The High-touch Legal Services® Blog • For Startup Companies

Accelerators offer entrepreneurs seed funding and one-to-one mentoring in exchange for an equity stake, making a profit when some of their startups receive institutional (VC) funding. However, according to a Wall Street Journal article published yesterday (Start-Ups Crowd ‘Accelerators’), most accelerators – especially those outside Silicon Valley, Boston and New York – are of doubtful value.

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This post is based on my answer to a Quora question: Can a little kid register a company in United States?

Answer: States differ as to whether minors may act as incorporators.

For example, Michigan, according to a 1981 Attorney General opinion, does not permit minor incorporators. A footnote in that opinion lists 31 other states that (as of that time) had the same prohibition.

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Yesterday the Wall Street Journal published an informative piece about asking people you know and love for a loan (Do’s and Don’ts of Asking Friends for Money). Here is a recap of the tips offered by experts quoted in the article:

• Put yourself in the lender’s shoes.
• Borrow the money as you would from a bank.
• Bring in a lawyer to draw up the agreement.
• Ask for more money than you think you need.
• Assume the worst.
• Remember “Hamlet”. ["Neither a borrower nor a lender be...."]

Dana H. Shultz, Attorney at Law  +1 510 547-0545  dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.

This post is the result of my research on the duties of a director of a Delaware corporation that is located, and doing much of its business, in California. Specifically, I wanted to confirm that California law governed those duties.

Corporations Code Section 2115 addresses non-California corporations for which (a) most voting shares are held by shareholders in California and (b) the average of the following three factors exceeds 50% (excepting many publicly-held corporations):

• The percentage of its property that is located in California
• The percentage of its payroll that is paid in California
• The percentage of its sales that take place in California

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Intellectual property license agreements often include a provision by which the licensor is paid a royalty that is calculated as a percentage of the revenue received by the licensee from licensed products. Given that licensees have a financial incentive to reduce the amount of revenue that is reported*, the prudent licensor includes an audit provision in the license agreement.

The audit provision typically:

• Specifies the frequency and nature of audits that may be conducted;
• Provides that the licensee will pay any underpayment amount that is discovered plus interest; and
• Obligates the licensor to pay for the audit unless the underpayment exceeds X% of the royalty that was due, in which case the licensee must reimburse the licensor for the cost of the audit.

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This post is based on a question that I answered on Quora. (The answer focuses on NY, because that was the questioner’s state, and CA, because that is where I practice.) Q. Can I use the word “Corp” in the name of an LLC (for example, AcmeCorp LLC or WhateverCorp LLC)?

A. No. NY LLC Law Section 204(e) states, inter alia, that the LLC name may not contain “corporation” or “incorporated” or any abbreviation or derivative thereof. This prohibition is not unique to NY. California Corporations Code Section 17052(d) has a similar prohibition for LLC names.

Check out all posts about LLCs.

Dana H. Shultz, Attorney at Law  +1 510 547-0545  dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.

The evening of Wednesday, April 18, I will moderate SVForum’s East Bay Series program “Improving Fundability with Social Media”.

Program description:

Social media such as Facebook, Twitter, and Google+ have clearly woven themselves into the very fabric of our personal and professional lives. Their simple and intuitive user experience, and the effective and efficient means they provide to connect people, brands, and consumers are transforming the very way business is conducted. It’s natural that so much of the innovation funded by the venture community is connected in some way with Social Media, whether it’s to reach customers, respond to service issues, or build buzz about new products and services. Our panel will discuss how companies are adopting–and adapting these platforms to increase traffic, conversions, and profit as they extend relationships and make every interaction part of their experience -– and how entrepreneurs can take advantage of this trend to build successful new products and ventures. Join us and learn how having a Social Media platform can impact or improve your start-up’s potential for raising critical funding.

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I recently spoke with three  startup entrepreneurs who had just retained a finder to locate venture capital in exchange for an equity stake in the form of warrants (the right to purchase shares at a specified price by a specified date). They got very nervous when, after reading their agreement with the finder, I told them the business and legal reasons why retaining the finder was a bad idea:

• The finder would start by sending nondisclosure agreements to targets – but VCs generally will not sign NDAs and are likely to think the entrepreneurs don’t know what they are doing.
• The finder then would send an Executive Summary to each VC. But virtually no ExSum that is sent to a VC cold is read, let alone responded to.
• Next, the finder would make follow-up calls to the VCs. But such follow-ups will be of little, if any utility. The way to get to a VC is via an introduction from someone that the VC knows and trusts. Furthermore, VCs who are interested will not want the finder’s answers to questions – they will want to talk to the entrepreneurs.
• More fundamentally, VCs will be suspicious of, and will have little interest in engaging with, entrepreneurs who use finders. The typical VC believes that if you cannot figure out a way to be introduced by someone that the VC knows, you don’t have what it takes to build a successful business.
• The finder’s form of warrant agreement gave him anti-dilution protection – a feature that would turn off many VCs and would make them think, again, that the entrepreneurs don’t know what they are doing.
• The finder required that the entrepreneurs indemnify him against any claims associated with his activities, even if the claims arise from the finder’s negligence.

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This post is adapted from a question I answered on OnStartups. Q. I’ve been working for a large private company, and my offer letter said I would receive X number of options as long as the board approved it. It’s been a year and I’ve been stonewalled on the option plan. I’ve sent multiple emails to HR and the controller and the CFO. HR has gotten back to me, but their hands are tied. Can I send a letter and a check to the CFO with $100 to force the issue of exercising some amount of shares and determining the strike price that way?

A. Unfortunately, “subject to board approval” is a common contingency for stock option grants. At this point, I’m not sure there is much you can do about it.

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This post is based on a question that I answered on OnStartups. Q. I’m in the process of closing a deal with a new client, and the only sticking point is the choice of applicable law. I am located in state A, the client in state B. My contract says it will be governed by the law of state A. The client wants to change this to New York. Why? Would doing so open my company up to any unintended side effects/liabilities (e.g., taxes)?

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