Our law firm assists clients in starting their businesses such as registering, incorporating, licensing, and financing their operations. Financing a business is an important component because the business will fail if it cannot cover its operational costs. Internet-based commercial organizations (also known as “e-commerce websites” or “e-businesses”) should consider financing to pay for research, development, production, distribution, and marketing. Early-stage businesses should plan for developing an online presence through marketing and advertising. Early-stage businesses do not usually have access to the traditional funding resources such as financial institutions. They tend to look for investors for short-term or long-term investment opportunities. Nevertheless, there may be disparate interests between the company’s founders and investors because the founders are usually in it for the long haul but the investors are looking for the fastest return on investment.
There is a basic difference between equity and debt. Equity usually means there is an ownership interest in the company. So, if the company prospers and shows positive growth, then the equity value increases with the growth. A corporation can issue “common stocks” or “preferred stocks” to shareholders. It can also issue “convertible preferred stocks” to shareholders. Common stock grants the right to vote on important corporate decisions such as mergers and acquisitions, elections, dividend rights, and liquidation rights. Preferred stocks are a more complicated type of equity interests and will have more features such as a multiplication of the investor’s original investment in the company. The investor may have liquidation rights between one to fifteen times its original investment. Preferred stocks can grant conversion rights to the investors in the event of a certain incident. In other words, the preferred stocks will convert to common stocks if a specific incident takes place in the future. Most venture capitalist investors take preferred stocks when investing in startup companies.
A business has the option to raise funds by incurring a debt like a loan taken out by the founder, shareholder, or other principal officer. It usually includes a promise to repay the loan with a specified amount of interest. The interest rate may be fixed or variable depending on the contractual terms. If the business pays off the debt within the specified time, then there will be no negative repercussions. However, if the business fails to pay off the debt on time, it may be forced into bankruptcy or asset liquidation.
A business must have access to capital throughout the course of its operations. The capital should be used for its daily operational expenses such as payroll and other financial obligations. The capital may be obtained from angel investors and venture capitalists who will in turn receive something in return for their investments. The investment may be characterized as a “bridge loan” which is usually short term and is repaid from the investment proceeds. The investors usually obtain a security on the corporate assets, including, but not limited to, real estate, inventory, or accounts receivables.
A business may obtain a loan from the Small Business Administration (“SBA”) by providing a personal guaranty and collateral security such as real estate and equipment. Our law firm’s internet business financing attorneys draft legal documents to consummate the transactions. These documents include stock purchase agreements, shareholder agreements, nondisclosure agreements, investor right agreements, management employment agreements, invention agreements, loan agreements, promissory notes, UCC-1 financing statements, personal guarantees, legal opinions, and letters of intent.
These legal documents are important for outlining parties’ rights and responsibilities and avoiding legal disputes. They should include a clear definition of the relevant terms and explain the nature and purpose of the transaction. Our law firm ensures the client’s rights are protected by drafting forms, applications, notices, disclosures, and agreements. We also are familiar with the relevant rules and regulations. For example, the Uniform Commercial Code applies to tangible and intangible personal property rights. Under Article 9, intellectual property is considered as an “intangible personal property.” Therefore, business owners should comply with the rules when financing their business operations.
In short, startups have the following financing options: Angel financing, crowdfunding, small business credit cards, venture capital, and small business loans. We are here to assist our clients in financing their business operations.