JUSTLAW

The best advice you’ll ever get for starting a business

                                                 About the Author

Dov S. Rosen is a JUSTLAW network attorney who represents private and publicly-traded companies in negotiating mergers, acquisitions, private placements,  IPOs, and commercial contracts.  He also has an active practice negotiating commercial real estate loans,  property acquisitions, and commercial leases.                   

Dov graduated from Georgetown University Law Center in 2011 and, in 2020, founded The Law Offices of Dov S. Rosen. 

He can be reached at [email protected]

(This article is the first in a multi-part series. Stay tuned to The Verdict for the next installments!)

You’ve got a winning idea. You have a business plan set up. Maybe you even have some investors lined up.

Congratulations – you’re on your way to starting your own business.

What’s next?

Part I: Cash 101

Cash is the lifeline of any business. And the key question for your business is how that cash flows in and how it may be expected to flow out. This leads us to the first big choices your business will make: how to raise money, whom to raise it from, and what to give up in return.

 

Early-stage startup investors will often include family and friends, “angel” investors (generally, high-net-worth individuals who are willing to invest in early-stage companies in exchange for preferred equity), and – for particularly promising new companies – venture capital firms. Nowadays, crowdfunding platforms like GoFundMe are also becoming increasingly popular for early-stage companies (we will explore the advantages and limitations of crowdfunding in a later installment). For startups later in their business lifecycle, institutional investors may play a greater role, and for more advanced companies the public equity markets may become relevant.

 

Each of these investors will have different expectations about what they will receive in return for their money. Typical forms of startup capital include common equity, preferred equity (often with the right to convert to common at a later time), and convertible debt (debt with a right to convert to equity at a later time). Other equity structures like simple agreements for future equity, or “SAFEs”, offer distinct advantages and disadvantages and are becoming more common. And for many businesses, business loans (including SBA loans for qualified borrowers) are a good option for providing initial capital – but with their own advantages and disadvantages. We will discuss these various types of startup capital later in our series.

 

A note on securities laws:

Our focus is on early-stage startups engaging in private offerings that are exempt from registration with the SEC or other state regulatory commissions. Securities laws are not just for public companies – any company that issues equity to raise money is potentially subject to them and must fall within an exemption avoid registration and reporting requirements. In later parts of this series, we will speak about the various exemptions from securities laws and

how to make sure you stay within the rules throughout your business lifecycle.

Trade-Offs

Cash will almost always come at a cost. To make your idea a reality, you will inevitably have to trade a piece of ownership over the idea you have created and often a degree of control over the business you are building. But that does not mean all equity raises will have the same impact on the future of your business. The choices you make early on can determine the evolution of your business for years to come, preserving your flexibility and a large degree of your control. Conversely, a sub-optimal equity structure, poor entity choice, or improperly drafted company agreement can hamstring your ability to raise cash, leave you stuck with a bad partner, and even cost you the control you need to make your business grow.

 

But making necessary trade-offs is a natural part of the growth cycle of every business. The key is to establish clear expectations and to structure investments in a way that respects the needs of investors while preserving your ability to grow the business. The trade-offs you will have to make will generally come in the following areas: keeping cash in the business, keeping the flexibility to raise more cash, and keeping control over business decisions

Employee v. Independent Contractor

Are you starting a business and need to hire more personnel? If so, have you thought about whether to hire an employee or an independent contractor? If not, please take a second to learn of the main differences between the two, below:

Why does it matter?

At first glance, you may be asking yourself: why does this even matter? Well, JUSTLAW is here to tell you it does, most importantly for tax liability purposes, among other things. 

Employers must pay a whole variety of taxes for their employees. However, that is not the case for employers who hire independent contractors. Employers don’t have to pay any taxes such as Social Security, state and federal unemployment tax, etc. If employers hire employees for their business, those taxes mentioned above and a list of others must also be paid. Therefore, it is clear that employers almost always prefer to hire independent contractors over employees from a tax liability standpoint. 

In addition, employees are protected by federal laws such as minimum wage, laws protecting their overtime work, and employment discrimination. Independent contractors have no such rights provided by federal law, specifically for overtime and employment discrimination. 

business law regarding freelancers
It’s vital to establish whether someone who works for you is an employee or independent contractor

Employers also should know that independent contractors do not normally receive employment benefits. To the contrary, employees enjoy such benefits including paid time off and various health benefits. 

Accordingly, it is quite obvious that almost anyone would prefer to work as an employee. However, most employers prefer independent contractors. From an employer’s standpoint, it really depends on the type of business they are operating and the type of positions they are looking to fill. For example, a startup has different needs compared to that of a 20-year successful public company. 

How can you tell if someone you have hired is an employee or an independent contractor? 

Usually, it is pretty obvious and easy to decipher. Employment contracts will explicitly state if the person hired is an employee or an independent contractor. 

However, in other cases, it is not as obvious. Luckily, courts have provided us with an array of factors to consider to determine whether someone is an employee or an independent contractor. These factors are commonly referred to as the “Economic Realities Test”: 

 

  1. What is the degree of control over the person’s work? Who exercises that control?
  2. What is each party’s (person and business) degree of loss in their exchange?
  3. Who has funded the person’s purchase of materials needed to complete their tasks such as equipment and supplies?
  4. How long-lasting is the person’s position? 
  5. Would the business suffer if this person was not present? How important are they to the business? 
  6. What degree of skill and expertise is needed to complete the applicable work? 

* * * * * *

Speak to a JUSTLAW attorney today to initiate your first consultation and receive immediate advice as to whether to hire an employee or an independent contractor. 

This post is not legal advice. It is for general informational purposes only. No reader should rely on this information in any way whatsoever without first seeking legal advice.