Blank Check Preferred Stock

The following post was written by guest blogger and CLBC student Dan Waxman (JD ’14).

When forming a start-up venture, an entrepreneur must decide which form of legal entity best suits the business’s needs. For example, an individual forming a small, family-run business may decide to form a limited liability company (“LLC”) due to its favorable tax treatment and relatively few formalities. However, should the business require venture capital (“VC”) funding, the corporate form is likely the best option, as VC investors generally refrain from investing in LLCs and other non-corporate entities.

Once a corporation is formed, an issue arises concerning the distribution of ownership interest in the corporation. For example: How many shares should the corporation authorize? Should it authorize preferred shares? If so, what are the terms of the preferred shares? Will potential investors agree to pre-set terms?

The good news is that many of these questions can be postponed until more information is obtained from potential investors. For example, a corporation can always authorize more shares with the approval of a majority of its board of directors and shareholders. Therefore, a sole owner can (while following certain formalities) file a share authorization form with the secretary of state should a VC investor require a greater number of authorized shares.

Furthermore, VC investors generally prefer to purchase preferred (as opposed to common) stock in a startup. This is because the investors have more leeway concerning the rights granted by preferred stock relative to common. The question then becomes which rights should the stock contain and which will the investors prefer? Such questions generally remain unresolved until the investment negotiation process.

Therefore, corporate law allows the corporation to authorize “blank check preferred” stock. Essentially, the stock is authorized without set terms. This allows corporate agents to negotiate with potential investors while using the characteristics of the preferred stock (dividend rights, participation, liquidation preference, convertability, voting rights, etc.) as bargaining leverage. It also allows the corporation to easily create new classes of preferred stock. Once the parties have settled on a mutually agreeable term structure, corporate management can issue preferred stock (from the pool of unissued blank check preferred shares) containing the agreed-upon rights without having to re-authorize additional shares.

Therefore, when forming a corporation in anticipation of VC investment, authorizing blank check preferred stock in addition to the corporation’s common stock can ease concerns over the proper composition of the preferred stock and facilitate investment negotiations.

Simple Contracts for Small Businesses

I recently led a workshop in Winston Salem on how micro and small businesses should think about and use contracts. This is an important issue for a business, and a clear understanding of when contracts can best be used to secure a business relationship is important for the business’ long-term growth. Here are some of the points from the workshop:

Contracts come in many forms and with many names, but in the end, they are agreements between parties that promise one party will do something and the other will do something else in exchange. Parties to a contract are generally looking to the future to assure an act will occur and they build their expectations around the performance of this act. Because a business is always looking to the future, contracts play a significant role in just about everything the business does.

1. Understand the stage your business is in. A business will move along a series of several stages during its life. It may seek to have more or less formal agreements with other parties depending on where a business finds itself along this continuum. Generally, the continuum can be described to several stages from existence to maturity. (See Churchill and Lewis, The Five Stages of Small Business Growth). At the start when the business first comes into existence, business owners face the challenge of balancing their need for certainty in relationships against the need to move forward as quickly as possible. It is important at this point for the owner to identify those relationships that will be most important to the business’s launch and early growth, this includes things like the partnership agreement, non-disclosure agreements, employment agreements with key people and supplier agreements. While careful thought should be put into all contractual relationships, these early agreements should rise to the top of the list.

As the business grows, new relationships emerge that will look different from those faced earlier. For example, a business owner may find that one client or customer accounts for a large amount of revenue, in fact, so much revenue that the health of the business is linked to this client relationship. The owner will want to consider how to formalize the relationship for the future, perhaps through a long-term agreement. Similarly, as the business grows and takes on new partners, existing agreements should be reviewed and revised.

In the end, the contracts that are needed for a business will depend in part on the stage the business is in.

2. Know what you want from any contract. Contracts memorialize relationships between people, but they are not the only mechanism for doing this. If the business owner wants a formal relationship that may be enforced by a court in a proceeding, then a contract will be useful. But this is not always what is wanted. I often tell my students of the client who was a church and who wanted to rent a space to a nonprofit food pantry. The pastor came to me with a lease he had been given by a member of the parish. The lease contained three pages of detail on defaults and remedies, including clauses on punitive damages and shifting of attorney’s fees. While the lease reflected a bundle of legal rights that would be available following a default by the food pantry, the church really did not want to sue the people who were trying to feed the poor or exact punitive damages following a breach. After some thought, the lease was reduced to one simply page that better reflected the relationship between the parties and the values of the church and its members.

3. Use standard form contracts for standard things. Many, perhaps most, businesses regularly work in a few areas. Think of a general contractor who works with homeowners. The contractor will spend most days pricing bids and preparing work contracts that reflect the work to be done. This involves a standard range of work, price and time. As such, it is easy to use a standard form contract that is edited for each customer to include work, price and time.
While form contracts are good at saving time and effort, it is important to keep in mind that they have been prepared with a set type of work in mind from the start. A formwork contract for a general contractor doing home remodeling will contain provisions that will not make sense for a business consultant working with farmers. Moreover, a form contract works as a whole, any changes or edits may have unintended consequences.

When developing and using form contracts the business owner should remember to use the appropriate form for the particular matter. A lawyer can add tremendous value to a business by developing form contracts that are tailored to the business’ needs.

4. Think about how you will enforce a contract. While contracts may create rights for a party, these rights will still need to be enforced, which may mean filing a lawsuit. The costs of litigation can be very high, in both financial and personal terms. Some lawyers advise clients that litigation is not worth pursuing if the controversy involves less than $75-100,000. In addition, the time spent on discovery and other trial matters is time taken from the business, as well as stress created for the owner and the owner’s family.

As a party to a contract, the business owner should always consider how to address failure or breach on the other party’s part. To do so, the business owner may want to decide early on whether there are informal enforcement methods that will be useful. Such methods include mediation or other non-litigation approaches, but also include referral networks for clients/customers and long-term relationships. When litigation is unavoidable, the business owner will want to assure that all contracts contain provisions that reduce the burden of going to court. Typically, these provisions will include choice of law, choice of venue and fee shifting provisions. In some cases, such as a nondisclosure agreement, provisions allowing for injunctive relief may be included.

In the end, contracts provide a business owner with a degree of certainty about the future. The business owner, however, must be sure to work with contracts that are crafted to the needs of their business and to recognize that types of contracts and value of the relationships they memorialize will grow and develop over time.

Posted by Steve Virgil

CLBC Holding Community Outreach Hours this Fall

The Community Law & Business Clinic, in conjunction with community partners, is holding regularly-scheduled sessions in the community. Meetings are structured as client interviews, where potential clients can meet with a law student, learn more about the services of the CLBC, discuss their business or nonprofit, and ask questions.

Typical questions can include:
- what type of entity to form – along with tax and filing implications
- how to protect IP, including trademark, trade secrets and copyright
- how to protect equity
- contract formation and partnership agreements
- employment issues, including use of contractors and 1099 employees
- liability and risk management
- Transfer of ownership and selling a business
- other issues that arise

Following the initial meeting, law students will meet with Prof. Virgil to discuss the matter and decide whether the Clinic will take the engagement. Legal advice will not be given to the client during the meeting, but the client will hear from us on how we will proceed within 3 business days. All information gathered during the meeting will be kept as confidential.

Hours will be held at the following locations and times:

SG Atkins CDC, Thursdays from 10am-noon
Dates: 9/12, 9/19, 9/26, 10/3, 10/17, 10/24

Wake Forest University’s Reynolda Hall, Fridays from 10am-noon
Dates: 9/13, 9/20, 9/27, 10/4, 10/18, 10/25

Winston-Salem Urban League’s Quality of Life Institute, Fridays from 2-4pm
Dates: 9/13, 9/20, 9/27, 10/4, 10/18, 10/25

Posted by Casey Crowley

Community Law & Business Clinic Starts 2013-2014 Year

The Community Law & Business Clinic has started the 2013-2014 academic year with a new cohort of students and clients. This week, 19 students from the Wake Forest University School of Law and Schools of Business started working with Clinic clients. During the fall 2013 semester more than 50 clients will be assisted through the Clinic, representing some 3,700 hours and over a half million dollars of pro bono professional assistance to clients.

Since the Clinic’s founding in January 2009, more than 57,000 hours of pro bono legal assistance has been delivered to more than 800 clients in our community and the region.

Clients are drawn from small business owners, nonprofit agencies and families facing legal consumer law issues. Clinic clients receive targeted services that assist with building businesses, developing nonprofit endeavors and protecting assets.

New for this semester, the Community Law & Business Clinic has launched a practice area focused on Arts & Entertainment Law. Winston-Salem is known for its involvement in and commitment to the arts, which it has incorporated into a broad-based economic development effort. Any visitor to Trade Street will see concrete examples of these efforts. In our new Arts & Entertainment practice area, nonprofit arts organizations, artists and entertainers can receive assistance with legal and business development questions as they start or grow their businesses. Look for more on the Arts & Entertainment Law practice group in future posts and on our website.

The start of the academic year is a continuation—and extension—the Community Law & Business Clinic’s intentional engagement with the community. We look forward to a great year that benefits both our students and the community.

Posted by Steve Virgil

Good Governance Leads to Great Organizations

Good governance leads to great organizations. Whether for-profit or nonprofit, organizations require efficient and effective governing boards to accomplish mission. In the nonprofit context, boards play several distinct roles. It is the board that is responsible for assuring that the organization serves its charitable purpose. It does this by defining a long-term plan, stating a course of action around that plan and holding the executive and staff, and itself, accountable. The nonprofit board is also responsible for allocating resources, which implies that the board has a deep appreciation of the nonprofit’s financial condition, income and expenses. And for many nonprofit organizations, board members are crucial to accomplishing the organization’s work. In many cases, nonprofit board members commit significant volunteer hours to the organization outside of the time spent with governance and board duties.

Too often, organizations fail to take the time to develop a solid understanding of board duties and roles. For many nonprofits the board role is not well defined, and bleeds across the line between governance to operations. In other instances board members see their role as volunteer service for a few hours a month, without an understanding of the duties board members have as they serve on a nonprofit board. The results are predictable: board meetings that are organized around ‘reporting’ from key staff with little time for, or interest in, deliberation leading to decisions that are then implemented by the staff.

As part of the Community Law Clinic’s ongoing work with nonprofit organizations, I presented a one-day workshop for nonprofit leaders in Charlotte on August 22, 2013. The first in the Wake Forest University Charlotte Center’s “Essentials of Business for Nonprofit Leaders” series, the workshop explored the role of governance in building organizational strength for impact.

The presentation was divided into two parts. View the presentation slides: Part I, Part II

Posted by Steve Virgil

Paperless Legal Clinic

Clinical programs have become such an integral part of so many law schools that it’s easy to forget that, at its core, a law clinic is essentially a standalone law firm. It’s no surprise, then, that clinics face similar challenges. Among them is electronic case and document management.

Additional challenges in a clinical setting are the 100% turnover every few months, and the fact that law students have other stuff to do. Having a hard copy document in the office is useless to a student writing a memo in the evening at home.

Enter the paperless (well, low-paper) legal clinic.

The three main components:

  1. Clio. All of the clinics at WFU School of Law use Clio, an online case management software. While it takes some legwork to restrict student access to certain cases, it is accessible from anywhere, and is actually pretty user-friendly.
  2. Fujitsu ScanSnap s1500 scanner. It’s fast, doesn’t jam and creates readable PDFs that can be uploaded straight into Clio. While the integration platform is relatively basic, it works fine…and the convenience factor makes this a no-brainer. Update: the Clinic has added additional scanning capacity in the form of a Fujitsu ScanSnap iX500.
  3. A robust document security and archiving plan. The crux of the system described herein is implementing good document security practices in the office. For a paperless setup, this includes logging out of Clio, keeping all documents and drafts on Clio (instead of on one’s local hard drive), choosing good passwords, proper scanning and naming of files, etc.

Two shortcomings of Clio hinder this paperless office setup. The first is the inability to search within documents once they have been uploaded to the Clio database. For a single matter, it’s not a huge deal (although it does render searchable PDF files way less useful), since you are generally familiar with the matter. For archiving purposes, however, it is a not inconsiderable problem. Force majeure language from a two-year-old contract can be a valuable time-saver. If you can find it.

The second Clio shortcoming is the inability to batch download files from a matter. While it seems like a minor quibble, it is in fact quite frustrating to archive a legal matter One. File. At. A. Time. And, for reasons already stated, archiving is essential. Plus, when and if Clio is phased out, having an archive can mean the difference between a smooth transition and a total, unmitigated disaster.

Are there other ways to do this? Absolutely. Better ways? Perhaps. But for the CLBC (and other law clinics trying to go paperless), this setup definitely checks all the boxes.

Posted by Casey Crowley

CLBC-Urban League Small Business Seminar – Week 4

This week, Clinic Director Steve Virgil stopped by the Urban League’s Quality of Life Institute to wrap up the CLBC-Urban League Seminar Series.

This week, regulation and licensing was on the docket for discussion. Unfortunately, the array of regulation can often make starting small businesses a daunting task. Part of the reason for this difficulty stems from the fact that sectors where small businesses are apt to come from–often food and service–are also those with a particularly cumbersome regulatory burden. Lack of access to pro bono or affordable legal assistance simply compounds the problem.

Hopefully, the seminar presentation and slides (below) lay out a road map for aspiring or current business owners, allowing them to spot legal hurdles before they become problems. Don’t hesitate to contact us to see if we can assist you in complying with the applicable regulations, licensing requirements and employment laws.

Slides from the presentation are available online.

Posted by Casey Crowley

CLBC-Urban League Small Business Seminar – Week 3

This week at the Urban League, the focus was on finance. The big takeaway here is no surprise: get an accountant. Knowing how a company makes money and where it goes is the very essence of a for-profit business. Pricing a product, for example, is nearly impossible without knowing how much it costs the company to make it.

In the non-profit realm, an eye for the financials is important, although the equation is reversed: the amount of money coming in dictates the subsequent activities of the organization. Cash flow is a prerequisite for, rather than a consequence of, operations.

Slides from the presentation are available online.

Posted by Casey Crowley

CLBC-Urban League Small Business Seminar – Week 2

This week’s Small Business and Entrepreneurship Seminar covered intellectual property, governance and Director fiduciary duties.

Intellectual property protection often can seem like something that can be put off, but protecting your ideas–especially in the context of a startup–can enhance your ability to monetize your ideas and is vital in accessing funding sources.

While somewhat less diverting, proper governance is no less important to the success of a company or nonprofit. Make sure you and your directors understand the differences in role of managers and directors, and the fiduciary duties that directors owe to the organization. Failure to cleave to these duties can have serious ramifications for both the director and the organization.

Slides from the presentation are available online.

Posted by Casey Crowley