Announcement: Moving to Carney Badley

New Startup Law Practice

My good friend and former DLA Piper colleague Mike Schneider and I are pleased to announce that we are bringing our corporate and IP transaction practices together to work on startups and emerging companies at the law firm of Carney Badley.

Carney Badley

You can find information about Carney Badley at www.carneylaw.com.

A New Alternative For Startups & Emerging Companies

We are excited to be working together again, and are looking forward to offering a new option for legal services to startups and emerging tech companies in the Pacific Northwest.  Startups and emerging companies can come to us for help with business formation, angel and venture financings, IP transactions, software licensing, exits and other strategic transactions.

We will also represent angels and institutional investors in their investments in early stage and tech companies.

A New Blog: TheLawofStartups.com

We will be blogging at www.thelawofstartups.com, and we will also plan a podcast discussing startup and legal issues.  Stay tuned for more details.

If you are interested in hearing more about our new platform, please feel free to reach out to either of us directly.

Best regards,

Mike Schneider & Joe Wallin

Learn more and contact Mike here.

Learn more and contact Joe here.

How to Compare Funding Options for Your Tech Startup

Funding Options

Fundraising Webinar 

Fundraising is unpredictable, time-consuming and ultimately will greatly impact the future shape of your company and the value you extract from it. Lighter Capital talks to hundreds of growing technology companies about funding their business growth.

Join their webinar to learn how to take control of your capital raising process, better understand the funding options available to you and learn how to build a funding path that works for you as your business grows. Also get some useful tips on how to make sure your business is in the best shape it can be to attract investors.

Speaker: Branden Harper, Director Lighter Capital

Register

When: January 22, 2015
10am Pacific / 1pm Eastern

Length: 45 Minutes including Q&A

IRC 409A: Update your common stock valuation

IRC 409A

Save time and money when raising a new preferred round.

Guest Post By Marek Omilian

Commonly referred to as the “Practice Aid,” the AICPA “Valuation of Privately-Held Company Equity Securities Issued as Compensation – Accounting and Valuation Guide,” provides guidance on determining the fair market value of common stock for Section 409A purposes. This same valuation often satisfies the financial reporting requirements outlined in ASC 718. Revised back in 2013, one of the new techniques introduced in the updated Practice Aid is the concept of using the latest round of funding to “back-solve” for values of the company and its preferred and common securities.

When applied in the context of an Option Pricing Method (OPM), the technique can be used to allocate value to various rounds of Preferred and Common Stock. To reflect all of the preferences in the OPM model, a valuation expert must possess a good understanding of the method and carefully review the operating agreement of the company.

The key input for the OPM is the value of the company, which is traditionally arrived at using discounted cash flow and/or comparable companies (Market Approach). This initial step of arriving at the company value can be skipped if the company has completed a recent preferred stock financing round where a new outside investor has participated in the round. For example, if a company recently completed a Series A round of financing with a new outside investor participating at $1.00 per share, then this transaction provides good valuation evidence that the value of the Series A is $1.00. We can then solve (“goal seek”) for the total equity value input that yields Series A value of $1.00 in the OPM, given all of the other constraints and inputs in the model. We can also arrive at fair value of common stock as it is part of the OPM model. This approach is more accurate, faster, less time consuming and less costly to all involved (see table below).

IRC 409AHowever, the “back-solve” can only be done (and should be done) when the round is recent. If the company passed any milestones (first customer, new version of product prototype, any new contracts with partners, patent approval, etc.) shortly after the financing round, the “back-solve” would not apply as, presumably, value of the company has changed.

In such cases, valuation expert should follow the “two-step” process:

  1. Determine value of the company using DCF and/or Market Approach.
  2. Allocation value to preferred and common using OPM or other allocation methods.

 

Marek Omilian, CFA, Managing Director, Value Prism Consulting – Marek manages the delivery of valuation and decision support analysis.  He has over twenty years of consulting and line management experience working with companies in such areas as:  valuations; business case and ROI analysis; decision support analysis; shareholder value enhancement analysis; mergers, acquisitions and divestitures; synergy identification; and capture in a post-merger business integration. 206.262.5695 or momilian@valueprism.com, www.valueprism.com

 

100% Exclusion for Qualified Small Business Stock To Be Extended

Big news: On December 16, 2014, the Senate passed H.R. 5771, the Tax Increase Prevention Act of 2014. The bill now goes to the President. He is expected to sign it.

The bill would do a variety of things, but from a startup perspective one important thing it would do is renew the 100% exclusion from tax for gain on qualified small business stock received from qualifying C corporations during the calendar year 2014.

Qualified Small Business Stock

The 100% exclusion expired at the end of 2013. This bill renews the 100% exclusion for stock issued by qualifying C corporations issued before the end of 2014.

Thus, if:

  1. You received founder shares in a C corporation in 2014, or
  2. You invested in shares of a C corporation in 2014, and
  3. You hold those shares for 5 years,
  4. You may be able to exclude up to $10M in gain from the sale of those shares.
  5. There are a variety of other limitations that apply to the Section 1202 qualified small business stock benefit. For example, the corporation issuing the shares has to, among other things, be a “qualified small business,” have less than $50M in gross assets, have an active business, and be engaged in a qualified trade or business.

The Text of the Extension

1202

This 100% exclusion affects your choice of entity considerations significantly. Only C corporations can issue qualified small business stock. Thus, if you form an S corporation, your founder shares cannot qualify for the 100% exclusion.

The Cap on the Benefit

The 100% is not uncapped, but you can exclude up to $10M under Section 1202.

limitation

In Conclusion

This extension is good news for the startup world.