How Do You Get A Veto In A Startup? And Why Would You Want One?

Posted by Mike Laszlo on September 26, 2012

I just read Inc.com's Norm Brodsky's The Right Way To Approach A Start-up - a short but insightful article on a recent experience he had with one of his startups.  What I found to be the most interesting item in his story was that among his business partners, he retained "a veto over the location" of the business (Kobeyaki Restaurants in NYC). 

This brings up a great question: "How does one get a veto in a startup?" Well, like anything else you agree on with your partners, you negotiate.  But then what do you do? ... Write it down!  Yesterday, we wrote about some things all startups should not avoid doing early on.  Number one on the list was choice of business entity.  It is during this process that you will best be able to make and memorialize agreements as to how the business will be run.  In a Limited Liability Company (LLC), for example, it will come in the form of an Operating Agreement.  An operating agreement is the governing document of the company, which, while similar in many respects to a stock corporation’s by-laws, contains the agreement of the members as to how the LLC will conduct its day-to-day business.  It is in the operating agreement you could include a provision providing for a "veto" much like Mr. Brodsky had in his startup. 

Q: How does one get a veto in a startup?

A: Negotiate.

It is best to memorialize any (and all) such agreements early on in the startup to avoid (or at least minimize) disputes at critical points.  An agreement for a veto may not be necessary in your situation, but there may be something else you want - or are asked to give.  In Mr. Brodsky's situation, the location of the business was a critical decision to him - so much so that he used his veto a couple of times.  I would venture a guess that when Mr. Brosky exercised his veto power, his business partners were at least a little annoyed.  But having a solid agreement will help in such situations as reasonable minds can simply point to the agreement and move on. 

Certainly, agreements are always up for interpretations, so be as clear and forthright when drafting them.  Drafting an operating agreement should be done by a lawyer or even lawyers depending on its scope and the parties involved.   If you are asked to give something up, it is always a good idea to consult your own lawyer - i.e., one who represents you and your interests, not the business itself.

Laszlo & Associates' Boulder StartUp Lawyers provide legal counsel to businesses on a variety of business needs including startup and corporate formation, employment law, risk management, corporate protection and legal compliance.

Why Preventative Law Is A Must For Every Business Plan - And Why Startups Should Not Avoid Seeking Legal Help Early On

Posted by Ted Laszlo on September 25, 2012

We spend a good deal of time with both prospective and current clients encouraging “preventative law.” And, I’ve got to tell you, that simple phrase often causes a number of blank stares. In our society we are conditioned to think that lawyers address existing problems rather than counsel before an issue becomes a problem. As we like to say: “help us help you" prevent issues from becoming problems.

We take for granted regular dental visits —we understand that the check-up dollars spent now can save us countless cavities, root canals … and … many more dollars (and pain) down the road. We take our automobiles in for regular oil changes, check-ups and tire rotations —why?  Because we understand that these routine maintenance tasks can and will save us time and money in the long run.

So, why is it that as we are considering a new business venture or off and running with our dream business idea, we do not involve legal counsel to guide us through the legal nuances of forming, starting and operating our business? Most likely because we are conditioned to believe that lawyers are expensive.  Certainly some lawyers are very expensive - but you would be surprised at how affordable quality legal advice actually is.

In his concise and timely post, Forbes' Mark Britton identifies Seven Legal Hiccups That Can Crush Your Startup - and explains why failing to get “your legal house in order” is a chronic failure of start-ups.

Mark Britton's 7 Legal Hiccups That Can Crush a Startup:


     1.) Choosing the Wrong Corporate Entity

     2.) Putting Off a Founders’ Agreement

     3.) Using Someone Else’s Trade Name

     4.) Failing to Protect Intellectual Property

     5.) Not Understanding Key Contracts

     6.) Failing to Comply with Federal or State Securities Laws

     7.) Not Hiring a Startup Lawyer

However, more often than not these failures persist in long-established businesses as well.  I’ve counseled multinational corporations that simply failed to do the simplest of maintenance over a period of years which led to millions of dollars in catch up, fines and lawsuit settlements.  It all could have been avoided.  I recently counseled a five person start up that chose the wrong business entity for their capitalization plan and didn’t look back until it was too late.  What would have been a nominal cost turned into tens of thousands of dollars in cleanup work to avoid litigation.

Again, it seems that we are conditioned to avoid legal counsel rather than seek it out until we are faced with the legal equivalent of a root canal or major engine overhaul. So, foregoing a few legal hours “check-up” turns into a huge problem—that may or may not be easily resolved – but will cost you time and money.

For example, if you have failed to take the necessary steps to protect your intellectual property or failed to adequately investigate whether you are infringing on someone else’s intellectual property, months or years of hard work building and marketing your brand may be lost. If you have selected a form of doing business aimed at insulating your personal assets from liability but then fail to observe the necessary entity formalities, you may, in the end, face unlimited personal liability.

"Your legal strategy will never catapult your company to $1 billion in sales, but it will help you avoid tripping over some costly, easily preventable mistakes."

- Mark Britton

Successful businesses not only start with a great idea but also adopt a strategy and philosophy for success—don’t leave legal counsel out of your start-up checklist or your businesses strategic plan.

Laszlo & Associates' Boulder StartUp Lawyers provide legal counsel to for-profit and non-profit businesses on a variety of business needs including startup and corporate formation, employment law, risk management, corporate protection and legal compliance.

Non-Compete Agreements - What You Need To Know

Posted by Ted Laszlo on May 16, 2012

In Colorado “non-compete agreements” are presumptively void and are only valid if they meet one of four requirements:

  1. The covenant is made in connection with the sale of a business;
  2. The contract protects trade secrets;Tug Of War
  3. The contract recovers an employee's training or education costs; or,
  4. The contract is for "executive and management personnel" or "officers and employees who constitute professional staff to executive and management personnel."  C.R.S. § 18-2-113(2)

If the non-compete agreement falls within one of the statutory exceptions and the restrictions on competition are reasonable under the circumstances, then the courts should enforce the non-compete agreement.

Colorado extends the “executive and management personnel” category to include even mid-level supervisors who lack key decision-making authority. Generally, so long as the employee is at the top level of compensation and at least at the start of the decision-making level, with some amount of autonomy, then that employee will fall within the statutory exception for management and executive personnel.  Further, Colorado courts have expanded the exception to also include officers and employees who constitute “professional staff” to management and executive personnel.  The exception applies to individuals who qualify as “professionals” serving as key members of the manager's executive staff and are involved in the implementation of management or executive decisions. 

Finally, the Colorado Supreme Court recently decided that continued at-will employment is sufficient consideration for a non-compete agreement entered into after hire.  Thus, if the non-compete agreement fits into one of the four statutory requirements and is reasonable in scope, time and geography, it is supported by sufficient consideration with the continuation of “at-will” employment alone regardless of when the agreement is entered into.  While this may not seem fair, it does make sense as an at-will employee could simply be fired for not signing the agreement, so continued employment would be a benefit of signing the agreement.  This may not be the case in other states however.  If you are a contract employee however, such an agreement, without consideration, would most likely not be enforceable. 

The lawyers of Laszlo & Associates Boulder provide legal counsel to for-profit and non-profit businesses on a variety of business needs including startup and corporate formation, employment law, risk management, corporate protection and legal compliance.

Non-Disclosure Agreements: Essential Points to Remember.

Posted by Mike Laszlo on May 16, 2012

Loose Lips Sinks ShipsNon-disclosure agreements or “NDAs” are agreements common in the early days of startups wherein parties agree to keep certain information confidential.  NDAs make sense and are necessary where one or multiple parties party seeks to share an idea with multiple potential investors and business partners.  NDAs are generally limited in duration and "bridge the gap" so to speak between an initial meeting and a later final agreement. 

When drafting an NDA, here are some key points to keep in mind:

  • Is the NDA a “one way” or “two way” agreement?  This is important to determine who is sharing the information and who is agreeing to keep it confidential?  If both parties are sharing information, you’ll need a two way NDA.
  • Like any agreement, be sure your NDA sets forth the goals and objective of the agreements and represents the positions of the parties.
  • Be sure your NDA adequately protects the information you seek to protect, i.e., using a broad term like “all confidential information” may not protect your IP as it may simply not be “confidential information.”  Be specific and spell out what it is you seek to protect.
  • Be reasonable and realistic in the NDA.  A requirement that all information must be stamped “CONFIDENTAL” may be over burdensome and not be realistic – and might ultimately hurt you if some information slips through the cracks and is left unmarked. 
  • NDAs should have a termination date or event.  For example, an NDA is a transitional agreement that would expire once a fully executed final agreement is reached.
  • NDA provisions that call for the return of protected material should reflect applicable document retention rules and laws.  Certain return provisions may not be practical.
  • If you are considering crowdfunding to raise capital, an NDA is probably not workable as your ideas and information will necessarily need to be shared with countless individuals.

The above are simply general points of consideration when formulating your NDA.  Some NDAs are simple, and some require more thought, detail and specificity.  As with any agreement, be sure you know exactly what your goals are and what you are trying to protect. 

Laszlo & Associates' Boulder lawyers provide legal counsel to for-profit and non-profit businesses on a variety of business needs including startup and corporate formation, employment law, risk management, corporate protection and legal compliance.

Employee v. Independent Contractor - What Is The Difference?

Posted by Mike Laszlo on May 16, 2012

The lines are often blurred between employees and independent contractors, and we are always amazed by how often we are asked by business owners whether they have an employee or independent contractor on their hands.  The distinction between employee and independent contractor is important to both the worker - in order to ensure you are receiving the proper benefits and are not being taken advantage of - and the business owner – to ensure it is complying with employment laws and regulations and protecting against liability. 

In Colorado, a person hired to perform services for pay is presumed by law to be an employee unless they meet the definition of an “independent contractor” or qualify under a specific exemption provided by workers’ compensation laws. 

An employee is broadly defined as any person in the service of a private or public employer under a contract of employment.  

Conversely, an independent contractor is one who works for himself and is not under a contract of employment with an employer.   West’s C.R.S.A. § 8-40-202(1).

Here are some signs that you are likely an independent contractor:

  • The Company does not tell you what hours to work;
  • The Company does not tell you where to purchase supplies or services;
  • You do the same type of work for multiple different companies;
  • Your work for the Company is generally short-term;
  • You are more likely to have expenses that are not reimbursed by the Company;
  • You are typically paid by the job rather than hourly, weekly or monthly;
  • You typically do not receive benefits, including health care, sick time, paid   vacation or worker’s compensation  from the Company.

While a written contract may be helpful in proving independent contractor status, the facts of the work relationship are actually more important than what the contract says.  And remember, each of the above factors need not exist in order for you to be considered an independent contractor.  All businesses should consider what they are trying to achieve with a worker before hiring or contracting with a worker.  Further, different states have vastly different rules and employment laws regarding employment.  If you are a Colorado company and hire an independent contractor salesperson in California, you may have actually just added an employee to your payroll.

The Boulder Business Lawyers of LaszloLaw provide legal counsel to startups, for-profit and non-profit businesses on a variety of business needs including corporate formation, employment law, risk management, corporate protection and legal compliance.

C Corp, S Corp or LLC: What Corporate Form Should You Choose For Your Startup?

Posted by Mike Laszlo on May 10, 2012

While there are many forms your startup can take, in reality, there are only three forms a startup will consider: C Corp, S Corp, or LLC.  Deciding what corporate form a startup should take is one of the most critical early decisions a startup will make.  But, making an informed decision and laying the proper foundation will save many headaches down the road. 

The C Corp:  The C Corp is a separate legal entity and is a separate tax payer, i.e., it pays its own state and federal taxes and if it distributes dividends to shareholders, those dividends are taxed (and paid by the shareholders).  This is commonly referred to a “double taxation.”  But does it make sense for a startup to organize as a C Corp?  Maybe … maybe not.  The most important scenario for startups to organize as a C Corp is where it plans on raising venture capital – in this instance it has to be a C Corp.  Another reason to be a C Corp would be where the startup plans to retain money in the company.

The S Corp: If you are not sure whether your startup will need to be a C Corp down the road, but it remains a possibility, the S Corp offers very good flexibility and can be easily converted to a C Corp should the need arise.  Perhaps the most attractive feature of the S Corp is the pass through taxation and ease with which it can be converted back to a C Corp (I say “back” because you first organize as a C Corp, then elect S status by filing Form 2553 with the IRS).  There are key drawbacks to the S Corp however.  An S Corp must adhere to all C Corp formalities including recordkeeping, shareholder meetings, file annual reports, etc.  Also, S Corps cannot have more than 100 shareholders – which would essentially eliminate the possibility of crowdfunding – LLCs cannot be shareholders and all individual shareholders in an S Corp must be US citizens or permanently reside in the US.  Finally, the S Corp is far less flexible in terms of division of profits and classes of stock – for example, as an S Corp, your startup cannot have common and preferred classes of stock. 

The LLC: Which brings us to the darling of the small business world – the LLC.  If your startup does not plan to raise venture capital and seeks flexibility in ownership structure, the LLC is a very desirable corporate form.  Like the S Corp, the LLC provides for pass through taxation and will protect personal assets from liability (when corporate formalities are observed).  One of the most convenient aspects of the LLC is that owners of an LLC operate the business pursuant to an “Operating Agreement.”  Please do not mistake this to mean an Operating Agreement is a simple document – generally, they are not.  However, LLC Operating Agreements can be drafted to address very specific items unique to a given business’ needs.  Further, division of profits and losses are easily dealt with in the LLC – whereas in an S Corp, any division must strictly conform with one’s percentage ownership of the company.  It is important to note that not all states permit conversion of an LLC to a C Corp – thus, an LLC may not be the best option if you need to be a C Corp down the road.

The above is a very general overview of the three main types of corporate structures utilized by startups.  It is paramount that any startup fully understands its current position with an eye toward the future when deciding what form to take.

The Boulder Business Lawyers of LaszloLaw provide legal counsel to startups, for-profit and non-profit businesses on a variety of business needs including corporate formation, risk management, corporate protection and legal compliance.

Crowdfunding Under the JOBS Act - Key Points For Startups.

Posted by Mike Laszlo on April 19, 2012

Financing is the most important and most frustrating thing a startup faces.  The most well known ways startups raise capital are through Venture capitalists, Angel Investors and now Crowdfunding. 

Printing Money If your startup is considering crowdfunding as a way to raise capital, there are a few keys to keep in mind.

A company can raise a maximum of $1 million per year from individual investors.

An investor can only invest the greater of $2,000 or 5 percent of their annual income or net worth if either is less than $100,000; or 10 percent of their annual income or net worth if either is greater than $100,000 not to exceed a maximum aggregate amount sold of $100,000.

A company can only sell to investors through a middleman – a broker or website – that is registered with the SEC.

The middleman can only sell shares that have originated from the company.

Your startup will need to provide detailed financial information; business plans and information that will help potential investors decide if they want to invest – and then you’ll also have to comply with state laws governing companies with shareholders.  This is not unique to crowdfunding however, you’ll have to do this for most traditional forms of investment and stock sale  – it may just not be at the scale you’ll have to do it with a crowfunding effort.  Further, with crowdfunding, you are sharing your idea with the potentially huge numbers of people.  With traditional funding you may share your ideas with very few people – all of whom propbably signed an NDA.  This is not to say you cannot protect your ideas, it will just be more difficult to keep 10,000 people from sharing your idea as opposed to 10 people.

Finally, you are going to have to wait to start crowdfunding - the JOBS Act provides that the SEC has until January 1, 2013 to make rules for crowdfunding “intermediaries” such as what information must be provided to potential investors, how to ensure individuals do not invest more than is permitted, and so on.  So be sure to keep in mind that crowdfunding is one of many options to raise capital for your startup, and it may not be easy as it sounds.

Laszlo & Associates' Boulder Lawyers provide legal counsel to for-profit and non-profit businesses on a variety of business needs including startup and corporate formation, employment law, risk management, corporate protection and legal compliance.

Why Operating Agreements are Critical When Forming a Colorado LLC

Posted by Ted Laszlo on March 07, 2012

Starting a business with friends can be an exciting thing.  However, the excitement and anticipation of jumping in and getting the business off of the ground often overshadows the little details that are necessary when forming your company and, when starting a new business, it is the “little things” that become very big things later!

In Colorado, there are two popular forms of doing business: the stock corporation (“Inc.”) and the limited liability company (“LLC”).  Both forms, if properly formed and administered, limit the liability of the shareholders or members—often the most critical reason to choose one of these forms of doing business. The LLC does offer a degree of flexibility that makes it an extremely popular choice for new businesses.

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Once organized, an LLC’s affairs are governed by an operating agreement, which, while similar in many respects to a stock corporation’s by-laws, contains the agreement of the members as to how the LLC will conduct its day-to-day business.  Think of an LLC’s operating agreement as its constitution—the operating agreement governs the rights, duties, limitations, qualifications, and relations among the members, the members' assignees and transferees, and the limited liability company.  The operating agreement may also contain provisions concerning its enforcement, interpretation, construction, and application.  Importantly, however, the operating agreement is a “contract” between the members – an “agreement” as to how the LLC will operate.

Colorado courts have consistently held that the provisions of an LLC’s operating agreement control over any provision of the Colorado state statutes governing limited liability companies to the contrary, subject to some exceptions.  The intent of the Colorado Limited Liability Company Act is to give the maximum effect to the principle of freedom of contract and to the enforceability of operating agreements.

While some companies may seldom find it necessary to have to refer to the LLC’s operating agreement, the reality is that most businesses with multiple members will need to consult the operating agreement to answer a question or solve disputes – questions such as: what becomes of the LLC if a member (or, the sole member) dies? What do you do when a member decides to exit the LLC or retire?  What if the LLC decides to bring in a new member?  How to go about winding up the operations of the LLC and closing the business – how are the assets to be distributed?  A well drafted operating agreement should answer all of these questions and serve as the roadmap by which your LLC conducts business.

Laszlo & Associates, a Boulder, Colorado based lawfirm provides legal counsel to for-profit and non-profit businesses on a variety of business needs including corporate formation, risk management, corporate protection and legal compliance.

What Does Your Company Worry About At Night?

Posted by Ted Laszlo on January 11, 2012

In his Top 12 Security Risks For 2012, Is Your Company Ready?, David Coursey of Forbes.com identifies routine negligence (you know—good ‘ole lack of due care) as a top business threat for 2012.

“Since people tend to be trusting, you and everyone around you are the weakest links in protecting against social engineering. If this isn’t already on your radar, it certainly should be and needs to be included in your overall corporate protection strategy. Social engineering isn’t the biggest threat you face, by far, but it’s an unavoidable one.”

Similarly, according to Wayne Rash in his 12 Security Threats for 2012, “In the case of security . . . the single-worst security issue we have isn’t the Chinese or the Russian Mafia. The single-biggest problem we have is us.”

How often did our parents warn us “look both ways before you cross,” “make sure you put a hat on … it’s cold,” “walk don’t run?” And, while nothing is stopping us from employing a cautionary spirit in the ways in which we conduct our businesses and instilling that same “be careful” spirit in our employees and contractors, at times we do tend to relegate “due care” to a back seat. Too often in our day-to-day business activities we take the exercise of “due care” (or lack thereof) for granted. We just “assume” that our employees, contractors and agents will be careful. Heck—we all have mountains of contracts and documents telling us how careful everyone we deal with is going to be!

Just today, one of our associates has been unable to access his computer for the past few hours because it was attacked by some new virus that our IT department had never seen—we just “assume” that our business computers will be set up and configured correctly—free from viruses and threats;  that access rights to our business hardware and software are enforced; that our threat protections like firewalls, anti-virus software and anti-hacking programs are current and are installed and administered properly.  But protection does not happen by accident.  Businesses need to actively employ appropriate password creation and maintenance techniques and use scrubbing software when transmitting sensitive, private or confidential business documents and records, etc. 

So, with this constant barrage of new and evolving business and security threats, how does routine negligence seem to make the list year in and year out? Are our employees, agents and contractors too busy? Are they too complacent? Are they too preoccupied? Is being careful too expensive? Exercising due care in the conduct of businesses is not a novel concept.  In our personal lives many of us would never be OK with an “ignorance is bliss” attitude toward our checking accounts or locking the doors at night.  Likewise, such an attitude should exist in the workplace.  Instilling a “be careful” attitude in your day-to-day business from the top down can go a long way to warding off threats to your business health and continued viability.  After all, we are our own worst enemies.   

Boulder, Colorado based Laszlo & Associates provides legal counsel to for-profit and non-profit businesses on a variety of business risks, corporate protection and legal compliance.