Ari Law recently completed a 2+ year litigation of a landlord-tenant liability lawsuit filed in San Francisco Superior Court. The Firm obtained a settlement for the client in the amount of $1,325,2000. Confidential v. Confidential, San Francisco County.
On April 13, 2018, ARI LAW, P.C. obtained a jury verdict for its client, a small business, that included an award of $2,100,000+ in punitive damages, against the defendants. The total amount of the jury verdict, in favor of the Firm’s client, was $2,482,179.00.
ARI LAW is a business litigation and corporate law firm focusing on small and medium-sized businesses in California.
Attorney Advertising Notice: Any testimonials or endorsements throughout this website do not constitute a guarantee, warranty, or prediction regarding your own legal matter.
* Client testimonials are not indicators of future outcomes. Nothing on this website creates an attorney-client relationship, or constitutes legal advice.
Sometimes a company will want to engage in one or more rounds of seed or venture capital (“VC”) financing. In this post, we discuss the basics of convertible debt financing, which is a commonly used type of financing in seed and early stage deals.
Convertible Debt Financing
Convertible debt is usually short-term debt issued by a company in the form of a loan that converts into shares of stock if and when the company receives VC funding (typically a single investment > $2M USD). In other words, investors loan money to a startup as its first round of funding. However, rather than the investors simply receiving their money back with interest (as would occur with an ordinary loan), they receive shares of [sometimes, preferred] stock as part of the company’s expected Series A or later financing, usually at a discounted price. The discount is offered to provide incentive for investing in a company at an early stage when the probability of the company succeeding is often at its least certain. At the same time, the benefits of a convertible note to the company include that the company need not subject its corporate governance and streamlined operations to the will of [more] outside shareholders, and the company can avoid the legal and administrative cost (>$10,000) of more complicated securities transactions.
Because the interests of the founders and investors are not perfectly aligned in an equity financing (i.e. the lower the valuation, the higher stake the investor receives for his or her investment, short term versus long term strategies, etc.), a substantial amount of negotiation may be required to arrive at a good deal. Also, practically speaking, it often makes sense to delay valuing a company until the Series A round of financing because, at that time, there will be considerably more information about the company and its worth, not to mention how expensive it can be to obtain a legitimate valuation.
Another significant advantage to the company of issuing convertible notes is to avoid giving the investors any control in the company. When investors receive shares of preferred stock, they are typically granted significant control rights, sometimes a board seat and/or veto rights with respect to certain corporate actions (known as protective provisions). They also have certain rights as minority shareholders under applicable State law and receive certain economic rights, such as a liquidation preference. Convertible noteholders are rarely granted any control rights and have no minority stockholder rights. These rights vary depending on whether the corporation is subject to California and/or Delaware law.
In a future post, we will discuss setting a cap on the price that an angel investor will pay in the Series A round of financing. The cap is designed to protect investors by limiting the amount they have to pay to convert their debt to preferred stock in the event that the company receives an unexpectedly high valuation in the Series A round. If, for example, the cap is $2 million and the pre-money valuation in the Series A round is $4 million, the amount of the note (plus accrued interest) would convert into shares of preferred stock based on a valuation of $2 million as opposed to $4 million. We will also discuss certain investment instruments and forms of contract that are commonly used in Silicon Valley, which you should try to avoid.
While convertible debt is commonly used and has many important advantages, equity financing at the seed stage is also viable. The best course of action depends on your company and business plan.
Attorney Advertising Notice: Any testimonials or endorsements throughout this website do not constitute a guarantee,
warranty, or prediction regarding your own legal matter.
* Client testimonials are not indicators of future outcomes.
Nothing on this website creates an attorney-client relationship, or constitutes legal advice.
People often come to us with the question of what is the definition of an employee under California law.
A common source of tension in the working relationship is the characterization of a worker as an employee or an independent contractor. It is frequently argued by some plaintiff’s bar attorneys in California that employers benefit economically from characterizing a worker as an independent contractor rather than an employee, and thus have financial incentive to do so. For instance, classifying an employee as an independent contractor may purportedly allow the employer to avoid payroll taxes, minimum wage, overtime and other hourly requirements, and various insurance requirements. On the other hand, the Courts have recognized that there are legitimate justifications for characterizing someone performing services as an “independent contractor,” and an argument can be made in some cases that the employer would have [unfairly] benefitted more by characterizing the person as an “employee,” undercutting the other party’s position. Interpretations of the often times “fine print” in the context of the Labor Code as well as administrative decisions, statutes, and local ordinances, etc., are relevant to any analysis of the facts at hand.
The Workers’ Compensation Act only extends to injuries suffered by an “employee,” which arise out of and in the course of “employment.” (Cal Labor Code §§ 3600, 3700; see Cal. Const., art. XIV, § 4 (former art. XX, § 21).) The California Labor Code defines an “independent contractor” as “any person who renders service for a specified recompense for a specified result, under the control of his principal as to the result of his work only and not as to the means by which such result is accomplished.” The affect of this concept may be far reaching. In other words, while the principal can control the objective of the independent contractor, the independent contractor controls the manner in which that objective is achieved and therefore is situated differently than the “employee”. The existence of a written contract classifying a worker as either an employee or independent contractor is often dispositive by itself, short of trial, but is given weight.
The California Supreme Court’s seminal opinion in S.G. Borello & Sons, Inc. v. Dep’t of Indus. Relations, 48 Cal. 3d 341, 350 (1989), identifies the factors weighed by the court in determining whether a worker is an employee or independent contractor. While the court acknowledges that “the right to control work details” is the most important consideration, the court enumerates several “secondary” indicia of an employment relationship. Id. at 350-351. The secondary factors considered by the court include:
(1) whether the one performing services is engaged in a distinct occupation or business;
(2) the kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the principal or by a specialist without supervision;
(3) the skill required in the particular occupation;
(4) whether the principal or the worker supplies the instrumentalities, tools, and the place of work for the person doing the work;
(5) the length of time for which the services are to be performed;
(6) the method of payment, whether by the time or by the job;
(7) whether or not the work is a part of the regular business of the principal; and
(8) whether or not the parties believe they are creating the relationship of employer-employee. Id. at 351.
Also, the court recognizes that an employer’s “right to discharge at will, without cause” is “strong evidence in support of an employment relationship.” Id. at 350.
The issue of whether a person is an independent contractor is not always clear.
ARI LAW may be contacted by phone at 1-415-830-9968.
California law provides particularly notable First Amendment protections. To the extent that a lawsuit may infringe on an individuals right of petition or free speech, the California Anti-SLAPP (strategic lawsuits against public participation) statute provides an immediate and effective means for the individual to seek dismissal of the lawsuit. As California Code of Civil Procedure § 425.16(b)(1) provides:
A cause of action against a person arising from any act of that person
in furtherance of the person’s right of petition or free speech under the
United States Constitution or the California Constitution in connection
with a public issue shall be subject to a special motion to strike, unless
the court determines that the plaintiff has established that there is a
probability that the plaintiff will prevail on the claim.
Lawsuits to which the anti-SLAPP statute may apply include, but are not limited to, defamation, slander, libel and malicious prosecution.
However, the anti-SLAPP statute is not absolute. Rather, it only applies to lawsuits arising from the following acts, which are considered to be acts in furtherance of the person’s right of petition or free speech under the United States Constitution or the California Constitution in connection with a public issue for purposes of CCP § 415.16:
(1) any written or oral statement or writing made before a legislative, executive, or judicial proceeding, or any other official proceeding authorized by law;
(2) any written or oral statement or writing made in connection with an issue under consideration or review by a legislative, executive, or judicial body, or any other official proceeding authorized by law;
(3) any written or oral statement or writing made in a place open to the public or a public forum in connection with an issue of public interest; or
(4) any other conduct in furtherance of the exercise of the constitutional right of petition or the constitutional right of free speech in connection with a public issue or an issue of public interest.
To prevail on a special motion to strike, the defendant must demonstrate that the plaintiff’s lawsuit arises from one of the foregoing acts. C.C.P. § 425.16(b). The defendant is not obligated to demonstrate that the plaintiffs subjective intent is to chill the exercise of constitutional speech or petition rights. See Navellier v. Sletten, 29 Cal. 4th 82, 89 (2002). Nor must the defendant show that the plaintiffs lawsuit had the actual effect of chilling free speech or petition rights. Id.
Once the defendant has made such a showing, the burden shifts to the plaintiff to establish a probability that he or she will prevail on his or her claims. Equilon Enterprises, LLC v. Consumer Cause, Inc., 29 Cal. 4th 53, 60 (2002). If the plaintiff cannot satisfy this burden, the anti-SLAPP motion to strike will be granted in favor of the defendant.
To the extent that a defendant prevails on his or her special motion to strike, the defendant is entitled to attorneys fees and costs pursuant to CCP § 425.16(c)(1). This is a significant benefit to a defendant because it allows a defendant to potentially recover all attorneys fees spent in defending against the lawsuit.
A special motion to strike may be filed within sixty (60) days of the service of the complaint or, in the court’s discretion, at any later time upon terms it deems proper. CCP § 425.16(f). Therefore, a defendant should retain experienced counsel upon being served with a lawsuit to which the anti-SLAPP statute may apply.
To the extent that the defendants anti-SLAPP motion to strike is granted, the lawsuit is dismissed, with prejudice, against the Defendant.
The attorneys at ARI LAW, P.C. have experience both filing and defending against anti-SLAPP motions to strike.
* Attorney Advertising Notice: The testimonials and endorsements throughout this website do not constitute a guarantee, warranty, or prediction regarding the outcome of your legal matter.
* Client testimonials are not indicators of future outcomes.
* Nothing throughout this website creates an attorney-client relationship or constitutes legal advice.
Many California companies choose to incorporate in the State of Delaware for a variety of reasons. We will explore the advantages of incorporating in California in a future post. Herein, we set forth the steps that a California venture must take to incorporate in Delaware and establish the manner in which it will be owned and operated.
While certain websites (e.g. LegalZoom and Docstoc) offer boilerplate forms and documents intended to form your LLC or corporation for little or no charge, we don’t recommend this. I’ve encountered numerous clients who pursued the online route, only to realize later either that their documents failed to establish the company in the desired manner, contained incorrect legal provisions, or down the road their partners or investors did not find the cookie-cutter documents to be usable or appropriate. In our opinion, non-legal services such as LegalZoom and Docstoc can increase the risk that your venture will end up in a dissolution or partnership dispute. Once these unfortunate circumstances occur, you are then forced to go and pay additional legal fees in order to correct the documents, during oftentimes already difficult circumstances. Sometimes it may be too late to fix the issues preemptively and you will have to deal with the consequences. I would estimate that in the majority of cases use of LegalZoom’s boilerplate forms ends up costing the client more money and (many times more importantly) valuable time. Still, we find, that there are those who insist on going at it themselves without the help of an attorney and believe that the risks are overblown or the cost of legal counsel simply not worth it in their opinion.
Web services such as LegalZoom merely provide standard agreements that may not fit the specific needs of your company. Further, because such websites are not qualified as attorneys in California, they do not render legal advice or provide strategic thinking. Therefore, such services are unable to create the type of sophisticated documents that you need to adequately protect yourself and your company. As Venture Capitalist Craig Johnson explained, “[s]tarting a company is like launching a rocket, if you’re a tenth of degree off at launch, you may be 1,000 miles off downrange.”
That being said, we wish to provide you with insight as to steps needed to incorporate your company in Delaware. To incorporate, you are required to:
1) Confirm the availability of the name chosen for your company. You can informally determine the availability of your company’s name on the California Secretary of State’s website at: http://kepler.sos.ca.gov/. You should also perform the same search on the website for the State of Delaware Division of Corporations.
2) Procure a registered agent in the State of Delaware. The registered agent of a corporation is, among other things, responsible for accepting service of process and other communications directed to the corporation and forwarding such communications to the corporation.
3) Prepare a Certificate of Incorporation or Articles of Organization. We recommend hiring an attorney to prepare your certificate of incorporation and other incorporation documents such as bylaws.
4) File, or cause to be filed, an executed Articles of Organization. Upon the proper filing of the Certificate of Incorporation, a company will constitute a body corporate in the State of California. At that time, the company will have the authority to conduct business as a corporation under California Law.
5) Prepare by-laws that govern the management and operation of the corporation.
6) Select a board of directors.
7) Select officers of the board of directors. Officers typically include a President, Vice President, Treasurer and Secretary.
8) Issue shares of common stock to the founders by preparing Subscription Letters and, if applicable, Founder Stock Restriction Agreements.
9) Obtain a Federal Employer Identification Number (“FEIN”) from the IRS, which is required for all corporations. You may obtain a FEIN number by filing Form SS-4 with the IRS or apply online to the IRS.
10) Register as a foreign corporation in California to the extent that your company intends to conduct business in California. A company may complete this task by filing a Foreign Corporation Certificate of Registration with the California Secretary of State.
11) Comply with federal and state security laws following the formation of your company.
12) Perform due diligence about your industry? For example, in California, businesses investments such as buying a franchise in California have specific laws on franchises. Local ordinances may also apply, for example, if you own a franchise in San Francisco.
In a “worst case scenario,” the failure by a company to properly incorporate may subject its founders to personal liability and have an adverse effect on the companys control and governance. More frequently, incorporation without the help of an attorney leads to disorganization, organizational failure, and/or greater legal costs. Therefore, it is important that a company be properly incorporated and that all statutory and regulatory specifications be strictly followed.
This website does not contain legal advice.