Getting a New York start-up company off the ground can be a challenging task. In fact, 8 out of 10 entrepreneurs who start a business fail within the first 18 months.
Scarinci Hollenbeck’s Corporate Transactions & Business Practice Group regularly works with entrepreneurs and other business professionals to address the legal obstacles that New York start-ups face. Our attorneys also frequently share legal updates and insights on the firm website.
Below are six start-up tips that we provided throughout the past year:
(1) Pros/Cons of Incubators and Accelerators: By providing mentorship and other resources, incubators and accelerators can help start-ups avoid common entrepreneurial pitfalls and speed up the process of raising capital and growing a business. However, they are not right for every business, and it is important to do your research before signing on the dotted line.
(2) Using Finders to Secure Funding: A New York start-up company or private investment fund can face unintended liability when they use third-party “finders” to identify and solicit investors to provide capital via a private securities offering. Even the use of employees to solicit funds for their employers can fall afoul of securities laws if not structured properly. In many cases, these individuals perform activities that require registration with the Financial Industry Regulatory Authority (FINRA) and the Securities & Exchange Commission (SEC).
(3) Debt vs Equity Financing: There are several different types of financing structures that may be available for initial start-up investments. Most involve some combination of equity or debt. Start-ups should be aware of the relative benefits and disadvantages of taking on debt versus taking in equity. More importantly, when reviewing term sheets presented to them, it is imperative that start-up founders be able to fully understand the terms.
(4) Alter Ego Liability: Start-ups and other New York businesses should be aware that there are circumstances under which courts will hold an LLC or corporation’s owners, members, and shareholders personally liable for business debts by “piercing the corporate veil.” Liability typically arises when a plaintiff claims that an LLC or corporation is not a distinct entity, but rather an “alter-ego” being used by the owners, members, and/or shareholders to advance their own personal interests or to perpetrate a fraud.
(5) Confidential IPO Filing: In an effort to boost capital formation, the SEC announced in July that it will accept voluntary draft registration statement submissions from all issuers for nonpublic review. The ability to keep filings confidential in the early stages of an initial public offering (IPO) was previously limited to emerging growth companies. Filing confidentially allows companies to work out any issues with the SEC outside of the public spotlight and reduces the potential for lengthy exposure to competitive risks and market fluctuations that can negatively impact the offering process.
(6) Delay of International Entrepreneur Rule: The Obama-era International Entrepreneur Rule, which would allow immigrant start-up founders to enter the country for up to five years under certain conditions, was slated to take effect in July. The National Venture Capital Association and several startup companies are now suing the Trump Administration over its decision to delay the immigration regulation.
Of course, this post offers only a brief review. To learn more about the issues discussed, I encourage you to click through to the relevant blog post linked above. Otherwise, if you have any questions or if you would like to discuss the matter further, please contact me, Dan Brecher, at 201-806-3364.