The Preccelerator® Program Virtual Demo Day kicks off on March 25th @ 3:30 pm, and you're invited to take part in the festivities.
Preccelerator cohort companies are early stage, and we work hand in hand with them throughout their term to know their market and users, foster their leadership skills, build and test their product, avoid legal pitfalls, ensure the defensibility of their products, acquire users and partnerships and prepare them for the fundraising process. Now it's time to showcase their efforts.
Preccelerator® Program Virtual Demo Day
March 25th, 2021 @ 3:30 PM
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BlockForms is a platform built for Employee Benefit Insurance Brokers to transform the process of managing multiple insurance provider applications for their clients. BlockForms delivers an intuitive, reliable product that improves client engagement and employee performance by streamlining data collection and forms management. The encrypted, cloud-based application allows service teams to invite clients to complete simplified forms, automatically map responses to multiple insurance provider forms, edit forms, obtain electronic signatures, and send fully executed forms to insurance providers in one secure application. Simply put, BlockForms makes it fast and easy to sign-up customers, collect client data, and apply for coverage across multiple insurance providers.
Visit https://blockforms.co/
Breakthru microbreaks are restorative and self-paced, yet fast, flexible, and on-demand. They help people context shift, focus, and create, replacing former office rituals like midday walks to combat sedentary behavior. It’s proven that small moments of movement throughout the day have measurable well-being impact. Breakthru is a solution that has been in development for three years, with 2.5 million of research dollars coming from strategic partners. Its roll out is designed as not just an individual betterment tool but focused on the well-being of the group. At its core is the belief that people adopt healthier habits and thrive with support and accountability to a community. To encourage remote collaboration, Breakthru is designed to be shared in a meeting or given as a gift by a friend, colleague, or trusted leader within an organization. People take better care of themselves when they take care of each other, and we’re proud that we have a product that is useful to enterprise and employees today, as they navigate a new work landscape.
Backstage Capital
About the Preccelerator
The Preccelerator® Program is an accelerator for early-stage startups offered to select companies out of the Santa Monica office of Stubbs Alderton & Markiles, LLP that provides initial capital, sophisticated legal services, interim office space, mentorship, a targeted curriculum, investment strategy counseling and access to a strategic perks portfolio with the objective of helping you grow your idea from business concept to funded startup. The Preccelerator® provides these benefits to as many as 5 promising young startups per term. Visit www.preccelerator.com
The halcyon days of start-up companies and the venture community attraction to them hit a hard stop as the COVID-19 lock down spread across the U.S. earlier this year. As the first half of 2020 nears an end – and in the wake of COVID-19 restrictions and the civil unrest our country has recently faced – many companies and their board members are faced with difficult strategic decisions and are confronting the potential for unprecedented corporate action. The financial distress that has now been wrought upon the start-up community has led many businesses to operate well below pre-pandemic budgets and forecasts, and in many instances in or near (sometimes referred to as reaching the “zone of”) insolvency. Many directors are facing pressure to take extraordinary steps to enable their company to access capital or pursue business strategies that were unthinkable just a few months ago, in some instances simply to keep the lights on and try to “live to see another day.”
Individuals join boards of directors of start-ups for a number of reasons, often as founders or operators, as a VC fund or private equity fund representative designated as a result of an earlier funding round, and/or due to industry-specific background relevant to the start-up. Creditors of all stripes have the ability to negotiate payment terms binding the organization, and covenants (including implied covenants of good faith) are indisputably owed to creditors.
While the allure of frothy valuations may have motivated directors and officers to join a start-up, in the wake of COVID-19, many of these individuals now find themselves unexpectedly preparing for an entirely different reality and asking the question: When might a director of a struggling business become personally liable for the debts of the business? Under both California and Delaware law, insolvency is the starting point of the analysis as it respects creditors.
Directors Owe a Duty of Care and Loyalty to the Corporation and its Shareholders
As a general proposition, both directors/officers, as well as member/managers (in the LLC context) (collectively referred to as “directors” for purposes of this article) of Delaware and California corporations, owe two basic fiduciary duties to the entity and its owners (shareholders, members, partners – these terms used here interchangeably)—the duty of care and the duty of loyalty. Directors are subject to these duties regardless of solvency. The duty of loyalty requires that directors act in the best interests of the corporation and its shareholders. Directors cannot use their position of trust and confidence to further their individual interests (or the interests of other constituencies), at the expense of the corporation’s best interests. The duty of care requires that directors consider all material information reasonably available in making business decisions and use the level of care that an ordinarily careful and prudent director would use in similar circumstances.
During these unprecedented times, the duties of directors may well be extraordinarily strenuous and prompt directors to consider whether they should resign. While directors are generally free to resign as they wish, under certain circumstances, resignation does not come with impunity. Directors can face personal liability to the corporation and its shareholders if their resignation amounts to a breach of their fiduciary duties. In one case, for example, directors were tangled in litigation because they resigned from the company’s board after learning that one of the directors stole assets “from under them”. The directors’ resignation left the company in the control of the principal suspected wrongdoer. The court found that such resignation was not free from impunity (at least at the outset of the litigation).1
The violation of either of those duties of care or loyalty may result in shareholders bringing either direct claims, or derivative claims on behalf of the entity against the directors for redress. By asserting direct claims, shareholders assert that the stewards of the business harmed the owners directly; whereas, by asserting derivative claims, shareholders assert that the directors’ breaches harmed the corporation, essentially all owners in the same fashion. Directors most commonly defend against such claims by asserting the business judgment rule, which creates a presumption that directors’ decisions are based on sound business judgment. The business judgment rule, though, is not fail-safe.
Director Liability to Creditors when the Company Is Insolvent
In attempting to weather the economic storm, directors should not forget about another key constituency: Creditors. When a Delaware or California corporation becomes insolvent, in certain limited instances, creditors may have grounds to sue directors, personally – that is, when directors violate their duty of loyalty and/or care.2
To maintain a lawsuit against directors, creditors must establish that the corporation was insolvent at the time of the directors’ alleged wrongful conduct, as opposed to the business being in the “zone” of insolvency (i.e., a concept that had at one point been in judicial favor, in Delaware, however, has been expressly repudiated as a dividing line). Many startups and venture-capital-backed businesses often operate in their early growth stage with tight cash flow, little revenue, and fluctuating valuations; however, these factors which may lead the business to a “zone” of insolvency are insufficient to trigger director liability. This winds up being a “double-edged sword” as circumstances often do not clearly spell out in a binary fashion, solvent/insolvent – with the vagueness resulting in the potential for a delay in the recognition that insolvency has in fact occurred.
Creditors most commonly establish that the corporation is insolvent by demonstrating that, at the time of the challenged conduct (1) the corporation’s liabilities exceed its assets or (2) the corporation is unable to pay its debts as they come due. As any finance major will tell you, either of these standards is elastic; e.g., are “stretching” payables to trade creditors not “paying debts as they come due,” or what about that great IP that has not yet fully commercialized and been shown on the company balance sheet at its “market value” though in an instance where a lot of debt was piled on to create that same IP?
When a corporation becomes insolvent under Delaware law, creditors (whether secured or unsecured creditors, bondholders, or any other lienholder) have standing to assert breach of fiduciary duty claims against the directors on behalf of the corporation, the reasoning being that interests of stockholders become subordinate to creditors. Plainly stated, and bankruptcy issues to the side, once the corporation becomes insolvent, creditors may file a derivative lawsuit on behalf of the corporation for breach of fiduciary duties against directors, personally.
It is important to note that, while creditors of Delaware corporations can bring derivative actions against directors, creditors of Delaware limited liability companies or limited partnerships cannot bring any such derivative action.3
By comparison to Delaware law, when a corporation or LLC becomes insolvent under California law, creditors cannot assert derivative breach of fiduciary duty claims on behalf of the corporation (or LLC) against directors (or members of the LLC).4
As a practical matter, however, this distinction between California law and Delaware law is largely meaningless. To explain, while creditors of an insolvent California corporation cannot file breach of fiduciary duty claims against the directors, California recognizes the “trust fund doctrine” (which may result in the imposition of a constructive trust of the insolvent corporation’s assets for the benefit of creditors).5 In asserting the trust fund doctrine, creditors may sue directors if the facts establish that the directors diverted, dissipated, or unduly risked the insolvent corporation’s assets, and the duties created require directors to take creditor interests into account, in decision-making. Thus, while California’s “trust fund doctrine” is technically not a breach of fiduciary duty claim, it is effectively ‘a rose by another name’ – i.e., another theory under which creditors can assert to hold directors personally liable for mismanaging assets of insolvent corporations.
Especially in these perilous times, directors/managers of California and Delaware business entities should take care to consider the implications of their actions on the entity’s creditors, and should be sensitized to creditors’ availability of claims against them — even if the directors/managers did not have any direct dealings with the creditors.
For example, one group of creditors may include the employees of a business who have claims against the business for unpaid wages and salary. More specifically, California employees — without claiming any breach of a fiduciary duty or showing of the company’s insolvency — may assert direct claims of wage and hour violations against those directors who “caused” such violations. In such a situation, the directors could be personally liable for the unpaid wages and salary, in addition to civil penalties. Whether the director “caused” the wage and hour violations depends on the unique circumstances of the director’s involvement (e.g., whether the director acted with awareness of a decision to not pay wages and to instead prefer a different creditor).
Similarly, directors can be liable for unpaid employment taxes if the director is “responsible”, i.e., the director “had a duty to account for, collect, and pay” the taxes (including a person such as a director, with the authority to exercise significant control over a company’s financial affairs) and “willfully” failed to do so.6 Again, the particulars of the director’s involvement and responsibilities will determine whether the director was “responsible” for the company’s payment of the employment tax and “willfully” failed to pay it.
In further analyzing their potential liability to creditors, directors should give thought to additional considerations that may impact the analysis, including the governing law (e.g., while directors may be operating the business in California, the corporate bylaws may require the application of Delaware law). To minimize exposure to personal liability, directors should be aware of the substance of the corporate governance documents, regularly assess the corporation’s financial position, and seek guidance from other directors and professionals, as appropriate.
Best Practices to Guard against Director Exposure
While a director’s duties and obligations depend on the specific facts and applicable law, directors of (potentially insolvent) companies should consider the following measures to minimize exposure to equity holders and, in certain situations, creditors:
• Obtain Information about the Corporation’s Financial Performance. This would oftentimes require consultation with the CFO and outside accountants. Arguably, when in doubt about solvency/insolvency, prudence may lead to a conclusion of insolvency.
• Make Informed Decisions. Clearly this requires active engagement in the decision-making process and obtaining needed information and consultation with others, both inside the organization, and outside (accountants and legal counsel). Recognition of transactions that involve conflicts of interest of interested parties is important. Similarly, the use of a special committee of the Board may be appropriate in focusing on solvency issues.
• Document the Board’s Decision-Making Process. The board should obtain all relevant information in writing, and questions, objections, inquiries, board meetings and other communications should be recorded.
• Consider Obtaining D&O Insurance and Director Indemnification
Agreements. While expensive, directors may mitigate potential liability by purchasing D&O insurance and seeking indemnity from the company, as long as the insurance and indemnity agreements are in place before the occurrence of the board decision triggering a shareholder or creditor claim. Care should be taken in the review of the insurance policy, in advance, to provide comfort that the policy provides coverage for breach of fiduciary duty claims of this nature. While having D&O insurance may be attractive to creditors looking for deep pockets (i.e., the insurance carrier’s pockets) and could also create the unintended consequence of encouraging litigation against the directors personally, the D&O policy is intended to shield the director – who is likely not judgment proof – from personal liability. The D&O insurance should be reviewed carefully because some policies include contract or insolvency exclusions that may bar coverage for claims from creditors. Directors may consider seeking express contractual indemnity from the VC-fund or private equity sponsors, as well, entities presumptively with greater creditworthiness than the subject entity.
Ultimately, director liability will depend on the unique circumstances of the case, including whether the director put his or her own interests before that of the company, and whether the company was solvent during the transaction or board decision at issue. While this analysis can be complicated and ambiguous, directors and LLC managers looking to limit their potential liability to creditors (and others) should let the following precept guide their conduct: Always act in the best interests of the business entity including all creditor constituencies, without preference to any.
This article was featured on SocalTech.com, to view the article on their site visit here.
For more information about this topic or issues relating to our Business Litigation Practice please contact, Michael Sherman at .
Authors:
1 See In re Puda Coal, Inc. S'holders Litig., C.A. No. 6476–CS 15–17, Feb. 6, 2013 (Transcript)
2 Quadrant Structured Products Company, Ltd. v. Vertin (Del. Ch. 2015) 115 A.3d 535, 546 (“After a corporation becomes insolvent, creditors gain standing to assert claims derivatively for breach of fiduciary duty.”)
3 CML V, LLC v. Bax (Del. 2011) 28 A.3d 1037, 1043, as corrected (Sept. 6, 2011) (“Only LLC members or assignees of LLC interests have derivative standing to sue on behalf of an LLC— creditors do not.”)
4 See Berg & Berg Enterprises, LLC v. Boyle (2009) 178 Cal.App.4th 1020, 1041 (“there is no
broad, paramount fiduciary duty of due care or loyalty that directors of an insolvent corporation owe the corporation’s creditors solely because of a state of insolvency.”)
5 Id. at 1041 (“the scope of any extra-contractual duty owed by corporate directors to the insolvent corporation's creditors is limited in California, consistently with the trust-fund doctrine, to the avoidance of actions that divert, dissipate, or unduly risk corporate assets that might otherwise be used to pay creditors claims.”)
6 26 U.S.C. § 6672 (“Any person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails to collect such tax, or truthfully account for and pay over such tax [. . .] shall, in addition to other penalties provided by law, be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over.”)
Making payroll is one of the most stressful issues on every business owner’s mind, and thankfully, the Paycheck Protection Program (PPP) section of the CARES Act provides significant aid to provide some financial relief. The final PPP loan application is now available here.
Who Can Apply? According to the Dept of Treasury’s Information Sheet, all businesses with 500 or fewer employees can apply. Businesses in certain industries can have more than 500 employees if they meet applicable SBA employee-based size standards. Business types that qualify for PPP loans include independent contractors, LLCs, S corporations, C corporations, sole proprietorships, as well as other types of businesses including certain nonprofits, veterans’ organizations, and tribal business concerns. Businesses who have received Economic Injury Disaster Loans (EIDLs) through the SBA between January 31, 2020 and April 3, 2020 are not prohibited from obtaining a PPP loan so long as the EIDL was executed for purposes other than the permitted uses of a PPP (see below for discussion of PPP permitted uses).
The SBA’s affiliation standards have been waived for this Program for companies that are (a) in the hotel or food services industries; (b) franchises in the SBA's Franchise Directory; and (c) receiving financial assistance from small-business investment companies licensed by the SBA. The affiliation standards have been the source of much confusion in the venture-backed startup community; and we explore those considerations in more detail here and will be monitoring for expected new guidance in that area and updating as that becomes available.
What Do I Need to Do to Apply? A business owner must apply through an approved SBA 7(a) Lender, or through any federally insured depository institution, federally insured credit union, and Farm Credit System institution that is participating. Applications are open as of April 3, 2020 for small businesses and sole proprietors. Independent contractors can begin the application process as of April 10, 2020. All applications must be submitted to an approved lender by June 30, 2020.
Applicants will need to certify that the business is suffering from economic hardship due to the current COVID-19. In addition to the certification in good faith that the funds will be used to maintain payroll and make mortgage, lease or utility payments, the applicant will need to provide:
How Much Can You Apply For? The amount of the loan is for up to 2.5 times a business’s average monthly payroll costs from the last year plus any outstanding amounts owed on an EIDL executed between January 31, 2020 and April 3, 2020, if any, and less any emergency advance amounts obtained through the EIDL program, if any. Note, this amount cannot exceed $10 million. If you are a seasonal or new business, you will use different applicable time periods for your calculation. Individual employee payroll costs are capped at $100,000 annualized, so anything above that is not considered for determining average payroll costs.
What Are the Permitted Uses of a PPP? A PPP loan can be used for “payroll costs” and other specific operating expenses.
Payroll costs include salary, wages, commissions, payment of vacation, sick, parental/family/medical leave, payment of retirement contributions, group health coverage premiums and state and local taxes assessed on payroll. Payroll costs do not include Federal Payroll Tax, compensation paid to employees in excess of $100,000, or compensation paid to employees outside the U.S.
In addition to payroll costs, PPP loans can be used to cover interest on mortgage obligations, rent, and utilities that were in use before February 15, 2020, and interest on other debt obligations incurred before February 15, 2020.
Loan Terms. PPP loans will be executed at an interest rate of 1% with a maturity date of two years.
When Do I Have to Pay it Back? A business’s loan repayment term is two years, with the first 6 months of payments deferred with interest accruing during deferment. There is no pre-payment penalty if paid back within that two-year period.
Is the Loan Forgivable? A business owner is eligible for loan forgiveness for the amounts they spend over the eight weeks after receiving the loan disbursement on the qualifying expenses named above (aside from interest on debt obligations incurred before February 15, 2020), provided that at least 75% of the forgiven amount must have been used for payroll costs.
If the number of full-time employees is reduced over the eight weeks or if the salary or wages of employees who earned $100,000 or less in 2019 are reduced by 25% or more, then the amount of the loan eligible for forgiveness will be reduced. However, depending on the timing of any such workforce or salary/wage reductions, reduced loan forgiveness can be avoided if the reductions are undone by June 30, 2020.
The lending bank will determine a business’s eligibility for loan forgiveness based on the criteria mentioned and has 60 days to render a decision.
Can I Still Qualify if I Already Have an SBA Loan? A business owner can have more than one SBA loan as long as the total combined amount of the loans does not exceed the maximum amount set by the SBA, and in the case of EIDL and PPP loans, a borrower cannot take out both types of loans unless they are for different purposes. EIDL loans executed before a PPP loan can be rolled into a PPP loan. In other words, the principal of an EIDL could later become part of a PPP loan, likely resulting in lower interest rates.
What are the similarities and differences between PPP loans and EIDL? Can I get both? As mentioned, you can receive both loans as long as the amount doesn’t exceed the maximum amount allowed by the SBA, and the proceeds are used for different things. EIDL can be used for payroll, paid sick leave, costs incurred due to supply chain disruption, rent or mortgage payments, and repayment of amounts owed that cannot be paid due to loss of revenue from a disaster’s (i.e. COVID-19) impact. Further, EIDL applicants can receive up to a $10,000 emergency advance, which does not have to be repaid even if the loan application is later denied but will reduce the principal of a PPP loan if such applicant subsequently executes one.
As addressed above, PPP can be used for payroll costs, group health care benefits, mortgage interest costs, rent, utilities and interest on debt incurred before February 15, 2020. Because the PPP is forgivable in certain cases, and forgiveness is tied to usage of the PPP loan on payroll specifically, borrowers should carefully evaluate which loan to use for which expenses where an expense is eligible to be paid by either type of loan. We have provided a useful flow chart, available at: PPE: EIDL Comparison Chart.
Authors:
Heidi Hubbeling
Garett Hill
Caroline Cherkassky
Greg Akselrud
For more information on PPP, EIDL and other SBA benefits, please contact us at
Background: The Coronavirus Aid, Relief, and Economic Security (CARES) Act was recently signed into law, and includes, among other things, a new loan type under the 7(a) loan program of the Small Business Administration (SBA), called the Paycheck Protection Program (PPP). Also available under the SBA framework are Economic Injury Disaster Loans (EIDLs). Our focus here is specifically on potential issues emerging growth companies may face in the context of these loan programs regarding deemed “affiliation” between a company and its investors.
Why does affiliation matter? Understanding whether an applicant’s investors will be deemed to be affiliated is important to ensure that an applicant does not breach a maximum level of employees required for eligibility under the loan programs. In order to be eligible for 7(a) loan programs, an applicant must employ no more than 500 employees.[1] For many early-stage companies, the 500 employee threshold would at first glance appear to be easily satisfied, but the SBA 7(a) loan programs require that an applicant includes in its headcount the employees of any companies under common control, or affiliated, with the applicant. For the SBA’s purposes, affiliation is defined more broadly than in many other contexts, and currently available guidance suggests that some common contractual rights held by venture capital investors could trigger a finding that an investor such as a VC fund would be affiliated with the applicant and that in turn the other portfolio companies of such fund would be deemed affiliates and be required to be included for purposes of the 500 employee threshold.
What triggers a finding of “affiliation”? There are several bases on which affiliation may be found, including the following:[2]
1. Majority ownership. This is likely the easiest category to assess. If an investor owns more than 50% of the voting equity, that investor controls the company and shall be affiliated with the company, along with any other companies that such investor controls.
2. Veto rights, aka protective provisions or negative controls.
a. This is the category that has caused the most confusion in the startup ecosystem. A minority investor may, notwithstanding the minority ownership position, be deemed an affiliate based on its ability to negatively control (i.e., have veto power over) the applicant’s operations. Since most VC investors take minority positions, this is where most of the action is for assessing a startup’s likelihood of triggering a finding of affiliation with its investors.
b. There is, unfortunately, no bright-line list of triggering provisions, but there are past decisions by the SBA Office of Hearings and Appeals (OHA) from which guidance can be drawn. Generally, the SBA focuses a finding of affiliation by negative control on whether the negative controls are operational in nature, as opposed to fundamental matters seen as reasonable for protection of a minority investor’s interests. Thus, a right to veto a sale of the company is unlikely to result in a finding of affiliation, but a right to veto capital expenditures probably would trigger such a finding.
c. The National Venture Capital Association (NVCA) has put out a helpful summary of veto rights that, based on past OHA determinations, are likely to trigger a finding of affiliation with an investor holding any such rights (though it is important to bear in mind that removing any such negative controls does not guarantee that no finding of affiliation will be found). Those veto rights that are likely to be problematic are summarized below:[3]
i. Making distributions or paying dividends (other than tax distributions).
ii. Establishing a quorum for a board or stockholders meeting.
iii. Approving the budget or capital expenditures outside the budget.
iv. Determining employee compensation.
v. Hiring and firing officers.
vi. Changing the company’s strategic direction.
vii. Establishing or amending an option plan.
ix. Incurring or guaranteeing debts.
x, Initiating or defending a lawsuit.
xi. Entering into contracts or joint ventures.
xii. Amending or terminating leases.
d. A couple of additional important considerations:
i. Negative control is assessed not only with respect to the investor entity as an equity holder having blocking rights but also where an investor-appointed director has the ability to block actions at the board level.
ii. Negative control is assessed with respect to a minority investor acting alone. However, this does not mean that the investor must have a right granted specifically to them; rather, a company must look at its ownership. For instance, if negative controls are granted to a company’s Series A holders as a group, and a single investor holds a majority of the Series A voting power, that investor constructively holds the veto right and will be found to hold those negative controls. In contrast, if an investor holds a large portion of the Series A but not a majority, this large ownership stake alone is unlikely to result in a finding that such investor holds those negative controls, because they do not, acting individually, have a blocking right.
3. Convertible or exercisable securities, or agreements to sell. The SBA will give present effect, i.e. deem to have occurred for purposes of the affiliation analysis, any convertible instruments or agreements to sell. This includes, for instance, taking into account exercisable securities for calculating ownership thresholds, as well as in certain cases letters of intent to merge or sell securities.
4. Management. Entities under common management may be deemed to be affiliated. This may include, for instance, where one entity controls the management of the applicant through a management agreement, or where one or more officers of the applicant control the management and/or the board of one or more other entities.
What if an investor has rights that would trigger affiliation, but they do not exercise them? For purposes of the SBA 7(a) loan programs, affiliation is measured based on rights held, regardless of whether such rights are exercised.
What actions should a startup take now? We recommend all startup companies applying for an SBA 7(a) loan familiarize themselves with the rights held by their investors. If an applicant has agreements in place with investors that are likely to trigger a finding of affiliation, it may be possible to amend those agreements to mitigate the likelihood of a finding of affiliation.
Will these guidelines change? There are substantial efforts in progress by the NVCA and other groups lobbying for guidance to clarify affiliation matters and ensure that startups are not inadvertently deemed affiliated with their investors by virtue of control provisions. There is no guarantee such efforts will be successful, and unless and until they are, companies will need to operate assuming the currently available guidance will apply. On Thursday April 2, 2020, House Minority Leader Kevin McCarthy (R-Calif.) told the Axios Pro Rata Podcast[4] that he spoke with Treasury Secretary Mnuchin and that guidance would be forthcoming in a couple of days to set out clearer guidelines for PPP loan eligibility.
We will continue to closely monitor developments regarding these matters. You can view prior alerts and additional guidance regarding the CARES Act and COVID-19-related matters at our resource center.
For more information on these matters, please contact Caroline Cherkassky at .
Author: Caroline Cherkassky
[1] Note that there are exceptions for certain franchises or applicants in the hotel or foodservice industry, but these exceptions will not be relevant for most technology or other startups.
[2] This is a non-exhaustive list of the bases most likely to be relevant for startups. See 13 CFR §121.301(f) for a complete listing.
[3] See NVCA Affiliation in the Context of SBA Loans – Guidance for Venture Capital Investors at https://nvca.org/wp-content/uploads/2020/03/VC-SBA-Lending-and-Affiliation-Guidance-for-SBA-Loan-Programs.pdf
[4] See https://www.axios.com/coronavirus-vc-startups-small-business-loans-6ae9e125-fbbb-4349-9d67-ce68d4a5ac57.html.
Stubbs Alderton & Markiles’ attorney Kelly Laffey will be featured as a speaker at Digital Hollywood Fall 2019 “ICOs, Financing, Packaging & Investment: From Entertainment & Indie Project to Technology & Startups.” The event will be Thursday, November 14th from 2:15 PM to 3:30 PM at the Skirball Cultural Center in Los Angeles in Herscher Hall, 3rd Floor, Room 305. Other panelists include:
For more information on Digital Hollywood Fall 2019 and the panelists visit here.
Kelly Siobhan Laffey is an Associate of the Firm and the Director of Business Affairs at the Preccelerator.
Kelly’s practice focuses on advising emerging growth and middle market companies in the technology, digital, internet, interactive media (i.e., AR and VR), and entertainment industries. Kelly counsels clients on issues related to corporate governance and formation, venture capital and other financings, joint ventures, employee compensation, complex stockholder and operating agreements, securities law regulation and other general corporate matters. Kelly also advises investors and funds in connection with venture capital and other financings.
Kelly also counsels clients in connection with mergers and acquisitions matters, including asset and equity acquisitions and dispositions, cross-border transactions, spin-off transactions, secured lending transactions, financing restructurings, and corporate reorganizations.
Drawing on her diverse work experience in the entertainment arena, including time spent with talent agencies, and music and television production companies, Kelly also assists on matters related to licensing marketing, and exploitation of intellectual property rights.
Congress passed and the President signed a tax act in December. Here are some highlights that may benefit startup companies.
R&D Changes
Small Business Changes
Section 179 Expensing Changes
Section 181
Section 181 of the Internal Revenue Code allows expensing of up to $15 million ($20 million for expenses incurred in certain designated distress and low income communities) in film and TV production costs as long as 75% of the compensation costs for actors, directors, production personnel and producers were for services performed in the U.S. Section 181 was supposed to sunset for production costs incurred after 2015, but the PATH act extended the eligibility for the Section 181 deduction for production costs.
______________________
Michael Shaff joined the firm in 2011 as Of Counsel. He is chairperson of the Tax Practice Group. Michael specializes in all aspects of federal income taxation. Mr. Shaff has served as a trial attorney with the office of the Chief Counsel of the Internal Revenue Service for three years. Mr. Shaff is certified by the Board of Legal Specialization of the State Bar of California as a specialist in tax law. Mr. Shaff is a past chair of the Tax Section of the Orange County Bar Association. He is co-author of the “Real Estate Investment Trusts Handbook” published annually by West Group.
For more information about the PATH Act and the Tax & Estate Planning Practice at Stubbs Alderton & Markiles, LLP, contact Michael Shaff at
SAM client Finny announced the completion of an initial funding round of $300k that includes participation from Spartan Ventures, Inc. (www.spartanventures.com) and several angel investors. "We are very excited to be able to support Finny -- a socially responsible and quite frankly, necessary tool for the benefit of our most prized possessions -- our children,” said Reg Lapham, Spartan’s President. Finny's parental engagement platform is the first mobile solution that turns screen time into learning moments. An increasingly valuable need as research continues to prove that device addiction is causing serious academic, social, and medical issues that are affecting today’s youth.
Targeted to 7-14 year olds, Finny monitors unproductive device usage and interrupts by triggering a custom quiz. Whether reinforcing traditional academic subjects or introducing new topics, the content library contains over 15,000 questions across a range of categories (Math, Science, Current Events, etc.). Through a comprehensive dashboard, parents can customize settings, receive real-time report cards, and gain visibility into their child’s device usage.
"This is the perfect tool to engage with your child and improve mobile habits.”
– Professor Eric Curcio, MD UCLA Pediatrics
The company, based in Santa Monica, California, intends to use the funds for continued product enhancements while igniting marketing efforts. They are focused on building out a powerful influencer network to drive awareness and legitimize messaging. Currently available for download on Google Play and with iOS scheduled for early 2016, Finny is ready to begin driving change by making device usage productive.
Follow along and join the movement, as everyone’s participation is important to combat the magnitude of the problem.
SAM Partner Louis Wharton represented Finny in this transaction. For more information about our Venture Capital & Emerging Growth practice, contact Louis at
Stubbs Alderton & Markiles, LLP announced today that it assisted client HelloTech with its $12.5 Series A Financing to expand their in-home tech support. The funding was led by Madrona Venture Group with participation from Upfront Ventures, CrossCut Ventures, and Accel Partners. HelloTech closed their $4.5M seed funding in February, bringing their total raise to $17M.
HelloTech is a new on-demand tech support service provided by our fully-vetted team of techs. Each HelloTech Hero is hand-selected, background-checked and completes a variety of tests and assessments. In addition to a complete range of tech support services, we also provide new technology consultation and training. We not only fix problems, we educate and help architect a home’s tech eco-system.
In today’s world of connected devices and the Internet of Things, our mission is to make the newest in technology available and understandable to all. We’re making technology in the home simple.
SAM attorneys Scott Alderton and Caroline Cherkassky represented HelloTech in this transaction.
To view the TechCrunch article, click here.
For more information about our Venture Capital & Emerging Growth practice, contact Scott Alderton at or (818) 444-4501.
Text message promotions have long been touted as a marketing jackpot for mobile applications due to their high open rates and short click-path to download—look no further than companies like Lyft for success stories. However, refer-a-friend invitations have also come under fire for violating the Telephone Consumer Protection Act (the “TCPA”), a law originally implemented to crack down on invasive telemarketing. Class action lawsuits that successfully establish that individuals received unsolicited text messages could result in penalties of up to $1,500 per text message.
On July 10, 2015, the Federal Communications Commission released a Declaratory Ruling and Order clarifying portions of the TCPA. In response to petitions from app-based service providers TextMe and Glide, the FCC set out best practices for companies utilizing text message promotions. In doing so, it established that the app user, not the company, may be responsible for initiating the text message in certain scenarios, opening the door for wider use of refer-a-friend text message promotions.
In order to comply with the TCPA, the FCC determined that companies must satisfy a balancing test which requires some direct connection between a person or entity and the sending of the text message. Specifically, the test examines who took the steps necessary to physically send the text message and whether another person or entity was so involved in sending the text message as to be deemed to have initiated it.
Pursuant to the FCC’s 2013 DISH Declaratory Ruling, persons or entities that merely have some minor role in the causal chain that results in the sending of a text message generally do not take the steps necessary to physically send such a text message, and thus are not deemed to “initiate” the text message.
In the case of TextMe, the app’s users invited friends to use the service via text message by engaging in a multi-step process in which the users had to make a number of affirmative choices. First, they were required to tap a button that read “invite your friends.” They were then able to choose whether to invite all their friends or individually select contacts, and finally they were prompted to send the invitational text message by tapping another button.
The FCC determined that, to the extent that TextMe controlled the content of the advertising message, the company might be liable under the TCPA. Despite that cause for concern, however, the TextMe app users’ choices and actions caused the user to be so involved in sending the text message as to be deemed its initiator. For that reason, TextMe’s invite flow was deemed not to violate the TCPA.
TextMe’s practices contrasted with those of Glide, which sent text message solicitations automatically to all of its app users’ contacts unless a user affirmatively opted out. In that scenario, the FCC determined that Glide initiated the text messages because the app user played no role in deciding whether to send the invitational text messages, to whom to send them, or what to say in them.
Ultimately, not all app providers are exempt from liability under the TCPA. In light of the FCC’s guidance, a company that desires for its users to send text message invitations to their contacts should require the user’s affirmative consent with respect to (1) whether to send a message, (2) who the message is sent to, and (3) when the message is sent. To further limit potential liability, the company should allow the user to determine or modify the language of the invitation message.
It is also worth noting that FCC’s declaratory rulings are not binding on trial courts, but are instead interpreted as persuasive authority. However, due to the limited amount of case law interpreting the TCPA, FCC opinions like this one are the primary source of guidance as to how companies should comply with the law.
SA&M client Iris.tv has raised $5.3 million in Series A funding for technology that makes personalized video recommendations to viewers who watch short clips online. The startup’s customers are lifestyle, entertainment, sports and news organizations that own and publish a lot of short videos online, and who want to drive audiences to watch more videos through their own apps or websites rather than on YouTube or Facebook.
Publishers or networks can generate more revenue from videos viewed through their own apps, potentially, said Iris.tv CEO Field Garthwaite, in part because there are fewer distractions there than on social media platforms.
If users do fast-forward past one clip to see another using Iris.tv, the next recommended clip will be a video from the same content company that is tailored around their interests.
Investors in Iris.tv’s funding round included Sierra Wasatch, BDMI, Progress Ventures and individual backers including Machinima founder Allen DeBevoise, Lions Gate CFO James Barge as well as executives from Nielsen and AEG.
SAM Partner Louis Wharton represented Iris.tv in this transaction.
To view the full press release in the Wall Street Journal, click here.
For more information on our Venture Capital & Emerging Growth practice, contact Louis at .
In a perfect world, a business lawyer isn’t the person you run to when things go sideways—it’s the trusted advisor you consult regularly to anticipate challenges and put you in the best position to succeed. While it may seem like a luxury for some startups, there are several important factors to consider that make hiring a lawyer earlier than later a smart decision.
Five Reasons to Hire a Lawyer for Your Startup
Guidance
At the incorporation stage, the value of a lawyer has as much to do with helping you figure out what you need as it does with preparing documents. When it comes to what kind of entity to form, how to structure and distribute equity, or the best strategy to protect your intellectual property, a good lawyer will help guide you toward where you need to be—and then get you there.
Ownership
When people embark on a business venture together, it’s best to establish everyone’s rights and expectations at the outset in case there are disagreements down the road. It’s a lot easier to resolve a conflict before it arises, and you’d never imagine anything could break the bond between you and your co-founders… until it does.
Intellectual Property
Intellectual property can be one of the biggest assets—and, if not protected, liabilities—of a startup company. Whether it means preparing nondisclosure agreements to protect trade secrets, drafting license agreements, defending trademarks, copyrights, or patents, or avoiding infringement of all of the above, a good lawyer will keep you protected.
Taxes
It probably goes without saying that you don’t want to violate tax laws or incur unnecessary tax liability, and that you want pay the taxes you owe so as to avoid penalties. Tax laws can be complex, and a good lawyer will keep you ahead of the curve on tax issues and structure your business accordingly.
Contracts
Finally, there’s the day-to-day legal that every startup encounters. Airtight vendor agreements, employment and contractor documents, and website terms of service and privacy policies are all invaluable for startups to get right—the first time.
Five Things to Look For When You Do
Expertise
First and foremost, you want someone that is skilled and experienced with the types of legal issues you will face. This includes both the underlying business issues and the challenges specific to your industry—an attorney with knowledge relevant to your business is best positioned to become the advisor you need.
For many startups across the board, it’s extremely advantageous to hire an attorney (and law firm) with experience in both formation and financing. An attorney who regularly helps companies get “up and running” but is also frequently involved in seed-stage and venture capital financing will be able to give you better advice, and better facilitate accomplishing your goals.
Fit
It’s also important that your lawyer (and his or her firm) is a good fit for your company. This means someone that you get along with and enjoy working with, but also someone who “gets” your business and industry and has the resources at their firm to serve all your potential needs. If a lawyer doesn’t speak the language of your business or understand the world in which you’re operating, it’s harder for him or her to adequately represent you.
Responsiveness
It should go without saying that you want a lawyer who responds to your calls and emails in a timely manner. What’s equally important is how they respond. A good lawyer shouldn’t just tell you “no.” They respond to a problem with the right questions and a new suggestion of how to get what you want: “This is what you can do.”
Connections
You might be thinking about your lawyer in terms of connections or cache, and you wouldn’t be alone in that thought. While the expertise, fit, and responsiveness of an attorney should take precedence, the ability of your lawyer to introduce you to investors or potential partners—as well as their guidance in how to do so and the credibility they lend—is simply part of the value proposition.
Fees
Let’s be honest: one of the biggest considerations in hiring a lawyer is the bottom line. The lawyers most start-ups deal with typically bill by the hour, and the hourly billing rate may vary widely between junior and senior lawyers. Depending on the complexity of your issue, the lawyer may be able to offer a flat fee arrangement to offer you some predictability, or at least offer an estimate of the amount of time it will take to complete the task at hand.
If you make the time and effort to find the right attorney and firm, you can get quality representation at a fair price. In the long run, hiring a lawyer for your startup is worth it—in time and money saved, and stress avoided, by starting down the best path in the beginning.
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Nick Feldman's practice focuses on corporate transactions, including mergers and acquisitions, dispositions, private equity transactions and general corporate matters for both public and private clients, focusing on middle-market and emerging growth companies. In addition, Nick counsels companies in connection with entity formation, corporate governance, federal and state securities laws and compliance, joint ventures, employee incentive plans, executive employment agreements and other executive compensation matters. Nick also serves as an Adjunct Professor at Loyola Marymount University, where he lectures on media law topics.
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For more information about services for your legal needs, contact Nick Feldman at or (818) 444-4541.
Stubbs Alderton & Markiles, LLP is one of the leading start-up law firms in Southern California. We pioneered a fixed fee start-up package making the formation and organization of your start-up as seamless as possible. Our Preccelerator Program is a platform offered to select start-up companies out of our Santa Monica office that provides interim office space and sophisticated legal services, with the objective of helping you grow your idea from business concept to funded startup. The Preccelerator Program provides free co-working space and other perks for 5-6 promising young startups.
The perks include:
For more information about the Preccelerator Program, visit https://stubbsalderton.com/preccelerator or contact Heidi Hubbeling at (310) 746-9803 or
No-Fee Platform Connects Accredited Investors to
Innovative Startups Pursuant to the JOBS Act
SANTA MONICA, Calif.: Oct. 16, 2014 – FlashFunders today announced the launch of its no-fee, online equity funding platform at www.flashfunders.com. FlashFunders (member FINRA/SIPC) was started by Europlay Capital Advisors, law firm Stubbs Alderton & Markiles, and co-founders Vincent Bradley and Brian Park, and was formed to help startups raise capital efficiently while also opening up access to startup investing for accredited investors.
FlashFunders’ platform helps entrepreneurs navigate complex SEC regulations and offsets costly legal fees, while giving accredited investors unprecedented access to startup investment opportunities. FlashFunders provides a turnkey solution for raising capital and a marketplace where entrepreneurs can connect directly with accredited investors across the globe.
FlashFunders ensures all investors are accredited and that all offerings are SEC-compliant and executed using FDIC-insured escrows — which are created and paid for by FlashFunders.
“We worked with FINRA over the past year to expand the scope of our broker-dealer license, allowing FlashFunders to operate an online equity funding platform in a regulated environment,” said Vincent Bradley, the co-founder of FlashFunders. “We felt it was critical to ensure our platform was compliant for both startups and investors. Online equity funding is in its infancy and seeing tremendous growth; by engaging with FINRA, we’re leading the way for how it should be done — creating an industry standard.”
“97% of the 8.5 million accredited investors in the United States currently don’t partake in startup investing,” said Mark Dyne, the chairman and founder of Europlay, a seed and early-stage investor in technology companies, as well as former Skype seed investor and board member and founder and CEO of Sega Ozisoft, Virgin Interactive Entertainment, and many others. “This is largely because they don’t have access to early stage companies. Leveraging technology and decades of combined experience in finance, venture investing, securities law and startup operations, FlashFunders provides entrepreneurs and investors a secure, SEC-compliant user experience, with e-Signature technology and document management capabilities backed by a team of FINRA-registered representatives to help ensure successful offerings on the platform.”
“FlashFunders is designed to fundamentally alter the capital-raising process,” said Brian Park, co-founder of FlashFunders. “We provide startups with a compliant, efficient and no-fee online equity funding platform to develop their business plans, publicly market their offerings and collect funding from accredited investors —saving startups thousands of dollars in legal fees. At the same time, investors on FlashFunders can purchase shares directly in startups with no transaction fees or carried interest charges.”
FlashFunders creates a safe and intuitive process that allows investors to view startup offerings and execute investments legally and properly in minutes using Flash Seed Preferred documents and e-Signature technology.
FlashFunders has created “Flash Seed Preferred,” a set of safe, balanced and transparent investment documents that have been customized to facilitate fundraising on the platform, further streamlining a process that would otherwise take months of road shows, multiple middlemen and tens of thousands of dollars in legal fees to execute.
“Unlike other equity funding portals, FlashFunders does not curate or try to pick winners, and investments are not made through LLCs or Special Purpose Vehicles,” said Scott Alderton, Managing Partner at Stubbs Alderton & Markiles, LLP. “FlashFunders provides a seamless end-to-end solution for startups raising capital with virtually no external cost, fees or investor carry. FlashFunders receives an ongoing right to invest a limited amount under the same terms as all other investors if a startup is successful in getting funded on the platform.” Stubbs Alderton & Markiles, LLP is southern California’s leading business law firm, with deep experience in providing legal services to companies including LinkedIn, Beats by Dre and Skype, among many others.
The announcement today is the first phase of FlashFunders’ rollout. Additional enhancements to the user experience will be added over time along with new tools and technologies to increase functionality and scale. Offerings from startups will be incrementally uploaded by the site’s concierge service, which assigns a live team to guide entrepreneurs through the process.
“We are educating a new generation of investors and building a more efficient roadshow for startups,” said Vincent Bradley.
About FlashFunders
A registered broker-dealer, member FINRA/SIPC, FlashFunders provides a no-fee online equity funding platform for entrepreneurs to publicly market their offerings, collect funding from accredited investors and gain access to SEC-compliant legal documents and escrow accounts to create their offerings.
For more information, visit: http://www.flashfunders.com
Media Contact:
Amy Morris Susan Guerra
FlashFunders Thatcher+Co.
917.887.2725 973.650.6555
Stubbs Alderton & Markiles Co-Founder and Managing Partner, Scott Alderton was featured in today's Entrepreneur.com article "Find an Attorney Who Will Be in Your Corner With These 3 Tips." Author Adam Callinan of Beachwood VC outlines some of the early questions you should be asking and warning signs you should be recognizing when searching for new legal counsel.
Scott Alderton states that you need “a lawyer with a deep contextual understanding of both the substantive nature of your evolutionary path (i.e. they understand and do the exact type of transactions you are going to be engaging in) and a broad understanding of your industry.”
To read the full article, click here.
For more information on our Emerging Growth practice, and for information about our Start-up Fixed Fee Legal Package, contact Scott Alderton at (818) 444-4501 or
Los Angeles, CA (February 25, 2013) - Stubbs Alderton & Markiles, LLP, Southern California’s leading business law firm, has announced the expansion of its Santa Monica office at 1453 3rd Street Promenade, Santa Monica, CA. This office is located on the corner of Third Street Promenade and Broadway Boulevard. The growth of the Firm and its Preccelerator Program has provided the opportunity for this expansion. The new office opening makes an inspiring statement about the support and involvement that Stubbs Alderton will continue to contribute to the Silicon Beach marketplace. An open house celebration will be scheduled for some time in March.
Scott Alderton, a founder and managing partner of Stubbs Alderton & Markiles, LLP, comments: “Since opening our office in Santa Monica, we have assisted in the growth of a handful of super early-stage businesses, two of which (Fleck and 3Ten8) have moved on to prominent Accelerator Programs. Fleck moved to the Portland Incubator Experiment (PIE) in Portland, Oregon (http://www.piepdx.com) and 3Ten8 moved to The Alchemist in the Bay area (http://www.alchemistaccelerator.com). We have also produced and hosted dozens of “Preccelerator Events” ranging from simple mixers to substantive educational seminars. That level of involvement is vital to Stubbs Alderton & Markiles, given our historical commitment to the start-up ecosystem. Our expansion and growth in Santa Monica is a demonstration of our commitment to be leaders and innovators in this community.”
Company Information
Stubbs Alderton & Markiles, LLP is a business law firm with robust corporate, public securities, mergers and acquisitions and intellectual property practice groups focusing on the representation of venture backed emerging growth companies, middle market public companies, large technology companies, entertainment and digital media companies, investors, venture capital funds, investment bankers and underwriters. The firm’s clients represent the full spectrum of Southern California business with a concentration in the technology, entertainment, videogame, apparel and medical device sectors. Their mission is to provide technically excellent legal services in a consistent, highly-responsive and service-oriented manner with an entrepreneurial and practical business perspective. These principles are the hallmarks of their Firm.
About the Preccelerator Program
The Preccelerator is a novel platform offered to select start-up companies out of the Stubbs Alderton & Markiles, LLP Santa Monica office that provides interim office space and access to sophisticated legal services, with the objective of helping start-ups grow their idea from business concept to funded startup. For more information, visit www.stubbsalderton.com/preccelerator
Media Contact
For further information regarding this press release, please contact Heidi Hubbeling, Director of Marketing – (310) 746-9803 or
Stubbs Alderton & Markiles, LLP has announced that its Preccelerator Program is now taking applications for the next class of companies to begin on February 1, 2014. Deadline for applications is December 1, 2013. To apply click here.
What is the Preccelerator Program?
Our Preccelerator Program is a new platform offered to select start-up companies out of our Santa Monica office that provides interim office space and sophisticated legal services, with the objective of helping you grow your idea from business concept to funded startup. The Preccelerator Program provides free co-working space and other perks for 5-6 promising young startups. Here’s the total breakdown:
1) Free co-working space on a rolling basis, including free wireless access to the Internet and access to conference rooms for meetings and presentations;
2) Access to real-time legal advice and transactional legal services on site (under our standard engagement and/or startup fixed-fee arrangements);
3) Access to in-house educational workshops and activities; and
4) Potential introductions to our network of investors and other service providers.
For more information, visit https://stubbsalderton.com/preccelerator or contact Heidi Hubbeling at
What is a convertible promissory note?
A convertible promissory note is a debt instrument that is convertible into equity at a future date either automatically upon the occurrence of certain events or at the choice of the investor. Even though it is a debt instrument, investors who purchase convertible promissory notes issued by a start-up company are expecting the notes to convert into equity at a future date, since equity (unlike straight debt) allows investors to participate in the upside of the company. A simple return of principal and interest is not attractive to an early stage investor who is taking tremendous risk in funding a start-up. To compensate investors for the risk they are taking, the notes sold are often convertible at a discount to the price of the next preferred equity round and will also contain a “cap” – or a maximum conversion price - on the price at which the note will later convert.
What is preferred stock?
Preferred stock is an equity ownership interest in a company with certain features that are designed to protect an investor’s investment. For example, investors in preferred stock typically receive cash distributions before holders of common stock and also receive certain rights relating to the control of the company, such as board representation and the right to veto certain company activities.
Why do start-up companies and investors sometimes prefer the sale of convertible promissory notes over equity to finance a startup?
Convertible promissory notes are sometimes used to finance start-up companies when the prospective investors lack the sophistication to properly price an equity round, when the size of the financing does not warrant the costs of a traditional preferred stock financing or when the company and the investors want to avoid pricing an equity round. In addition, convertible note financings are often used because they are perceived to be quicker and cheaper to structure and document than preferred stock financings.
What are some of the risks for investors financing a start-up through a convertible promissory note?
Even though convertible notes often contain price discounts to the next equity round and conversion caps, purchasers of convertible notes are often not sufficiently compensated for the risk they are taking in financing a start-up. Caps are often set at a premium to the company’s value at the time the notes are issued and discounts may not be adequate, especially as the time between the issuance of the notes and the priced equity round increases. Moreover, initial investors are subject to the risk that later investors, who often have greater bargaining power (especially if a company is in dire need of financing), will attempt to renegotiate the terms of the promissory notes to their detriment.
Convertible notes also may not adequately compensate early stage investors to the extent the investors provide resources to the company, such as key customer or supplier introductions, or otherwise add credibility or other value to the company. If the value of the company rises substantially as a result of the investor’s efforts, the investor is ultimately increasing the price they will pay for their own equity in the company, which is clearly a perverse outcome.
What are some of the risks a company that issues convertible promissory notes faces?
Convertible notes work well for start-up companies when the value of the company increases between the time of the debt financing and a preferred stock financing. However, if the value of the company falls, investors who purchased convertible notes may end up owning more equity in the company then the company anticipated at the time of the debt financing. This occurs because the price discount feature often included in the notes enables the investors to purchase equity at a price below what they would have paid at the time they purchased the convertible notes. Moreover, because the purchased equity often contains a liquidation preference, in addition to obtaining a larger equity position in the company at the expense of the founders, investors will also likely obtain an increased preference over the founders to the cash of the company in the event of a sale, dissolution or winding up of the company. Another downside of convertible notes is that, in the event a convertible note is not converted into equity prior to its maturity, investors could demand that the note is repaid with principal and interest, or potentially force the company into bankruptcy if the loans cannot be restructured.
Conclusions
The issuance of convertible promissory notes can be an effective means for start-up companies to raise capital. However, before raising capital through the issuance of promissory notes, investors and companies need to carefully evaluate the risks associated with the issuance of promissory notes in comparison to other financing alternatives.
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Jonathan Friedman discusses how convertible promissory notes often provide a fast and cheap way for start-up companies to raise capital. However, before raising capital through the issuance of promissory notes, companies need to evaluate the potential impact of convertible debt on the company’s future capital structure, and investors need to evaluate whether a straight equity investment is preferable to the purchase of debt. Jonathan’s practice focuses on venture capital and corporate finance, intellectual property licensing, mergers and acquisitions, securities law and general corporate and business matters. Jonathan has represented corporations and other entities in a wide variety of industries, including Internet and e-commerce, apparel, medical devices, entertainment and high technology.
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For more information regarding promissory notes, raising capital, or similar inquiries, please contact Jonathan Friedman at (818) 444-4514 or .
Santa Monica, Calif., November 8, 2012 – Stubbs Alderton & Markiles, LLP, a leading Southern California business law firm, announced today the opening of its Santa Monica office. The firm, already boasting a broad practice representing emerging growth and technology companies, large technology, consumer electronics and internet companies, and entertainment and video game companies, now has a second Los Angeles office to serve the area’s robust and growing technology, digital media and start-up community in Silicon Beach.
Stubbs Alderton & Markiles also announced the launch of its Preccelerator program for startups looking to access accelerators and venture capital. The Preccelerator will offer on a rolling basis 5-6 entrepreneur groups or start-ups free co-working space as well as the ability to leverage the firm’s resources, including access to legal services, business plan reviews and introductions to sources of capital and service providers offering targeted expertise.
“Since founding the firm more than 10 years ago, we have been committed to the growing venture capital and start-up communities in Southern California, and in Silicon Beach specifically,” said Scott Alderton, a founder and managing partner of Stubbs Alderton & Markiles. “As this area continues to foster the growth of startups, accelerators and venture capital firms, we wanted to demonstrate our commitment to Silicon Beach. We believe there is no better way to do that than being there full-time.”
Founded in 2002 by Joe Stubbs, Scott Alderton, Murray Markiles, John McIlvery and Greg Akselrud, Stubbs Alderton has grown to 17 lawyers and possesses a broad practice representing emerging growth and technology companies, middle market public companies, large technology, consumer electronics and internet companies, investors, private equity funds, investment bankers and underwriters, and entertainment and video game companies in all aspects of business formation, corporate transactions, seed and venture capital finance, securities, mergers & acquisitions and internet, mobile and other intellectual property transactions. Partners Joe Stubbs, Scott Alderton, Kevin DeBré, Greg Akselrud and Louis Wharton will have offices in Santa Monica.
The firm understands the business challenges faced by companies and provides contextual representation throughout the growth and life cycle of its clients.
“Our Preccelerator program is not intended to compete with the existing Silicon Beach accelerators that are doing so much for our community, or provide initial funding to startups, “ added Alderton. “Rather, we will provide a platform for them to get interim office space and sophisticated legal services, and to ultimately grow their ideas from business concept to funded startup. We hope that the platform will allow entrepreneurs a streamlined transition to an accelerator program, financing or to otherwise launch their businesses.”
For more information, or to apply to the Preccelerator program, visit our Preccelerator site.
About Stubbs Alderton & Markiles
Stubbs Alderton & Markiles, LLP is a business law firm with robust corporate, public securities, mergers and acquisitions and intellectual property practice groups focusing on the representation of venture backed emerging growth companies, middle market public companies, large technology and internet companies, entertainment, video games and digital media companies, investors, venture capital funds, investment bankers and underwriters. The firm’s clients represent the full spectrum of Southern California business with a concentration in the technology, entertainment, video games, apparel, consumer electronics and medical device sectors. The firm’s mission is to provide technically excellent legal services in a consistent, highly-responsive and service-oriented manner with an entrepreneurial and practical business perspective. These principles are the hallmarks of the firm.
V. Joseph Stubbs is a founder and partner of the firm and co-chair of the Venture Capital and Emerging Growth Practice Group. Joe practices in the areas of corporate and securities law, emphasizing the corporate representation of both publicly-held and privately-held growth and middle-market companies, venture capital firms, angel investment groups and investment banks. He acts as outside general counsel to numerous emerging growth and technology companies, advising on a wide range of legal and strategic issues at each stage of a company’s evolutionary path.
Scott Alderton is a founder and partner of the firm, and co-chair of the Venture Capital and Emerging Growth Practice Group. Scott is a corporate and technology lawyer who focuses exclusively on advising middle-market, technology, emerging growth, and development stage companies in the areas of corporate and securities, mergers and acquisitions, high technology, business, licensing, intellectual property, the Internet and multimedia.
Kevin DeBré is chair of the firm’s Intellectual Property Group and advises entrepreneurs and companies engaged in building businesses based upon technology or intellectual property assets and he has particular expertise in structuring and negotiating intellectual property-driven deals. A business lawyer, a registered patent lawyer and a former engineer, Kevin handles a wide range of transactions, develops IP protection strategies and advises management teams on compliance with privacy and data security laws and regulations.
Greg Akselrud is a founder and partner of the firm and chair of the firm’s Internet, New Media and Entertainment practice group. Greg acts as outside general counsel to entertainment, Internet, apparel, digital media and other technology companies in a variety of corporate, financing and transactional matters; serves as strategic counsel to clients, representing their interests in investment transactions, joint ventures and mergers and acquisitions; and serves as primary counsel to publicly-held companies, providing advice on all aspects of their business activities, securities filings and public and private offerings.
Louis A. Wharton is a partner of the firm. Louis’ practice focuses on advising startup, emerging growth and middle market companies across a spectrum of industries in securities compliance, corporate finance, mergers and acquisitions and general corporate matters. He counsels clients in the technology, internet/e-commerce, pharmaceutical, apparel and entertainment industries, among others.
Contact:
Heidi Hubbeling
Director of Marketing
(818) 444-4526
Stubbs Alderton & Markiles, LLP – Office Locations
Santa Monica
1453 3rd Street Promenade
Suite 310
Santa Monica, CA 90401
Sherman Oaks
15260 Ventura Blvd.
20th Floor
Sherman Oaks, CA 91403