Startup Vesting Stock Tax Election “83(b)”

By Chase Addams, a San Francisco Business Attorney 83(b) Election You’re getting hired by a fledgling San Francisco Start-Up company, and you’ve just signed a Stock Purchase Agreement granting you a vesting equity interest in the Company.  Congratulations and good luck.  But watch out.  Upon the initial grant of this stock to you, the clock starts running on your ability to make an 83(b) election under the Internal Revenue Code of 1986.  You have 30 days from the date of grant.  So what does that mean to you and what should you do? At some point you have to report to the IRS (and get taxed for) the difference between the fair market value of the equity you’ve been given, and the price you paid for it (the “difference”).  This reporting can either happen when you purchase the equity OR when your equity is actually freed of restrictions (ie, the Company’s repurchase right expires) and the shares vest to you.  The difference is taxed as ordinary compensatory income.  To be clear, in instances where equity is granted immediately and there is no vesting schedule, there is no decision to make and 83(b) does not apply.  After vesting, when you’re ready to sell your equity or otherwise dispose of it pursuant to the terms of her Company Stock Purchase Agreement, the transaction will be taxed again as a capital gain. The 83(b) election is a directive to the IRS to assess taxes on the difference at the time of stock purchase.  While the fair market value at the time of stock purchase will oftentimes equal the amount paid, the IRS... read more

Website Privacy Policy

Privacy Policy, By Chase Adams a San Francisco Business Law and Corporate Attorney  When it comes time for your San Francisco Startup Company to launch its product or service, it is crucial that there exists a robust Privacy Policy for the Company available on the Company website. Think of your Privacy Policy as a contract with your customers privacy. Do you need an attorney to draft your policy? As a San Francisco Business Attorney who reviews these privacy policy, I would highly recommend having a professional business contracts attorney draft custom policies to protect your company’s ability to use customer information. For most people, the extent of interaction with a Company’s privacy policy is to get annoyed whenever it pops up on the website, then scroll immediately to the bottom and click “I Accept.”  We all do it.  The thing is, the contents of these documents will provide crucial protection to the Company as a multitude of users use the product or service, and filter through the Company website.  Obviously, your Startup can’t negotiate a user agreement with every single user, so the privacy policy must be a one-size-fits-all agreement.  The Privacy Policy are legally binding agreements between the Company and the User.  The Company sets forth the terms under which it will allow the use of its service/product/website, and by clicking “Accept” or by merely using the service/product/website the User agrees to be bound by those terms. The Privacy Policy will typically contain a great deal of detail specific to the Company regarding the methods of gathering, storing and using data from its Users.  The challenge for the... read more

Website Terms and Conditions

Website Terms and Conditions, By Chase Adams, a San Francisco Business Attorney. When it comes time for your San Francisco Startup Company to launch its product or service, it is crucial that there exists a robust Terms of Service and Privacy Policy for the Company available on the Company website. Think of your Terms of Service as your business contract with your customers. Would you ship a CD with your software without a contract? Of course not, however startups companies are notorious for overlooking this critical business contract. Do you need an attorney to draft your terms? As a San Francisco Business Attorney who reviews these Terms and Conditions I would highly recommend having a professional business contracts attorney draft custom Terms to protect your company’s intellectual property. For most people, the extent of interaction with a Company’s Terms of Service is to get annoyed whenever it pops up on the website, then scroll immediately to the bottom and click “I Accept.”  We all do it.  The thing is, the contents of these documents will provide crucial protection to the Company as a multitude of users use the product or service, and filter through the Company website.  Obviously, your Start Up can’t negotiate a user agreement with every single user, so the terms must be a one-size-fits-all agreement.  The Terms of Service and Privacy Policy are legally binding agreements between the Company and the User.  The Company sets forth the terms under which it will allow the use of its service/product/website, and by clicking “Accept” or by merely using the service/product/website the User agrees to be bound by those... read more

The Convertible Note, Terms to Know

The Convertible Note, By Chase Adams, Business Attorney at Sutter Law Firm The Convertible Note is an often-used security instrument for newly formed companies raising money, and one that every San Francisco Start Up should have in its pocket for when investors come calling. Generally speaking, the Convertible Note is issued to an investor by the Company as a loan, recorded on the Company books as debt, payable over a specific period of time and accruing a specific simple interest rate.  However, at a certain time – upon the occurrence of specified material events, most likely a subsequent round of investing (called a “qualified financing round”), or upon the natural expiration of the term – the debt will convert into an equity interest in the Company at a number of shares equal to the repayment amount of the loan and interest.  No longer is the investor a debt holder on the Company books, but instead a shareholder. The primary advantage to the Convertible Note is that it delays valuation.  Obviously, to sell shares, the Company needs to establish a per-share price, which in itself requires a determination of overall value of the Company.  Valuation is prickly: its difficult to assess; it’s contentious between investors and founders; it can provide unwanted precedent for future investors; and, for a fledgling San Francisco Start Up, it can be expensive both to obtain and for tax purposes.   Without losing interested investors now, the convertible note punts the valuation beehive down the road to a time later on when better metrics of company value (revenue, sales, etc) exist to generate accurate per-share price. The... read more

Is Title IV right for your Startup?

Is Title IV of the JOBS Act the right way to fund your Startup? Recently the SEC approved Title IV of the Jumpstart Our Business Startups (JOBS ACT), also known as Reg A+. This has also been called a mini IPO. Title IV gives startups the ability to sell stock on the internet through a third party porthole to unaccredited investors (everyone, not just persons earning over $200K annually). The question remains: is Title IV right for every startup? To answer this question startups should understand the qualifications for Title IV. Your company needs audited financials (significant fees $40-$60K) depending on the year incorporated and business model. Background check on the offices and board Legal Due diligence Strenuous SEC filings Total upfront fees are at or around $100,000.00 So far Title IV is an unproven method for raising capital for your startup. The attorneys at Sutter Law will be watching this closely to see how the first few startups are received by the general public. We would love to see this become more affordable, have easier filings with the SEC and develop a streamlined process. If you would like to consult with an experienced business law attorney regarding Title IV please reach out to our lawyers at Sutter... read more

What is a SAFE Note?

What is a SAFE Note? By Sutter Law a San Francisco Business Law and Transactional Law Firm As a San Francisco Transactional law firm we get asked about the best way to fund a startup. There are several different financial instruments used in Silicon Valley and San Francisco. The new kid on the block is Y Combinator’s (YC) Safe Note. S.A.F.E. Stands for Simple Agreement for Future Equities. YC developed this new agreement to help simplify the funding process. The SAFE is different than a convertible note in that it is not debt, the SAFE is actually a Futures agreement between the company and the investor. YC released several version of the note, with and without interest, with and without a cap. There are some major pros and cons to the safe note. Pro: Since the note is not debt, this releases the company of its fiduciary duty to the investor. Pro: The note truly is simple. Its easy to read, and more less easy to comprehend. Pro: It’s a single document, whereas the convertible note consist of a Note Purchase Agreement (NPA) and a Convertible Note (Note). Con: Unless you are a YC batch company you may have some resistance from Angel Investors. Con: Most Angel Investor are accustom to the standard terms of the Convertible Note. In our experience as a San Francisco business firm the SAFE is still getting pushback from Angel Investors. Although we do like the SAFE, we generally see the Convertible Note being used more offend than the SAFE. If you would like to know more about funding your Startup Corporation feel free... read more

Expert Advisors;

Expert Advisors; By Sutter Law a San Francisco Business Law Firm. Who should be your Startup Advisor. As a business, corporate and transactional law firm we get asked about when and who should be on the board of advisors for your startup. The short answer is your startup should get advisors early; a good advisor is worth their weight in gold. Typically you will want an advisor for technical know-how; you will want an advisor for legal structuring, a financial advisor, and marketing advisor. You generally don’t want redundant advisors since you will be paying them in equity. Who should be an advisor: As a general rule you want Rock Stars. Its worth giving .5% – 1% to someone with industry contact, funding connections and the knowledge to save you from making the same mistakes that others have made. How much equity should you give an advisor: This is a trick question and it depends on the stage your startup corporation. There are a few criteria that you should consider: Standard advisor; someone with skill, knowledge but not many connections. Idea State = .25%             Startup stage = .20%       Growth Stage =.15% Strategic Advisor; someone who can intro you to angle investors and customers. Idea State = .50%             Startup stage = .40%       Growth Stage =.30% Expert Advisor: someone who has seen numerous exits, has been a big shot during an IPO. Idea State = 1%                 Startup stage = .80%       Growth Stage =.60% These are only some guidelines to help you negotiate with your prospective advisors. If you need advice regarding your advisor or a template advisor agreement, please reach out... read more