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Building Your Brand

Lesson 3 of 12

Legal (with Guest Alon Rotem)

 

Building Your Brand

Lesson 3 of 12

Legal (with Guest Alon Rotem)

 

Lesson Info

Legal (with Guest Alon Rotem)

our next module. We're gonna be talking about legal, something that I'm not an expert in. So I had a lan come and join me today. But before we begin, I wanted to just talk about some of the resource is first because I want to make sure that you guys have some good tips. And resource is so a couple of things that I just wanted to point out. Alarms company Goodwin Procter has this amazing resource called Founders workbench, and if I don't give it its full justice, please tell me of Latino to add on. But at founders workbench, there's articles. There's tips, but there's also a lot of free templates. And so if you have legal needs immediately but you don't have the resource is to hire someone. You can actually go on there and find the forms for a lot of the things that you might need to do. So an amazing resource, frankly, like that's that's worth washing the show just to get the resource right. True. Yeah, um, one need thing about it is you can basically learn. Learn a lot about the topic...

s about starting your company, right? And of course, if you want to talk to an attorney immediately, or you're obviously more than welcome to do that. But it's got like a very do it yourself sort of attitude about it. And if you're not quite ready to talk to someone else and you just want to get a little bit more savvy about the basic legal topics and actually form your startup, whether it be a corporation or an LLC, and we'll talk about that as well, you can actually get the forms. Set the company up right there. That's great. I love that. So free resource is right at your fingertips. A couple other websites that I just wanted to tell you about to make sure that you have the Labour Employment Law Guide. It's a government site. So a dot gov. That's a great one just for lots of employment law. And then we talked a little bit about the Trademark office one. So remember those because big implications with trademarks and legal so quickly. I just want to introduce you and thank you for being on the show we met probably six months ago. I now that I have a book in a small company, I had some legal questions. And so in the Bay Area where I'm from, I sent out an email to all my friends. I said, Who's a good lawyer? That could work with startups. I don't have a lot of money, and this is who I ended up with. So thank you for joining us. Your firm. I'm the discount lawyer. No, it wasn't discounted. Was understand startups and can really help people prioritize what's important and what's not important. And he's been great because there's been a couple things that I thought I needed. And he was like, Well, you don't really need to do that. So your firm specializes in startups, Correct? Well, Goodwin Procter is a full service law firm, so it's like 1000 lawyers all across the country, and they do pretty much everything but the group that I work with. The technology companies practice, we do specialize in startups, and so half of our practice is devoted to working with companies from, you know, two people in a garage all the way through companies that are basically publicly traded that we've all heard of taking them from, You know, from that point all the way through Thea. Other part of the practice is focused on working with investors when they're investing in companies, and so that gives us a little bit of insight into what investors are looking at when they're when they're analyzing whether a company is a good investment to make. Great, Great. It's funny when you say to people in a garage, of course I start thinking about Apple. You never know what business is going to start in a garage and like where things are going to go. So even though we're you know, individuals and have smaller companies a year from now, we could have huge businesses. And so it's exciting and great to get your advice. So we're gonna talk about quite a few legal topics today. We did talk about in her last module. I brought up the airline the astronaut story about the email, and that was one story that I wanted to bring up. But it's important to know that legal mistakes it's always better to do kind of your conversation beforehand instead of after the fact right, And I think a lot of times we see the lawyer after the fact, when it's too late and where I'm trying to get ourselves out of a problem. We haven't done the right documentation. So what I'm hoping that you guys get from this module is some of the things that you should do now to protect yourself, to do things right, to set up your company, right, to make sure that you're using employees in the right way instead of contractors or whatever you should be doing. So going through that, even looking at things like tax credits and when you should get an attorney for taxes, all sorts of things. So that's kind of the framework. What I thought we would do is start going through your slides. And then I know that some of you guys had questions. Dan. I already heard some questions from you earlier, so we'll get to those soon. So corporate structure. There's all sorts of ways you can do things. And a lot of the people that are watching online might be just a single person right now. But tell us a little bit about the different types of structures for companies. Sure, so they're actually a lot of different types of structures you can start when forming your business, but the two most common ones. We tend to see our limited liability companies and corporations limited liability companies air an interesting way to go because they are passed through entities, which means there's no separate level of taxation at the entity level. It's just at the individual level, and they tend to be a very flexible, flexible entity to use. There's a lot of different ways you can work with the way that the members or the owners of the company are gonna receive allocations and distributions from the entity. Uh huh. Um, and, uh, there's also a lot of different permutations with respect to the voting control of the company that you can work within the policy. The issue with it is is because they're so flexible. They end up being very customized instruments, and that could be a little bit more costly to set up from the outset. It's definitely a good idea to talk with an attorney and even a tax adviser when setting those up, because there's a lot of different ramifications, uh, especially on the tax front that you can run into If you don't set it up properly. Well, let's take one example. So, uh, let's have a hypothetical example. We have a photographer that has a growing business. Maybe they have a studio. They've brought two or three other photographers in, and they're going to do a joint business. When should they move into an LLC agreement? If there's multiple people coming together in a company. So, uh, I would say, you know, right from the outset, you're gonna want to set up some sort of entity, whether it be an LLC or a corporation. And the important an important reason to do that and we'll get we'll get to the other slides, is it's really you want toe. You want to be clear about how the pies are ultimately going to be divided between the founders and what sort of rules we're going to set up with respect to decisions that the company is gonna have to make. A lot of times, people just try to do it without setting up the entity first on, and they run into disagreements. And there's no document documented framework for everybody to go to, to figure out, you know, what do we do now that that we have different ideas about what we want to do right? I've heard about that, of course, in the horrible stories where it's two friends that have started a business together. Maybe they were dating and then the relationship dissolved. But the company did, and there's a lot of disagreement about who gets what and very complicated when there's no documentation. So that makes sense to really have clearly defined terms up front, right? I mean, it's kind of like a pre nuptial agreement for a marriage. Um, it's an uncomfortable topic to bring up when things are going well, but everybody's thankful that is in place when things are, you know, not so not so stable, right? Tell me about the Delaware corporations because I've heard a lot about people doing Delaware see Corpse, especially if they're in Silicon Valley. So tell us about that. Yeah, So Delaware is the state where the vast majority of corporations are ultimately registered, and I would say in upwards of 90% of the companies we work with our Delaware entities. Delaware is known for having a very sort of well developed body of law in corporate. Ah, lot of cases come up there, and the judges and Delaware that that hand down rulings are very kind of well versed in in corporate corporate law and corporate situations that come up additionally there codified statutes are very user friendly, and they make it very easy for everybody to understand. Codified the same kind of word as a code. The Delaware Code for four governing, basically corporations and the dental. The Delaware General Corporation Law, which is what it's called, is very clear prescribing. What are the rights of stockholders? What are the duties of directors and so forth? And so for those reasons, especially when you get to the level where you're getting investment from institutional investors, you know, in Silicon Valley, for example, they're very comfortable with the rules and Delaware and very comfortable with Delaware entities, and specifically, they're very comfortable with Delaware corporations. Okay, so does your business have to actually physically be in Delaware? That's a great need. An office in Delaware? No. So your business definitely does not have to physically be in Delaware. It could be in California. It could be in Washington. But ultimately, when you file the corporations is domestically gonna be, you know, at the end of that, like a atmospheric level based in Delaware, and then you're gonna file to do business is a foreign corporation in the state in which you actually do business. OK, before we move on to the next topic, I just want to ask our great guests here any questions about LLC's how to set up your business? Dan is just a quick question regarding LLC's when you name when you put your name into into an LLC, should you do so in a more broad range so that if you have other companies that you start, it's all under one L l C umbrella? Or do you specifically assign an LLC to that specific business name? Does that sort of makes sense? Yeah. You could form the entity with whatever name you want to have. And, you know, if it's your name, it could be, you know, Mike Smith LLC, that kind of thing. Um, it is that Is that something you would Would you put it under under your name, or would you put it under the business? We're all sort of aspiring business owners here, right? You put it under that specific one that we're going to start. Or maybe your name so that if you branch off, you're not tied to that one business that you maybe yeah, away from That's a good question. I would probably lean towards giving the business name its actual name in the entity and not necessarily putting your your given name in the entity. You can always change the name later, and you can certainly have, you know, products and services in different lines of business businesses coming off of that L l C that have different names. A lot of times, people will have a name like, um, you know, Creative Labs LLC and the labs will signify the fact that they're planning on having more than one product or more than one business line come out of that L L. C. The other thing you can do is you know, there's a limited number of names that are available because for the same kind of reasons that there's restrictions on trademarks and so you can actually go to the Delaware Secretary of State website and do an entity search, and you can search for the LLC name and see if nobody has it. Um, and if you can grab it, great. Any other questions from you guys. We have questions online. Okay, let's take a question online before. Okay, uh, question from Mary, representing what a number of people are asking when you're starting out as a small business sole proprietor with what will likely be small profits initially, initially, should you immediately become an LLC, or is that something should come later, if later? What is that question that what influences when? So if you're gonna get profits early on and you're gonna be subject to taxation on those profits like like we said before, the LLC is a good vehicle to deal with that because you're not gonna have the level of double taxation. One thing we didn't get a chance to touch upon, which is sort of relevant to this question is if you're a sole proprietor and it's really just your business and you don't have outside institutional investors, you could set up as a subchapter s corporation. And that that utilizes the same formal structure we talked about with respect to the C Corp. But it is also a passed through tax entity, just like an LLC. Thank you. Great. Um, we've got a couple more. David end. If founding a nonprofit Is there any benefit to incorporating in Delaware? That's a good question. So nonprofit laws actually a whole another sort of area of law, Um, and they have a bunch of different considerations. But in general, the Delaware is the preferred choice for for almost any any entity, including nonprofits. Although we definitely see, you know, if the nonprofit is based in New York or based in California, we we do tend to see those be a little bit more regionally incorporated. Surprised? We don't have competition from Rhode Island or some other state trying to go after that. No, you're right. Well, so somebody was asking. Bravo was asking, Can you talk briefly about Wyoming LLC versus Delaware vs Nevada? Are there some other states I don't know enough to know whether those two are specifically? Yeah. I mean, I definitely am not an expert in all 50 states of of LLC law, but every state does have a little bit different twist on their on their rules. Delaware happens to be really user friendly, and the fact that they'll accept electronic signatures they'll turn documents back to you sometimes within two hours. If you ask them to. Different states kind of have a different level of of customer service and a different level of flexibility. Um, a lot of people do talk about Nevada's being sort of a decent competitors, and we do see some companies formed in Nevada. Well, there's a lot of tax benefits in Nevada also. So that's one of the reasons people are going there. Correct? Yes. Yeah, like like any state has its own tax regime. You and I both happened to live in California, which is tax heavy, but has it has its other benefits, including sunny weather, things like that. But yes, tax considerations are always. They always are an important factor, if not the driving factor of deciding. You know where to ultimately incorporate and where did and where, even just to do business. Right? Great. I love that point about Delaware taking the electronic signatures and turning things around quickly. It sounds like they're more potentially tech friendly and with a lot of businesses being very online based and driving in that way, having a state that is flexible and that kind of way, it's probably really good for future business to Yeah, they move at the speed of business, which you're you're fond of like phrases. I would say, I would say Delaware is is ah, friendly in that respect. Good. All right, So let's move on to our next topic. Founder Equity, obviously, in San Francisco, where were at There's a lot of startups and people doing stock options for those of us that are, you know, may be new to this space. What should you When should you be thinking about this? Which, when should you actually have stock? When, like Jeff, for example, he's got a company where he's got a partner. When did they get to the point where they start thinking about issuing stock and dividing up the pilot? When do you start doing this type of thing? That's a great question. Um, immediately would say, as soon as you're ready to form the entity, you should be ready to start talking about how that entity is gonna be capitalized and how it's gonna be developed, how the ownership of that entity is gonna be divided. So if you know if your two founders and you're you're going in a 50 50 and you're comfortable with that approach then you should be, you know, issuing. You know, 50% of equity toe you and 50% of the equity to to your co founder. Of course, if you have three founders that you know that math works out differently. But those considerations should be dealt with at the outset. And actually, when company when people come to us to form, companies will provide them with, like, a 10 or 15 question worksheet that has them think about each of these points. Because as we form the entity, you know, immediately thereafter, we're gonna be issuing stock to to the people that that already there at the outset, One thing that has been great, it's been an honor. I've had a couple companies that have asked me to advise them, and a lot of times when they're start ups, they don't have a lot of cash flow. And so instead, they'll offer stock options. And it's obviously a risk, because you never know. But you have to decide. Okay, I'm going to do this because it seems like this is a great company. I like what they're doing, but how do you get to the point where you actually even have the stock options available to give to somebody to advise. Because for a start up, sometimes it's really nice to surround yourself with a team of people that can help you, especially I'm thinking about your magazine. You probably would love to have some people that give you thoughts on, you know, distribution strategy or partnership strategy, but cash flow you probably don't have a lot of cash. So in the situation where you wanted to all of a sudden and sent someone with stock options, how would you get from where she is today? Just starting out her business to being at that point? Right? So, um, the company formation process that we talked about with respect to the questionnaire will include that will include that concept. So when we form companies, not only will we incorporate them, not only will we issue stock to the founders, but we'll also set up a compliance stock option pool. And from that stock option pool, it'll be, you know, it'll be one document that's the plan, and then the plan will have a set of templates underneath it. In order to issue the order to issue the stock or the option to the adviser. So it's It's very template driven, and it's not very expensive. But you want to make sure you're working with attorneys that know what the rules are because there's a lot of regulations about about stock options and other sorts of compensation in the deferred compensation sort of realm. Right? Okay, so talk about this a little bit. Vesting schedule, acceleration triggers a lot of that. Sounds like with new employees. He want to give them a vesting schedule. So they're going to stay on board for a certain number of years, maybe their vesting over four years, various triggers of when they could get their dollars back if it was a public company, tell me a little bit more about that in kind of basic terms for the individual business. What do we need to know about this short? So this is actually relevant. Even at the founder level, let's say you have to to co founders of the business and you're just getting started. One way to properly align incentives would be to place these vesting vesting restrictions on the stock. So let's say you're a 50 year company where Founder A s 50% and Founder B is 50%. When you put a four year vesting schedule on that equity, that means that on a monthly basis it will take four years for that. That equity not to be subject to forfeiture. So let's say you have a falling out after year one. Um, let's say Founder A leaves after your one. After the falling out, they'll be vested in 25% of the equity that they had and Founder Be who's left to carry on. The business is gonna feel like that's equitable because they have to spend the next three years or even longer, building the business and providing services and kind of putting their heart and soul into it. And so founder a will leave. They'll have a smaller percentage because they have earned a smaller percentage, right? So then they're not gonna leave and say, Oh, I get 50% and I'm leaving and, you know, leave the other person there with 50% in all the work, so exactly it sounds good protection. It's great protection, and mechanically, the way it works is after year one and and founder A leaves. The company has the contractual ability to buy back of the unvested shares. And that's sort of how they're left with, you know, less than than what they're originally granted. So if we're buying back the shares again being hypothetical, how do we put the value amount on the share? How do you figure out the value of a share? So when the company gets to buy it back, they'll buy it back at at the A nominal price. Basically the same price that the founder paid to get the shares initially. Usually when a company is sort of just getting up and running and it doesn't really have, like, a real tangible value, it will be, You know, it'll be a de minimus amount. Okay. Sounds like a question here from Jeff. We've been in business for coming up on four years, so this juncture I don't think we actually did a vesting schedule. Worse of s. And we are 50 50 um, owners. Stock was divided that way since we've been at it for four years. Is is it pretty much assuming that we've vested? Is it too late? The answer is no, it's not too. So yes, the default is that you're both fully vested in the stock, and neither of your shares are subject to forfeiture. But if now that you're sort of reconsidering it and wanting to put in this kind of protection, you can layer in stock restriction agreement on top of what you have now and have you both agree to sort of reset your vesting and and actually you wouldn't have to reset it. Let's say for four years you could give each other credit for the work for time served. Basically, if we, um, we don't currently have a stock option pool program, But we're starting to bring on some real talent, and it's something which we should think about. Um, how easy is it to modify the agreements to allocate that that option pool? It's relatively easy. You wouldn't necessarily have to modify what you already have. You would just at the at the corporate entity level, assuming you have a board of directors. If you're a corporation, you would approve stock option plan, and that plan would have its templates, and you could start issuing stock. One important thing to think about is to make sure that the cup the company has enough shares authorized already to accommodate that plan. So let's say right now you had a 1,000,000 shares authorized and your 500,000 shares for you and 500,000 shares for your your co founder. You would have to amend your charter to increase the number of shares to accommodate for, let's, say, a 200,000 share option pool now, since they haven't had the shares yet. Now, if Jeff wanted to go back to his co founder and say, Hey, I think we should do this Is that an uncomfortable conversation? Or is that one where it's like, Oh, we're just protecting each other? Like, how do you How do you even have that dialogue? It can be uncomfortable, but if you approach it with the mindset of hey, you know, we had a lot of we had limited resource is before we were totally focused on just ramping up in getting the business operational. Now that we've, we've seen that this business has some legs and is gonna have a future. It's a good idea to put all these all these legal components in place so that we're both protected and that we have a chance to to expand. I heard you talk about scaling in in the last segment, and part of scaling is building out a legal framework that can accommodate, you know, adding employees at adding potentially even another founder and and making sure you have the full set of tools to properly incentivize people. Right? Right. And I love that, too, because we've been talking about thinking big and growing, and so like having this mindset that these are things that you should consider and think about. I can see lots of applications with your businesses. Did you have another question is could amplify something that you said along, which is, um, to do it early and get out of the way and put it in a drawer. And I will tell you that we, um we had every intention do it early, but it took a while to come to terms and to get the proper guidance and to put it to bed. And it was a real source of anxiety because there started to be real money involved on. We didn't have an agreement in place, so everything you're saying along those lines, I I felt that and just encourage everybody that do the work to get it out of the way early. Great. Any questions from the Web? We do. You know, we have some kind of more basic questions, just about stock in general, Big Show says when starting my Sub S Corp. That gave my wife and I 1,000,000 or 50, shares each. What is that? And how is it used? And then are the shares they're talking about? Part of the stock market or just internal to the company? Kind of give a little bit more basic information about how that works. Sure. So when thinking about the stock market, that's that's dealing with public companies that are publicly traded. Um, I think for the most part, what we're talking about here are private companies. So when they're saying, you know, we got 50,000 shares each or 500,000 shares, whatever the number B, it's It's kind of an arbitrary number. You think of the pie as being 100% of the company and if they're getting 500,000 shares each than the each up 50% of the company, a lot of times we like lawyers like to use these huge numbers only because you can get really precise with the with the percentages. It's really easy to go 50 at first. But then once you introduce a stock option pool and you and you grow and you've got a number of different investors that are that are owners in the company and you want to give somebody 1.2% of the company, it's nice to have that that large number of shares. The other thing, I'd say, is at an optical level. All companies are competing with other companies for talent. And while the relevant question for an employee to ask is, what percentage of the company are you giving me? Ah, lot of times they're very focused on the absolute number. And so if you only have, let's say 1000 shares in your company and your telling someone, but I'm offering you 50 shares that that maybe 5% of the company. But to them, the absolute number seems unimpressive. So a lot of times, even at the optical level, people like to have a 1,000,000 shares or million shares to divide up. I guess the question would be. What's the value of each share that you really need to figure out what it's worth and what the potential could be. Also, right, Right. Which is could be complicated but important not to just get stuck in the number. Correct. I mean, I have some shares which I don't believe all ever figure out how to turn them into money. They're just shares. So I think they are exciting, but does it's hard to get your money out, right? That's true with private companies. The nature of the beast is that they're illiquid, and you don't know when you will be able to liquidate. Will they go public? Will they get sold to another company, or will they start making, you know, issuing dividends? Teoh owners. Which is another way to sort of get economic benefit from ownership of shit. Right? Right. Okay. We're gonna move on to the next slide. Excellent. Um, intellectual property. We talked a little bit about this when we were talking about trademarks, but what are some things that companies should be thinking about protecting? We've got an online magazine T shirt company, tech company calendars. When is something protect herbal? And when should you get kind of an I P protection on it? Great question. So I think before we get into whether something is protect herbal at the like in terms of registering a trademark or filing a patent, the most important thing for a young company to do is to make sure that all of the intellectual property or know how or contributions that you're getting from either founders or from employees or consultants are properly assigned to the company so that the entity owns all of the I P. And that's got to be documented with with the right kind of agreement. Typically, they're called proprietary inventions, assignment agreements or or other names similar to that. But the main concept is that the entity should ultimately be the owner of the I P that's developed and the two components to think about our what happened before you started the entity. And then once you've got your entity in place, what's happening? Going forward? What about for a lot of the creative folks that are watching? Maybe they're photographers, and they hire other photographers who are shooting images for them. Who owns the images, the photographer or the company that's hiring the photographer. So, uh, that's sort of a gray area question and depends on whether their employees or whether they're consultants, which will talk about and also what, what? The document between the photographer and the and the entity or the company owner has. Ultimately, it could. It could sort of very depending on the nature of the business. But of course, if you're running a business, you would love to own those own those photos. And so if you have a properly documented consulting agreement that's got an inventions assignment clause, you can make sure that the that the content that's being created is owned by you. Okay, and what about in the case of blog's and content and articles? Who's owning the content that's being developed? So again, Gray area question. A lot of blog's will have terms of service assigned to them. And so whoever is contributing to the Blawg hopefully is reading the terms of service, which will tell which will tell the contributor whether they own the content or whether or whether it's being assigned to the company once it's published. Okay, so those all those details when you scroll all the way down in terms of service, and you just say Yes, maybe we should be looking at those and see what they say, Yeah, I mean, it's understandable. I download stuff all the time and just kind of click. Yes, that's fine. And don't worry about it too much, but when it's but when you're that's as a consumer. But when you're running a business and when you're sort of interacting at the at the business level, those terms of services and when you click, I agree those air valid contracts So it is relevant to read them and relevant to make sure the same thing goes for privacy policies, which will what you'll see a lot a swell, those air, all relevant to read and sort of be aware what the rules of the game are right not to put you on the spot, but this whole terms of service. If somebody's clicking on it, what have you seen in the past where people didn't realize they were giving away their rights to something or signed something they didn't realize with a contract, like maybe an example of something bad that happened just so that we can understand the ramifications right? so I mean, if the terms of service have something that's that's unconscionable in them and you know, if the terms of service said, Hey, by clicking here, your mother now owes me $10, or something like that, that's probably not gonna be enforceable just because, you know, it violates the general covenants of fair dealing. But if the terms of service say, hey, if you post something offensive here, we have the right to take it down or if you post something that we don't like, we have the right to terminate your membership in whatever the service. Maybe those air those air valid contracts. And the company that is offering the terms of service is well within their rights to enforce that. Okay, great question. Yes. Um, this is a simple question, but it's come up since I have a magazine Media laws, air so crazy. And I've been doing a lot of studying and talk to a few lawyers and things like that. The picture thing has been a big issue for us. Um, can you define intellectual property? I mean, I know what it means, but I've had it come up where someone feels that they give me advice on something that that that's their intellectual property, and I'm using it. And you know, those types of things. Could you define what would be considered intellectual property? So it's not an easy thing to just sort of define. And when you read these contracts and when they have a defined term in the contract and it says intellectual property or company intellectual property, it'll be a paragraph talking about know how designs, business ideas, plans, thoughts, anything sort of conceived into writing. So the concept of intellectual property is extremely broad. But the the thing to focus on is what's protect herbal intellectual property and general business advice that you're getting from from folks you know, is not necessarily going to be something that they can prevent you from using or or prevent you from, sort of going forward with unless there's a pre existing contract of some sort, right? Right. And so, if yeah, my sense is you're probably getting informal advice from people saying, Hey, I think this would be a good strategy. Now that's my intellectual property that has come up not just that way, but I've had, you know, our photographer had taken photos previously. She owns the rights to the photos, and then the person who's event It was, you know, asked said that she owned those photos because it was at her event and we've actually already had to go through some legal things. And we've only been around for three months, So I mean, I think on that just because I was a documentary filmmaker before I was in this world. And so any time you're shooting things location release, subject, release, you know I don't have anything that's recognizable, like a the name of a book or piece of art. If it's video, you don't want to have a song. Happy Birthday is notorious that the happy birthday people constantly like, Look for anybody that singing Happy Birthday. I probably shouldn't even say that. So I didn't sing it. I just said the words, but like, there are certain things that you just have to like figure out in your industry. How do you need to cover yourself? So if you have some advice on that yeah, absolutely. Specifically, with regard to photos or or or filming importers, right, it's important to have a release agreement in place. You'll often watch reality shows and you'll see certain reality show contestants faces. And then some will be blurred out. And that's because the ones who have been blurred out have not given the company the right to use their image on TV. And that's part of getting a release. And a release agreement could be a short is, you know, 32 or three sentences just saying, Hey, you hereby agree, Toe, let me use your images or your your likeness in the following way. We've been asked to do a lot of red carpet events. They invite us to come do interviews, things like that. Should I should I sign a release agreement beforehand with the person holding the event? Yeah, that's a that's a definitely a good idea idea to do. I mean, any time you can sort of memorialize the relationship that you're gonna have with somebody that you're interacting with on paper, it's going to serve to clarify the you know, the rights for each side. Well, I think in your situation to its get a release so that you can use the images that you're taking and have them on your site. later on and not worry about it, because those will be great for you to have these red carpet photos. So you want to be able to use the content? All right, so we're gonna move on to the next topic. Um, board of directors again. You just mentioned this with Jeff. We were talking about if there was a board of directors in place. When is it a good time to happen In advisory board versus a board of directors. And how do you decide when you need to do that? Sure. So a board of directors is actually illegal concept codified under Delaware law or anywhere any state law that that's a requirement so that the board of directors air basically the stewards of the company. And they sort of set the set the broad based agenda. They are responsible for hiring the officers who are ultimately going to run the day to day operations of the company. And so typically, what we say on the board is to limit that toe the main founders and maybe a major investor who's got a really vested interest in the company's success. I think a lot of times companies really want to put ah thought leader or an influence, or somebody who they feel like is going to give them access or help them even just be unique in their space and put them on the board. But typically, I would say that's not the best idea, because that person is not going to be as focused as the founders or the investors on the success of the company at a more granular level and in. So if you just want to attach that name to the company and maybe just get advice on an ad needed basis on a as needed basis, a great way to do that is to create a board of advisors, which is it can be created formally for the company, but it's not. It doesn't carry the same weight as a board of directors who really make you know high level business decisions for the company. Okay, are there any trigger points in terms of finances, number of employees, anything like that? That what you would say? Oh, now I'm big enough that I need this or is it really individual? It's pretty individual, depending on what you need out of the person that you're gonna want to put on your I assume you're talking about a board of advisor. So for a company that's gonna that's maybe relying more on celebrity endorsements or things like that, it might be nice to put somebody from the outset on the board of Advisors. A lot of times when a company is like in the medical space, like a medical device space, it's nice to have a scientific board of advisers, which signals to the to the community that hey, I've got these six or seven PhD's on my board of advisers who I can go to for advice. And, you know, they think what I'm doing is interesting, right? Okay, so question from Jeff, you typically incent a border advisers. Great question. So, uh, assuming you can't pay them cash, a great way to do that is to give them options out of the option pool about T shirts for life. You know, if if their T shirt collection is limited, then that might be a great way to do it. But you know, on that I have done some advisory situations where when I have traded for food, but you then do get taxed So you need to make sure that you figure out if you're giving the T shirts, you still will need to give them some kind of document at the end of the year that the value of the T shirts were X. So you still need to cover yourself even in a barter situation, right? Right. Yeah, no. Anything you give to somebody in consideration for their services, you know, if it has value that's gonna be taken under consideration for tax purposes, that's the most common way we've seen it done. And that's what folks that are generally on board of advisors there. They're on more than one board of advisers and so typically that they're used to getting equity. So options are a great way to do that. This one, I think, is actually really important. I wanted to talk a little bit about the difference between employees and consultants because a lot of times when you're starting out, hiring someone is cost prohibitive and having somebody on salary that might be too stressful. And so having contractor relationships is great. But I've heard a lot of things about Well, if they're contractor, they need to use your own equipment. They can't be in your office. Can you just tell us what the rules are? And maybe even thinking about dams business, where he's gonna be doing some tech advising and potentially need some people to help go be the face of his company out in about taking client calls? How do you make sure that you're doing things right? Sure. So, um, every state and even even the at the federal level. There's There's different rules as to how folks can be classified, whether they be employees or contractors. And it's not necessarily determinative what you call them. You know, you could call somebody a VP of marketing, um, and assume that they're an employee. But but really, you know, they could be classified as a consultant or an independent contractor, depending on how they work. And so you actually touched on the on the way it's the determination is made. It's as it says on the screen. It's a multi factor test, so employees are typically doing the day to day ordinary course business, uh, activities that the company does. They're doing it usually at the direction of a supervisor, and they're using company materials as as you said, whereas consultants or independent contractors are usually working on a project basis, maybe on a limited time for a limited scope of time, Um, and using their own materials, like their own laptop on DSO fourth. Sometimes there is sort of this motivation toe hire consultants and not employees, because then you don't you think you don't have to worry about, you know, employment related laws that sort of apply with respect to, like, payroll taxes and things like that. But ultimately, if there's an audit and if it's determined that you've misclassified a consultant, that should have been an employee, there's a whole host of of ways the government will find you for misclassifying well, in that it wasn't my situation. But I do have a friend who has a graphic design shop and small. Maybe he's got a couple of people that are on staff, and he had 1/3 party who was helping as a contractor when kind of the peaks and the valleys of the business were going. Now that person, he ended up not having enough work for them. After a certain period of time, let them go, but they actually went and filed unemployment claims, saying that they were an employee. So then it triggered an audit, ended up getting fined. I think it was like $20,000 basically saying that they had worked a certain number of hours that were over so that it turned them from a contractor. Even with these outside kind of aspects because of length of time, so are their time periods that we need to think about two. So there's no hard and fast rule. But but yeah, certainly the more, uh, the more the employees there, the more the individual is providing services in terms of hours, the more likely they're there to be considered an employee, and the longer they do it for the more feels like ordinary course business for the company and less like a project. Right, right, right Casino, $20,000 fine. All this and that can be tough on an entrepreneur. So yeah, I know it's it's a it's a really risk. And even when investors are looking at companies especially, you know in that kind of space where the operations have to do with having a whole bunch of people of people sort of outside outside sales kind of rolls. A big question is have we looked into the issues? Is whether these people are misclassified. Okay. All right. Okay. So moving on to our next topic initial capital. Um, obviously, a lot of us are bootstrapping our businesses. I think that's very common. We are gonna talk tomorrow about kick starters. We don't need to go too deep into that. But talking about crowd source funding, which is much more common than it used to be. But what are some other ways that people can raise capital? And when do you decide that you're ready to do that? Like, if you need. You know what an office or you need new equipment. Like, when do you want to turn and start going to get capital? Yeah. So the need for capital is gonna feel pretty organic because with without it, it's gonna limit how fast you can scale your business. Some businesses start out earning revenues and some sort of pre revenue for a while. So, um, that's gonna help Determine when you need to start raising capital. Um, in terms of in terms of ah, when to start thinking about it. I mean, when you put together your business plan when you start a business, and hopefully a lot of you have have done a formal business plan, which I would recommend is a good exercise. It's going to force you to think about how much money do you have now. And how far is that going to take you? And at some point along that continuum, when you're gonna have to start thinking about raising money from outside investors? Or will the business? Or are you expecting the business to be successful to the point where before you run out of your own money, the companies actually earning money? I've also heard another small tip, but is to actually get to know your local banker so wherever you have your money to go in and to meet them, because there can be times when you know if you need a credit extension or you know something, if you actually have a personal relationship with your banker, it might be beneficial. So just a small business trip. But have heard a girlfriend of mine has an art gallery. She's talked about how that's been useful and that, you know, to have ah person know your face is good. Any any other tips like that, like little small tips for the small business owner. Um, any time you're out and about and ableto talk to investors informally, one thing we like to tell our clients is it's nice to talk to investors before you need their money because you can actually have a conversation where there's less of a quid pro quo and they can really get to know your business. So to the point about your girlfriend that's got the let's get the banker relationship, that banker not only has a personal relationship, they were actually getting to know more about the business. And so when it comes time to ask for money or ask for a loan, the the banker or the investor, whoever it is is more comfortable and more ready to sort of help. Right now, I know that, of course, Shark Tank. Probably a lot of us have seen that, But we'll see. You know, I'll give you $50,000 if you give me 40% of your business. How do you figure out the percentages? Is that again looking at the valuation of the company and then, uh, kind of slicing up the pie. Yeah, that's exactly right. So, um, in order to figure out what what that dollar amount is worth in terms of percentage of the company, you want to think of the overall enterprise value of the business. And there's a 1,000,000 different ways toe to think about that. Sometimes people look at revenue is as a good metric to figure out what the company's worth is. Often times, it feels like it's more art than science. And really, you're looking to your competitors to see what their values are and then working from that value to your company by by sort of adjusting for for certain metrics. Okay, so again, hypothetical. But let's say we have a photography business, said Springing. In $100,000 a year, is there a multiplier where we can say that the value of that company then is four times five times like what's the kind of the equation? So that that is a totally valid way to do it. But every business and every sort of industry, it's gonna have its own set of multipliers, just like even in the real estate business, the value of the building might. The value of a residential building might be a multiplier based on the amount of rents that that it can generate on a monthly basis. So in MAWR established businesses that air that grow a little bit slower, the multiplier is a little lower. And for like, the hot the hottest thing on the block, that's sort of exploding. The multiplier is higher because the thought is the trajectories is more vertical. OK, we've got questions for all the different segments that were great that we've done. So this will be just general legal. Catch all if that's okay. Um, Jazmine says, Do you still have to file forms for gifting a service to someone like donating a free session to a person? Um, and in a similar vein, sweet, sassy diva says. So if you're giving a voucher for photography for free makeup and hair as well as $100 credit, do you still have to fill out all those forms for the people? Um, that's kind of Ah, that's kind of interesting question. The answer is, you consort of you can gift the amount of services that are that are small, and you probably don't have to fill out any particular forms. But after a while that the value of those gifts they're going to accumulate and a a certain threshold you may actually have to fill out those kinds of forms. Is there like a number where that you know, $10, of gifts or is there a trigger point? There is a trigger point. I don't have that dollar number off hand, but it's it's probably lower than 10,000. Okay, okay. All right. This is a question from the rainy day store. And, um, what about employees in other countries? We talked earlier about virtual assistants. Do we have to follow the laws in the U. S. Or in another country? Great question. So typically you have to follow the laws in the other country. And actually, some of our clients do sort of outsourced the development of whatever technology they're doing, whether it be in the Ukraine or Romania or something like that. And they do have to engage local local council there to figure out what one of the laws where the employment laws and actually specifically with stock option plans. Those vary by country as well. And so a lot of times you'll see like a United States compliance stock option plan that has a sub plan below it that's specific to the country where they're issuing the options to. It's complicated pretty quickly, huh? It does. And businesses go global a lot faster than they used to to. So these sort of sorts of issues come up sometimes relatively early in the process, Right? Dan had a quick question on just legal fees. I know that most start up companies the legal side of things could be fairly daunting because there's a pretty high hourly fee, right? Those folks charge, Um what? What are your opinions on going to sites? Or companies that offer the creation of LLC's in terms of services and privacy statements sort of in a cookie cutter way, but at a lot cheaper rate. I'm going and getting it. And are there any downsides to that? I know it's not as customized, but would you would you recommend it? Or is there any sort of unbiased answer you have regarding that? Um, no, I think that's a valid question, and I I think I would say this. Those sites are valid and relevant and it's there's it's a good way to get up and running and even actually Founders Workbench was, which is a site that's developed by Goodwin. Procter is a place that you could go generate the LLC documents or or the corporate incorporation documents and get it all done yourself without talking to a lawyer. So we certainly don't. I wouldn't tell you that. That's a bad way to go. It's an acceptable way to go, but, uh, having worked with a bunch of companies that are sort of just getting started and not getting started by, you know, second time founders that have plenty of money to throw it, their business is something that law firms like Goodwin Procter do is. We differ legal fees. And so if you, when you get started with with us, will differ the first you know X amount of dollars of legal fees until you actually get funded, and that helps solve that chicken and egg problem. Because it is, it's dangerous to start a business without having any advice. Um, and as you alluded to in the beginning, it's not fun to sort of have to fix a 1,000, problems down the road when it would have been relatively inexpensive to get it done right from that from the get go. Okay, so you would say then, overall, if you have a certain amount of funds, would you Would you recommend that you put a good amount of those funds into setting the legal precedent correctly, rather than going sort of the more budget route Your money is well worth putting in in hiring somebody like you or your firm. Your money is well worth hiring a good lawyer. And to the extent that you can differ, however much that costs, I think that's that's a feather in your cap going forward. That said, You know, a lot of people feel like they're relatively savvy and there, and they want to do it themselves and at least get started on their own. And eso I wouldn't shy away from that, Actually, one of our company's rocket lawyer. It's a company I represent, and they do that sort of thing, too, and they'll even help connect you with an attorney after you've filed after you file your initial papers. So, um, I wouldn't generally council against it, but it doesn't hurt to start by talking to a lawyer from the start. A good one will give you a consultation at least without charging you and the better ones. Like Goodwin. Procter will actually work with you, as I mentioned by deferring Piece Well, and I have asked him three questions and each one of them. He said, No, you don't need to do that. So I haven't spent any money yet still sitting here on the couch as my friend. So that's true. I mean, I think as with any business, we value a long term relationships. And so if we can help you with a couple early questions and sort of show you that were that were good business advisers, that's more effective than nickel and dime ing somebody from the get go and retainers air they usually an hourly retained on hourly rate? Or do you do like a retainer where I need to have extent thousands of dollars, and we're gonna bill against that and then tell you when you get to that level or so retainer. Zahra separate a separate concept from deferred fees. But assuming there is a retainer relationship, usually what happens is it will be an X number of dollars that that you commit to the law firm up front and that that money will serve to sort of pay for the hourly rate That comes as follows when you're when you're actually getting the legal advice. Okay, so I want to dio quickly, I want you to summarize for really quick reminder for anyone out there who wanted to check out that Founders workbench, which is the resource for the free advice on that is that founders workbench dot com. You can also check them out on Twitter at at Founders WK bench. OK, just wanna make sure you get that out there for everyone who may have just heard the name and wanted to check it out. Thank you. Absolutely. Because this is the module that were really getting in kind of the nitty gritty. Are there any other people other than the lawyers that we really should be thinking about in terms of accountants bookkeepers? Because we're not going to really talk about this topic again? So, you know, are there other players in the this whole kind of pie that we should be thinking about? Definitely. And you hit the nail on the head. It's really important to get in touch with an accountant who will then who can then serve as your bookkeeper as well refer. A lot of times people talk about, you know, I do what I do best, but I'm not good at accounting, which you mentioned before I'm not good at, You know, you know, lead legal issues is really important to get somebody involved early on and hope. And there are a host of accountants and bookkeepers and and folks like that that are willing to work with companies from from the outset and not sort of charge you an arm and a leg from the beginning. And so you should be ask comfortable asking those questions explaining what situation you're in. Um, and there tends to be I found a sliding scale for that. And actually, either your lawyer or your accountant should be a resource for you to find either an accountant or a lawyer or another service provider that that could be useful. So you're all kind of linked together. You kind of all know each other. I know some of them, and some of them know me. All right. Any other questions from the group. So what I just wanted to do was, if you could just summarize for me for the small business owner, kind of the three legal things that you know. I talked a lot in module one about prioritizing. What are the three things in terms of legal that we should think about? A small business? Owners? Sure. So the first thing would be to document everything. I can't tell you how many situations we've had with clients where there's been an aural promise or miscommunication between people as to what their what they think they're entitled to and what they're actually entitled, too. And so putting things down on paper is definitely always a good idea. The next thing I'd say is, and this may feel counterintuitive to the 1st 1 but it's keep it simple. Don't over optimize the way you're going to divide up your founder equity or the way you're going to set up your vesting schedule. Stick Teoh what's customary, and that's gonna help down the road. Kind of keep legal costs down as well. And then the last thing I'd say is, um, don't procrastinate when there's like an underlying issue that you feel like you don't want to deal with, and it's festering. You'll deal with it later. Bring it out in the open, consult with it with an attorney early on, or even consult with your co founder early on about whatever potential disagreement it might be. It'll end up being, ah, lot cheaper and a lot quicker to solve in the long run. Okay, great. So keep it simple document. And don't put things off exactly. Right. Okay, great. Well, the super advice. We really, really appreciate it. Any other thoughts or questions from the Internet? We will take one or two more if you have. Okay, we do have them. I wasn't sure if you want to just wrap up with that. But, um, So we had a question from a guest. Who? You know, a lot of people we've talked about set everything up, right. And then there are people who have been in business for a while. So the question is, can you start an entity retroactively? Like, if you already have a one year old company, Can you set it up correctly? That? Yeah, actually, a lot of times a company will come to us that's sort of a mess and will create a new entity. Will transfer the assets from the old entity into the new entity, issue stock from the new entity and and either dissolve, emerge the old entity into the new one. And it it's it's ah, commonly, uh, it's a common way to sort of clean up the old corporate stuff that's laying around there and start fresh. So we do have a couple of people asking about businesses that air purely online on whether that's a service based business or even um, yes, somebody who is handling no inventory. So Desert Eagle asked, If we're online selling over the Internet and handle no inventory, do we need to incorporate in our state war? Doesn't matter. And that's I saw a question earlier. That was an international one. Similarly, yeah, So the answer, which kind of touches back on what we talked about earlier, which is you can actually incorporate in any state, Um, and assuming the founder of the person running the site is in is located somewhere, they'll probably have to register as a foreign foreign corporation doing business in the state in which the founders in but they could certainly do it in any state, that's great. And as a follow up to that, yes, mean says as a photographer do we need to be registered as a foreign entity? In each state, we photograph a wedding in, like if you travel from Washington toe New York to do a wedding in New York, do you need to be registered there? The short answer is you. You know, if you're not consistently doing business there, you probably don't have to register in the state as someone that's doing business. But specifically with that kind of business, I would probably encourage them toe dig into the issues a little deeper. It might be that there's some sort of business filing they have to do if they're gonna continually go back to the same state. Great. Any more questions in our studio audience? All right, one final question, then can you? If you start as a sole proprietor in your state, can you then transfer it into an LLC or corporation in another state like Delaware? So going in between the two and between states? We talked a little bit about that, but yeah, absolutely. And so each state whether the it's the original state of the state you want to migrate to will have a different set of rules that govern how you can convert the entity. Thio Thio. An entity in a new state. And so it's important to look at those rules. Sometimes it will be a matter of converting the entity. Other times it will require a an actual merger of entities into the state, and so it can be done. But there are rules. Well, I want to thank you so much. It's very clear to me that you know your space and you know all of these these terms and it's been great to have you on as our guests. So thanks for coming and for all of your great thank you, been a lot of fun. And I really appreciate you inviting me on. Of course, Of course,

Class Description

Every successful business needs to have a clear brand message. Porter Gale is a consultant and former VP of marketing for Virgin America. In this class she’ll teach you everything you need to know to a business idea all the way to the front pages of major publications.

This class condenses 20 years of knowledge in creative development, social media, email marketing and PR and delivers it all in concise, easy to follow steps. 

During this class, Porter will discuss:

  • Naming your company
  • Creating a corporate culture
  • Multi-channel marketing and more!

She’ll share the stage with entrepreneurs from some of the world’s most innovative brands, like Virgin America, Dollar Shave Club, and Hint Water. You’ll learn how the pros build a brand through interviews, case histories, resource lists, and how-to tips.

A successful business brand understands its ideal customers and employs a team that consistently finds a way to stand out in the crowd. Learn how to build that brand from Porter Gale.

Reviews

a Creativelive Student
 

Thank You so much Porter Gale I have learned so much you made me view everything in a more professional way seeing how the big boys do it made me realize the steps that need to be taken for success. You are a very smart thank you again for sharing your knowledge I have the title of your book stuck in my head I think is powerful.

a Creativelive Student
 

This is an excellent course which delivers so much key information to developing your brand. Highly recommended!