As a business owner, you are a special breed -- unafraid to dream big and take risks, despite being faced with numerous laws and regulations. Whether planning, starting or operating an existing family or closely held business, you need to stay grounded to both boost sales and limit your liability.
As you review, you will gain insights and practical guidance to grow and protect your business.
Subjects discussed are:
-Tools for protecting the family's equity interests
-Protecting patents, trademarks, and copyrights
-Protecting against unfair competition
-Avoiding employment law claims and suits
Alignment of IncentivesAs a family or closely-held business grows and evolves over time, hire outside managementDesire to align incentives and motivate by more than salary Tie their compensation to the success of the business.
Economic Rights – dividends, distributions, allocations of profits and losses, proceeds from a sale and other liquidity eventsNotice and Voting Rights – notice of general and special meetings, veto power over unanimous actions (procedural or substantive), director elections, sales of assets, mergers, amendments to governing documentsInformation and Inspection Rights – stock ledger; “books and records” for a proper purpose related to interests as a stockholderFiduciary Duties – applicable to officers, directors and in some cases majority / controlling shareholders; minority shareholder oppression issuesExisting holders have these rights, and we always encourage our clients to follow corporate formalities. However, with a new party, someone with whom you don’t have the history, might make things more difficult
These impact when rights are received and how much they getRestricted Stock GrantsVest or allows purchases over timeOften coupled with a purchase option on termination of employment (nominal price for unvested shares, pricing mechanism for vested shares)Encourages longer associationStill entitles holder to “bundle of rights”Stock options – may vest over time or on liquidity eventShould be at FMV to qualify as incentive an avoid 409A excise tax
Works for C Corporation, but not S CorporationFlexible LLC structure can be used to limit or further define the “Bundle of Rights”In conjunction with voting agreements, there typically are other restrictions placed on owners
Important to review current structure before granting equity interests to new holders; the current agreements may not be appropriate for a non-Family/founder equity holderEXAMPLE: Might be okay to allow family members to give stock to children, but not new managementTax and Accounting ImpactsThere are deferred compensation rules and regulationsInvolve the tax and accounting specialists IN Addition to your corporate lawyer