Stubbs Alderton & Markiles and the Preccelerator Program are proud to announce the launch of their Startup Superhero Video Series - featuring SA&M Attorneys, Preccelerator Mentors, and entrepreneurs on topics specific to entrepreneurship and lessons learned throughout the journey.

This week we're featuring Preccelerator Mentor Christine Perakis as she chats about "Three Essential Strategies for Small Business Success."

Christine Perakis has been a lawyer, business adviser, entrepreneur, C-Suite executive, adj professor, and professional boat captain, navigating myriad transactions and businesses across 5 continents.  Her work, expertise and interests have taken her beyond a lucrative legal practice in the entertainment industry over a couple of decades. Christine has run or been a part of a management team in 10 businesses, growing, expanding and achieving results beyond the expectations of all involved. The most recent role being as a COO in a company that went from a 100% equity funded startup to a $10 million/year business in 4 years.

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Transcript

Heidi:  What are three mistakes that you see entrepreneurs make when they are first starting out?

Christine:   Well, when we get started, we’re coming up with an idea that we get so excited about. That we end up talking about the features of it way more, then we focus on the benefits to the client. We need to get inside the head of our ideal target audience and understand what is the number one problem they have that they don’t want and the number one result that they want and don’t have and then we can start talking to them. The second thing is to be aware we are on a buyer’s journey. Most of us don’t have a 50-million-dollar branding budget like some of the big brands that we know about and these days with all the information that comes out at us it takes 20-100 touch points to get people’s attention. So, we want to be able to first recognize that we are on a journey. Knowing that 99% of our target audience, are future buyers and less than 1% are now buyers. We want to take them along that journey, using something I call the conversion equation. You want to get their attention with an interrupt, engage with them, educate them and then be able to make an offer. The third thing is to think strategically. Most people will employ tactical marketing. They throw a bunch of tactics at the wall and hope that something sticks. Rather than, recognizing that if they think strategically their marketing is going to be more effective. So, they don’t want to do anything that isn’t something that their target audience wants.

Heidi: So, to achieve success what are the 5 main areas that a startup or an entrepreneur should focus on?

Christine:  Most of us are familiar with the 80/20 rule, Pareto’s law, right? 80% of our outcomes come from 20% of our efforts. So, that overwhelming job of a small business owner really can be reduced down to five basic steps. Something, I call the five-step profit formula.  Small business owners focus on lead generation, lead conversion, transactions, pricing and profitability.  They will achieve exponential results. They really only have to make incremental changes to get there. I have something I call the profit acceleration software that will show you, by plugging in some numbers, how small changes in these 5 areas only, will create exponential success.

Heidi:  All very important things, so what is one thing that every entrepreneur should know before they start their business?

Christine:  Well, I think Simon Sinek said it best in his book “Start with Why.”  Know your why. He knew that Steve Jobs, Wright Brothers and Martin Luther King had very little in common, but they understood one thing; which is people don’t engage with a product, service, movement, or an idea unless they know your why. We want to get people to invest in us, to buy from us, to work for us and follow us, we have to know our why.  You have sat in many rooms with investors as have I and you have heard time and time again we don’t invest in a product or service, we invest in the people. What they’re really investing is people who know their why. That’s how we get investors, our partners, with our clients, our customers, they want to know. They’ll buy from you if they really want to understand your why and your team. These days the millennial workforces are a growing resource that we have these days and they are committed to knowing their why. They don’t want to do anything without knowing they why. You have to enroll them in your why to get them to work hard for you and then they will. Finally, you need to know your why, most importantly because it gets you through the obstacles and challenges that come up in your business all the time. Keeping your eye on that outcome the benefit, the reason for being that you have and why you’re invested in doing. So, there’s that and when you’re in the early goal setting stages, creating your vision, you have your why as a corner stone for the goals that you create. Once you know that your subconscious can start working to achieve that outcome. The goals in it of themselves aren’t as meaningful as knowing that you’re going to get to where you need to go.

Heidi:  Absolutely, the “why me” and the “why now” - also knowing why this is the right time in the market. Both of those are so important for young companies before they get started.

Christine:  That’s right it’s not about widgets. It’s about what you’re going to get for yourself and what they are going to get for themselves.

Heidi: Well, thank you very much it was great to have you here.

Christine Perakis
www.christineperakis.com

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To learn more about the Preccelerator Program, contact Heidi Hubbeling at .

[vc_row type="in_container" full_screen_row_position="middle" scene_position="center" text_color="dark" text_align="left" overlay_strength="0.3" shape_divider_position="bottom"][vc_column column_padding="no-extra-padding" column_padding_position="all" background_color_opacity="1" background_hover_color_opacity="1" column_shadow="none" column_border_radius="none" width="1/1" tablet_text_alignment="default" phone_text_alignment="default" column_border_width="none" column_border_style="solid"][vc_column_text]LOS ANGELES, Calif., November 28, 2017 (Newswire.com) -  The Preccelerator® Program, a Santa Monica, California-based accelerator program for early- stage startup companies in the digital media and technology space, announced today that it has added its eighth class of companies featuring four innovative startups.

In 2012 Stubbs Alderton & Markiles launched the first-of-its- kind Preccelerator® Program to provide select start-ups with co-working space, mentorship, sophisticated legal services, curriculum and access to a strategic perks portfolio with the objective of helping grow a founder’s idea from business concept to a funded company. Over the past five years, 34 companies have graduated the Program, of which 20 have received funding totaling over $9M.

Preccelerator® Program Class 8 companies include:

Boomer Returns – Boomer is an ecommerce return platform that brings returns to your front door. The company's goal is to eliminate the pain points in the return process where they hurt online shoppers the most. If you need clothing or accessories returned, you no longer have to leave your home. Instead, you can use Boomer and a reliable person will be at your door within an hour to handle your returns for you. The company is founded by Pat Bauer and Ben Grabow.

Best Food Trucks - Best Food Trucks (BFT) is the largest food truck platform in the U.S., with over 500 trucks booking lots nationwide. BFT is reinventing the office lunch experience, by providing business parks & office buildings with all the logistics of setting up food trucks, booking, and (coming soon) the ability to skip the line and order ahead from your phone. The company is founded by Matt Geller and Kevin Davis.

Lumenus – Lumenus is an IoT safety company, building a Hardware/Software platform using the Internet of Things to provide real-time safety alerts and create actionable insights for both consumers (bike/run/motorcycle) as well as industrial usage (high-risk vocational workers). They license their technology out to existing companies to scale the operation across industries and use-cases. They are currently in production with Timbuk2 on a backpack ‘Powered by Lumenus’ launching Spring 2018. The company is founded by Jeremy Wall.

BluAtom VR – BluAtom VR is a provider of a next-generation motion and haptic game controllers for virtual and augmented reality entertainment and training applications — It effectively turns any player’s body into a game controller. The BluAtom system comes with a wireless motion vest, hand controller and network hub to detect as well as enhance the user’s movements for a more natural and immersive virtual reality experience. The system is plug and play, no special device driver is required. The BluAtom VR founding team are Steve Kearsley,  Dean Shipley, Farzad Ahmadkhanlou, Sean Sharifian, and Mark Thimmig and Sean Lee.

For more information about the Preccelerator® Program, visit www.preccelerator.com.

About Stubbs Alderton & Markiles, LLP

Stubbs Alderton & Markiles, LLP is a Southern California-based business law firm with robust corporate, public securities, mergers and acquisitions, entertainment, intellectual property, brand protection and business litigation practice groups focusing on the representation of, among others, 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 a broad range of industries with a concentration in the technology, entertainment, videogame, apparel 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. For more information, visit https://stubbsalderton.com.

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, sophisticated legal services, education,  networking, mentorship and $250,000 in usable perks from Google Cloud for Startups, Amazon Web Services, and HubSpot among others, with the objective of helping grow a founder’s idea from business concept to funded startup. The program also retains more than 50 active strategic mentors providing free office hours and discounted services, and provides over 50-plus educational workshops and networking events each year. The Program expanded in 2017 to accept a greater number of companies in more formalized classes, depending upon where the companies are in their evolutionary growth, expand benefits to accepted companies, and will look to make strategic investments backed by strategic angel investors. To apply to the Preccelerator, visit www.preccelerator.com/application.

Contact:

Heidi Hubbeling
Chief Operating Officer, Preccelerator® Program

310-746-9803[/vc_column_text][/vc_column][/vc_row]

Stubbs Alderton & Markiles and the Preccelerator Program are proud to announce the launch of their Startup Superhero Video Series - featuring SA&M Attorneys, Preccelerator Mentors, and entrepreneurs on topics specific to entrepreneurship and lessons learned throughout the journey.

This week we're featuring Preccelerator Mentor Chris Bechtel of Growth Engine Labs as he chats about "Driving Growth for Early-Stage Startups."  Chris is a growth consultant, start-up advisor, customer acquisition and sales coach, former SaaS CEO, and marketing executive. Chris brings 20 years of sales and marketing expertise, specializing in demand generation, marketing automation, pipeline optimization, content marketing, and sales technologies. Chris has extensive experience in B2B, internet and SaaS technologies working with start-ups, growth stage organizations and brands to maximize the results of their digital marketing, PR and revenue generation activities through the use of content and technology.

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Transcript

Heidi: What do you think is the most important thing for driving growth for early stage companies?

 Chris: I think really, the most important thing is really the market. Being in the right section of the market, really focused on customer needs. I think that most start-ups, start with a hypothesis. It usually comes from personal experience, but people often forget there’s many potential buyers of that start-up’s initial idea. There’s a problem, there’s a pain that needs to be solved and think sort of the biggest barrier is not really focusing on the right growth segment within that market. So, I think first and foremost it’s about making sure you’re in a strong market, where the customer’s segments under served. I think then it’s really about that focus. It’s really about focusing on the right section of the market, really understanding who you are marketing to and that’s really going to dictate the value proposition to use and what channels you use to acquire them.

 Heidi: Going back to barriers, talk about the most common barrier to early stage success.

 Chris: I think really the same it’s about focus. With every entrepreneur, it’s both a blessing and a curse to have that creative mind. To be able to come up with unique solutions to common problems. But, then the barrier often comes from overthinking and questioning all those ideas and then not actually being able to focus because essentially every start-up is a hypothesis and then when it comes to marketing that hypothesis those are also a set of hypotheses. The key is focusing and prioritizing a series of tests.

 Heidi: For early stage start-up, how do you find the right people to surround them with to provide attraction and growth.

 Chris: I think that’s a great question, and one that often many founders struggle with.  In terms, of how do I have a co-founder, who’s my initial founding team?  A lot of it starts with what’s the stage that you’re in? What kinds of people? Do you have people, you know, if you’re already at product market fit and you need people to scale? You will need people who have had experience really scaling. In the early days, you needed people who could do many things and are willing to do many things and are able to then also focus on those core things and get us to the next stage of validating product market fit and identifying the actual acquisition channels that are going to help us get to that next stage. Hopefully get some more capital to start scaling.

Heidi: Finally, what’s your favorite thing about being a mentor here at the Preccelerator? What drove you to join us?

 Chris: Well, first of all it’s a great community. There’s great people here and I just really love helping people. That’s why I do what I do I think and helping people get clarity. Because people have so much passion, but it’s hard, it’s really, really hard. So, I love the joy in people’s face when they sort of get clarity, at least what I’m supposed to focus on for the next week or two and get unstuck. I think that’s really what I enjoy the most about being here at Stubbs.

 Heidi: Yeah, community and that sense of empathy, among advisors, mentors, and other entrepreneurs that are advising. It’s been really important and greatly beneficial. Thank you for being here.

Chris Bechtel
Growth Engine Labs

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To learn more about the Preccelerator Program, contact Heidi Hubbeling at .

Stubbs Alderton & Markiles and the Preccelerator Program are proud to announce the launch of their Startup Superhero Video Series - featuring SA&M Attorneys, Preccelerator Mentors, and entrepreneurs on topics specific to entrepreneurship and lessons learned throughout the journey.

This week we're featuring Preccelerator Mentor Jonathan Tavss of Kaleidoko, Inc. as he chats about "Utilizing Mentorship." Jonathan Tavss is an award-winning entrepreneur, marketer, strategist, and content creator with more than two decades of experience leading content creation, distribution, product development and global marketing for international entertainment studios, Media firms, CPG brands and service corporations.

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Transcript

Heidi: Jonathan, what do you see being the most important benefit to the Preccelerator companies in regards to mentorship? 

Jonathan: I guess the one that just sticks out the most is connections. Right?  It gives you resources that you might not otherwise have. What I have seen, are the companies that really succeed, are the ones that take advantage. It’s almost like a secret thing, the fact that there’s so many mentors here, there’s so many people that you can call upon. That in and of itself is something that people aren’t used to.  A. having the people to talk to and, B. knowing what to ask of them. It’s interesting because in success you will have a lot of people coming in wanting to be an advisor. Can I be on your board? Wanting to do all that kind of stuff and in this secure environment you can work with different advisors on different things, even advisors that do similar things to each other, to really get a sense of how you are going to work best with them.

Heidi: With your personal background, with your professional background what perspectives do you bring as a mentor 

Jonathan: I think it really is tied to what Kaleidoko is all about, which is to brand holistically. How you position, but it’s not just about the marketing. It’s how you set up your company to be able to deal with change that is constant. With Kaleidoko we usually work with later stage companies and so it’s a matter of going in and seeing what fundamental bricks were not placed as they were rushed to deliver to clients’ needs. We go in with that fresh look we really fill in those bricks. What I deal with for these participating companies is to help them be mindful of those fundamental pieces that you need to be able to set up for your company so that you can be successful moving forward into the future. 

Heidi: If you could give one piece of advice to the companies based on your breath of experience, what would that be? 

Jonathan: I think it would be to have your eye’s wide open all the time. As a founder you’re really heads down, running that sprint to get to where you’re trying to go. You have got to keep your eyes open to see what’s happening culturally, what’s happening technologically. Mentors, advisors, board members, or employees will come up with different ideas. So, it’s a matter of really capturing that. Also, something that I find interesting; there’s a lot of companies out there that set off to do a certain thing and as they were developing that certain thing. They found, this pot of gold, that they were just creating to help them deliver, what they thought was a value, but the real value is over here. So, not that you’re trying to go right, left, all over the place. What you want to be doing is to be able to keep your eyes open. What is that IP? What is that certain thing that might be a different direction, but that might be your real winner?

Heidi: One last question. What is your favorite thing about being a mentor at the Preccelerator. What does it give to you?

Jonathan: I got involved because I really wanted to find a way to give back. Being that I am also a university professor you know I have always just been of the "how can I help other people" mindset. This was just a great opportunity to be able to do so and meet a lot of really great people. Both on the company side and the mentor side. There’s some really strong participants all over the place. That’s why I was really excited to be a part of it.

Heidi: Very much appreciate you.

Jonathan: Thanks.

Jonathan Tavss
Kaleidoko, Inc.
www.kaleidoko.com 

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To learn more about the Preccelerator Program, contact Heidi Hubbeling at .

SA&M Preccelerator Company nēdl, an app that allows radio listeners to use speech recognition to eliminate the need to go station-to-station to find specific news, sports, talk and music, has been named among the 12 finalists for the PILOT Innovation Challenge. PILOT is an innovation initiative of the National Association of Broadcasters (NAB). The PILOT Innovation Challenge recognizes creative ideas that leverage technological advances in the production, distribution and display of engaging content.

To read the full press release visit here.

About nēdl  
nēdl uses proprietary Speech Recognition to let you search within 100,000+ live news, sports, talk, and music broadcast streams to find what you want and listen to the stream or add your unique voice to the global real-time database for instant discovery. Visit www.findnedl.com

To learn more about the Preccelerator® Program, contact Heidi Hubbeling, COO at (310) 746-9803 or

Stubbs Alderton & Markiles and the Preccelerator Program are proud to announce the launch of their Startup Superhero Video Series - featuring SA&M Attorneys, Preccelerator Mentors, and entrepreneurs on topics specific to entrepreneurship and lessons learned throughout the journey.

This week we're featuring SA&M Managing Partner Scott Alderton as he chats about "How to Position Your Company for Financing."  Scott is the Co-Chair of the Venture Capital & Emerging Growth practice at Stubbs Alderton, General Partner of SAM CREATV Ventures, and a thought leader in the startup financing space.

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Transcript

Heidi: Tell me a little bit about your practice and experience and what you love most about working with emerging growth companies?

Scott: Sure, I have been doing this for a long time. My practice is broad-ranging. Early on in my career, I was more of a corporate & securities lawyer doing traditional SEC type of work with larger companies. As this thing called the “Internet” began to develop in the '90s, it looked like it was interesting, I transitioned my practice to being more of a technology and venture capital lawyer. I really like working with companies all along their evolutionary path, but I really like working with early-stage companies. They have diverse, wide-ranging needs, they typically don’t have the resources that large companies have. I feel like I can play a vital role as an advisor even more-so than a lawyer. The lawyering part is the easy job to me, the advising part is really the fun part.

Heidi: Let’s talk a little bit about emerging growth companies and how they approach financing. What are some of the things an early stage company should be thinking about when they are going for funding. If they are really early, how do they attract investors?

Scott: I think it's really a couple of things. The first thing that every company needs to do is to decide what its vision is and what kind of company it's going to be. Venture capital is not right for every company and there’s lots of different ways to fund your businesses. The overwhelming majority of businesses do not get funded with venture capital. Venture capital is a way of financing a business through its growth stage. When it has a proven product, when it's found its market and when it now needs to scale and grow. That’s when venture capital comes in and helps a company do that, but to get to that point is challenging. First you need to decide; am I a company that is going to require venture capital and am I company that is going to address a large scaling market, be disruptive, grow to be very large? That’s a venture fundable business.  Through the early stage, the second thing you need to figure out is  - how am I going to get to the point where professional investors are going to be interested in me? Professional investors are not going to be interested in every company like I said they are going to be interested in companies where they can apply their capital, grow and scale the business.

Heidi: As far as some of the tips that you would give to them, for them to actually attract investors - where do they look for them? Are warm introductions the best thing? What are some of the tactics?

Scott: First of all, don’t look too early. Understand that if you are really going out and seeking traditional, professional investment that you are going to have to have some metrics. You’re going to have to have at least a MVP of a product, you’re going to find a market where that product is being accepted. You are growing and scaling a business in that market. Whether its users or customers - whatever it is - you have to get to that stage first. How do you get to that stage? Well, you get to that stage by raising money from friends and family, from people who know you. From people that are going to invest in you, because you’re the entrepreneur. They believe in you. Relatives, friends, strategic business partners. A second way to look at that is for people who ultimately will be interested in your product, even though you have no metrics or proof of your product today. They will invest in you because they want your product to hit the market. Might be a strategic investment. Figure out a way - come hook or crook-  to raise that initial capital to where you can develop your product. Find a market place and the other doors will open.

Heidi: From a legal and business stand-point, how do they best position themselves?

Scott: Early stage companies by necessity cut corners, right? You don’t have resources. You’re boot strapping. You’re making promises that you can’t fully document. You can’t always afford lawyers or professional advisers and that’s fine. Do not second guess any of that. You got to where you are, but when you reach that point where you are now ready to go out and find professional capital, it's important to look internally first. That you look at yourself, do the same kind of diligence with yourself that an investor is going to do on you. That way there are no surprises. Figure out capital issues and fix them. Figure out your employment issues and fix them. Figure out your commercial contracts that you have done on a whim and fix them. So that investors don’t look at you and think good concept, but I am not going to take all this risk.

Heidi: There’s another topic that startups tend to think a lot about but aren't typically fully  educated on - how should they approach valuation and dilution?

Scott: I think that people get hung up on valuation because they have some number set in their mind or they have some experience that they talk about with other entrepreneurs. They think they either have to hang on to a certain percentage of their business or it’s not appropriate to give a certain amount at a certain round. You have to come into a financial transaction with an open mind and understand not just what you’re selling and what you have to give up for that. Also, where you are going and where that money is going to take you? I see entrepreneurs being penny wise and a pound foolish all the time. They think they don’t want to be significantly diluted. They end up throwing a wrench in the negotiation  or they loose a financing deal because they want to hang on to a few points of equity. In reality that money is going to take them so far that they are going to be vast and more valuable. Its a simple proposition of - there’s a pie and you want a piece of that pie. It's much better to own a smaller piece of a gigantic pie than it is to own a big piece of a small pie.

Heidi: Appreciate you for being here and I’m sure we will have you back for other topics some time soon.

Scott: Thanks, looking forward to it.

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To learn more about our Venture Capital & Emerging Growth Practice, contact Scott Alderton at .

In this two-part series, Kelly Laffey discusses the legal pitfalls that startups can avoid when forming their company. Kelly counsels clients on issues related to corporate governance, mergers and acquisitions matters, and securities regulation and compliance. She also assists with financing for large private corporations, and entity formation and succession planning for professional services firms. Kelly provides general business counseling on a variety of up-and-coming regulatory issues for small and emerging companies that offer commercial services, allowing them to explore new business opportunities in various states. 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.

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In Part 1 of this series, I described some typical legal problems that startup companies face when they try to go it alone in the early stages of their business-related to the choice of entity form and jurisdiction and common issues that arise with respect to the division of equity.  In part 2, I discuss issues related to securities laws and intellectual property and finally offer some words of advice regarding how to manage the costs of hiring an attorney early on.

Compliance with Securities Laws

Any issuance of securities, meaning stock, LLC interests, options, warrants, convertible notes, convertible securities (or SAFEs) and more, will be subject to federal and state securities laws.  Startup companies often need to find an exemption to the registration requirements of federal securities laws until they are ready to go public.  Securities law is a large and complex subject that really requires a good corporate attorney to help explain those obligations relevant to a particular company in a particular given circumstance.  Failure to comply with securities laws can result in a huge financial burden on the company, the founders and recipients of equity, including employees and investors, when fines are imposed or the recipients are forced to pay a much higher price for the equity than what was intended.  An experienced securities practitioner can help you find the right exemption and implement the right process to avoid fines and adverse consequences.

Protecting Your Intellectual Property and Employment Issues

It is critical to have proper employment documentation in place and such documentation should properly protect the company’s intellectual property.  Typical employment agreements include “at-will” offer letters, independent contractor agreements, consultant or advisor agreements and stock incentive award documents.  Employment laws vary from state to state so depending on what state you’re in, you may need to include specific provisions to comply with applicable state law. One of the most important employment documents which every employee (including co-founders) should sign is a proprietary or confidential information and inventions assignment agreement.  This document ensures the company’s confidential information will remain confidential and that any ideas, work product or deliverables created by the company’s employees while working for the company will be owned by the company.  These agreements generally prevent key employees who have developed significant intellectual property for the company from claiming rights in such intellectual property in the event that they leave.

Trying To Do It Yourself

For the reasons stated above and many more, one of the biggest mistakes a company can make is trying to do the legal formation work on their own or with an inexperienced legal service provider.  All of the mistakes described above are correctable but correcting them takes time and can incur greater cost than getting professional advice from the beginning.  Many firms have very reasonable startup packages for early-stage companies that include both forming the company properly and providing a suite of documents covering most, if not all, of the above issues for the company’s use, for a very reasonable flat fee.  These packages are designed to get the company started and provide you with the basic forms of agreements you need to be protected.  Once these are put in place, the company is unlikely to incur significant legal costs until it raises capital or undergoes another significant event.  While a startup package fee may still seem like a significant amount of money to spend in a company’s early stages, the value is immeasurable over the life and success of the business.

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For more information about startup legal pitfalls, Startup Formation, and other emerging growth issues, contact Kelly Laffey at .

For more information on the Preccelerator, SA&M's early-stage accelerator, visit https://preccelerator.com/

In this two-part series, Kelly Laffey discusses the legal pitfalls that startups can avoid when forming their company. Kelly counsels clients on issues related to corporate governance, mergers and acquisitions matters, and securities regulation and compliance. She also assists with financing for large private corporations, and entity formation and succession planning for professional services firms. Kelly provides general business counseling on a variety of up-and-coming regulatory issues for small and emerging companies that offer commercial services, allowing them to explore new business opportunities in various states. 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.

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In my practice as a corporate attorney, I work primarily with startup and emerging growth companies.  This article may read similar to an advertisement for legal services and there may be some truth to that.  My ultimate goal as an attorney, however, is to save startup companies time and money (and stress) in the long run by doing things right from the start which will allow the company to put more resources to work on growing the business rather than fixing mistakes that could have easily been avoided.

Attorneys are often brought it in to work with clients who have done a significant amount of the formation and organization work themselves or through an online legal service provider at a low cost.  While it is certainly understandable that a very early stage company does not want to incur more legal cost than it has to, what seem like very minor issues to founder can lead to a lot of unnecessary clean-up work and time spent determining the best way to fix those issues including if and how to disclose them to potential investors, strategic partners or others that are critical to the business.

The unfortunate fact is that errors in company formation usually come to light when a company is about to engage in its first major financing or strategic transaction and potential investors or strategic partners start doing their “due diligence” on the company, i.e., looking into its formation documents, the founder agreements, employment agreements, etc.  This is often a critical time for the company as the founders have begun conversations with potential investors or a strategic partner, built momentum and are usually geared to start scaling the business. When the problem areas are identified and those activities are put on hold, it can cause a panic at the company, requiring lawyers to address the errors on a tight timeline in order to minimize the damage and not lose momentum. The result is typically a very high legal bill for a financing or strategic transaction.

In this two-part series, I describe some common legal issues encountered by startups that are not properly considered without legal counsel and which, when thoughtfully discussed with legal counsel prior to forming the company, should spare the company from legal expenses for corrective measures.

Choosing the right entity AND the right jurisdiction for you.

One of the first decisions a new company has to make is what legal entity form to take.  There are without a doubt dozens of articles that say you should be a C-corp for these reasons or you should be an LLC for those reasons.  Maybe you’ve read or know something about S-corps and you think that sounds like a good idea.  The reality is that the right entity form for your company is very specific to the facts and circumstances of your company.  Factors we consider include, among others: How many founders are there? How many employees will the company have? Will the company raise money from VCs or angels (and if so, does it expect to do so right away or will that be much further in the future of the company)? What is the anticipated size of the business? In what industry does the business operate? What might make the most sense now might not serve as the best form later and the form of entity can generally be changed later if necessary.  These are all factors a good lawyer or tax advisor can talk through with a new business and provide guidance regarding which options to select based on the company’s business plans.

The less often thought about issue is where to form the company.  As a lawyer practicing in what’s been termed “Silicon Beach,” most of our clients are based in California and so many assume they should organize or incorporate in California.  For some companies, being formed in California is perfectly fine, however, California can also be problematic for a number of reasons.  Many outside investors do not like to invest in California entities because California does not have the established corporate jurisprudence that Delaware has and so there is an element of unpredictability in California.  Companies will often be advised to incorporate in Delaware because Delaware corporate law is seen as both business and investor friendly.  However, if a company incorporates in Delaware, it has to engage a registered agent located in Delaware and so for some companies, it does not always make sense to pay the registered agent fees. Other factors to consider when choosing a jurisdiction are filing fees, franchise taxes and required annual filings. These are all considerations a corporate lawyer can help startups navigate.

Division of Ownership; Dilution and Vesting.

This can be an awkward conversation amongst founders but it is an important conversation to have early on in the life of the business.  How much of the company should each founder own? What is each founder bringing to the company in terms of skills, resources and service and how do we value what each founder adds? How much dilution are the founders willing to endure and from which sources, i.e., outside investors, an employee option or stock pool, venture debt transactions, etc.? Should the equity be subject to vesting and continued service to the company?

I’ve often encountered very early-stage clients who have 2 to 3 initial founders and they have already diluted themselves by giving away equity such that together, they own less than half of the company.  Founders are so passionate and focused on developing the idea and growing the business, they don’t necessarily have good insight when it comes to managing the cap table.  Further, I’ve seen companies provide equity grants to service providers or intended partners of the business without subjecting the grants to vesting or continued service to the company over time.  We typically recommend that all service-related equity vest over a certain number of years to ensure the company is getting the intended value in exchange for that equity.

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For more information about Startup Formation and other legal pitfalls for startups, contact Kelly Laffey at .  Stay tuned for Part II of the Startup Pitfalls Series on Monday, October 16th.

For more information on the Preccelerator, SA&M's early-stage accelerator, visit https://preccelerator.com/

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SAM client HouseCanary, the leading data analytics and valuation platform for real estate professionals, announced it has closed a $31 million series B funding round, bringing the company’s total funding to $64 million to date.  Investors in the round include PSP Growth, the venture and growth equity arm of PSP Capital, a private investment firm founded by entrepreneur and former Commerce Secretary Penny Pritzker, as well as Alpha Edison and other existing investors.

Stubbs Alderton & Markiles, LLP attorneys representing HouseCanary in the transaction were Greg Akselrud and Adam Bagley.

To read the full press release on the financing, click here.

About HouseCanary

Founded in 2014, HouseCanary's mission is to help people make better real estate decisions. Built on a foundation of great data, powerful models and predictive analytics, the HouseCanary platform aggregates millions of data elements, including more than four decades of property data and a rapidly expanding arsenal of proprietary data calculations and analytics, to accurately define and forecast values and market influences. HouseCanary's Series A investors include Hillspire (Alphabet Executive Chairman Eric Schmidt's family office), Alpha Edison, ECA Ventures, Raven Ventures and other top investors including Egon Durban and Nikesh Arora. The company is headquartered in San Francisco. For more information, visit www.housecanary.com.

About Stubbs Alderton & Markiles, LLP

Stubbs Alderton & Markiles, LLP is a business law firm with robust corporate, public securities, mergers and acquisitions, entertainment, intellectual property, brand protection and business litigation practice groups focusing on the representation of, among others, 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. Stubbs Alderton’s clients represent the full spectrum of Southern California business with a concentration in the technology, entertainment, videogame, apparel and medical device sectors. Our 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 our Firm. For more information, visit www.stubbsalderton.com

There are more than $25 trillion dollars in U.S. pension plan assets as of December 31, 2016.[1]  To a company (for purposes of this article the entity seeking pension plan investment is referred to as the “Company”) seeking investment capital, pension plans may be important potential investors.  This blog article identifies two important considerations when seeking pension plan investment:  1.  Will the assets of the Company be considered “plan assets”? and 2. Will an investment in the Company result in an income tax liability for the investing plan?

PLAN ASSETS:    The first hurdle is whether the Company’s assets will be considered “plan assets” and what are the implications if the Company’s assets are regarded as plan asset?  The general rule is in general that a portion of the Company’s assets will be treated as plan assets in percentage that pension plan investment bears to all investment.[2]  As having the Company’s assets treated as plan assets turns the Company’s management into plan fiduciaries, plan asset treatment is to be avoided.  To avoid a portion of its assets being treated as plan assets of the investing plans, the Company must meet one of the exceptions listed in the plan asset regulation.[3]

1.  Debt. The plan asset regulation applies to equity and equity-participating debt instruments.  Straight debt is not subject to the plan asset regulation.[4]  Convertible debt is only treated as equity on conversion unless the conversion feature is more than an incidental feature of the debt instrument[5].   Relying on the determination that the conversion right in a debt instrument is “incidental” would be risky.
2. Publicly offered security. The plan asset regulation exempts a class of security that is sold to the public under a registration statement effective under the Securities Act of 1933[6] and that is registered under Section 12(b) or 12(g) of the 1934 Act within 120 days after the end of the fiscal year in which the registration statement was declared effective.[7]  To avoid manipulation of this exception, a publicly offered security must have a minimum investment of $10,000 or less and be held by 100 or more investors independent of the Company.[8]
3. Operating company. The plan asset regulation exempts equity securities issued by an “operating company”.  The plan asset regulation gives no helpful guidance on what would constitute an “operating company.”[9]  Instead, the plan asset regulation offers two safe harbors, for a venture capital operating company[10] and for a real estate operating company[11].   A venture capital operating company is a company 50% or more of whose assets are securities of companies in which the company obtains and actually exercises management rights.[12]  A real estate operating company is a company 50% or more of whose assets consist of real estate that the company manages and develops.[13]  Real estate that is net leased on a long term basis is not considered “managed” for purposes of qualifying for the real estate operating company safe harbor.[14]  On the other hand, where the Company has the obligation to maintain and operate the real estate and hires a manager on a short term basis, the Company may still be a real estate operating company.[15]
4. No significant participation. Probably the most relied on exception from the plan asset rules is the no significant participation exception, meaning that at all times pension plans hold less than 25% of the value of any class of equity interest in the Company.[16]  Investment in the Company’s securities by the Company’s sponsor or managers is ignored.  The effect of that computational rule is to make it harder to meet the test for not significant participation.  If the Company raises $1,000,000 in capital, $200,000 from a pension plan and $200,000 from management, the pension plan’s investment will be 25% (200,000/800,000), with the investment by management being excluded from the calculation.  On the other hand, if a manager were to invest through his IRA or 401K, that investment would be included in the aggregate pension plan investment in the Company.[17
5. Tax implications of plan asset treatment. If the assets of the Company are treated as pension plan assets—because none of the exemptions in the plan assets regulation has been met—the managers of the Company will be deemed fiduciaries[18] of the plan assets under management. Use of the plan assets to benefit the Company’s managers would be susceptible of being treated as a prohibited transaction, with the Company’s managers potentially liable for a 15% penalty excise tax imposed on the investment.[19]  That tax rate jumps to 100% of the amount involved if the transaction is not reversed by the time the IRS issues a notice of deficiency to the fiduciaries with respect to the prohibited transactions.[20]
6. ERISA Fiduciary implications of plan assets treatment. Section 406 of the Employee Retirement Income Security Act of 1974 (“ERISA”)[21] creates a civil cause of action against plan fiduciaries and in appropriate cases against non-fiduciaries who are “parties in interest.”[22] If a plan suffers an economic loss in a transaction that involved a prohibited transaction, the fiduciaries can expect to be required to personally restore those losses.  With that understanding, no entrepreneur should want pension plan investors without assurance that the entrepreneur will not be a fiduciary to the pension plan investors, meaning management of the Company should be motivated to avoid plan asset treatment.

UNRELATED BUSINESS INCOME.  Another issue for pension plan investors, completely apart from the prohibited transactions discussed above, is the determination of whether an investment in a Company will generate unrelated business income (“UBI”)[23] for the pension plan or exempt organization investor.  As noted above, an operating company is not subject to plan asset treatment, but an operating company may well generate unrelated business income.[24]  Income from a business that an exempt organization or pension plan operates or invests in is treated as UBI.  UBI less allowable deductions results in unrelated business taxable income, upon which the unrelated business income tax is imposed[25].

Income from dividends, interest, royalties, rents and capital gains are excluded from UBI[26].  Rents of personal property and rents based on the income or profits of any person are includible in UBI.[27]   A portion of dividends, interest, royalties, rents and capital gains derived from debt-financed property will be included in UBI.[28]

The allocation of net profits to an investing pension plan by a limited liability company (“LLC”) or other partnership that itself conducts an operating business will be treated as UBI to the investing Plan.[29]  A plan really has three choices when considering an investment, (a) avoid an investment in an active business through a pass-through entity like an LLC, (b) invest in an active business through a pass-through entity and pay the tax on the UBI, or (c) form a wholly-owned C corporation to hold the interest in the operating LLC (generally known as a blocker corporation).  Where a sponsor is promoting an investing in an operating business through a pass-through entity, the sponsor itself may form the blocker corporation through which plans, exempt organizations and foreign taxpayers may invest.

As a general rule, the purchase of an interest in an investment that would otherwise be exempt from UBI, for instance because it generates royalties, dividend, interest or rents, by incurring debt or buying subject to debt will cause a portion of the income to be taxed as UBI.[30]  The determination that an investment constitutes “debt financed property” that will cause a portion[31] of the income from the investment to be UBI can be made at the investing plan level and at the investment level.  For example, if a plan borrows to buy a corporate bond, a portion of the interest from that bond will debt-financed property.  In addition, if a plan invests in an LLC that borrowed to acquire an asset, the debt-financed character of a portion of the income will be passed through to investing plans.

Section 514 provides a limited exception from acquisition indebtedness treatment for mortgage debt secured by real property owned by a “qualified organization”.  The term “qualified organization” includes (a) a charitable educational organization, (b) a pension trust, (c) a corporation formed to hold real estate for a pension plan or charitable educational organization, and (d) a church retirement income account.[32]  If a partnership or LLC will acquire real estate subject to mortgage debt, as is typical, the sponsor may make the investment more attractive to potential pension plan investors by satisfying the requirements for partnerships to avoid debt financed income for investing plans in the LLC’s operating agreement or the limited partnership’s limited partnership agreement.[33]

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. Michael received his A.B. at Columbia College in 1976, his J.D. from New York University School of Law in 1979 and his LL.M. in taxation from New York University School of Law in 1986. He is admitted to practice law in the States of California, New York and Massachusetts and is a member of the Orange County Bar Association.

For more information about our Tax & Estate Planning practice, contact Michael Shaff at 
______________________________________________________________________________

[1]   https://www.ici.org/research/stats/retirement/ret_16_q4
[2]   29 C.F.R. §2510-3.101(a)(2)(second sentence); the first sentence of subsection (a)(2) establishes the “general rule” that a pension plan’s assets consist of its investment but not the underlying assets of the entity.  The second sentence relegates that rule to being an exception.
[3]  29 C.F.R. §2510.3-101 will be referred to as the “plan asset regulation” in this article.
[4]  29 C.F. R. §2510-3.101(b)(1).
[5]  29 C.F.R. §2510-3.101(j)(example 1).
[6]  As Regulation D is an exemption from registration pursuant to Section 5 of the Securities Act of 1933, securities offered pursuant to Rule 504 or 506 would not satisfy this part of the plan asset regulation.
[7]  29 C.F.R. §2510-3.101(b)(2).
[8]  29 C.F.R. §2510-3.101(b)(3) and (4).
[9]  29 C.F.R. §2510-3.101(c)(1): “An ‘operating company’ is an entity that is primarily engaged, directly or through a majority owned subsidiary or subsidiaries, in the production or sale of a product or service other than the investment of capital.”
[10]  29 C.F.R. §2510.3-101(d).
[11]  29 C.F.R. §2510.3-101(e).
[12]  29 C.F.R. §2510.3-101(d)(3).|
[13]  29 C.F.R. §2510.3-101(e).
[14]  29 C.F.R. §2510.3-101(j)(example 7).
[15]  29 C.F.R. §2510.3-101(j)(example 8).
[16]  29 C.F.R. §2510.3-101(f).
[17]  29 C.F.R. §2510.3-101(f)(1).
[18]  26 U.S.C. §4975(e)(3).
[19]  26 U.S.C. §4975(a)).
[20]  26 U.S.C. §4975(f)(2).
[21]  29 U.S.C. §1106
[22]  Harris Trust Savings v. Salomon Smith Barney Inc., 530 U.S. 238 (2000).  Salomon Smith Barney acted as broker for a pension plan’s fiduciary, executing trades that constituted self-dealing prohibited transactions.  (Id.)  The Supreme Court found that although not a fiduciary, Salomon Smith Barney was a party in interest and therefore could be sued for the plan’s actual damages, effectively making the defendant the insurer of every transaction that the fiduciaries engaged in.
[23]  Internal Revenue Code (I.R.C.), 26 U.S.C. §511-514.
[24]  I.R.C. §512(a).
[25]  Id.
[26]  I.R.C. §512(b).
[27]  I.R.C. §512(b)(3).
[28]  I.R.C. §511(a)(1).
[29]  I.R.C. §512(c)(1).
[30]  I.R.C. §514(a).
[31]  In short, the ratio that average acquisition indebtedness bears to the average basis of the debt financed property will determine the portion of the income from the debt financed property that will be UBI.  As the amount of debt and the adjusted basis of the debt-financed property change, the portion of the income treated as UBI will change. I.R.C. §514(a).
[32]  I.R.C. §514(c)(9)(C).  The exemption for these organizations may reflect Congress’s determination that pension plans and certain educational institutions often invest in leveraged real estate.
[33]  I.R.C. §514(c)(9)(E).

(Los Angeles, CA - June 19, 2017)  Stubbs Alderton & Markiles, LLP announced that its clients, Kravitz and Kravitz Back Office Solutions, have been acquired by Ascensus. Kravitz is a retirement administration firm and Cash Balance specialist focused on bringing its clients the latest in the design, administration, and management of corporate retirement plans.  Kravitz Back Office Solutions delivers private-label actuarial services to third-party administrators across the country to help them grow and succeed with Cash Balance plans.

Stubbs Alderton & Markiles' attorneys representing Kravitz in the transaction included Scott Galer and Kelly Laffey.

For the full press release, click here.

About Stubbs Alderton & Markiles, LLP
Stubbs Alderton & Markiles, LLP is a business law firm with robust corporate, public securities, mergers and acquisitions, entertainment, intellectual property, brand protection and business litigation practice groups focusing on the representation of, among others, 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. Our 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 our Firm. Visit www.stubbsalderton.com 

For more information about our Mergers & Acquisitions practice, contact Scott Galer at 

Stubbs Alderton & Markiles' client Sofie Biosciences, Inc, a developer of molecular imaging diagnostics and technologies to empower widespread access to Positron Emission Tomography (PET), announced last week that it has entered into a definitive agreement under which it will purchase Zevacor Pharma (previously IBA Molecular North America) and its high performance manufacturing and distribution network of PET imaging diagnostics and radio-therapeutics.

To read the full press release click here.

About Sofie Biosciences
SOFIE is a molecular imaging company combining new PET imaging diagnostics with innovative imaging and synthesis systems to provide researchers and physicians with tools to better investigate the biology of disease. By empowering a wide array of people with valuable, translational imaging tools, SOFIE is making PET scans more accessible. www.sofiebio.com

To find out more about Stubbs Alderton & Markiles’ Intellectual Property & Technology Transactions practice contact Kevin DeBré at

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SAM accelerator program for early stage companies, The Preccelerator Program, announces its new class of five digital media & tech startups

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Stubbs Alderton & Markiles, LLP has been ranked in the #111th place in the 2017 edition of the Los Angeles Business Journal for "Largest Law Firms."  The LA Business Journal provides comprehensive data and statistics on top-ranked Los Angeles companies across all industries.

About Stubbs Alderton & Markiles, LLP

Stubbs Alderton & Markiles, LLP is a Southern California based business law firm with robust corporate, public securities, mergers and acquisitions, entertainment, intellectual property, brand protection and business litigation practice groups focusing on the representation of, among others, 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 a broad range of industries with a concentration in the technology, entertainment, videogame, apparel 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. For more information, visit https://stubbsalderton.com.

Contact:

Stubbs Alderton & Markiles, LLP
Heidi Hubbeling
(310) 746-9803

Join the Preccelerator® Program
for this exclusive event!

Sue Funkhouser, Managing Principal, Pinwheel Performance

Parking
4th Street/Broadway ramp or in the Santa Monica Place Mall

We hope to see you there!

Stubbs Alderton & Markiles’ client Resonant, Inc. (NASDAQ: RESN) a designer of filters for radio frequency, or RF, front-ends that specializes in delivering designs for difficult bands and complex requirements, announced that it has entered into a definitive agreement with an affiliate of Longboard Capital Advisors, LLC, an existing stockholder of Resonant to raise gross proceeds of $7.5 million. Congratulations on this success!

To read the full press release click here.

Stubbs Alderton attorney representing Resonant in this transaction was John McIlvery.

About 
Resonant is creating software tools and IP & licensable blocks that enable the development of innovative filter designs for the RF front-end, or RFFE, for the mobile device industry. The RFFE is the circuitry in a mobile device responsible for the radio frequency signal processing and is located between the device’s antenna and its digital baseband. Filters are a critical component of the RFFE that selects the desired radio frequency signals and rejects unwanted signals and noise. For more information, please visit www.resonant.com.

For more information about our Public Securities practice, contact John McIlvery at

On behalf of Stubbs Alderton & Markiles thank you to everyone who attended the "Networking for Capital" event with Executive Director of LAVA, Len Lanzi. To those that were unable to make it, the full video from the event can be viewed below.

For more about the Preccelerator® Program or to subscribe to our mailing list for events, contact Heidi Hubbeling, COO at (310) 746-9803 or

Stubbs Alderton & Markiles's managing partner Scott Alderton was featured on Built In LA this week giving his expert opinion on essential legal advice for early-stage startups.

To find some of the answers to your most difficult startup-related questions, read the full article on Built in LA here. 

Scott Alderton is a founding partner of the Firm, Managing Partner, and a member of the Firm’s Executive Committee. Scott is co-chair of the Firm’s Venture Capital and Emerging Growth Practice Group and chair’s the Firm’s Interactive Entertainment and Video Games Group. Scott advises both public and private clients across a number of industries, including technology, manufacturing and distribution of goods in commerce, finance, the Internet, interactive video games, and new media industries.

To learn more about Stubbs Alderton & Markiles, LLP contact Scott Alderton at

For more about the Preccelerator® Program, contact Heidi Hubbeling, COO at
(310) 746-9803 or