By Rick Colosimo / May 11, 2020 / Comments Off
I recently got an inquiry for someone with an unusual entity selection question. Here it is: “I am in the process of creating a non-profit. Can you please tell me whether you think a non-profit should be an LLC or Corp… and why?” Now, this person didn’t just pull my name out of a hat;…
By Rick Colosimo / July 17, 2017 / Comments Off
Should co-founders vest in their equity? Lots of founders – everyone who hasn’t been down this road and some who have – feel that because they started the company, because it is, at that point, “their” company, none of the co-founders should have vesting. And they’re right: at that stage, everyone is committed, has a…
By Rick Colosimo / July 1, 2017 / Comments Off
I’ve been meaning to write a post about accredited investors for some time now, and a random Quora question just got most of my fury. Here’s the steak: Actually, the Securities Act of 1933 (LII link)) regulated public offerings. The definition of accredited investor appears in Rule 501 of Reg D (LII link), which is…
By Rick Colosimo / February 13, 2017 / Comments Off
Mark Suster wrote a great post on management bandwidth being the scarcest resource for startups. It seems from the outside that he’s wrong, that only money stands between every team and their dream, but you have to go around the block a few times before you see the truth of his advice. You can take…
By Rick Colosimo / February 6, 2017 / Comments Off
This WSJ article describes some of the problems that small businesses have faced with names. The most significant one, from my perspective, is the trademark lawsuit that cause the cookie company to change its name after being featured on the “Rachael Ray Show.” What a waste of potential marketing value! Over the years, I’ve serviced…
By Rick Colosimo / August 9, 2016 / Comments Off
When the board makes option grants, it has to set a strike price – the exercise price for each option. (NB: this applies equally to stock options for corporations and unit options for limited liability companies, so don’t get thrown off by the terminology.) How does the board do this? You look at the plan,…
By Rick Colosimo / April 12, 2016 / Comments Off
The HBR recently shared the results of a study showing that an increase in the amount of flattery received by a CEO disproportionately increased the likelihood of the CEO being fired. “You look mahvelous” Flattering the CEO increases chance of getting [him] fired http://t.co/2odFtkwBW3 — rickcolosimo (@rickcolosimo) November 5, 2013 That link is dead: look…
By Rick Colosimo / March 4, 2016 / Comments Off
You’ve read my post on the benefits of having a board in your closely held company, and you’re convinced. You’re ready to move forward but stuck at step 2. How do you go about putting a board together? For most companies, major investors push for governance rights and the structure of the board becomes an…
By Rick Colosimo / March 1, 2016 / Comments Off
Most of my startup and small business clients are operated by the majority owners – a founder/CEO holding 70%, for example, or the CEO who owns 100% of the company. For each of these situations, its incredibly uncommon for the company to have a board. Why is this? NB: I’m not talking about technical corporate…
By Rick Colosimo / January 14, 2016 / Comments Off
Code Smell in Development Agreements I recently answered a Quora question about the Gigster contract for freelance developers. In that answer (reproduced below), I run through some basic considerations that almost always deserve attention – regardless of whether I’m representing the developer or the client. If you read through the comments, you’ll see a number…
By Rick Colosimo / December 24, 2015 / Comments Off
Still No News on New York LLC Publishing Requirement New York state has imposed an unusual requirement on newly formed LLCs. Each LLC is required to publish a legal notice of its formation in newspapers designated by the county clerk for six weeks. Because not all newspapers are designated, there is a noticeable lack of…
By Rick Colosimo / May 3, 2015 / Comments Off
I recently came across a situation where we used “net revenue” in a bonus plan as part of the calculation to determine what the bonus pool would be. In other contracts, we’ve used “net revenue” to distinguish from “revenue” (aka gross revenue) to deduct things like discounts, credits, returns, and so on. In many of…
By Rick Colosimo / March 7, 2014 / Comments Off
The redacted email below was sent to the Cornell NYC/ tri-state community – thousands of people. Conveniently, it’s not automatically a securities law violation any more, but this is definitely how to be sure you’ve fallen under the new general solicitation rules, which require a company to take “reasonable steps” to verify that each investor…
By Rick Colosimo / February 19, 2014 / Comments Off
As part of the crowdfunding regulations, the SEC created heightened standards for determining whether an investor was accredited, requiring issuers (that means the startup company) to take “reasonable steps” to determine whether each investor who is part of a general solicitation offering under 506(c) is in fact accredited. Here’s a short overview of these rules,…
By Rick Colosimo / January 14, 2014 / Comments Off
So here is a message I recently received, unsolicited, from someone I don’t know, through a major Q&A site (URL redacted to protect the guilty): I’m a startup founder starting a company in the legal space. It’s called [abcdef.com], and it connects people with lawyers online. Sorta serves as a law firm to both lawyers…
By Rick Colosimo / October 24, 2013 / Comments Off
I recently came across this language (unaltered) in a contract: The Parties understand and agree that all Confidential Information (i) is to be preserved and protected; (ii) is not to be disclosed or made available, directly or indirectly, to anyone other than Authorized Employees, including, without limitation, third parties or unauthorized employees for purposes unrelated…
By Rick Colosimo / October 23, 2013 / Comments Off
Over the years I’ve had many occasions to figure out the price of an offering of preferred stock for a typical venture funded startup. This is different from, and definitely not to be confused with, the valuation of the company on a pre-money basis. That’s a topic for a later post. In its most simple…
By Rick Colosimo / August 12, 2013 / Comments Off
I have seen a number of articles recently talking about splitting the CEO and chairman roles. Here’s one about JPMorgan. Everyone still seems so up in arms about this issue. I would have thought someone would have done a little digging. Here’s my take: All directors have equal power and equal responsibilities. There is no…
By Rick Colosimo / August 6, 2013 / Comments Off
This Lifehacker post attempts to answer the question of how someone should handle befuddling legal documents, like terms of service, leases, car rental contracts, and so on. The easy answer is in the article: of course you should read everything. The problem is that that’s not what lawyers actually say and do because it’s advice…
By Rick Colosimo / June 6, 2013 / Comments Off
It happens every week. A client sends a short email describing a contract they want, or even a term to be added to an employment agreement for a new hire. This post on issue spotting by Ken Adams shows you what a good lawyer thinks when she hears: Oh, and Jane should work out…
By Rick Colosimo / June 26, 2012 / Comments Off
Here’s a quick link to a brief introductory article on the differences between patents and trade secrets as an IP protection strategy. There are more questions and quirks than this, of course, but that’s why legal advice is always custom.
By Rick Colosimo / May 28, 2012 / Comments Off
The US is fairly easy place to do traditional business. We have far fewer restrictions on who may operate or own a business than other countries, and while there’s still progress to be made in streamlining regulatory compliance at multiple levels of government, it’s not always arcane. But nonprofits are a little more trouble…
By Rick Colosimo / February 8, 2012 / Comments Off
Several years ago, I switched my law practice from mass torts (plane crashes and shipwrecks) in New York City to corporate law at a large Silicon Valley law firm. As a result of that experience and clients I worked with in the years following the dotcom bust, I developed a number of simplifying rules about…
By Rick Colosimo / March 21, 2011 / Comments Off
“Joint venture” is a sloppy term used to describe a number of different business operations. The important thing to remember is that it is too vague to be meaningful legally. A project that is called a joint venture might legitimately be structured like any of these: a brand new entity with shared ownership a subsidiary…
By Rick Colosimo / February 1, 2011 / Comments Off
Here’s a common set of angel-investor questions regarding a standard seed round term sheet for a tech company: Why are the shares divided into preferred and common? Why does the preferred stock have a limited “1x” return? What will happen with liquidation preferences in future rounds? What will happen with dividends? Does the preferred stock…
By Rick Colosimo / January 31, 2011 / Comments Off
I recently came across a LinkedIn question asking about entity selection for a social enterprise. The generic question for a generic business is what people often conceive of as an “easy question” with a simple answer. Here’s my answer: Laura, the question you ask is only properly answered in light of more important questions. I’ve…
By Rick Colosimo / November 22, 2010 / Comments Off
Fred Wilson of Union Square Ventures wrote about his board meeting and ugly travel schedule some time ago. It’s refreshing to hear him talk about being excited to go to board meetings. I’ve sat in too many where a VC (even a monster big-name guy) ended up talking about the format of financials being presented…
By Rick Colosimo / November 17, 2010 / Comments Off
Here’s a LinkedIn question about LLC operating agreements. The poster wonders whether the operating agreement he received from the entity formation company is a little “generic” and asks the forum for specific advice about what should be included. The answers point to some provisions that should be included (division of gains and losses, breakup/buyout/dissolution schemes,…
By Rick Colosimo / October 15, 2010 / Comments Off
Nancy Lublin’s column in Fast Company is always interesting, even moreso when I disagree with her. A column from February, “We Really Need to Talk,” (oddly renamed on the web as “Foundations’ Four Biggest Faux Pas”) is a little list of four points she’d make to foundations. To me, they boil down to versions of…
By Rick Colosimo / October 15, 2010 / Comments Off
This LinkedIn question asked about mission drift for non-profits. There are a couple different layers of answer, depending on what’s going on and who’s asking. First, the fundamental concern: will the change of mission jeopardize nonprofit status (and that typically means jeopardize 501(c)(3) status, which means deductibility of donations by donors)? The answer depends on…
By Rick Colosimo / October 12, 2010 / Comments Off
This post on the use of the term immediately, one of many similar explorations by Ken Adams, is the sort of thing that attracts me to contract drafting. There is a lot to be said for using the right language to convey an idea: language that is clear, concise, hard to misconstrue, and simple without…
By Rick Colosimo / September 9, 2010 / Comments Off
Here’s a question on quasi-nonprofits that I’ve been hearing more often: Do I need to have a nonprofit status to become a social entrepreneurial enterprise? I found this LinkedIn question to be interesting for two reasons: first, it’s very related to a nonprofit question I field all the time, and second, I have a current…
By Rick Colosimo / September 5, 2010 / Comments Off
I have more than one client currently considering convertible bridge notes as a parallel angel/seed round funding technique, and I have one who recently closed a small convertible note that will convert in the upcoming seed round. What’s a convertible bridge note? A convertible bridge note is a not-uncommon financing instrument in venture capital. This…
By Rick Colosimo / August 9, 2010 / Comments Off
Due diligence is the catchall phrase used to describe both the amorphous investigative process that prospective investors and acquirors go through before, during, and after their initial decision to proceed with a transaction with your company as well as the materials (paper, electronic, and Q&A) that they and their advisors receive in response to their…
By Rick Colosimo / June 18, 2010 / Comments Off
This LinkedIn question asking about reverse mergers is a question I’ve answered for a lot of entrepreneurs who get pitched by these folks and are invariably misled confused about where, how, and whether this deal brings money into the company. “What is a reverse merger or reverse IPO?” Short answer: “reverse merger” is almost always…
By Rick Colosimo / May 28, 2010 / Comments Off
Here’s a link to a brief article about crowdsourcing as applied to startups. Grade for this article? Nominally 80% for 4 out of 5 right, but the wrong answer on financing can kill a company. This one gets a #FAIL from me. Hearkening back (or forward, since I don’t know if I’ve posted it yet)…
By Rick Colosimo / May 20, 2010 / Comments Off
Crowd-everything is super hot, and super cool. The vastness of Wikipedia alone is sufficient to teach every one of us that when “crowd” is applied to your field, really neat and seemingly impossible things can happen. To me, “crowd” is just the plural of “open,” as in open data. But crowd doesn’t always work, and…
By Rick Colosimo / May 20, 2010 / Comments Off
Many of my readers have seen my “Five-minute General Counsel” blog post series. The idea is to give readers an informed opinion that, while not specific to their situation, highlights some of the major issues involved in various decisions, such as whether to form an LLC or corporation for your tech startup. (Hint: read this…
By Rick Colosimo / May 2, 2010 / Comments Off
Here’s another LinkedIn-derived question that merits a better answer. The question was essentially whether the fellow with some IP to build a business on should form an LLC or a corporation. In typical LinkedIn fashion, off-the-cuff answers that are specific end up being wrong. In my mind, if someone is asking this question, they either…
By Rick Colosimo / October 25, 2009 / Comments Off
You’ve probably already seen our Five-minute Lawyer post on How to Form a Nonprofit, but sometimes people are at an earlier stage of the process, where they haven’t figured out what they exactly want to do. This process looks a lot like planning a for-profit business in the early stages, but here are a few…
By Rick Colosimo / October 13, 2009 / Comments Off
I often get questions asking about entity selection when someone is considering incorporating. Here is a summary of some general ownership structure issues. What do all these entities do? This introduction will make it easier for you to come up with questions that will help you select the best alternative for your specific situation. There…
By Rick Colosimo / October 12, 2009 / Comments Off
Another LinkedIn user asked about how to structure a startup that would be a typical VC-funded software company. Here’s my edited answer: As someone who’s represented dozens of startups, closed probably 100 venture deals, and cleaned up too many small companies to count, there is in fact a right way and wrong way to do…
By Rick Colosimo / October 9, 2009 / Comments Off
People often ask about what entity they should choose for their new business, not knowing that the real first question is the one they skipped over without even realizing it. Should you incorporate? Short answer: you should probably just buy insurance instead. Entity types to consider include the corporation (with S- or C- taxation), limited…
By Rick Colosimo / October 9, 2009 / Comments Off
Here’s another common question I get: I’m onto a new startup idea. How much would you charge to incorporate? Do you have any advice as to where to incorporate? Here’s my usual answer: I’ve done this sort of work for companies under firm quotes of $2000 + state filing fees for a full incorporation package,…
By Rick Colosimo / October 9, 2009 / Comments Off
I regularly find people asking this question: How do I form a nonprofit? What most people mean and want is a charitable organization that satisfies the requirements of IRC 501(c)(3), which gives donors assurance that their donations will be tax-deductible. To set up a charitable organization, you generally run through the following steps: 1. Determine…
By Rick Colosimo / October 9, 2009 / Comments Off
Kat Shoa asked about licensing audits on LinkedIn: How do you know if your IP licensees are paying you properly? I sat on a presentation about royalty audits today and think it’s a fantastic to collect due royalties – wrote about it here[.] But I’d be interested to know what other methods are used to…
By Rick Colosimo / February 23, 2009 / Comments Off
Over on LinkedIn, this question caught my eye: How much do founders get diluted through exit? This isn’t a new question.I regularly answered it for founders, employees, and even angel investors during my time at Brobeck in Silicon Valley. There are lots of people concerned about “dilution” without really knowing what it is. Dilution means…