By Michael S. Melfi
Emerging companies make up a majority of our economy’s accounting. To demonstrate the impact, here are a few statistics:
- The 28 million small businesses in America account for 54 percent of all U.S. sales.
- Small businesses provide 55 percent of all jobs and 66 percent of all net new jobs since the 1970s.
- The 600,000 plus franchised small businesses in the U.S. account for 40 percent of all retail sales and provide jobs for some 8 million people.
Having the right legal foundation is an important aspect of the growth and success of an emerging company. While there are many aspects, including mindset, to growing a successful team, there are some foundational items involving business acumen around legal topics. Here is a look at five legal areas to consider in building a strong foundation for your emerging company:
Entity Formation
Having the proper entity formation is crucial to establishing the foundation for a successful business. Understanding the differences between a C-corporation and an LLC, and the implications on fundraising, taxes and investment are the first things that must be discussed with an emerging company. While there are many online solutions for establishing an entity, it is very important to truly understand the nuances of this area to properly establish the corporate structure most advantageous to your situation.
Additionally, knowing that most businesses will fail or go thru some kind of partnership dispute during its lifetime, it is crucial that the founders take the time to have the necessary corporate documents drafted to protect the interest of the parties and avoid ambiguity down the road. Addressing capital, transferability of ownership, rolls and duties of owners and future funding structure are all integral parts of drafting a document built for the success of a business.
It’s All About Having the Right Team
Success of an emerging company is almost always based on the people that comprise the team. In addition to building the right culture, it is important to memorialize these relationships. Most emerging companies have various types of relationships ranging from freelance independent contractors all the way to equity-owning key team members. The relationship with each of these individuals is distinctly different and requires the proper agreements in order to protect the interest of the business, as well as empower the efforts of the team member. While it may come natural or seem like an easy solution, a conversation over beers at happy hour or an email exchange is not the ideal way to address these relationships. Ultimately, there should be documents memorializing each relationship and they should be updated regularly as changes happen to the business and the relationships.
Intellectual Property
It is estimated that there will be over 700,000 trademarks filed this year, and according to the United States Patent and Trademark Office website, over 30 percent of them will not be registered. These types of staggering statistics are similar for copyright and patents. Similar to entity formation, many founders will take matters into their own hands and attempt to file for Intellectual Property (IP) protection on their own without truly understanding the nuances of registering IP.
Further, understanding IP portfolio management and treating these assets as an integral part of the business are an important legal strategy of an emerging company. The ability to secure and protect the business’ IP creates a strategic advantage and can have direct impact on the valuation of the business.
Funding
At some point almost every emerging company will face some type of funding, whether angel investing, venture capital, crowdfunding, traditional bank financing or even some other type of debt financing. Having an understanding of the intricacies of financing instruments, securities laws and the various state and federal rules and regulations is fundamental to negotiating and securing a good deal.
Properly drafting these documents is important to protect the business, to insulate the investor and to remove any liability against the founders. The biggest obstacle emerging companies face is adequate resources to operate their businesses. The ability to tell a story utilizing numbers is the most important aspect of succeeding with fundraising efforts.
Succession Plan
While many businesses die on the vine, many others will eventually be sold or acquired. For these emerging companies, it is important to have the proper plan in place for the owners and team members. Understanding the tax implications and ensuring estate planning is in place for these successful business owners are vital to protect wealth established by their emerging company.
Regardless of what area of law an attorney specializes in, they will inevitably come across an emerging company at some point. Understanding these key areas and how to properly advise the client is crucial to the success of the business, the reputation of the profession and the growth of our economy. Take the time find a strategic partner within the legal community to assist you and your clients with their emerging company needs.
Michael S. Melfi is an attorney with Bodman PLC in Ann Arbor, helping emerging and established businesses overcome the legal and financial obstacles that often stand in the way of growth. He’s the author of a series of four books, has published numerous articles and is the founder of an online curriculum called Be Investable. Michael can be reached at mmelfi@bodmanlaw.com or 734.930.2497.