More on winding up a business
Unfortunately, winding up investments that did not work out, is a task that will be with us for some time. I have written a number of posts on the liabilities of officers and directors. One more item that needs to be considered in this context is obligations subject to foreign law. For example, the UK has labor laws under which the directors of a corporation may have personal liability for severance obligations owed to the employees of a UK sub. Agreements with foreign distrubutors can also pose special problems. To make matters worse, your US attorney is not likely to be expert...
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Personal liability of directors under Delaware law
One of o the issues that has plagued directors of all sorts of companies is the potential for personal liability. Over the last several decades, Delaware has enacted provisions in its corporate law that can limit the liability of directors and permit a corporation to provide indemnification to directors. One thing that has always been a “hole” in these protections has been that they depend upon having and keeping in place certain bylaw and charter provisions. To put a fine point in it, Delaware corporations have been able to change existing bylaw and charter protections to deny them to directors, who thought they...
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Salary deferrals have bad consequences
We recently sent out a client alert on a recent court decision in a case involving salary deferral. The gist of the case was that two founders of a new company agreed to a salary deferral until the company could afford to pay them. This agreement was, apparently, set forth in a written agreement. The two founders came to a parting of the ways, and one of them, the CEO, later sued both the company and the cofounder for back pay under the Massachusetts Payment of Wages Statute. This may sound bizarre, but even though there was a written agreement...
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When to shut down personal liability
Approximately a week ago, Simeon Simeonov posted a piece on the subject of when to throw in the towel. This was in response to another post by Jason Calcanis that seemed to be arguing for fighting on against all odds. My personal sense is that each situation is different and has to be evaluated on its own merits. All that being said, I am guessing that there are a lot of conversations in a lot of board meetings about whether or not to shut down and that there will be many many more in the coming months. At the risk...
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When to Incorporate
Even though it is not much money, incorporation costs money. So, when should you incorporate? It does not need to be the first thing you do. But, you should certainly incorporate before you enter into any contractual agreements with third parties or, if there is more than one of you, when you start building up some value in terms of intellectual property or other assets. When you enter into a contract with another person or company, you are likely to want that contract to be between your company and the other person. If this is not the case, it is likely that you will...
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Why Incorporate
Incorporation may seem so obvious that it hardly bears mention. Nevertheless, at the risk of being boring, you want to incorporate because: (1) if you do it right as a general proposition, you get protection from personal liability for the obligations of the business, (2) the company (or LLC or limited partnership) is a vehicle that can be financed, and (3) it greatly facilitates many mechanical aspects of the business, such as hiring people, holding assets such as IP but other assets as well. With respect to personal liability, as everyone knows, companies get sued for many reasons, often contractual disputes...
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When You Find Yourself in a Workout Situation
I spoke with Peter Alcock, a long standing client and friend, the other day about the issue that keeps coming up with respect to personal liability, personal guarantees and the like. Peter is particularly well situated to address these issues because in past lives he has had to deal with these issues both as a consultant and as an entrepreneur. Fortunately, in his current life as CEO and owner of Beckwood Services, he doesn’t have to worry about these types of issues. Anyway, I asked Peter if he had only a few pieces of advice to give to an entrepreneur who found himself...
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Personal Liability
With the economy dropping off the edge of a cliff, personal liability is becoming a frequent topic of advice with clients and board members; see my prior blog on the subject of liability of officers and directors. Right now, I want to make a note on personal guarantees because either clients are worried about having to make good on them or because creditors are asking for them to shore up a risky situation. You may remember the three rules of real estate: Location, location, location. The three rules of personal guarantees are: Don't, don't and don't. When someone asks you to sign...
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Surviving the downturn
Since Sequoia's 56 slides of gloom and doom, a lot has been written on surviving the downturn. Don Dodge has captured 11 items of advice from John Doerr of Kleiner Perkins. This focus on what you need to do to survive the downturn seems healthy to me because it assumes that you can and, with some grit and determination, will survive the downturn. And, I think most start-ups will survive. Having said that, some will experience a lot of pain and find themselves in dire straights. And, yes, some will get into real trouble. By real trouble, I mean bankruptcies...
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Liability of Officers and Directors
I recently have had the misfortune of having to counsel a client on the general subject of closing down a business including the duties and liabilities of directors and officers who find their companies in this circumstance. Depressing as it sounds, I have the sense that there may be more of this in the near future. So, below is a punch list (not comprehensive or detailed) of some of the things you should be aware of, if you find yourself in this horrible situation. Here are the disclaimers: The content of this blog posting is in no way an...
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