Issuing Shares for Your Corporation

If you are approaching the phase of your business where incorporation is the next move then congratulations!

This is a positive step towards expanding your business and bringing in an infusion of cash.

Every province will have their own distinct set of rules for articles of incorporation. Some of these "zones" are more corporation friendly than other regions. No matter where you land, you'll more than likely be required to write up bylaws, explain the roles on your board of directors and their responsibilities and issue stock.

Questions such as: how many shares should be authorized for an incorporation? Who should be listed as officers and directors? How many shares should be created?

You'll have to look at the big picture of your business for the right answer.

Millions of Shares

Every single stock certificate represents a piece of the company. The owner of that stock is entitled to a dividend based on the stock's performance and the amount of stocks they own. A typical offering of common stock could be anywhere between 10 to 15 million shares.

You can break this down as 8 million shares divided among the founders and 2 million shares for an option pool. The rest can be held in reserved and released down the road. Whatever amount you settle on for the initial release you have to stick to the number.

If you want to increase the amount of shares available that will have to be put to a vote by the board of directors and shareholders because they are all now part-owners.

That first number of shares is also important when you are considering offering them as employee incentives. In other words, you don't want to give everything away all at once and you want to make the incentive large enough to attract good talent.

Stocks for the Small Business Owner

Set aside the headline grabbing IPOs like Facebook or Yahoo. The typical startup can have a stock price share beginning at around $15. Add them up to 20 million shares and you've got a $300 million market cap. That would be an extremely successful IPO launch. It also allows for plenty of buffer room that can prevent stocks from splitting at the time of the launch.

From a small business perspective, you can incorporate your company and issue a single share of stock. Keep in mind that the more shares you do end up issuing the more you'll pay in corporation filing fees.

Before making that call, plot out where you see your business in 5, 10 and 20 years from now. If it's just going to be you and your family running things you might not need to go big. However, if you're goal is to go global, let your stock offering reflect that plan.

For more information on shares, articles of incorporation, and how to incorporate your business in Canada, please visit our website.

Five Reasons to Avoid Crowdfunding

In the wake of tight credit markets in North America, crowdfunding or crowdsourcing, has quickly become a source of readily available financing to startups, charities or projects. This form of financing is extremely popular with the creative industry such as documentaries, artists and writers.

This new form of financing allows a person to get funding through small contributions from a large group of individuals through an online platform.  The entrepreneur makes an online pitch to a community, which then decides if they want to support the project by giving money towards it.

Raising funds for your small business by crowdfunding has its own set of dangers that can be harmful to your company’s success.  Here are the top five reasons to avoid crowdfunding as a financing option.

Crowdfunding is not meant for large projects.

If you need a million plus dollars to get your business up and running, crowdfunding is probably not the best source for you. Yes, there have been exceptions, but raising the large pool of capital works best with venture capitalists that you can focus on as opposed to the sometimes-scattered approach of crowdfunding. The other thing to consider is repayment. Imagine trying to keep 1,000 investors happy!

Crowdfunding is not sophisticated investing.

There is a kind of hip, underground vibe to crowdfunding. You could kick in a couple of hundred dollars towards an edgy independent film and feel like you’re part of the creative process. However, some professionals might not want to open up their business plans for such wide scrutiny.   

Crowdfunding could impact future investments in your company.

If you're tapping into crowdfunding as source of capital, you want to think about the longevity of your business. A single project can benefit from the financing, but if you've giving up shares in a company that might become extremely successful, those shares could tangle up future investment opportunities. See "The Social Network" for a perfect example of this dynamic playing out with billions at stake!

Crowdfunding has a limit on share values.

The cap with crowdfunding is $1 million. If you manage to raise more than that amount you'll be frozen out of crowdfunding for at least a year unless you want to become involved in security registration compliance. Suppose your company experiences rapid growth? You might be stuck if crowdfunding is your only cash flow source.

Crowdfunding is not a quick option.

If you need cash fast, crowdfunding is not the way to go. Once you place your proposal up on a site you essentially have to wait until it catches "fire." You'll also have to do a lot of your own promotion to drive people to your plan. This process can stretch on for weeks and months. Now consider being approved for a loan from a bank and having the funds by the end of the week. Which works better for your plans? 

5 Reasons to Keep Your Minute Book up to Date

One of the many requirements of a corporation is to maintain a minute book. This is the official record of all of your company’s business dealings. Often it falls to the responsibility of the “recording secretary” of the corporation to keep the minute book up to date. Why is this important? Here are the top five reasons to keep your corporate minute book up to date.

1)      Detailed History

If for no other reason, the minute book becomes the written history of your corporation from its inception up to the last board meeting. This “open book” allows the many potential owners and their lawyers the opportunity to review all the actions taken by the corporation. It also establishes important financial milestones which will come in handy when it is time to report taxes and expenses.

2)      Supports the Corporate Structure

A current minute book record will clearly show how decisions were made and voted on. This might come into play when a minority shareholder or director questions the actions of the board. In extreme cases, a government agency might want to review how certain decisions were made. The minute report clearly lays out the corporate structure at any given time. By doing so, the authority to make those decisions shouldn’t come into question.

3)      Legal Backing

The bigger the corporation the bigger the chance that a legal opinion will have to be written to support a decision made by the board. With this record, your company’s attorneys will be able to build their opinions on a solid foundation of facts. This type of opinion could be written when a business is looking for investors and needs to establish the various banking relationships of the parent company. A corporation’s minute book can also serve as evidence in any dispute.

4)      Stock Records

The minute book should have a section that keeps track of all the company’s stock records. It’s vital that this is always kept up to date so as to establish the current ownership. In fact, a corporation’s ownership principals are only officially recorded in the minute book. This record should also keep track of stock transfers and who the original holders of the stock certificates are.

5)      Dividend Records

Just as it is important to trace ownership, it is equally important to keep track of dividend and compensation payments. A corporation cannot provide a clear financial portrait without access to these kinds of numbers. In fact, all company expenditures should be included in the minute record.

 

How to Remove a Poorly Performing Director from the Board

Any type of corporation will have a board of directors established to develop strategies, policies and implement those ideas. The board is beholden to the shareholders in the sense that it is their job is to increase the profits which are paid out as dividends. It falls under the responsibility of the board to make sure that all of the members are living up to the standards of excellence that have been established for that company to succeed.

Just because someone has been named to an executive board is no guarantee that they’ll be up to the task. In certain circumstances it might become apparent to all that a particular board member needs to be removed. Usually the reasons are that they have become ineffective or are having difficulty working with the other board members.

When it is obvious that a move needs to be made, the board of directors will be restricted by the guidelines they have established in their bylaws. Here are some examples of bylaw clauses which can determine how a poorly performing director is removed from a board.

Term Limits

A majority of corporations have built in term limits for their board of directors. Typically, a director might serve out a three-year term and then be rotated out. In some cases a board member proves to be extremely valuable. For them to outlive their term limit a special vote would have to be conducted.

On the other hand, if a board director that has been targeted for removal has only a few months left on their term it might make sense to let them simply retire as opposed to creating a potential “dust-up” in the company.

Asking for a Resignation

Often the targeted board member might not have any idea they are being looked at to step aside. This would require a personal intervention from the chairman to this director. In the meeting, the chairman would spell out the areas of concern and ask for that person’s resignation.

On many levels, this is a “face saving” gesture. It allows for a smooth transition and doesn’t automatically tarnish the reputation of the board or the member being asked to leave. To insure this is all above board, it is advisable that the company’s lawyer be present during the discussion.

Impeachment

Impeachment is the formal process by which an executive board can remove a member. The process should be clearly spelled out in the bylaws including all the specific reasons for dismissal. For an impeachment to pass you will need a 2/3 majority of the board.

It is important that any such action like the removal of a board member be supported by a unified front. A bad press report can drive the price of a company’s stock down. Board shake-ups would certainly qualify as bad news.

That is why it’s best if the company can get out in front of the story with a definitive press release explaining the transition. The goal is to insure the shareholders and the stock traders that business will proceed as normal.

Reverse Takeovers - Evaluating a Possible Alternative to the IPO Exit Strategy

From the very first business contract there were loopholes. These are ways around a particular rule or guideline that offer a more desirable outcome. It isn’t breaking the law, but coming up with an alternative approach.

That’s the best way to describe a reserve takeover: it’s a loophole to expedite the IPO strategy and provides a viable alternative for private companies to become publicly traded companies without a lot of hassle.

The Basics of a Reverse Takeover

In a reverse takeover, a private company buys controlling interest in a publicly traded company. The private company then merges with that public entity and in effect becomes a publicly traded company. The original public company is known as a shell company. That’s because all that really exists is the organizational structure and all that comes with that in terms of approved documents, corporate filings and other paper work.

The shareholders who are part of the private company assume a majority stake in this shell company and thereby are granted controlling interest. If the shell company is in compliance then this type of transaction can be completed in a matter of weeks as opposed to months (or years) following the normal course of filing for an IPO. There needs to be due diligence in terms of the proper disclosure forms filed once the merger has been enacted.

The Pros of a Reverse Takeover

On the top of the list of benefits of a reserve takeover is the potential for bigger earnings. The contributing factor is because there is less stock dilution than with a traditional IPO. There is also no need to raise capital as you would with the former IPO which makes this an affordable and streamline process.

The reverse takeover is often less beholden to the fluctuating and sometimes volatile market conditions. Even the hint of a bad review or negative earning potential can send a stock plummeting. That is not something you want released on the day of your IPO offering.

Look no further than the IPO offering of Facebook for a perfect example of this.

Finally, because a reverse takeover is less time consuming, the private company in play can focus on their business instead of all enormous “to-do” list required to get ready for a standard IPO. In the long run that’s going to be good for business all around.

The Cons of a Reverse Takeover

Think of a reserve takeover as moving your business into an established warehouse building. There might be some problems with that “warehouse” that could impact your business. The shell company might have some sloppy bookkeeping practices or pending lawsuits.

 There might even be some greedy shareholders who want to dump their shares right out of the gate. That could impact the offering. This can be avoided with a share lockup put into place before the merger.

There is also a huge learning curve for a private company to go through once it enters into the world of a publicly traded company. Sometimes those board members aren’t ready for the new game.

Is a reverse takeover right for you?

How a Shareholders' Agreement Can Protect You and Your Business

Corporate law doesn’t offer a solution for every potential conflict that can occur between partners or shareholders during the course of running your business. Which is why creating a shareholders’ agreement can be a very smart thing to do to protect yourself.  There are many situations in which a shareholders’ agreement can get you of trouble. Here are a few examples:

·         An unfortunate event that occurs such as a conflict with one of the shareholders, an accident, bankruptcy or even death of a shareholder

·         When the shareholders want to maintain equal equity within themselves

·         When shareholders want to participate in company decision-making, such as the introduction of new partners in the company

·         Or changing the shareholder voting rights

Even if you have less than three shareholders, you should write and sign a shareholders agreement. The departure of a partner or even a disagreement between shareholders can often lead to bad blood within your company.  And in situations like these, you want to make sure you’re protected.

If you want to have the best shareholders’ agreement that meets your needs, it is advisable to consult a lawyer. He will determine what clauses should be included in the agreement and suggest solutions tailored to your situation and that of the shareholders. Expect to pay a few hundred dollars for a lawyers’ service.

If there is a dispute or uncertainty on how to proceed in a particular situation, you can refer to the shareholders' agreement for guidance. In the event that the agreement does not cover a particular circumstance or the situation cannot be resolved by the shareholders, an arbitration clause can be inserted in the agreement that requires the dispute to be referred to an independent third party.

Here are some of the clauses that you should be aware of and may wish to put in your agreement:

1.       First refusal: This allows shareholders to have a say over the sale of their shares to someone else who is not a part of the company.

2.       Mandatory offer due to death: Provide what will happen upon the death of a shareholder

3.       Mandatory offer due to withdrawal from business: Provide for situation which could lead to the withdrawal of a shareholder from the company for various reasons

4.       Pre-emptive right: Protects the rights of the shareholders against issuing new shares by the Board of Directors

5.       Shotgun clause: Protection from any disagreements between shareholders

6.       Working conditions: This outlines the working conditions governing the shareholders who work for the company

7.       Voting: Allows shareholders to be elected as board of directors

In starting your business, you should hope for the best, but plan for the worst to occur. By using a shareholders' agreement, you save money, time and frustration in the long run. What you get is greater trust and peace of mind between you and your partners which is fundamental to every successful small business.

Facebook's IPO Lawsuit: What Went Wrong?

In many ways, the Facebook IPO can be looked at as the perfect storm of how not to launch a public company. Leading up to the stock sale, media outlets were breathlessly hyping how much money founder Mark Zuckerberg and his team would be making. Nearly every news program was offering tips on how the small investor would have to wait in line to buy their handful of shares and be a part of this “history-changing IPO.”

Then reality hit and Facebook fizzled. What went wrong?

Right out of the gate there were problems. The U.S. stock market rings its opening bell at 9:30 a.m. The IPOs usually start trading about an hour later. However, Nasdaq informed everyone that Facebook trading wouldn’t start until 11:00 a.m. It actually didn’t start until 11:30.

In that first wave, close to 80 million shares were being bought and sold in a matter of seconds. And in that same blink of an eye, traders were complaining that their orders weren’t being properly processed. In some cases, they were getting shares at a higher price.

The NASDAQ would blame all of those errors on a technical glitch but it left a bitter taste for most traders. But even all that sloppiness isn’t why some newly-minted Facebook shareholders are suing the social media giant. They claim the fix was in.

As reported by Reuters, the lead underwriter for the IPO, Morgan Stanley, was provided with some pertinent information regarding the true nature of Facebook’s financials. Namely, they weren’t so hot. Coming upon the heels of GM backing out of a $10 million Facebook advertising campaign, this report apparently let the big players in on a dirty little secret - when it comes to generating dividends base on profits Facebook might just turn out the be the Emperor with no clothes. Suddenly that $100 billion valuation wasn’t looking so accurate.

Reuters went on to report that a few hours after Morgan Stanley got the news it was apparently shared with Goldman Sachs, JP Morgan and Bank of America. They all reduced their earnings outlook. When those numbers were publicized, the stock price took a hit and kept on sinking. The disgruntled shareholders claim this was a classic case of insider trading and they were the ones left holding onto a stock that dropped like a brick.

Naturally, the big brokers claim they are innocent of any wrongdoing. Are they right? At what point does it become insider trading?

 Were the people jumping on the Facebook bandwagon misinformed intentionally or did they merely buy into the hype only to be smacked by reality? Obviously, this will be an issue addressed by the courts. Meanwhile, the stock is still trading. Zuckerberg still became a billionaire (on paper), got married and went on a honeymoon.

And Facebook still has millions and millions of users. In the grand scheme of things, not much has really changed for those users.

Everyone is just waiting for the next move.