Cryptocurrency is a form of digital currency that essentially removes the middle-man—banks and the government—from currency transactions. This new form of “money” boasts its unique level of security, drawing on the cryptography element of this trend.

Cryptography is the process of turning basic information into a complex code, making the information hard to access, steal, or alter. These codes, or algorithms, are used to create and control cryptocurrencies and their transactions. Through a system called “blockchain”, users are able to use these complex algorithms to keep records of balances and transactions and publicly verify their exchange of cryptocurrency.

Unlike conventional forms of currency, cryptocurrency exists in limited circulation, making it more valuable. As opposed to working on an inflationary model, crypto coins are deflationary, meaning that the number of coins in circulation will remain the same, but the value of the coins increases. Though cryptocurrency has not reached a point of payment ubiquity, it has a high investment appeal, which you should approach with caution.

Why is Cryptocurrency Becoming Popular?

As noted, cryptocurrencies offer a range of benefits in comparison to conventional currencies, including:

  • The ability to make transfers without an intermediary and without geographic limitation.
  • Finality of settlement.
  • Lower transaction costs compared to other forms of payment.
  • The ability to publicly verify transactions.
  • Personal anonymity and the absence of government regulation or oversight.

The benefits make it seem way too hard to pass up whether you want to invest or offer Initial Coin Offering (ICO). But, not so fast. The government is keeping a close eye on these transactions because they have been used to take advantage of many and are risky.

Dangers to Watch Out For

If you are considering investing in any coin offerings or cryptocurrencies, beware of the following risk factors:

  1. Minimized investor protections in the cryptocurrency and ICO markets, which can lead to more opportunity for fraud and manipulation.
  2. Unregistered ICOs may violate federal securities laws.
  3. The SEC has yet to approve listing and trading any exchange-traded products that hold cryptocurrencies or other assets related to cryptocurrencies.
  4. Amplified risk due to the cross-border nature of the cryptocurrency and ICO markets.

Hire Legal Counsel to Protect Your Investment or Help You Make your ICO Compliant

Because most offers and sales of digital assets are subject to the requirements of the federal securities laws, issuers must register offers and sales of digital assets unless a valid exemption applies. If the offerings are unregistered, issuers could potentially be liable for violations of the securities laws. If you want to raise capital or invest in coins or cryptocurrency offerings, make sure you obtain the proper information and legal guidance from a corporate lawyer experienced in startups, blockchain law and federal securities laws.

Securities exchanges that provide for trading in these securities must also register unless they are exempt. The facts and circumstances of each case, including the economic realities of the transaction, will be considered to determine whether a particular transaction involves the offer or sale of a security.

The ease, independence, and anonymity of cryptocurrencies and ICOs clearly come with strings attached. The many legal and regulatory hurdles and requirements are not easy to navigate, and failure to appreciate them can jeopardize your investment in this innovative market. Before investing in virtual assets and becoming a market participant, be sure to consult a lawyer with corporate experience to advise you on protecting your investment and ensuring it conforms with securities laws. Contact Padua Law Firm today at 713-840-1411.

Piercing the Corporate Veil – Minimizing Your Risk

Feb 26 2018

One of our roles as corporate lawyers is to use the business organizations code and applicable case law to protect our clients with the principles of limited liability. Indeed, that is why our various corporate forms exist – to shield shareholders and owners from personal liability for obligations of the corporate entities. However, in certain cases, the law must also protect people from those who try to take advantage of legal formalities to perpetrate fraud on another person or business. That is to say, a corporation or other corporate form should not be misused as an unfair device to achieve an inequitable result or perpetrate fraud.

For these reasons, the Supreme Court of Texas has identified instances where the corporate fiction can be disregarded. In Castleberry v. Branscum, our state Supreme Court allowed “piercing the corporate veil” when the corporate form is being used as a sham to perpetrate a fraud, as an alter ego of another corporation, or as a means of evading an existing legal obligation, achieve a monopoly, circumvent a statute, or justify a wrong. When a court pierces the corporate veil, it disregards the corporation, and holds its shareholders liable by imposing a type of vicarious liability for an underlying cause of action.

Shortly after the Supreme Court’s decision, there was push-back from the corporate world, and our legislature in Texas decided to limit the ability to pierce the corporate veil, focusing on cases with the presence of actual fraud. Still, it is important for honest entrepreneurs and founders of corporations and other business entities to minimize the risk that a court will impose liability by piercing its veil.

Below are a few ways to minimize such risk:

  1. Adequately capitalize and insure your business entity.
  2. Avoid using a corporation as a mere conduit or shell.
  3. Ensure that an owner does not exercise excessive control over a corporation.
  4. Comply with all corporate formalities.
  5. Keep separate books and records between a corporation and its shareholders.

While these principles hold true with LLCs as well, courts have also applied less weight to the control factor for LLCs compared to corporations. If you are an entrepreneur and have been using business organizations, our firm can help you navigate the sometimes-murky waters of veil piercing.

At Padua Law Firm PLLC, our corporate practice group has counseled a wide variety of small and medium sized businesses in their corporate structures, formations, asset protection, and related corporate matters and formalities.   Call us today to schedule a free consultation to discuss your case.