Guzman Law Group


Blog & News

Posts tagged Business
TV Series 'Veronica Mars' Finds Crowd Funding

Crowd funding is hot! It has taken form in recent years, allowing anyone with a project, cause, or company to secure donations online in exchange for various gifts, or simply just for the sake of donating. Typically, sites like Kickerstarter, Indiegogo and Rockethub serve as conduits for the campaigns and their gift givers.

One recent example is Veronica Mars, the defunct TV series now poised to be a motion picture thanks to its wildly successful crowd funding campaign. Veronica Mars' Rob Thomas spearheaded the capital raising campaign via Kickstarter, attracting 91,585 backers donating over $5.7 million dollars! Not bad for what typically turns out to be a thirty day time frame. While not all campaigns are successful, the amount of money raised by this budding industry has caught the attention of Congress.

In April of 2012, the President signed the JOBS ACT and TITLE III of that Act permits equity crowdfunding: selling shares or units in your company in exchange for cash. Until the SEC issues rules as required by TITLE III of the Act, it's still illegal to offer equity in exchange for investments online; however, once that happens, we will see a whole new industry blossom. Entrepreneurs and other business people will be able to use third party intermediaries to conduct campaigns to raise capital online. There are parameters upon how it all works-the devil is in the details, but it's expected that sometime this year those rules should be in place to make this a reality.

Perhaps Veronica Mars could have set up a campaign for equity crowd funding, seeking investment in its production company. The cap per twelve month period for the production company would be $1 million; and the investors would have a stake in the company, but perhaps if you have a well known brand like Veronica Mars, you might want to stick to the donative model that they used (they raised more money). If you are the "next" Veronica Mars and don't yet have brand recognition or a proven fan/customer base, perhaps you might want to use the equity model (once legalized) so as to incentivize investors that even though you can only raise $1 million per year, investors may possibly make more on a return (the donative concept doesn't allow any return-it's just a gift).

Time will tell how this space evolves, but one thing is for sure, it will be a show worth watching!

Crowd Funding: The Rules of the Game

Imagine that you need to raise $100,000 for your business. With limited options, you seek the internet as source of funds. You place a campaign on a third party website that allows you to reach infinite amounts of people, who may want to donate to your cause in exchange for different types of creative gifts you offer in return. A California based company, Pebble Technology did just that and surpassed its $100k goal to set an incredible record of securing over $10 million dollars in just thirty days! Granted, this is probably the highest campaign to date; however, it begs the questions: How did they do it and what are the rules of the game?

Well, as most entrepreneurs know, access to capital has been increasingly difficult for small businesses, which in turn affects jobs, tax revenues, and a host of related areas.  Fortunately, on April 5, 2012, the Jumpstart Our Business Startups Act (JOBS) was signed into law, allowing crowd funding to exist as a way to infuse much needed capital into the business sector.  Crowd funding is a way for the "crowds" to invest online in ventures of their choosing in exchange for equity.  Currently this does not comport with securities laws; however, the Securities and Exchange Commission (SEC) is actively setting forth rules that implement the JOBS Act provisions on crowd funding, so that the balance between access to capital and reduction/prevention of fraud can effectively be balanced.  One of the key issues relates to third party websites that serve as a conduit between the entrepreneur and the investor. These portals are the subject of debate in terms of how their role will be shaped to effectuate that balance of providing access to capital and protecting from investor fraud.  While sites currently exist under the donative (gift) model, where causes, business, and various projects have sought funds in exchange for gifts, this area of business and law is about to propel to new levels, particularly once the SEC and FINRA (Financial Industry Regulatory Authority) rules are established.

Creating Related Businesses: How Robbing Peter to Pay Paul Could Wipe Out Peter!

Often time companies will have the need to create related businesses to their core business.  While in theory this is great, in practice it can be more than problematic.  For instance, you are the key shareholder in a product company.  You see great opportunities that relate to your product company by setting up a transportation company that can ship your products and possibly others’ products within the industry.  You also see the opportunity to establish an insurance company that insures your products and again, possibly those of others’ in the industry.

Excited about the potential revenue that you can capture, you have these two additional entities created.   You also take money from your product company and place it in two new bank accounts for these two new companies that you now own.  As time goes on, these new companies need additional capital in order to sustain themselves and reach your goals.  You have bills for each of the new companies paid out of the product company.  You also have employees working on all three companies, but only have their payroll taken from the product company. In addition, you mix and commingle money, assets, and human capital between all three of your business entities—because, after all—they are all your companies.

Is there a big deal?  Yes! Why? Because by failing to maintain and operate all three entities separately, you have now risked liability from each of these companies as to the other.  For example, if the transportation company gets sued and is subject to damages as a result, the lack of keeping all the “eggs” of each company in their own “basket” now permits the plaintiff to reach assets of the other companies.  If the product company has cash flow and/or sizable assets, your operating the three companies interchangeably has now put your product company at risk.

Therefore, it’s important to ensure that each company operates as if it has three different owners, notwithstanding that you are the only owner.  One example of operating under complete separateness is the following:  If one company needs cash, make it a loan, document it as between the two companies, and ensure that the company who needs the money pays its bills from its bank account with that loan money.

Operating completely separately may take some getting used to; however, it beats having to risk everything you worked for to build up that product company.  Making sure you have the right systems in place in the short run, will position you to try to reach your goals in the long run.

Balancing Act: How Attorneys Play a Key Role in an Entrepreneurs Vision

Entrepreneurs, you are indeed risk takers. You are "idea" people with creative minds constantly thinking outside of the box. Most of you do not know that there is a box. Attorneys, on the other hand, are trained to stay in the box and to spot the potential pitfalls that could cost a company time, money and possible lawsuits. While there is nothing wrong with thinking outside of the box, every business owner needs the right business attorney to balance your entrepreneurial spirit with the perimeters of the law. While this may sound confining to you, the visionary, a good business attorney allows a company to grow by keeping the impediments of a lawsuit or other disputes at bay. Entrepreneurs, we know you see attorneys as wardens, doling out warnings and restricting your ideas, but in actuality we share in your vision. We just help you minimize risk to get there and beyond.

Going Mobile: 5 Tips on Mobile App Creation

Do you have the next great mobile app idea? Here are 5 tips on the legal side of Mobile App Creation:

Due Diligence. Basically, do your homework. Google your idea and find out if a similar app already exists. Its better to do the leg work at this stage of the game then down the road when you have put money into development.

Preliminary Protection. A lot of the time, people want to talk about their idea to gain feedback or simply want to talk about it out of pure excitement. Please don't ... unless, of course, you have a signed Non-Disclosure Agreement. Not all NDA's are the same. This is such an important point in the early stages of development that I am going to state it again: Not all NDA's are the same. You need one specifically for Intellectual Property Rights. Also, be careful of other parties, such as Mobile App Developers, asking you to sign their NDA. Most likely it is written to protect their company's interest and not yours. Have a lawyer read it over to make sure that you are keeping full control of your intellectual property.

Ownership. Who owns the intellectual property? Once the app is built, who owns the rights? Did you use a work-for-hire agreement*? Are there multiple authors meaning joint ownership? Or, is it just you? Ownership must be established before you can take the next step and acquire advanced protection.

Advanced Protection. Can't I just copyright the idea? Unfortunately, you cannot. However, you can copyright the code used to write the app, artwork, text, etc. In order to keep the copyright in your name, you would need to write the code yourself or hire a programmer on work-for-hire terms. Once the code is written and artwork designed, then it can be filed for protection with the copyright office. At this stage, you can also search to see if your app is something that can be patented. To be on the safe side, register all your materials with the copyright and patent office before the app is launched.

License / Assignment. For most people, this is the most important part because this is how your app makes its revenue. One of the more common ways is by having companies or individuals purchase a license to your app. There are two types of licenses: exclusive and non-exclusive. An exclusive license means you license your app to a company or individual with exclusive terms of use such as a certain geography or client base. For example, Company A wants an exclusive license for North America. This means you cannot license your app to another company or individual in North America. You could, however, give an exclusive license to Company B in Europe. A non-exclusive license allows you to licenses to Company A in North America, but also to anyone else who would want to purchase a license in North America.

Another option is an assignment. In an assignment, you have the option to sell all your rights or sell (or assign) select rights that you have in copyright. For example, in a copyright, you can assign the right to reproduce and the right to distribute, but you might retain the right to make derivatives. Remember, with any assignment, whether you are assigning all or part of the various rights, you are selling your ownership, just as if you were selling your house.

* Work-for-Hire describes works that are produced for somebody else. The person who hires the creator holds the copyright to the finished work.

Related posts:

Does your Business Need Cash?
See the four part series on Starting a Business:
Part I: Laying a good foundation
Part II: More than one owner
Part III: Safe-guard your product
Part IV: Choosing your Corporate Counsel

Does Your Business Need Cash?

If you own a business and need an infusion of cash, borrowing from banks has become increasingly difficult during these recessionary years.  Most business owners logically look toward family and friends as sources of capital.  On face value this may be just fine; however, the "devil is in the details."

Technically, whenever a business is raising money it's in exchange for shares of stock or membership units.  Those shares or units are the evidence of ownership as a result of receiving the funds.  These shares or units are securities, and as such, are governed by both state and federal laws.  Granted, many small businesses taking money from friends and family fall within exemptions to state and federal securities laws; yet, it is critical to ensure that your company does in fact fall within and comply with those exemptions. Otherwise, penalties can be assessed, and depending on the circumstances, there can be other more serious consequences if any fraud or misrepresentation to the person or entity giving the money is proved (if a dispute happens down the road).

So if your business needs money and it can’t be obtained through traditional sources, what should you do?

•  Most of the exemptions to securities registration prohibit advertising, so you should not advertise that you need money unless you talk to a lawyer knowledgeable in the area.  There are limited "tombstone ads" that may be placed, but this shouldn't be done unless you have sought legal advice.

•  Assuming you are just asking a family member or friend for the money, you should definitely have the necessary legal documents drafted. These documents will reflect what needs to be done from the company's perspective in terms of complying with your Bylaws or Operating Agreement.  Other related documents will address the sale of the share or units in exchange for the funds, and still more documents will address appropriate disclosures to protect your company. Overall, you will generate some paper, but the "bark" here is bigger than the "bite."

•  Your company will need to file appropriate documentation with the state Department of Corporations. This is done online and is to be done within 15 days of the company issuing any stock in order to avoid penalties.

While all of this may seem a bit burdensome, in the end, doing this will position your company to reduce risk with respect to regulatory compliance and an investor who was your family member or friend, but is now your plaintiff.


This information is intended for general educational purposes and not specific legal advice.

Lawsuit vs. Settlement: Is suing the best answer?

Nothing will cost you and your business more than a lawsuit.  Not just money – time, energy and focus – it is an absolutely absorbing event.  Lawsuits don’t happen, nor end, overnight – they will hang as a dark looming cloud, demanding your time and taking you away from doing what you love to do: Run your business. Outcomes cannot be determined despite the best litigator’s gut feeling or best guess, whether the case is tried before a sole judge or a jury of your peers. It can take years to get to judgment. You should always allow your attorney the opportunity to attempt to resolve the matter via a settlement. It is not a sign of weakness to take the higher road.  Both parties of course have to be brought to the same junction and both parties have to be given the incentive that each side taking a little less that their original demand is in the long run a wiser choice. Pragmatic solutions are becoming the dominant mechanism for good reason – pure economics. When I am counsel in a situation like this, I evaluate every conflict as a business transaction and, putting the principle aside, find the logical solution. Occasionally, the answer is “Sue”.  More often than not, the solution is short of that mark, saving the client time, money, energy and sanity.

Non profit Organizations: Guess what? It’s a business and you need to run it like one.

The greatest number of inquiries we receive from non-profit organizations stems from discord within the Board members or Trustees.  9 out of 10 times, a schism occurs on the board.  One group does not approve of how money is being spent or reported.  The first question we ask is to see the Bylaws of the organization.  We usually are met with a sheepish answer that the Bylaws of the organization do not really reflect the operations of the organization. The common reason is that the organization selected a boilerplate set of Bylaws for the sake of having something to present to the IRS during the exemption phase of the formation of the non-profit organization. But now the organization has run into conflict and there are no true guidelines laid out. Whether it is how money will be distributed or how Board members will be elected each year, a non-profit organization’s Bylaws need to reflect who that organization is and how it will function in a general business capacity. What will the members of the organization be able to vote on and what issue will need only a Board vote?

The second mistake of most non-profits is that their passion for their particular cause blinds them as to their financial reporting obligations. Unfortunately, donors want to know how much of their dollar goes to the cost of a fundraiser and how much to the cause and or mission of the non-profit. Donors also want to know how much of the net-profit is applied to the administrative cost of running the organization as opposed to the actual beneficiary of the non-profit.  Trustees/Board members are asked to raise funds.  There has to be agreement as to how those funds will be used.  There also has to be a budget for fund raising. You cannot spend $100,000 a year in order to give away $10,000 a year in scholarship or grants, etc. There has to be transparency in the accounting and reporting of the expenditures and income of the organization. Your non-profit organization needs to be run with the same sound business judgment and with the detail to accounting that any business would present to it’s shareholders, profit or not.