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IA's Lunch and Learn: 10 Early-Stage Business and Company Governance Issues

By Innovate Arkansas Staff
6/7/2010 11:50:00 AM

Kutak Rock and Innovate Arkansas will host a Lunch and Learn on July 14 to discuss early-stage business and company or corporate governance issues.

Topics will include business and financing plans, friends and family financings, multiple founders, buy-sell agreements, equity transfer restrictions and equity incentive plans for IA clients. The event is open to IA clients only.

If you would like to attend, please contact Vicki Malpass at vmalpass@winrock.org.   

Some thoughts to prepare for this meeting:

1. Who Owns What and How?  You should do more than "incorporate" your business with the Secretary of State. You need to put in place agreements setting out who owns equity in the company and describing the rights and obligations of the equity owners and how major decisions will be made. If you wait until you are actually faced with these issues down the road, it will probably be too late to start the process.

2. I'll Sign Anything for Money. If you are raising investment capital for your business, seek counsel regarding both (a) how you go about finding investors and (b) the investment terms you might receive from potential investors. Don't let your desire to move quickly cause you to make serious mistakes along the way that could hamper or stop the development of your business.

3. Board or Bored? Does anyone want to go to another meeting? Despite what you think, there are individuals who want to help and will. Recruit a board to offer valuable guidance, refine your business strategy, help problem solve, and help with business development (and on certain days, you'll enjoy just having a friend).

4. I Have An Original Thought! If you have intellectual property, immediately take the steps necessary to protect it. This may take the form of a confidentiality agreement with partners or other insiders to protect a trade secret, or filing for trademark or patent protection. The cost to the business of failing to protect your intellectual property will be far greater than the cost to protect it.          

5. I Have An Investor, Now What? Deciding how much your company is worth and how much of its equity you should be giving up to early investors can be a difficult decision. The less current cash flows you have, the greater the standard deviation in projecting future cash flows. If the parties cannot agree on valuation, you might consider a convertible note structure to bridge the issue until valuation can be better validated.

6. Wrong Runway. If you in-license rather than own your technology, be sure the agreement provides enough runway and, if possible, exclusivity to generate a return and provide for an orderly exit for the owners. Seek the maximum number of years or extensions based on performance.

7. All Your Projections were Wrong. Hold periodic meetings of your board to celebrate milestones, establish new ones, discuss your capital position, have candid discussions about any major departures from budget, and approve a new budget to replace the old projections. The structure and exchange of information and ideas at these meetings will do your company good.

8. All Your Projections were Right. You exceeded all your expectations, but you now own just 2 percent of your company, or your key employees don't own anything. Have a management incentive plan to attract and hold talent.

9. Dang! All My Employees Quit. Be sure to provide meaningful performance incentives for your employees. Is it profit sharing, a stock ownership pool with a vesting period, or just a compensation plan?  If you wake up one day and your best employees quit to join another business, or worse, everyone resigned in favor of unemployment because it was a pay raise, you'll wish you had done something.

10. The Honeymoon is Over. Few people anticipate what to do if someone wants out...or wants you out. For a moment, avoid the euphoria of starting a new business to plan for management departures in advance through your operating agreement or a buy-sell agreement. Otherwise, your bargaining position may be zero later.