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This presentation was given by Mark Jeanfreau, Bryan Bowdler, and Alex Glaser of Phelps Dunbar. Please find out more http://phelpsdunbar.com.
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Taxes, Subpoenas and Other Dirty Words:
The Top Legal Issues That Entrepreneurs Should Know
New Orleans Entrepreneur Week | March 24, 2014
Alex Glaser Bryan [email protected] [email protected]
Mark Jeanfreau [email protected]
Legal Issue 1How the JOBS Act Affects Crowdfunding
Crowdfunding
Raising money in small increments from a large number of people, usually through social media or online platforms.
Crowdfunding
• Title III of the JOBS Act added a new transactional exemption to the Securities Act of 1933 for “equity crowdfunding” (or “securities-based crowdfunding”) and directed the SEC to make rules implementing Title III.
• Release No. 33-9470 (October 23, 2013) – the “Crowdfunding Release”
• Crowdfunding is NOT legal until these rules are adopted
Crowdfunding Under Title III / Crowdfunding Release
• Limitations on Offering Size• Limitations on Investment• Disclosure Requirements• Financial Information• Ongoing Reporting• Bad Actor Disqualification
and Other Exclusions• No Advertising• Internet Only• Transfer Restrictions
Crowdfunding
Going Forward
• Benefits • Challenges
Legal Issue 2Founder’s Stock
Founder’s Stock
• What is it?• Why is it created?• When to do it
Vesting
Vesting• How much subject to vesting?• What is the vesting schedule?
Acceleration• Single Trigger vs. Double Trigger
Other Issues
• Tax impact• Strategies to increase founder liquidity
Legal Issue 3Independent Contractors
versus
Employee Status
Do I Actually Have an Employee?
Employees v. Independent Contractors• IRS 20-part test• Behavioral Control
• Whether a business has a right to direct or control how work is done through instructions, training or other means
• Financial Control• Whether a business has the right to direct or control the financial and
business aspects of a worker’s job
• The Relationship of the Parties• Evaluates evidence of the relationship, including how workers and
the business owner perceive their relationship
How Do I Support Contractor Status?
• Independent Contractor Agreement• Nature of Business Relationship
• (i.e., Contractors seek business on their own, make their own hours, keep their own supplies/offices)
• Other Employment • Contractors free to seek and accept other employment
Legal Issue 4Employment Agreements:Work for Hire, Non-competition, Non-solicitation
Do I Need To Have Key Employees Sign an Employment Agreement?
Under Louisiana law, employment deemed to be “at will” in absence of agreement to the contrary.
Common Features of Employment Agreements:• Employment for term• Compensation Structure (form, timing, performance
goals/objectives)• Cause vs. good reason termination• Job Duties/Responsibilities• Business Covenants
How Can I Protect My Business?
•Confidentiality•Trade Secrets•Non-competition
• Two years maximum
•Non-solicitation• Two years maximum• Customers and employees
•Non-disparagement•Firewalls/Restricted Access•Employee Handbooks
Business Protection
Suggestions When Hiring New Employees:
• Inform new and potential employees that they may be exposed to confidential information
• Have employees sign confidentiality and nondisclosure agreements– Must decide which employees should sign
• Limit access to trade secrets only to the extent employees need such access to do their jobs
• Determine if the employee you’re hiring is subject to someone else’s non-compete
Non-Compete
Purpose: To prevent your former employees from using information to compete with you.
• In Louisiana, governed by statute• 2 year temporal limitation• Reasonable geographic limitation• Requirement to list specific parishes you’re doing business in• Defines employer’s business• Enforceable against employees and independent contractors
Non-Solicitation
Purpose: To prevent the solicitation of your employees and/or customers by former employees.
• Both employees and customers • Usually same time period as
non-compete
Non-Disclosure
Purpose: To prevent disclosure of trade secrets and other confidential information.
•Usually written into the non-competition and non-solicitation agreement
I Just Realized that None of My Current Employees Have Signed Non-Competition Covenants—Can I Have Them Sign Now?
Perhaps. Non-competition covenants must be supported by consideration - something over and above what an employee is already receiving.
• Possible forms of consideration– Pay raise– Bonus– Bona fide long term employment– Severance pay
Legal Issue 5Equity Compensation for Developing Companies
What Kinds of Equity Awards Can I Give Employees (Traditional Corporations)?
Type of Award Description Benefits
Stock Options Grants right to purchase equity at a predetermined exercise price during set time period
• Share in company appreciation
• Participate in liquidity event
Restricted Stock
Issuance of equity subject to forfeiture (i.e. continued employment)
• Retention device
• Shareholder rights (voting, dividends)
Equity Bonuses Performance bonuses paid in the form of equity instead of cash.
• Incentivizing employees through performance goals
• Minimizes cash outlaysRestricted Stock Units
“Phantom” restricted stock subject to forfeiture
• Retention device
• No voting rights
• May issue Dividend Equivalent Units
What Kinds of Equity Awards Can I Give Employees (LLCs)?
• Capital Interest (liquidation + income distributions) vs. Profits Interest (same but liquidation interest limited to appreciation after vesting)
• Phantom Units • Liquidation + income distributions based on any appropriate
formula; often no member rights
• Optional Attributes• Vesting• Forfeiture for bad acts• Full or limited voting rights
Why Can’t I Just Grant Warrants Instead of Equity Compensation?
• You can, but warrants received in exchange for the performance of services are deemed to be compensatory.
• Substance over form• Different tax and accounting treatment
Legal Issue 6Health Care Reform and Small Business
Is Health Care Reform Going to Affect My Business?
• Individual Mandate vs. Employer Mandate
• SHOP (Small Business Health Option) • Fewer than 100 employees
• Exchanges (Individuals only)
Kaiser Family Foundation Charts
Penalties for Employers Not Offering Affordable Coverage Under the Affordable Care Act
Kaiser Family Foundation Charts
The Requirement to Buy Coverage Under the Affordable Care Act Beginning in 2014
Is Health Care Reform Going to Affect My Business?
• Individual Mandate• Currently in effect
• Employer Mandate• 100 or more employees = coverage for at least 70% FTEs in
2015, 95% in 2016 and after• 50-99 employees = coverage for at least 95% in 2016 and
after
What is the SHOP Option?
• Small Business Health Options Program (SHOP)• Marketplace intended to provide coverage for small
employers• 2015: SHOP available to employers with 50 or fewer
FTEs• Employer Mandate• 2016: SHOP available to employers with 100 or fewer
FTEs
What is the SHOP Option?
• Employers choose between 4 levels of coverage (bronze, silver, gold, platinum) to offer employees and employees able to select between multiple plans
• All plans offered on SHOP exchange meet essential benefits and minimum value requirements imposed by Health Care Reform
• (i.e., limits on cost-sharing, out of pocket expenses, and annual/lifetime deductibles; offer all preventive and other specific services)
• SHOP requirements• Offer coverage to all FTEs and at least 70% sign up
What are the Advantages of SHOP Coverage?
• Employee and Employer Choice over Levels of Coverage
• Cost Control• Competitive Advantage• Tax Advantages
• Compensation Deduction for Employer-Paid Premiums• Tax Credit for Employers with 25 or Fewer Employees (up to
50% of premium costs); employees must have annual wages less than $50,000
Can I Just Give My Employees a Flat Amount Per Month and Tell Them to Sign Up for the Coverage They Want?
• Yes, but may lose tax advantages
• Private Exchanges
Legal Issue 7The Basics of Louisiana’s Open Account Statute for Unpaid Receivables
La. R.S. 9:2781
“When a person fails to pay an open account within thirty days after the claimant sends written demand therefor correctly stating forth the amount owed, that person shall be liable to the claimant for reasonable attorney fees for the prosecution and collection of such claim when judgment on the claim is rendered in favor of claimant.” La. R.S. 9:2781(A).
• What does that mean?
What is an “Open Account”?
• The statue defines an “open account” as “any account for which a part or all of the balance is past due, whether or not the account reflects one or more transactions and whether or not at the time of contracting the parties expected future transactions.”
What is an “Open Account”?
Example: You provide your services to a client and, after completing a task, you send your invoice. If your client does not pay according to the terms of the invoice, there is an “open account.”
Open Accounts
So you have an open account, what do you do?• You need to make written demand on the party that owes you the
debt.• The easiest way to do so, is to write a letter demanding payment.• The demand letter must contain certain information though.
Why Send the Demand Letter?
The most important reason why you want to write a demand letter is because if you have to eventually file a lawsuit, you can recover your attorneys’ fees if you send a demand letter with the required content.
Content of Letter
First, the demand letter must correctly state the amount owed.
• If you do not state the correct amount, a court can decide that you cannot recover attorneys’ fees.
• If your invoices contain an interest provision, make sure you include and correctly calculate any interest that may be owed.
Content of Letter (continued)
Attach the unpaid invoices.• The current version of the statute
does not require you to attach a copy of any unpaid invoices.
• A previous version of the statute did requireyou to include a copy of unpaid invoices, and, as a practical matter, a court and/or the recipient might expect to receive them.
Content of Letter (continued)
Reference the statute.• Although it is not required, it is a good idea to reference the Open
Account statute in your demand letter.• You don’t want there to be any ambiguity from your letter. You
want the letter to clearly state that it is an attempt to collect a debt.
• Potential Language: “This letter constitutes formal written demand for immediate payment of the [ ] that you owe on your open account pursuant to La. R.S. 9:2781.”
Sending the Letter
Keep a copy of your letter.• Make sure you keep a copy of the letter that you send so that it
can be attached to the lawsuit if you have to file one.• In fact the statute requires that, if you mail the letter, you must
attach a copy to the lawsuit.• If you don’t have a copy of the letter attached to your lawsuit, the
court can deny your request for attorneys’ fees.
Send it Certified Mail, Return Receipt Requested.• Under the statute, you do not have to proof that the letter was
actually delivered.• While proof of receipt is not required, it is always a good thing to
show the Court.
Now What?
Wait 30 days.• The statute requires that you give the person 30 days to pay after
you send the letter.• If they do pay in that timeframe, you cannot recover attorney fees
assuming you had a lawyer prepare the demand letter.
If they don’t pay within the 30 days, you are free to file a lawsuit and will be able to collect attorney fees.
Other Things to Keep In Mind
The statute of limitations.• The statute of limitations, or as a Louisiana lawyer will call it
“prescription,” is three (3) years for Open Account claims.
You only recover a “reasonable” attorney fee.• We talked a lot about this before and taking steps to ensure you
can recover the attorney fees.• But, the court will ultimately decide how much you receive in
attorney fees.
Issue 8Bankruptcy Basics:
What you need to know when someone who owes you money files for bankruptcy
The Good News First
You are not alone.• Bankruptcy is probably one of the few areas of law that makes
lawyers who aren’t familiar with it a little scared.
Bankruptcy filings are on the decline.• According to the American Bankruptcy Institute, 2013 had the
lowest number of bankruptcy filings since 2007.• Also, small business bankruptcy filings fell by approximately 24%
in 2013 from 2012 levels.• In 2013, there were approximately 44,111 small business
bankruptcies as compared to 57,964 in 2012.• Hopefully, this trend continues and none of you will ever need to
know any of this.
Forms of Bankruptcy
For the purposes of today, there are two forms of bankruptcy small businesses should know about:
• Chapter 7• Chapter 11
Chapter 7 - Liquidation
• As far as businesses go, Chapter 7 bankruptcy is probably the most “extreme.”
• What happens in a Chapter 7?• Not long after the bankruptcy petition is filed, the Court will
appoint a Chapter 7 Trustee.• It is the Chapter 7 Trustee’s job to gather all of the non-
exempt assets of the business and sell them or abandon them in order create the maximum return on those assets that can be distributed to creditors.
• Once that is done, the Chapter 7 Trustee will distribute the funds to the creditors and close the case.
Chapter 11 – Reorganization
• This form of bankruptcy is probably the most well-known form of bankruptcy.
• What happens in a Chapter 11?• Unlike a Chapter 7, there is no automatic trustee appointed
by the Court. Courts usually allow the business to be a “debtor-in-possession.” What this means is that the people who control the business will be allowed to continue to operate the business while it reorganizes.
• Eventually, the business will present the Court and the creditors with a “plan of reorganization” which will lay out how and in what amounts the debtor will pay its creditors and how it anticipates to fund those payments.
The Automatic Stay
• Perhaps the biggest benefit that a debtor obtains when it files for bankruptcy is the imposition of the automatic stay.
• What this does is the instant the debtor files for bankruptcy, all debt collection efforts against the debtor must stop.
• This means any pending lawsuit is stopped.• It also prevents creditors from taking an steps in an attempt
to collect a debt. For example, the letter we talked about in connection with the Open Account statute cannot be sent if the business has filed for bankruptcy.
The Proof of Claim
The proof of claim is the document you will need to submit to the Court if you want to receive any payment from the debtor.
The Proof of Claim (continued)
• In most cases, there will be a deadline by which you must submit a proof of claim.
• In some Chapter 7 cases, however, you may not need to submit a claim. This is because the case has been categorized as a “no asset” case which means there is nothing in the estate to liquidate and so there will be no cash to distribute.
The Proof of Claim (continued)
The most important part of the proof of claim is the proof!
• The form that we showed earlier has a box that appears on the second page and is easy to overlook.
• But, it is the most important. When you file your claim you must attach to it any documents, such as invoices, purchase orders, notes, statements of accounts, contracts, etc., that prove you are owed what you say you are.
• The failure to attach supporting documentation is a basis for a Court to later reject your claim.
Preferences
What is a preference? • Basically, a preference is a payment you receive from a debtor in
the 90 days before the bankruptcy filing.• These transactions during the 90 days before the bankruptcy can
be “avoided.” What that means, is you may have to give the money back.
Based on my practice so far, nothing is more frustrating to the clients I have dealt with than a preference lawsuit.
Preferences (continued)
There are defenses to preference claims, however and we will talk about the two main preferences:
• The “Ordinary Course” defense• What this is if you received payments from the debtor in the
ordinary course of the debtor’s and your business on ordinary business terms, you may not have to pay the money back.
Preferences (continued)
Ordinary Course Defense
ExampleCreditor’s arrangement with debtor is that debtor pays on 60-day net terms, and this is a customary term in the industry. However, over the course of the prior two years, debtor frequently paid within 65 to 75 days. In the 90 days prior to filing bankruptcy, debtor makes payments to creditor which are within 55 to 75 days net. Although the agreed upon terms were 60 days net, because debtor and creditor established a course of payment which was often 65 to 75 days net, if this occurred frequently enough, and if this was ordinary within the industry, most courts would probably find that none of the payments received within the 90 days prior to filing were a preference.
Preferences (continued)
The “New Value” Defense• How this defense works is that if you receive a payment from a
debtor before the bankruptcy filing, and that provide additional goods and/or services for which you were not paid, you can reduce your preference liability.
Preferences (continued)
New Value Defense
Example
Example: Creditor receives a potentially preferential payment in the amount of $50,000. Creditor subsequently ships to debtor $60,000 worth of goods. Debtor then files bankruptcy. The result will be that the $50,000 payment was not a preference.
QUESTIONS
Taxes, Subpoenas and Other Dirty Words:
The Top Legal Issues That Entrepreneurs Should Know
New Orleans Entrepreneur Week | March 24, 2014
Alex Glaser Bryan [email protected] [email protected]
Mark Jeanfreau [email protected]
