Many entrepreneurs face difficulty when they confront legal issues, including structuring a company to financing businesses. Larry Gennari, parter at Gennari Aronson, LLP, held a “lunch and learn” session for the Summer Venture Program Summarizing five simple rules startups should know.
The first rule is to understand that if you are selling shares in your businesses, you are engaging in sales of security. The offer and sale of “securities” in the US are heavily regulated. “Securities” include just about anything involving an investment with an expectation of profit through the efforts of another.
Second rule is that generally, any offer or sale of a “security” must be (i) registered with the SEC and the state where the prospective investor resides or (ii) specifically exempt.
Third rule is that a “promoter,” that is, a person who raises money for companies and takes a percentage of the amount raised as a commission must be a “finder” or a “broker/dealer” registered at both the federal and relevant state level. Despite their protests to the contrary, most promoters are not “finders.” Ask a simple question, “Are you a registered broker/dealer?”
Fourth rule comes when one looks for funding or a loan. Consider what investors want before fashioning a security. Consider the “pizza parlor” analogy: when you add toppings on pizza, you can charge people more compare to when you sell plain cheese pizza. That is why house pizza cost more. Now think of each ingredient as special power, rights, and privilege that you give out to investors. Do not let investors take your “ingredients” without paying for them.
Last rule is about getting to know “409A.” 409A is permission to tax code. It captures differed compensation meaning when you go into auction, it must be granted at fair amount of market value.
These five simple rules are not complicated yet many entrepreneurs ought to mistake on these rules. If you are an entrepreneur, remember to take these rules into consideration.
Posted in Babson Entrepreneurs