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Dec. 2013

December 2013
From the Colorado Bar Association
Business Law Section

Ed Naylor, Editor
In this issue...

Secretary of State End-of-Year Hours

The Secretary of State’s office will be closed on Wednesday Dec. 25 and Wednesday, Jan. 1.

In addition, online services will be unavailable from 11:30 p.m. on Tuesday, Dec. 31 until noon on Wednesday, Jan. 1. The Secretary of State is conducting yearly maintenance during this time and services like filing and searching are affected. Filing deadlines will not be extended, so be sure to finish your filings before 11:30 p.m. on Dec. 31.

Entrepreneurs: Be Diligence Ready for an Acquisition or Financing

by Joel M. Jacobson, Rubicon Law Group, Ltd.

This fall has seen exciting investment activity: from Twitter’s IPO to Snapchat’s recent close of a $50 million dollar round to Box’s $100 million raise. In Colorado, Intrawest filed plans for an IPO and a PricewaterhouseCoopers report revealed venture capitalists invested $136.6 million in Colorado companies during the third quarter, up from $114.5 million during the second quarter.

Receiving a term sheet for funding or finding a suitable buyer for exit are exciting and important events for entrepreneurs. However, transactions too frequently become overly complicated because the business is not due diligence ready with the legal and business information needed to close a transaction. The problem is that founders are rightly product and revenue focused, but financing or sale transactions require due diligence. Fortunately, entrepreneurs can have the answers to the diligence test before the questions are asked.

This article outlines key areas to being diligence ready and provides a brief explanation of the legal background for each area. Attention should be paid to the following key areas: Incorporation, Accounting, Founders and Employees, Contracts, and Intellectual Property. The best practice is to begin with the end in mind through careful planning and early organization.

1. Incorporation.

The diligence process requires a company to provide evidence of its corporate structure and internal guidelines (operating agreement or bylaws depending on entity selection). Entrepreneurs should know that a sole proprietorship or general partnership can be created without any formal agreement or filing with the state. They should not wait too long before incorporating because neither the sole proprietorship nor general partnership model provide limited liability protection. A good rule of thumb is that once an idea and activities go beyond a hobby, then select and file the appropriate entity. This decision requires a choice on both entity type and filing location because incorporation occurs at the state level.

Selecting the proper entity should protect the rights of each founder and encourage hard work from everyone involved. An LLC can be a great starting place depending on individual tax circumstances and business model, but a corporation is often the better fit for entities that plan to seek outside funding, scale, and give away equity. Regarding state of incorporation, it is usually best to select whichever state the company operates in or Delaware if there are plans to work with sophisticated investors. Fortunately, Colorado’s online Secretary of State website makes handling business filings very convenient compared to other states and Delaware has options for near immediate response time.

2. Accounting.

The diligence process requires analysis of a company’s financial and business records. Although early stage financial projections are almost always wrong, it is good practice to hire outside help to keep organized from the beginning. Proper advisors can ensure that local, state, and federal taxes are accurately paid, loans (especially from founders) to the company are properly documented, financial statements are accurate, and appropriate methods are in place to track accounts payable and receivable. Plus, a well maintained capitalization table demonstrates organization and savvy. As operations progress, an entrepreneur should be careful not to jeopardize limited liability protection by commingling company and personal funds. A classic commingling example is buying groceries on the company card.

The entrepreneur should be aware of two federal tax provisions that can come into play early in a company’s development: 83(b) and 409A. 83(b) impacts capital gains treatment of transferred property that vests over time – think stock vesting. Although it might seem confusing to file an 83(b) election when vesting stock is granted at or near incorporation, valued at $0.00001 per share and a funding transaction is far from the horizon, making the election is simple and can result in significant tax savings. Most importantly, the 83(b) form must be filed within 30 days of receiving the property. Section 409A requires that stock options given to employees be at fair market value. This provision ties back into incorporation because incorporating too late and issuing inexpensive stock to founders while selling much more expensive stock to investors can raise questions with the IRS about the stock’s fair market value.

3. Founders, Employees and Equity.

The diligence process requires review of employment and equity agreements. The relationship between company and worker is governed by federal, state, and common-law requirements. Entrepreneurs know that hiring and retaining talented workers is critical to success and that equity can be valuable in attracting such talent. However, a company has to be careful in classifying a worker as an employee or independent contractor. Classifying a worker as an independent contractor can save considerable money, but improper classification results in legal problems and tax penalties. Proper classification depends on a fact-based inquiry guided by an IRS list of 20 factors. A well-written independent contractor agreement is a wise starting place and workers that are employees should be clearly designated as at-will.

Regarding equity grants, the entrepreneur should begin with the end in mind by setting expectations for these relationships upfront in written agreements that define what will happen with unvested stock if a worker quits or is terminated or a business transaction closes. A Restricted Stock Purchase Agreement between the company and all founders, workers, and advisors can save time and money. Right now, it is common for founders and workers to see monthly vesting over a four-year period subject to a one-year cliff. Decisions about vesting should be given serious consideration because vesting is a useful tool for protecting the company and motivating workers.

4. Contracts.

The diligence process requires review of a company’s contracts to understand key relationships and obtain necessary assignments, waivers, and consents. A company should keep track of agreements regarding creditors, vendors, real estate, workers, and investments so that it is clear who is owed what.

A contract is a legally enforceable promise or set of promises and entrepreneurs should know that an agreement does not need to be drafted by a lawyer or contain fancy words like “whereas” or “witnesseth” for a court to enforce it. Courts have enforced napkin, instant messenger, and oral agreements. With this in mind, exercise care in making any type of offer. Well-written contracts accurately reflect negotiated solutions and set the rights, restrictions, and expectations of the parties – they are future oriented and help both parties understand what is to come.

5. Intellectual Property.

The diligence process requires review of a company’s intellectual property. All companies are IP companies in some form, and, for many, the majority of their value rests in IP. IP value can be found in trade secret protection of internal processes or customized software, trademark of a logo or brand, or patent of a novel idea or invention. Entrepreneurs should know that if they are currently working for a company, particularly as a key employee, moonlighting can cause IP problems and they should not operate a competing business.

In early stage companies, IP should be viewed broadly and not just as code or technical contributions. Entrepreneurs should avoid infringing other’s IP and be vigilant in protecting new IP. Begin with the end in mind and require founders and workers to sign a Confidentiality Agreement and IP Assignment to ensure that the company owns the IP. This agreement can protect against a situation where a company is gaining traction only to become embattled with someone claiming they own part of the IP—think Facebook or Snapchat litigation. Plus, a typical representation that a company must make to close a transaction surrounds ownership of IP.

6. Bottom Line.

Founders are rightly product focused because even the best organized business will not be around long without a quality product or service, but the entrepreneur can take incremental steps from the beginning with business and legal diligence in mind. Early organization will keep due diligence from feeling overwhelming, result in lower legal costs and quicker closes, and demonstrate that the entrepreneur is a professional who understands what it takes to run a business. Conversely, if a company is not due diligence ready, deal momentum slows, legal fees rise, and ultimately deals can be killed. Entrepreneurs should begin with the end in mind because significant legal and business information will need to be disclosed in a business transaction.

Sponsorship of Transactional Moot Team

by Nicole Black

In an effort to boost student involvement in the Business Law Section (and keep them involved as young attorneys), the Section decided this year to sponsor a transactional moot team from the University of Denver. At the Section’s Executive Council Retreat, DU Professor Celia Taylor and CU Professor Andrew Schwartz indicated the law schools had both interest from the students and a need for funding to participate in the National Transactional LawMeet© competition. The Business Law Section jumped at the opportunity. We are excited to sponsor the first DU team this year and hope to also sponsor a CU team next year, with the goal of eventually establishing a CU/DU pre-competition moot in Colorado to help provide the basis for selecting future teams.

The National Transactional LawMeet© is the preeminent “moot court” opportunity available for students interested in transactional law. This year’s competition topic involves an indemnification provision in an acquisition agreement. Teams will represent the buyer or seller of a business involved in a dispute with a licensor regarding the calculation of an ongoing royalty payment.

Over the next two months, the DU Team will participate in a client conference call and draft an agreement. On February 28, the Team will travel to the Southwestern Regional Competition of LawMeet© in Houston, Texas, to compete in a full day of negotiations. During negotiations, the goal is to reach an indemnification provision mutually agreeable to both parties. Successful teams named as finalists at Regionals will advance to the national competition later this spring.

The Team

With the Section’s support and funding, three DU law students, Jessica Borchers, Aaron Jacks, and Skylar Marshall, will attend the National Transactional LawMeet© in Houston, Texas this February.

Jessica Borchers is a third-year law student. Jessica’s area of interest is business transactional work, including commercial, contract, bankruptcy law and alternative dispute resolution. She is currently the Editor-in-Chief of the Race to the Bottom and Business Editor for the Denver University Law Review. Jessica has interned at the United States Attorney’s Office, the Colorado Secretary of Stat’s Business and Licensing Division, and with in-house counsel at IntelePeer. Last year, Jessica also served as a student mediator in DU’s Mediation Clinic. Jessica holds a bachelor degree from Colorado State University.

Aaron Jacks is also a third-year law student. He is interested in practicing corporate and commercial transactions. Aaron is a recipient of several merit-based scholarships, including the 2012 and 2013 Henry G. Frankel Endowed Scholarship, and the 2013 Stephen H. Diamond Memorial Scholarship based on academic merit, leadership, and community service. Aaron has served as a Staff Editor on the Transportation Law Journal and has worked as a student attorney representing community organizations and non-profits in transactional matters through the school’s Community Economic Development Clinic (CEDC) program. Law is Aaron’s second career; prior to attending law school, Aaron served as a Colorado state trooper and police officer in Arvada, Colorado for 22 years. Aaron holds a Master of Professional Studies in Organizational Leadership from the University of Denver, and a Bachelor of Science in Criminology from Metropolitan State College of Denver.

Skylar Marshall is a third-year law student and will serve as the Team’s alternate. Skylar is interested in corporate, commercial, and mergers and acquisitions law. Skylar is a Senior Editor on the Race to the Bottom blog, a Staff Editor for the Denver University Water Law Review, and a teaching assistant for first-year legal writing classes. During law school Skylar clerked at Burg, Simpson, Eldredge, Hersh & Jardine, P.C. and was a corporate apprentice at CenturyLink. Skylar holds a bachelor degree in English Literature from Metropolitan State College of Denver.

The team has three coach advisors: Professors Celia Taylor, Stacey Bowers, and Michael Sousa of the University of Denver Sturm College of Law. The Business Law Section wishes the DU Team best of luck as they prepare for competition!

Holiday Spirit(s)

Here are a few recipes to get you into the holiday spirit(s).

Brandy Freeze Drink
From Sarah Steinbeck

Ingredients:

7 cups water
2 cups granulated sugar
1 can frozen orange juice
1 can frozen lemonade
1 pint apricot brandy
Ginger ale

Directions:

Boil 7 cups water with sugar, stirring frequently so that the sugar doesn’t burn. Remove from heat and add the orange juice, lemonade, and brandy. Pour into plastic bowl, cover, and place in freezer. Freeze for 24 hours. To serve, add Ginger ale to taste.

Mistral Mulled Wine
From Nicole Black

I learned this recipe from my host-parents while studying abroad in Avignon, France. Though in the south of France, Avignon gets quite cold during the winter when le mistral—a cold, northerly wind—blows off of Mount Ventoux and down into the Rhone Valley. My host parents would make this spicy and sweet brew to keep us warm. Be sure to stock up on extra ingredients: a second batch is standard fare!

Prep and Cooking Time: 1 hour
Servings: 8–10

Kitchen Items Required:

A big crock pot or deep kitchen pot
A spice ball or a cheese cloth and kitchen string (for binding the spices together)

Ingredients:

5–6 cups apple cider
1 ½ cups white sugar
1 ½ cups brandy
3 lemons, sliced
3 oranges, sliced
2 bottles of red wine*
4–6 cinnamon sticks
1 Tbs. whole cloves
1 Tbs. cardamom seeds (shucked)**
1 cup raisins

* Syrah or Cabernet work best but don’t spring for anything expensive; a boxed wine does the trick. ** Cardamom seeds can be found shucked or whole. If they are whole, simply split the shuck by flattening the seed between the flat edge of a knife and a cutting board and then pry the seeds out. One spice jar of whole cardamom seeds usually makes one tablespoon of shucked seeds.

Directions:

  1. In the crock pot, heat the apple cider, brandy and sugar on low to medium heat until the sugar dissolves. Add the wine. Stir. Add the fruit slices, squeezing in the juice as you do.
  2. In either a spice ball or cheese cloth (making a spice bag), combine cloves and cardamom seeds.
  3. Add the spice ball/bag and cinnamon sticks to the pot.
  4. Cover and cook on low heat for 30–40 minutes. Avoid cooking the pot longer or the alcohol will begin to cook off. Remove from heat; keep warm.
  5. Serve in a mug. Add a slice or two of the cooked lemons and oranges and a tablespoon of raisins to each mug to snack on when your mug is empty.
Business Law Section Activities
Financial Institutions Subsection

The CBA Financial Institutions Subsection will not hold its monthly CLE lunch on Wednesday, Jan. 15. The next CLE lunch and learn event is scheduled for Wednesday, Feb. 19.

Asset-backed Securities and the American Financial Crisis—Wednesday, Feb. 19
How it Happened, Who Sued Whom, and Lessons Learned

This presentation will include an overview of how asset-backed securities (and related financial instruments like collateralized debt obligations and credit default swaps) were transformed in the 2000s, and how they helped create the credit crisis. Our speaker will be Matthew Spohn, Senior Counsel at the Denver office of Norton Rose Fulbright. Matt focuses on commercial litigation involving the financial industry as well as intellectual property litigation, with a special emphasis on complex and high-stakes cases. He has represented major financial institutions in sorting out mortgage-related liabilities, and has handled bank fraud actions, multi-million dollar product liability lawsuits, IP, trade secret and unfair competition cases.

The program will be held at the CBA-CLE Classroom, 1900 Grant Street, Suite 300, Denver, or attend via webcast. One general CLE credit is available. Registration information coming soon.

Save the Dates: Upcoming Financial Institutions Subsection CLE Programs

Wednesday, March 19
Wednesday, April 16
Wednesday. May 21

Mergers and Acquisitions Subsection

The CBA M&A Subsection will not hold its monthly CLE Breakfast on Tuesday, Jan. 7. It will hold its next monthly CLE breakfast event Tuesday, Feb. 4.

2013 Wrap-Up and 2014 Expectations: An Investment Banking Panel Perspective—Tuesday, Feb. 4

Please join us as representatives of some of Denver’s leading investment banking firms come together in a panel discussion format to discuss the local M&A market in 2013 and expectations for 2014. Our distinguished panel will discuss the deals and trends they saw in the market in 2013 and the background of each, along with how the completed 2013 M&A market compares with what they were expecting in 2013. In addition, the panel will discuss what they expect in the local M&A market during 2014 in terms of trends and predictions. Don’t miss this informative M&A panel discussion as they provide background, insight, anecdotes, and war stories integral to M&A service providers.

Program location is at the CBA-CLE Classroom—1900 Grant Street, Ste. 300, Denver, CO, or attend via webcast. One general CLE credit is available. Registration information coming soon.

Save the Dates: Upcoming M&A Subsection CLE Programs

Tuesday, March 4
Tuesday, April 1
Tuesday, May 6

New Lawyers Subsection

Mark your calendars: Happy Hour with the CBA Business Law Section—Jan. 30

Co-Sponsored by the New Lawyers, Bankruptcy, and Trusts & Estates Subsections of the CBA Business Law Section

The New Lawyers Subsection along with the Bankruptcy and Trusts and Estates Subsections invite you to attend the happy hour event that will be held at Pizza Republica, located at 890 14th Street, Denver, from 5:30–7 p.m. Complimentary drinks and appetizers will be provided.

We hope to see many of you next month at this event! Contact Joel Jacobson or Nicole Black with any questions. No RSVP is required.

CBA-CLE Information

Unless otherwise noted, all programs are at the CBA-CLE offices, 1900 Grant St., Ste. 300, Denver

40 Hour Mediation Training—Begins Monday, Jan. 13

If you are ready to take a serious plunge into mediation, this 40 Hour Mediation Training Course will provide the basic skills and knowledge needed to start a mediator career or learn new tools to enhance your mediation skills. Developed by the CBA Alternate Dispute Resolution Section, the program is designed to meet the 40 hour training standards approved by the CBA and the Mediation Association of Colorado.

40 general CLE credits are available, including 5 ethics. Learn more and register online, or call 303-860-0608 (toll free 888-860-2531).

iPad for Legal Professionals—Friday, Jan. 24
Two half-day programs: Basics and Advanced

Morning Program: Introduction and iPad Basics
Whether you’re new to the iPad or you’ve been using it for years, you’ll find this morning seminar tremendously useful. Take a quick tour of the iPad and explore a “day-in-the-life” of an iPad-using lawyer. Discover the “must-have” apps for every lawyer’s iPad, tackle critical security settings, and learn the how-to’s on loading and printing documents. 4 CLE credits available.

Afternoon Program: Advanced iPad Topics
Now that you’re familiar with the basics of your iPad, it’s time to dig a little deeper. How can you do legal research on the iPad? How do you give a presentation on the iPad? Do you need to buy a keyboard or stylus? We’ll answer all these questions and many more as we discuss and demonstrate the professional tasks able to be accomplished on an iPad. This will be a “hands-on” event, so bring your iPad and learn how to get the most out of it. 4 CLE credits available.

Learn more and register online for the morning program, the afternoon program, or both, or call 303-860-0608 (toll free 888-860-2531).

2014 Tax Update—Wednesday, Jan. 29
Co-Sponsored by the CBA Business and Taxation Law Sections

Get up to speed on federal and state tax code changes driven by social issues. Learn the current state of the law, as well as active and anticipated changes concerning:

  • The Medical/Recreational Marijuana Industry—Accounting and Tax Issues and Ballot Initiatives
  • Public Benefit Corporations—Tax Treatment of Expenses
  • Civil Unions and Same Sex Marriage
  • The Affordable Care Act—Individual Mandate and Medical Device Tax Changes

Three general CLE credits available. Learn more and register online, or call 303-860-0608 (toll free 888-860-2531).

Public Benefit Corporation Act, Effective April 1—January 29
Co-Sponsored by the CBA Business Law Section of the Colorado Bar Association

This program is taught by two of Colorado’s top business lawyers who were on the front lines of the drafting and passage of the Public Benefit Corporation Act (PCBA). The Act added Part 5 to Article 101 of the Colorado Business Corporation Act in Title 7, C.R. S., to allow Colorado corporations desiring to do so to elect the status of being a “public benefit corporation.”

Important Agenda Topics include:

  • Colorado’s Framework for the Public Benefit Corporation (PBC)
  • How Colorado’s PBC Structure Differs from Other Benefit Corporation Statutes
  • PBCs Versus Non-PBC Entities
  • Unresolved Issues Facing PBCs
  • Usefulness of PBCs

Four general CLE credits available. Learn more and register online, or call 303-860-0608 (toll free 888-860-2531).

Save the Dates:

A Primer on Advising Nonprofit Organizations—Thursday, May 1
22nd Annual Institute on Advising Nonprofit Organizations—Friday, May 2
45th Annual Rocky Mountain Securities Conference—Friday, May 9

Recent Homestudies

Check out the complete catalog of CLE Homestudies, plus some recent business law programs.

What to Do When the SEC Comes Knocking? —Original program date Nov. 20

2013 Business Law Institute —Original program date Oct. 16–17
If you missed this year’s Business Law Institute, you can get the content via homestudy! Includes course materials.

Busted M&A Deals—Perspectives from an Investor and an Operator—Original program date Nov. 11

CBA-CLE Featured Publications

CBA-CLE carries an extensive catalog of business law ABA publications—and CBA members save 15 percent on the ABA regular price! Check out just some of the books available:

  • Advising the Small Business: Forms and Advice for the Legal Practitioner, 2nd Ed.
  • Business Bankruptcy Essentials, 1st Ed.
  • Business Torts Litigation, 2nd Ed.
  • Contract Drafting: Powerful Prose in Transactional Practice, 1st Ed.
  • Intellectual Property Deskbook for the Business Lawyer—A Transactions-based Guide to Intellectual Property, 3rd Ed.
  • Model Jury Instructions—Business Torts Litigation, 4th Ed.
  • A Manual of Style for Contract Drafting, 3rd Ed.

Check out the CBA-CLE library!

Contributions for future newsletters are welcome —
Contact Ed Naylor at ed.naylor@moyewhite.com or 303-292-2900

This newsletter is for information only and does not provide legal advice.

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