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Are your business assets protected? Free legal check-up, business audit from California business lawyer Chris Barsness

With the recent economic turmoil of the last few years, more and more businesses of all sizes have faced tough choices when it comes to the future operations of their company. Some have gone out of business and others have cut costs down to the bone to survive. Typically, the large corporations have their assets and business structure planned properly to provide as much protection as possible. However, many small to mid-sized businesses may have not worried too much about planning for the future, they are just worried about making payroll for the month.

Obviously a best practice would be to get everything structure properly when the company is formed and setup, then maintained and kept up to date. Most start-up or small businesses don’t have the resources to do this, despite the fact that it would save them tons of time and money down the road, not to mention assuring that their personal assets aren’t at risk.

The problem is that the owners or management don’t realize the major risks to their own assets and personal livelihood can be in jeopardy. Just because you have a LLC or corporation formed doesn’t mean there are not any major landmines. I have seen many business owners come to me having to file for personal bankruptcy because their lives and their families lives were ruined by a business failure in which they thought they were protected. Some lose their homes or personal assets, like savings accounts as well.

Some examples of how this can happen are failure to keep adequate workers compensation insurance in California or properly withhold and deposit enough payroll taxes for your employees. The owners, directors, officers, and management can face personal liability for all of these liabilities, even if the company is a corporation and no personal guarantees were signed by those individuals.

There are ways to protect yourself personally and your assets from business issues, but the best way to handle this before it ever gets to your personal assets is to be sure your business and business assets are properly protected and structured. This can be done at any time, but if you wait until after the fire starts, it will be much more difficult to put it out the longer you wait.

There are many ways to protect your business and assure it is being properly run. One of the best ways to see how healthy your business is would be to get a business check-up, sometimes called a legal check-up or business legal audit.

We provide a free initial consultation to take a look at your current business structure, operations, finances, assets, liabilities, insurance, record keeping, and risks. We can devise a plan of action and strategies on how to improve the health of your business. This is even more important if the business is not doing well financially, because that is usually when the problems are going to start or get worse.

Contact me, your California business attorney, to give you a free consultation and check-up for your business. I can give you a no obligation review and idea on what steps you should take and any costs or fees involved to get the business back up to speed and protect not only the company, but your personal assets.

Litigation in California is big business for plaintiffs’ lawyers and state agencies take no mercy on shutting down companies and taking the owner or management’s assets.

Entrepreneurs Suffer Credit Problems In Economic Hard Times

Many small business owners or other entrepreneurs start out with a great idea for a new product or service. They start a business and focus on doing whatever it takes to make the company successful. Many don't take the steps necessary to properly protect the business from creditors or don't really pay much attention to what they sign when they are making deals. The ones who do read the fine print may just have the attitude that they are so confident in the business' success, who cares if they use their own personal credit to get some working capital. With the economic downturn over the last few years, many business owners have had to close their doors because they couldn't get the funds they needed to even cover the simple things like payroll or rent.

Use of Personal Credit

Many entrepreneurs feel that they should put some 'skin in the game' by contributing some of their own money into the business. In fact, the Small Business Administration backed loans often require the founders to contribute at least a certain percent of their own assets or some other major contribution in order to qualify for a business loan. When the owner doesn't have available cash, they look to other sources to get the money to contribute. That can lead to things like taking out a home equity line of credit or using personal credit cards to help fund the business. Obviously that is pretty risky, but often necessary to get early access to this seed money to start and grow. The banks that issued the credit did so based upon the owner's personal credit rating. Just because the credit card may have the business' name on it doesn't mean the bank hasn't covered their bases by making sure they can sue the owner personally if the business defaults in payment.

#JOBS act #entrepreneur #startup #founders #credit repair #bankruptcy

2012 US Compensation Policy FAQs from ISS

Back on January 25th, 2012, Institutional Shareholder Services, Inc. (ISS) released its report and frequently asked questions regarding corporate governance relating to policies on compensation and proxy solicitations. This helps provide guidance for companies preparing their proxies for 2012 and beyond in terms of disclosures and voting for say on pay, pay for performance, and equity plans.

A link to their answers and the link to their white paper and the methodologies used in adopting its policies can be found at:

http://www.issgovernance.com/policy/2012/USCompensationFAQ

SEC report on Reg D offerings

What do I look for in a business or startup attorney?

One of the biggest questions small business owners or founders have when it comes to early stage business issues is when do they need to hire an attorney and how do they pick one. I will explain what I think are important qualities and how an attorney can be invaluable, even before the company is formed.

A good startup or business attorney needs to be able to see a wide variety of potential issues the company may face and be able to address those with the company or founders. If they simply form a corporation and provide some initial shareholder agreements, bylaws, resolutions, or other initial documentation, that is a valuable service, but there is much more to be examined and addressed in an early stage business. There are many legal or business issues, such as what intellectual property protection is or needs to be in place (e.g. patents, trademarks, non-disclosure agreements), advise the founders about securities laws relating to issuing stock or raising money, preparing for human resources and hiring (e.g. explaining that you can't just call someone an independent contractor or 1099 and avoid payroll tax withholding obligations), and when to get someone involved in drafting or reviewing contracts. While it is true that "startup law" is really mostly about basic formation and protection of business entities and possibly help with closing initial rounds of funding, the attorney should have a wide general knowledge of many aspects of business and law.

"Emerging Growth Companies"- JOBS Act May Provide Eased Regulations

With H.R. 3606, or most commonly referred to as the "JOBS" Act (Bill Summary | Bill Text PDF), likely to be signed into law this week by President Obama, there are some new changes that may be of help to startup and small companies. In addition to the so-called crowdfunding exemption from securities registration which allows pooling of small amounts from investors to fund a company, the JOBS Act puts in place regulations that carve out a category called "emerging growth companies" which have an intermediate level of reporting obligations with the SEC. It is between the level of disclosures required for a fully reporting large company and a private, non-reporting company. This could be a very good help for these small to middle market companies to ease the burden of time and expense in being a fully reporting company.

#Dodd-Frank #HR 3606 #JOBS Act #SOX #emerging growth

To Stagger or Not to Stagger Your Board of Directors, That is the Question

One question faced by companies from startup through Fortune 500 status is whether they should stagger or classify their board of directors. Staggering or classifying occurs when the corporation sets up voting for election of only a minority of members of the board every year, so it often takes several years to replace an entire board. This is viewed as a good takeover defense and also argued to be good for the corporation because frequent changes of directors can result in corporate policy and corporate governance changing more often or more dramatically. Those against it feel that it doesn't give shareholders the ability to make major changes when problems arise with the current board's decisions and it entrenches existing corporate policy and management to not as easily allow for necessary change. Although some would downplay trying to make this about shareholder rights versus management or existing structure, that is a major factor of the argument.

#staggered board #board of directors #corporate governance #corporate ownership #Dodd-Frank

Crowdfunding Passed Senate but Reduced By Bill Amendment

H.R. 2930, one part of the multi-bill JOBS Act being pushed through Congress, was to allow more eased securities regulation of so-called crowdfunding. Some have argued that sites like Kickstarter or others could change their business model (currently only accepts gifts or donations, called pledges, to raise money) to help companies raise money for companies in exchange for stock in that company. Currently, that model would be prohibited under securities laws as general advertising and public sales of stock are not allowed, especially through an intermediary, with certain exceptions like using a registered broker-dealer or registering the stock with the SEC.

#crowdfunding

Exits- What are the common forms?

Many people start companies because they are passionate about their idea, product, or vision. Investors love to see that passion in a founder, but they are obviously wanting a return on their investment. This is where exit strategies come into play, sometimes referred to as a liquidity event. You could lump things like a dividend distribution or repayment on a note in as a form of exit for the investor to recoup their investment and gain their return; however, most early investors in startups are willing to take the very high risk of failure for that investment in return for a potentially large return on their investment and dividends are not usually as sexy of a return.

Mergers & Acquisitions

Common forms of exit are to merge with another company or be acquired (i.e. bought) by another company. Of course, a startup could also seek out acquisition targets to obtain their intellectual property or their management team and be the one doing the buying, but we will look at M&A from an exit strategy point of view for the selling company.

#M&A #mergers & acquisitions #IPO #going public #Exits #Exit transactions

Good brief overview of some of the implementation of Dodd-Frank when it comes to public companies wanting to limit what they are required to do to comply with allowing shareholders to add nominations in proxy materials.

Kickstarter and other crowdfunding platforms to grow in the very near future

Kickstarter is one of the main examples of a crowdfunding type of company. It solicits money to help fund new projects or companies. So is this general advertising, solicitation, and funding by a non-broker/dealer or intermediary that is not allowed by law? Yes and no.

Although their terms of use and other information on their website do not specifically state this, they are essentially relying upon the fact that the money used is in the form of a gift (or pledge as they call it) to the company. The person pledging the money does not get an ownership interest or much else in exchange for their contribution. Usually a company obtains funding by selling stock or getting a loan and enters into a sale of stock or sale of a promissory note. These are securities and are subject to federal and state law regarding their offering, purchase, and sale. Generally, a company cannot use general advertising or solicitation of the investment if they want to use the exemptions from registration available by law. Two examples: First, Facebook files for an IPO and the world knows they are selling stock. They have filed a registration statement, or S-1, with the SEC and this complies with laws to allow them to be able to publicly announce the sale. Second, Most startup or small companies do not have the resources or want to try to go through the process of filing with the SEC. They rely upon exemptions from registration to sell stock. The law puts certain requirements that need to be met to be able to use those exemptions, one of which is that they can't go out and issue a press release or put on their website that they are trying to raise $1 million by the sale of their stock.

#crowdfunding #HR 2930

Double-Edged Sword of Control for Startup Founders- "Isn't it MY company?"

When someone starts a company, they usually have an idea or vision and a passion to bring that idea or vision to market. Many founders get stuck in a difficult spot that most commonly comes up in the process of raising money. This is what I call a double-edged sword for startup founders, i.e. ownership and control of the company.

Many founders start to form a deep bond with their ideas and visions that are embodied in their new company. They take ownership of those ideas and the company. During the growth phase, they are asked to slowly give up some control of that company, usually through dilution of their ownership % by private sales of stock. One major identified reason that startups face major problems and may result in the company failing is the inability to give up control when the company starts to grow. New investors are coming in to get an ownership stake at a very risky stage in a pre-revenue company in exchange for potentially very high rewards. Part of what investors look for in investments are the ideas or vision, management team, and the passion of that team to drive the company to growth. If the founders are only focused on an exit where they go public or are acquired and retire early rich, investors will be put off by those founders who seem to care more about their own personal wealth than having a successful company. If Mark Zuckerberg would have pitched to investors that he was going to take Facebook public and make the company's stock worth billions within two years, he would probably not have gotten many of those early investors, at least the experienced ones.

#startup #startup control #startup founders #corporate ownership

SEC Proposes Rule To Protect Identity Theft under Dodd-Frank

The SEC published a proposed rule promulgated under Dodd-Frank to deal with issues of identity theft when dealing with broker/dealers, investment advisors, and other investment professionals. The rule would require SEC regulated entities to implement written identity theft policies and procedures to ensure investors' identity remains confidential. It uses what they call a program of "red flags."

There is a 60 day comment period before the rules would go into effect from the February 28, 2012 publish date.

The press release can be found here. The proposed rule can be found from the SEC website in pdf form.

#Dodd-Frank #indentity theft

Founders & Startup 101: Part VI) Internet & Tech Intellectual Property Protection

Part VI) Internet & Tech Company IP Protection

So you are working on the hottest new startup and want to know how to protect your ideas when you are out raising money and recruiting new engineers and designers. Here is a brief overview of the types of intellectual property (IP), ways to protect them, and tips for your startup. I will focus on some of the more common issues in internet and tech related companies, although some of these issues appear in other contexts. This information is meant to be an educational overview only and should not be used as a substitute for legal advice or considered an exhaustive discussion of all IP issues. Facts & circumstances can vary, as do laws and regulations by state or other territory, so you should consult with a local licensed attorney to be sure you are properly protected.

Copyrights

Copyright is a protection for original works of authorship that must be tangible. You can't use copyright protection to protect an idea until that idea is put into a tangible form. The most common ideas people have of copyright is usually with authors who write film scripts or books where they often see the words "copyright" or a c with a circle around it and things like the name of the author and year next to it. The idea of the book is not protected by copyright law, it is when the book is written is when it becomes tangible and subject to copyright laws. In the internet and software context, source and object code can be protected under copyright laws if they are an expression of an idea, not if they are simply the idea themselves.

Cap Tables, Capitalization, & Initial Accounting for Startups

Many founders are asked during the funding process for a “cap table.” So what exactly is a cap table and where do you get one?

In this article, I will explain what cap tables are, how to prepare one, review capitalization, and the initial accounting associated with startups. This article is meant to be educational only and should not be used as legal advice. Laws and regulations can vary by state and particular circumstance, so if you have specific questions, you should consult a local licensed attorney.

I) Capitalization

People need to have a basic understanding of what capitalization of a company means before they can really understand what a cap table is. Capitalization is a term that deals with the capital structure of the company. It is made up of the amounts and types of financing used by a company. Types of financing include common stock (which can include founder’s stock), preferred stock, retained earnings, and debt. It provides a general overview of the company’s debt and equity (See Part I to understand equity). You add the long term debt, equity, and retained earnings together for the normal total number. Most people are familiar with a version of this called market capitalization or market cap. That is essentially taking the number of issued shares of common stock times the company’s current price per share for a total number of market cap. It is one number used to determine an estimated value of the company as a whole. It can also change due to accounting changes due to various transactions.

II) Cap Tables

A cap table is basically a summary of the company’s capitalization and ownership. There are various forms of cap tables used and there is no one template that is the agreed upon version of a cap table. Although they can give a summary overview, the detailed version needs to be put together from the start of a business which includes specific details about who owns what from day one. It could include things like a historical timeline of stock issuance with the date of issuance, name of shareholder, number of shares, consideration given in exchange for the shares, and some accounting entries related to that consideration (cash, services, etc.). It could also be less detailed with a general overview of the total number of shares of stock issued and amounts still available for issuance. You want to keep the detailed version with actual shareholder’s names internal and only use a summary grouping such as “founders”, “seed investors”, “Series A Preferred”, “Series B Preferred”, “employee options”, and so on.

Some other common terms used in connection with a cap table are pre-money valuation, post-money valuations, price per share, dilution, options, warrants, percentage of ownership, and preferred stock. It is usually easiest to create a cap table through Excel or an accounting program, such as Quickbooks. You can purchase and download templates online; however, they are not all that complicated to put together on your own if you understand the basics of capital structure and a little accounting and finance.

A very simple example of a cap table would be:

Type Value Price per Share Shares Total Ownership

Founders - $5,000 $1.00 5,000 50%

Investors- $5,000 $1.00 5,000 50%

Total- $10,000 10,000 100%

You will normally want to include variations in your cap table that show what happens if more shares are issued, such as upon someone exercising their option or warrant right to purchase stock or additional funding rounds. It should show clear calculations of valuation and percentages of ownership both pre-money, post-money, and fully diluted post-money (if you assume that any options are exercised, warrants are exercised, or a convertible note is converted and result in stock issuances). An investor wants to see exactly what they will own in all possible scenarios.

III) Initial Accounting Practices

I will discuss the initial accounting that goes along with capitalization to expand upon the cap table preparation. I will keep it pretty simple and use an example of a California corporation.

When you first form the corporation, you list in the articles of incorporation filed with the secretary of state the total number and type of shares that are “authorized” to be issued. Think of those like a total pool of available stock in the company’s bank to issue when needed. For purposes of this example, let’s say the company authorizes 1,000,000 shares of common stock and 1,000,000 shares of preferred stock. Although these days you often don’t have to list what they call a “par value” for the authorized stock, but it is easiest just to pick something like $0.001 as a par value for accounting purposes. The initial issuance to founders of 500,000 shares of the 1,000,000 pool of authorized stock is in exchange for them putting in $50,000 of their own money into the company would have an accounting entry like this:

Account Name Debit Credit

Cash 50,000

Additional Paid In Capital (APIC) 49,500

Founder’s stock (500,000 shares x $0.001 par value) 500

Each side (both debit and credit) total 50,000 so the accounting entry reconciles. Both APIC and founder’s stock go towards the overall equity and capital of the company, so the balance sheet would show assets of $50,000 in cash and owner’s equity of $50,000 total with no liabilities. There would still be 1,000,000 shares authorized and 500,000 shares issued as the capitalization structure. The founders would own 100% of the company as you only look to what they own out of the total amount issued of 500,000, not the amount authorized since those have not yet been issued. When the remainder are issued out of that pool, the founders would get diluted down from 100% ownership to as low as 50% if the rest of the authorized are issued to new investors. This would result in a price per share of $0.10 per share ($50,000 investment divided by 500,000 shares).

Many founders try to figure out how to account for the founders stock issuance if they didn’t put much cash into the company and got a large number of shares (e.g. 1,000,000 shares issued in exchange for $500 initial investment = $0.0005 per share price). There can be tax and accounting implications, but you shouldn’t be that concerned about that low of a share price since it is really more of an accounting entry and not a real determination of value of the company. If the company is that concerned about how that may look, they can make the initial issuance at a higher share price (and bring up the valuation) if there is a legitimate basis or valuation model to support it. One thing that would stick out is if you started the company with a $500 valuation based upon $500 cash being contributed and the next day the company is trying to raise $500,000 for 50% of the company based upon a valuation of $1,000,000. You would need to justify where the value is coming from (e.g. future revenues, contract deal, patent acquisition). Valuations in early stage companies can vary widely and are extremely difficult to accurately forecast anyway, so don’t get too caught up on a low per share price.

In many cases, you don’t need to worry about including things like par value on a cap table, but the total values involved with the stock issuances should be. Often you will see the more detailed accounting entries if you look at a public company’s financials in the statement of stockholders or owners equity. That is really a variation of a cap table and might be able to give you some further examples although it may not show dilution for options or valuations.

I may post some sample cap tables I have prepared online down the road, but for now, I hope this gives you a basic understanding of cap tables.

Founders & Startup 101: Part IV) Private Placements, PPMs, & Fund Raising

So what exactly is a private placement memorandum (PPM) and why do I need one?

This article goes over the basic information about what a PPM is, when and why you may need one. This information is being provided as a general overview and a basic education of the common terms and federal securities laws involved with a PPM. Each state has their own securities laws and the discussion in this article is not to be used as legal advice, as each circumstance is different and you should consult with a licensed attorney in your state to be sure that any PPM or offering you do complies with all current laws and regulations.

What is a PPM?

A private placement memorandum is an offering document, sometimes called a prospectus, offering circular, or PPM. The majority of early startups and emerging growth companies commonly raise money through what are know as private placements. It is simply a sale of stock (or debt) in the company to private investors that become shareholders in the company. The reason they are classified as private, is not because they are private investors, but because the offer and sale of stock (a security) does not involve any public advertising or general solicitation of investors. For example, when a stock goes public, they are offering stock publicly by filing a registration statement, press releases, etc. This process of registering the securities with the SEC allows the company to utilize the media and other methods to offer its stock for sale. Since most companies don't have the money or resources to file a registration statement with the SEC, they rely upon selling the stock through exemptions from registration.

Although there are other exemptions that are used, the most common exemptions used under federal securities laws (Securities Act Section 3(b)) for startups raising money are:

Regulation D- Private offer and sale of securities requiring compliance with manner of offering requirements and limitations on resale of securities requirements. The common categories are listed under the following 3 classes:

Rule 504- raise up to $1 million within 12 month period; no specific information requirements for PPM

Rule 505- raise up to $5 million in a 12 month period; unlimited number of accredited investors and only up to 35 unaccredited investors; 502(b) information disclosures required

Rule 506- unlimited amount of money raised within a 12 month period to accredited investors; unlimited number of accredited investors and up to 35 unaccredited, but "sophisticated" investors; Rule 502(b) information disclosures required

If Rule 505 or 506 placements are only sold to accredited investors, there is no information specifically required to be provided. If there is even one non-accredited investor, the company must provide (unless they are already a reporting company with the SEC) certain financial and non-financial statement information.

Section 4(5)- up to $5 million; unlimited number of only accredited investors

The term accredited investor was amended recently under the Dodd-Frank Act. There are a number of categories to qualify based upon things such as recent income and net worth, but the main change was to limit the definition for net worth to not include the investor's primary residence as an asset and not include the mortgage on their primary residence as a liability (except for debts taken out within 60 days, for example a cash out refinance).

Rule 502(b) does also required the company to provide reasonable access to information requested by potential purchasers for Rule 505 and 506 offerings prior to their purchase.

Even though a sale may be exempt from registration and have limited or no information requirements to provide to potential investors, the anti-fraud rules still apply and a company can get into a serious bind if they misrepresent, lie, omit, or misstate items about the company, its business, its management, future business, and other items.

Also, as of this article, we are still waiting for further rule-making changes from the SEC for loosening or eliminating the public advertising and general solicitation rules in some cases. This could end up being a help to small companies to give them better access to capital, but we will know more once those rules are finalized.

Those exemptions require that no public advertising or general solicitation is used in the offer and sale of those securities. So, the company is not able to start issuing press releases, posting website ads, or sending mass mailings to potential investors in most cases. This does make it more difficult to get your message out there, but it must be complied with for the offering and sale to qualify for the exemption and not violate securities laws. Often this results in needing to be introduced to prospective investors through connections.

When the company decides to raise money through a private placement (which can also be in the form of a loan, which is still classified as a security), they have certain rules they must follow for the placement to qualify for the exemption and comply with securities laws. Typically, the company was already in the process of, and I highly recommend, putting together things like a 30 second elevator pitch of their company/product/service, a 5 minute presentation, a written executive summary, and a full business plan with financial projections, pro forma data, exhibits, and other relevant materials. The full business plan is essentially the formal document given to potential investors to tell them about the business, its product or services, management, financial projections, and plans for the future.

A recommended list of categories for your business plan (which will also cover many of the PPM information requirements):

Executive Summary- A brief, usually one page or so, overview of what your company does, how it is different or solves an existing problem, who your team is, and what your plans are to grow the business (i.e. how are you going to make money for the investor)

Management Team- Name, title, and a bio on each top member of the management team (officers and directors) to show what experience or assets they are bringing to the table

Product or Service Description- What do you do and how is it novel or better than something else out there and how do you make money from it?

Intellectual Property Protection- How have you or will you protect your company's ideas, brand name, developments?

Manufacturing and Operations- How will you produce the product or provide the service, as well as manage and operate the administrative side of things?

Human Resources- How many people do you have now and how many do you plan to bring on? Any other challenges, such as using independent contractors versus employees? Do you still need to identify and hire certain positions in the company?

The Market- What market are you targeting and where do you fit into it? What is the landscape and current trends in the market or industry?

Competition- You are probably not the first person to think of this, so how are you better or different than your current or future competitors?

Sales and Marketing- How do you plan to get your message out about your produce or service?

Company Background and Structure- things like current capitalization, how the company was formed, is it a C corporation formed in a certain state...

Financial Information- current, historical, and future pro forma financial statements such as balance sheet, statement of cash flows, and profit and loss statement.

It becomes essential for the company and management during this process to cover all bases and be sure it is protected from lawsuits and SEC or other regulatory action. When a company fails to execute what they said they would do and the investor loses their investment, the plaintiff's lawyers start circling looking for someone to go after, like the board of directors and upper management or just about anyone involved with the investment process. This is where a private placement memorandum can be a valuable tool to help protect the company and its officers, directors, and others.

How does a PPM help?

No one can guarantee that the SEC, state regulators, or private investors won't pursue claims against the company or management, but there are steps you can take to limit any potential exposure. This is where the PPM comes in. The PPM is an offering document that is an expanded form of the business plan that is given to investors. The basis for PPMs go back to the information often required in a full registration statement filed with the SEC. Depending upon the exemption used for the number and level of investors, time for funding, and amount of money raised, there can be differing requirements for what must be provided in the PPM. Even if the exemption doesn't require some element to be disclosed to investors, it is often a best practice to simply cover all your bases in that document. That is not to say that there may not be a legitimate business reason for not disclosing something when you are not required to do so. For example, in some cases you need to provide a recent audited balance sheet. Many startups don't have the money to pay auditors to come in and audit their books to obtain the balance sheet, so if there is no requirement to provide that audited balance sheet, it may be best for the company to avoid that additional expense.

The basic principle behind the PPM is to fully inform the investor about all aspects of the business, company, industry, management, prior financial performance, and future prospects, as well as providing certain risk factors involved with investing in a new company, often with no revenue to sustain it. The SEC and state regulators want to be sure that you disclose what is required and don't over-hype your company. The biggest threat is the anti-fraud statutes. If you put something in the PPM that is materially misstating the facts, misleading, fail to include relevant facts, or an outright lie, you can end up facing serious civil and criminal penalties. As an officer or director, you have certain duties and you have to be sure that you have control over what is happening in the fund raising process. Just as was discussed in Part III, you don't want a random finder running around selling your stock by saying whatever they need to make the sale and try to get a commission.

How do I get a PPM?

There are services online and companies that offer templates for PPMs, but be cautious in going down that path just because it looks a lot cheaper. If you fail to disclose something you should have and lose your exemption from registration, you could end up in a situation where the invested money is gone, but a regulator is telling you to offer to buy back the stock you sold the investor. Guess who can end up holding the bag if the company is out of business at that point? You.

It is always best to hire a local licensed attorney to assist you in this process. Look for someone with experience in securities laws and private placements. You can save time and money by putting together a good business plan internally, but then having the lawyer add, edit, or clarify the business plan to make it into a full and compliant PPM.

What needs to be in the PPM?

This depends upon the exemption being used for the current offering, but it is best to try to include some general discussion in categories such as: summary information and risk factors, offering terms (e.g. offering for sale of 1,000 shares of common stock at $1 per share), use of proceeds, dilution, plan of distribution, description of securities to be offered, and certain information about the company and its business. This is really a matter for your lawyer to review to be sure you have adequate disclosures. Also, they should review the PPM to be sure that anything that you say in there may not be construed by an investor as misleading or fail to include something material to the business. You want to be sure the document is clear and easily understandable.

Many startups worry about weighing the document down with all that "legal mumbo-jumbo," but if you are dealing with any investor who has been through the process with a legitimate company, they are familiar with those disclosures. You can see examples of how much risk disclosures are involved by finding a copy of a prospectus for any large publicly traded company. They go on for pages and pages and cover all kinds of random disclosures of possible risks down the road, but they are being cautious to warn investors. The SEC wants to know that investors are being informed and not misled. Most PPMs will include a statement about risks of "forward-looking statements" for things like projected revenues, which is normally a safe harbor from enforcement for public companies, but it is a best practice to include it anyway.

What else needs to be done in the process?

There are other things that are a best practice to in connection with a private placement. You should setup a control log where you document to whom the PPM was given and when. You normally should set definite dates to close the round of funding, be sure to file any required federal or state disclosures, such as a Form D with the SEC or a Form 25102 in California, keep track of when and how much was raised for calculations of exemptions for future rounds, and complete closing checklists. You need to be sure that all your investors got the same version of your PPM, even if they got a shorter business plan. These are all things that companies don't realize can affect their ability to do business down the road, so it is always best to have a licensed, local attorney assist them with the entire process.

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