Month: June 2015

8 Tips For Entrepreneurs Buying a First Home

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By Doug Bend This article first appeared on Business Collective. Both Alex and I recently bought a home in California. And while we are excited to be new homeowners, we were quickly faced with the reality of the purchase. Like many first-time homeowners, we were surprised by some costs and the time it took to… Read More

By Doug Bend

This article first appeared on Business Collective.

Both Alex and I recently bought a home in California. And while we are excited to be new homeowners, we were quickly faced with the reality of the purchase. Like many first-time homeowners, we were surprised by some costs and the time it took to get approved for a loan. We share the eight tips below with the hope that they will help ease the pain for others planning to buy a home.

Don’t Mentally Move in Until You Strike the Deal

If you have already mentally moved into your home before closing, you will lose your ability to objectively determine whether that particular property is the best fit for you and your family. You may also lose leverage in negotiating fair terms since the seller can tell if you have taken the bait, hook, line and sinker.

If you proclaim, “I absolutely have to have THIS house,” is the seller likely to drop the price or make any repairs that might be found during the home inspection?

Instead, when you think you may have found your ideal home, do your best to blanket your excitement when negotiating with the seller and stay objective on whether it is indeed the best home for you and your family.

Set Aside Money for Home Repairs

Your potential new home may seem to be operating just fine, but damages may surface just a few weeks down the line. Make sure you set enough aside to cover big ticket expenses.

For example, my friend recently purchased a home with a driveway that needed $12,000 in repairs, and Alex’s home will need a new roof. When buying a home, it is wise to err on the cautious side of how much you think home repairs will cost.

If the seller has either disclosed flaws in the home or a home inspector identifies problems, be prepared to spend money to fix those right away. If the seller has disclosed a troublesome hot water heater, washer and drawer, roof, etc., odds are it will need to be repaired sooner rather than later.

Set Aside Money for Interior Design

In addition to home repairs, you will likely want to make some design changes, including purchasing furniture and other items for your home. I personally am budgeting for patio furniture, since I know I’ll be itching for it once I move in.

Prepare to Close on a Mortgage

Some first-time home buyers are surprised that it costs several thousand dollars to close on a mortgage for their home. It is smart to plan ahead and ask your mortgage broker for an estimate of how much the closing costs will run when you get pre-approved for a loan. That way, you won’t wait to find out how high closing costs are until a few days before closing.

Strategically Select Your Mortgage

A 30-year fixed mortgage is not a one-size-fits-all solution for financing your home. I’m working with a savvy mortgage broker to see whether a 7- or 15-year mortgage would best fit my circumstances, as I may sell my home in the next few years.

Gather All Necessary Paperwork and Information

Getting approved for a home loan can be a tedious, stressful process. Just when you think you have provided every single last possible bit of your financial details, the mortgage broker is likely to ask you for one more piece of information.

To keep from going crazy from the paperwork, plan for the time it will take to complete it. Alex and I had to remind ourselves to ask our broker how much documentation we would need before loaning a large amount of money to a complete stranger.

Time Your Home Purchase Around Other Life Changes

There are only so many hours in a day, and finding your ideal home, purchasing the home, getting approved for a mortgage and planning a move can be extremely time consuming. It’s ideal to focus on buying a home when you do not already have other big time commitments going on in your life. For example, try not to purchase a home when you are expecting a child, planning a wedding, or changing jobs.

Beware of Your Own Hubris

The idea of paying a real estate agent 2.5 to 3 percent of the purchase price of your home might seem absurd at first, but involving an expert makes sense when you are making one of the biggest investments of your life. Get the help you need and don’t be overconfident that you can figure out all of the home-buying wrinkles on your own. The right real estate agent is likely to earn every penny of their commission by not only being a knowledgeable resource but by also being emotionally supportive and trustworthy. You will be glad you had them during the home buying process.

Buying a home is an exciting but also a stressful time. Hopefully these tips will help make the process one more of celebration than of regret.

Disclaimer: This article discusses general legal issues and developments. Such materials are for informational purposes only and may not reflect the most current law in your jurisdiction. These informational materials are not intended, and should not be taken, as legal advice on any particular set of facts or circumstances. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction.  Bend Law Group, PC expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this article.

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Top 7 “Gotcha” Provisions For Investors To Watch Out For In Convertible Notes

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Bend Law Group has helped close dozens of seed rounds for startups raising investment capital, the vast majority of which are still completed using convertible notes. Here are the top seven provisions investors should be on the lookout for when negotiating convertible notes with startups. 1.  Prepayment Of The Note Some convertible note documents allow… Read More

Bend Law Group has helped close dozens of seed rounds for startups raising investment capital, the vast majority of which are still completed using convertible notes.

Here are the top seven provisions investors should be on the lookout for when negotiating convertible notes with startups.

1.  Prepayment Of The Note

Some convertible note documents allow the startup to prepay the convertible notes.

An investor nightmare is to pick a winner, but the startup prepays the note before the note converts and the investor misses out on the company’s upside. Instead, the convertible note should provide that it may only be prepaid with the consent of the holders of at least a majority of the outstanding principal amount of notes.

2.  Most Favorable Investor Provision

If the company offers better terms to other investors, you should also benefit from those terms. You can do so by adding in a provision that provides any changes in the terms of the convertible notes that are more favorable to investors shall automatically apply to all of the notes.

3.  Cap On Conversion Price, aka the “Instagram Provision”

Most convertible notes provide a 20% discount if the note converts into equity compared to the price paid by the next round of investors. This conversion discount is intended to reward the risk early stage investors take for supporting the company.

However, if the company really takes off, even after a 20% discount the seed stage investment might not translate into a significant stake in the company. For example, a $25,000 seed stage investment in Instagram without a conversion cap would only have translated into a very small equity stake because the company was valued so highly at the next round of investment.

A conversion cap helps to align the incentives for the founders and the seed investors to seek as high a valuation as possible in the next round. To make sure your seed stage investment still converts into a fair equity stake, the convertible note should include a conversion cap.

4.  Sale Of The Company

Some convertible notes provide that an investor will only be repaid their investment amount plus accrued interest if the company is sold before the note converts.

If you invest in a startup that is purchased before the note converts you should be adequately rewarded.

Instead, you include a provision that provides that the investor will get 1.5 or 2 times a return on the initial investment if the company is sold before the note converts.

5.  Voluntary Conversion

Most convertible notes do not convert by the note’s maturity date. It is important to bake in a provision that provides the investor with the option to still have the note convert into equity at the maturity date at an agreed upon conversion price.

6.  Right to Invest

One incentive to act as a seed investor is to be on the inside of a new company, and hopefully this “insider” status will give you the ability to invest more later if the company takes off. However, these investment rights are not automatically guaranteed, and if a company is hot then there will be plenty of other investors ready to buy during the next round.

Guarantee your right to invest later by adding a Right of First Offer provision into the convertible note, so that you are informed of and given the chance to participate in all equity offerings.

7.  Warranties and Representations

Just as important as the above economic provisions is including strong warranties and representations to kick the tires of the company. You would, for example, certainly want to dig deeper if a company is not willing to include a warranty and representation that there are no threatened or pending actions against the company.

Every set of convertible note agreements is different and so you should consult with your legal counsel prior to making an investment. However, the above list is a good starting point to make sure that the risks of investing in an early stage startup pays off it the startup becomes successful. If you have any questions, give Bend Law Group a call at (415) 633-6841 or email at info@bendlawoffice.com.

By Doug Bend and Luthien Niland.

Disclaimer: This article discusses general legal issues and developments. Such materials are for informational purposes only and may not reflect the most current law in your jurisdiction. These informational materials are not intended, and should not be taken, as legal advice on any particular set of facts or circumstances. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction.  Bend Law Group, PC expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this article.

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How to Change Your Company Name

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By Luthien Niland Do you want to change your company’s name? If your company name is outdated, too complicated, or needs to be changed for some other reason, you must change the name with all government and other entities that have your current name on file. Not only is this important for proper name recognition,… Read More

By Luthien Niland

Do you want to change your company’s name? If your company name is outdated, too complicated, or needs to be changed for some other reason, you must change the name with all government and other entities that have your current name on file. Not only is this important for proper name recognition, but legally you cannot conduct business or sign contracts under a name that is not properly registered.

If you simply want your business to go by an additional name, but you are happy keeping the current legal name on record, you can simply register a new DBA with the county. If you want to change the legal name of the company, however (for example, when “Jerry’s Guide to the Worldwide Web” decided it made more sense to be named “Yahoo”), then the checklist below is a good starting point.

1.  Internal Approval

Changing the entity’s name typically requires approval from the decision makers of the organization. This means amending the Articles of Incorporation for a corporation or the Articles of Organization for an LLC. The bylaws or operating agreement of the entity should describe the approval process.

2.  California Secretary of State

Next the name should be changed with the California Secretary of State by filing either a Restated Articles of Incorporation or Restated Articles of Organization. This will legally change the name of the entity if it was formed in California.

Note for Delaware entities: If the entity is a Delaware corporation or LLC that is qualified to do business in California, the name must be changed in Delaware first.

To do this, file a Certificate of Amendment to the Certificate of Incorporation (or Certificate of Formation for LLCs). Once the name change is processed, request a “Certificate in RE: Name Change Amendment” using the Corporate Certificate Cover Memo, and submit this Certificate with a signed Amended Statement by Foreign Corporations to the California Secretary of State.

3. IRS

In many cases changing an entity’s name will not require a new EIN, but check IRS Publication 1635 to be certain.

If a new EIN is not required, the entity name may be changed when filing the tax returns for the business, or you can send a letter to the IRS stating the name of the company has been legally changed that includes: a copy of the endorsed Amendment to the Certificate of Incorporation (or Formation), the company’s FEIN, and a mailing address where the IRS can send a confirmation of receipt. The letter must be signed by an LLC manager or corporate officer.

4. Board of Equalization

If the business sells tangible goods in California, the entity must obtain a seller’s permit. As long as only the entity name is changing, not the entity type, you should file the BOE-345 form. If the entity type also changed, you must obtain a new Seller’s Permit and file a Close of Business form with the BOE.

5. Employment Development Department

You can change the entity name with the EDD by logging into your online account and updating your account with the name change.

6. City and County Registrations

The city business license should be updated with the new business name. Contact the city where you business is located to determine what forms must be filed to update the license.

To change the name of a business that registered a fictitious business name (DBA), a new fictitious business name statement must be filed with the county and published in a local newspaper. Contact the county where the business is located for filing instructions.

7. Miscellaneous Organizations

After you have legally changed the name in the entity’s state of incorporation, don’t forget to also change the name with business service providers (i.e. banks, credit cards, payment processing accounts, etc.) and online business listings (i.e. Yelp, Facebook).

For many companies these are the steps necessary to change your business name, but please contact us at (415) 633-6841 or info@bendlawoffice.com to make sure no additional steps are required as each situation is unique.

Disclaimer: This article discusses general legal issues and developments. Such materials are for informational purposes only and may not reflect the most current law in your jurisdiction. These informational materials are not intended, and should not be taken, as legal advice on any particular set of facts or circumstances. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction.  Bend Law Group, PC expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this article.

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How Does Minimum Gain Chargeback Work?

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Nonrecourse Debt What is minimum gain chargeback? Many LLCs finance acquisitions of property with nonrecourse debt. When this occurs, the economic risk to individual members is limited to their cash investment and any portion of the loan for which they may be personally liable. We use the term “economic risk” because if the LLC were… Read More

Nonrecourse Debt

What is minimum gain chargeback? Many LLCs finance acquisitions of property with nonrecourse debt. When this occurs, the economic risk to individual members is limited to their cash investment and any portion of the loan for which they may be personally liable.

We use the term “economic risk” because if the LLC were to walk away from the debt, the nonrecourse nature would leave each member at a loss only to the extent of their cash investment in securing the loan. Therefore, allocating a depreciation deduction to each member lacks economic effect unless it accurately reflects a corresponding economic burden to the member.

Minimum Gain Chargeback

This is where minimum gain comes into the picture. Because an allocation of a nonrecourse deduction lacks economic effect, the regulations will only allow such allocation if the tax payback is accomplished through a “minimum gain chargeback” (Reg. Sec. 1.704-2(f)(1)). A minimum gain chargeback is a provision within the operating agreement requiring the LLC to allocate minimum gain to those members who previously were allocated nonrecourse deductions.

Example

A good way to think of minimum gain is this: any excess of the nonrecourse liability over the adjusted basis of the property that secures the debt results in a minimum gain situation. In other words, an LLC is only in a minimum gain situation if they were to dispose of the property and the debt exceeds the adjusted basis.

For example, assume member A and member B form an LLC to acquire property they plan to fix up and sell. Both contribute $50,000 to the LLC, which they use to secure a $1,000,000 piece of property (down payment of $100,000 and $900,000 as a nonrecourse loan). Let’s also assume no principal payments are due on the loan for 5 years.

In year one the LLC is permitted to take a $50,000 depreciation deduction, which is allocated 50/50 to each member. Do we have a minimum gain situation? No. In year one the LLC would not realize minimum gain because if the property was disposed for full satisfaction of the nonrecourse debt ($900,000) its amount realized would not exceed its adjusted basis ($950,000).

Now in year two the same $50,000 depreciation deduction occurs. Do we have minimum gain? We still do not, as the debt ($900,000) does not exceed the adjusted basis ($900,000).

How about in year three if the LLC takes another $50,000 deduction allocating the deduction 50/50 to each member? Yes! Now the debt ($900,000) exceeds the adjusted basis ($850,000).

In Conclusion…

Minimum gain is a neutralizing provision that permits a member to receive a tax benefit in a year despite the benefit lacking economic effect (i.e., the member has no economic risk if the property goes under due to the loan’s nonrecourse nature). However, to offset the benefit the taxpayer receives, a minimum gain chargeback provision within the operating agreement requires the member to have a tax burden based on the amount of allocation they took below the adjusted basis if the property were to be disposed. In our example above, if the property were sold after year three the chargeback would be $50,000, which is the amount of nonrecourse debt that exceeded the adjusted basis.

As you can see, minimum gain can be tricky. However, for many LLCs the benefits can certainly outweigh the risks. It is important to ensure you talk to a tax professional and an attorney when putting together an operating agreement as typical boilerplate language may not cover your unique situation.

For question or comments about this article, or to talk through your particular situation, please call us at (415) 633-6841 or email us at info@bendlawoffice.com

Disclaimer: This article discusses general legal issues and developments. Such materials are for informational purposes only and may not reflect the most current law in your jurisdiction. These informational materials are not intended, and should not be taken, as legal advice on any particular set of facts or circumstances. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction.  Bend Law Group, PC expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this article.

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