Five Ways to Limit Your Liability

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1. Structure your business accordingly. To protect your personal assets, such as your car, home, and bank accounts, from potential lawsuits involving your business, it’s often advisable to structure your business as a limited liability company (LLC) or corporation.  Unlike sole proprietorships or partnerships, both LLCs and corporations have the added benefit of shielding you from personal liability when certain actions are taken by the company; instead, only business assets would be subject to liability.  In order to become an LLC or corporation however, the proper forms and fees must be given to the appropriate government entity, and many states’ requirements differ in this regard.  For this reason, it is highly recommended that you discuss potentially structuring your business as an LLC or corporation with an experienced lawyer.

2. Execute a contract. When dealing with customers or other businesses, you may want to consider limiting your liability directly via a contract.  Within the terms of a contract, you could directly lay out what you can, and cannot, be liable for.  This strategy, however, may cause pushback from said customers or businesses due to the nature of the competing interests at hand.  Generally, customers want to be able to sue you for everything, while you seek to limit your exposure as much as possible.  Because of this, it’s important to be rational and fair when looking to execute a contract with such terms, and remember that a court may favor the interests of the customer if contractual terms are too one-sided.

3. Cap your liability. Relatedly, within a contract which limits your liability, you may seek to put specific caps on certain areas of liabilities, such as time caps and financial caps.  Time caps limit the amount of time a party has to bring a liability claim against you, while financial caps limit the amount of money you are liable to pay.  Both time and financial caps can offer great benefits as a means of limiting your liability within a contract.

4. Obtain insurance. Business insurance, such as home-based business insurance or general liability insurance, is also an advisable step to take.  Since many homeowner’s and renter’s insurance policies do not cover home-based business losses, it’s important to make sure you are protected in case of a lawsuit or other event.  Oftentimes business insurance not only covers the amount you are deemed liable, but your attorney’s fees and related expenses as well.

5. Hire and experienced lawyer. It is important that you consider consulting with an experienced business attorney when examining some of the ways in which you can limit your business’ liability.  Entrepreneurs face specific challenges when beginning a business venture, such as properly forming a business entity and abiding by all applicable government formalities.  As such, receiving adequate, competent legal advice is vitally important to starting off on the right foot.

This article was sponsored by Vlodaver Law Offices, LLC, an experienced business solutions and transactions law firm in the Twin Cities. If you would like a free legal consultation, contact us.

RCBA – Real Estate Section: Ethics for the Real Estate Lawyer

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Royee will be presenting Susan Humiston, Director of the Office of Lawyers Professional Responsibility at the next Ramsey County Bar Association Real Estate Section event. Susan Humiston will discuss common ethics issues in real estate practice, and how to address them, as seen by the Office of Lawyers Professional Responsibility. Join us for an informative session on conflicts of interest, negotiations, law-related services and more! The event will take place from 12:00 PM to 1:00 PM on February 19, 2019 at the First National Bank Building’s Training Room in downtown St. Paul.

Please contact us with any questions or for additional information.

RCBA – Real Estate Section: 8 Things You Should Know About the Residential Real Estate Purchase Agreement

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Royee will be presenting David J. McGee of Chestnut Cambronne at the next Ramsey County Bar Association Real Estate Section event. David J. McGee will discuss residential real estate purchase agreements, the most important and frequently used document in residential real estate transactions but also the most misunderstood. The MNAR form is used in almost all residential real estate transactions. Learn what the purchase agreement includes and what it does not, the hidden provisions that may catch the unsuspecting, and how the default, cancellation and enforcement provisions apply. The event will take place from 12:00 PM to 1:00 PM on December 18, 2018 at the First National Bank Building’s Training Room in downtown St. Paul.

Please contact us with any questions or for additional information.

Preparing To Sell A Business: How To Handle Your Contract Extensions/Renewals

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After consulting with an attorney, many times businesses begin to do legal clean up as they approach a potential sale of the business. As we have discussed, selling a business takes time, and careful planning is key.

One of the first areas that legal counsel is asked to tackle for a business considering a sale, is to review legacy contracts in place before granting any renewals/extensions and determine how to approach the renewals/extensions to best frame the business for a potential buyer down the road. Many times, vendor or service agreements have provisions for auto-renewal or extension, and it is typical for businesses to use this time as an opportunity to renegotiate terms that are more important now than before as the sale of the business is closer than it was 5-10 years ago. A business’s key contracts embody a valuable business asset. Thus, it is crucial that these agreements either remain in force as a business changes hands from the seller to the buyer, or at the very least do not deter a potential buyer due to unfavorable provisions within the contract.

Prior to negotiating these agreements, the business owner and lawyer need to work together to determine the best framework in case of a future sale. Specifically, the business owner and legal counsel should review and prepare to negotiate the following key provisions that may be included in a contract extension:

1. Early Termination: The business owner will want to negotiate for early termination rights. These rights will be important in allowing the business owner to terminate the agreement upon sale if the potential buyer does not wish to assume the contract after closing.

2. Renewal Options: Similar to termination rights, the business owner will want to negotiate and take into consideration automatic renewal options. Renewal options are often good, as the buyer may need the continued service, but these renewal rights need to be drafted in a particular way so as to get the best terms including consent.

3. Fixed Pricing: The business owner will also want to strategically review all fixed pricing provisions to ensure that they are competitive with the market, and to ensure they will not be an issue to any future buyers when conducting their contract due diligence.

4. Assignment: In general, the default rule is that a party to a contract has the right to assign the agreement to a third party. However, contracting parties often want to have the right to control who they do business with. Figuring out the best language for the particular needs of a party and having carve outs sometimes work to pacify everyone’s concerns.

5. Change of Ownership Provisions: The business owner may want to refrain from agreeing to any change of ownership/control provisions within the contract. These provisions allow the other party to terminate or have similar effects of an anti-assignment provision. Again, if the contract is a material contract to the operation of the business, the buyer will want the contract to be in full force and effect after closing.

Each agreement should be reviewed for these material contract terms to help identify and plan for any potential setbacks or hardships on potential buyers. Failure to do so could delay or endanger the closing of a future sale or even leave the buyer with less of the business than expected. Either of which is a recipe for disaster. Therefore, if you are considering selling your business in the near future, it is important to consult your attorney prior to renewing or extending any vendor and service agreements.

This article was sponsored by Vlodaver Law Offices, LLC, an experienced business solutions and transactions law firm in the Twin Cities. If you would like a free legal consultation, contact us.

RCBA – Real Estate Section: 2018 Real Estate Legislative Update

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Royee will be introducing Scott Lucas of Olson, Lucas, Redford & Wahlberg, P.A. at the next Ramsey County Bar Association Real Estate Section event. Scott Lucas will discuss what happened in the 2018 legislature regarding real estate law, and what is likely to happen in the 2019 legislature. The event will take place from 12:00 PM to 1:00 PM on October 16, 2018 at the First National Bank Building’s Training Room in downtown St. Paul.

Please contact us with any questions or for additional information.

RCBA – Real Estate Section: Railroad Real Estate Fundamentals

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Learn the basics about railroad real estate, including background on the establishment and documentation of railroads, federal and state land grants, railroad deeds, eminent domain, contracts, and more. The event will take place from 12:00 PM to 1:00 PM on September 18, 2018 at the First National Bank Building’s Training Room in downtown St. Paul.

Please contact us with any questions or for additional information.

Selling Tenant-Occupied Commercial Property

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Selling a tenant-occupied commercial property sounds scary, but in practice, the building’s tenants won’t be affected all that much. Below are answers to the most common questions asked when conducting this type of transaction. However, despite the answers to these questions, landlords should always review the language of the governing lease agreement as this will be the primary law governing the process.

First, should you notify your tenants of a potential sell? In most situations, the answer is no. Your tenant’s will likely not be effected by the transition, and knowledge that you are thinking of selling is often enough to worry tenants and make them consider other options. This sudden panic can create hesitation by the prospective buyer and ultimately cause a deal to sour. Therefore, unless the lease agreement requires notice for a potential sale or transfer, it is not recommended to notify the commercial tenant’s just yet.

Next, what happens to the Tenant’s leases? Typically, these leases are assigned to the new owner of the property. Unless one of the tenants has an expired lease or fails to have a formal lease at all, the new owner will not be able to immediately remove the tenants after the purchase without going through a formal eviction process. To be evicted, a material breach of lease agreement must exist, typically in Minnesota this means the failure to pay rent. Alternatively, the new owner may not even be planning to evict any of the tenants. In fact, most commercial property owners want as many tenants as they can have and for as long as they can, as this is good for business.

Next, will the tenant need to sign a new lease with the new owner? Once again, the current lease between you and your prior tenants will govern the new relationship between the tenants and the new landlord. Therefore, the new owner may ask the tenants to sign a new lease, however, the tenants do not have to do so until their current lease expires. However, to persuade the tenants to sign a new lease agreement, the new landlord may offer incentives, such as a short-term price reduction, or an expansion of the premises. However, it is important to note, the tenants will have the power to negotiate, as once again, so long as the prior lease remains in effect, they do not have to sign anything.

Lastly, should the tenant security deposits be credited back to the tenants? Minnesota law requires that tenants receive their security deposits timely and in full unless damages are present. Minn. Stat. § 504B.178. Therefore, at the end of each lease, someone will need to return the tenant’s security deposit. The most common solution to this problem is to transfer the security deposits along with the tenant leases from the seller to the buyer on the HUD-1 Statement. Thereafter, the new owner will be responsible for funding the deposits at the end of each lease so long as the tenant fully complies with the terms of the lease.

These types of transactions are common and should be handled with care to avoid litigation. Prior to doing anything it is important to review each lease agreement and consult your attorney.

This article was sponsored by Vlodaver Law Offices, LLC, an experienced business solutions and transactions law firm in the Twin Cities. If you would like a free legal consultation, contact us.

Four Tips for Master Supply Agreements

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Whether a business is just beginning and needs the necessary supplies to start production, or an existing business is simply looking to renegotiate terms or find a new supplier, business owners face a specific set of challenges when figuring out how to best deal with supply agreements.  In the aggregate, master supply agreements, or MSAs, are generally contracts that come into existence when a company maintains several contracts with the same supplier, and therefore seeks to streamline the process by merging them into a single agreement.  MSAs are also commonly utilized to provide consistency across an organization so that purchasing/procurement teams have a guideline on how to systematically deal with various needs. MSAs provide many advantages, but for those of you considering an MSA or if you are wondering whether you’ve considered all of your options in your current MSA, here are a few tips for navigating them:

  1. Evaluate Fair Pricing. Cost is usually at the top of everyone’s list when considering a contract.  Especially when an MSA is centered around raw material, fair pricing of the good is crucial.  Consider having the supplier base his or her contract price of the material around a market-based, published price or index for the good.  Goods such as previous metal are represented on a commodity price index which averages prices for the good based on futures and spot prices and often trades on an exchange.  This in turn allows investors to trade in the underlying commodities without having to be directly involved in the futures market.  By basing the cost of the good off of this real-time average price, it increases the fairness of the contract by providing the cost based on what countless others are paying for the same material.
  2. Consider Exclusivity. Perhaps if you elect to make a certain supplier your exclusive provider of a certain good, or a certain type of good, this could potentially convince the supplier to grant you a discount or even guarantee your supply over others.  However, exclusivity may also become problematic if an issue arises between you and your supplier, leaving you with little recourse under your contract to make up for your lost supply.  It’s advisable that you carefully analyze a contract and ensure certain legal provisions are in place before entering into such agreements.
  3. Expect a Denial of Goods. Whether you’re getting a raw material or a packaged product, as a buyer you should consider the consequences of receiving an incorrect or damaged shipment.  Buyers often have the right to refuse a product if it is unsatisfactory but of particular note is the situation in which the buyer does not take notice of wrong or damaged goods right away, but rather waits months to discover the issue.  This could be due to the nature of the business, for example buying batteries to operate machinery in bulk, only to realize a few months later that a few of the batteries are defective.  In this situation, you should look to your MSA to discover whether you have the right, at that time, to deny the goods and either get monetarily compensated or sent replacements.
  4. Have an Exit Strategy. No matter what the relationship is between your business and the supplier, contractually, you should always consider what the end of that relationship will look like.  Put in writing things like:
    1. Will this MSA renew automatically or terminate upon completion?
    2. What are acceptable termination causations?
    3. Who will pay for certain termination costs and what requirements will you need to survive?

All of the above questions are important factors to consider when creating a new MSA or renegotiating existing relationships with vendors. 

This article was sponsored by Vlodaver Law Offices, LLC, an experienced business solutions and transactions law firm in the Twin Cities. If you would like a free legal consultation, contact us.

RCBA – Real Estate Section: Resolving Residential Real Estate Disputes – Observations and Recommendations From a Lawyer/Mediator

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Royee will be the co-chair of the discussion of various questions the real estate attorney will find regarding residential transactions and exploration of different options for resolving those disputes short of the courtroom. The event will take place from 12:00 PM to 1:00 PM on May 15, 2018 at the First National Bank Building’s Training Room in downtown St. Paul.

Please contact us with any questions or for additional information.

RCBA – Real Estate Section: Vapor Intrusion: Keeping it Simple

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Overview of the physical, financial, and legal risks associated with this evolving property development and property management concern. Discussion of Superfund liability and other potential liabilities that property owners and managers face at vapor intrusion sites. The event will take place from 12:00 PM to 1:00 PM on April 17, 2018 at the First National Bank Building’s Training Room in downtown St. Paul.

Please contact us with any questions or for additional information.

What to Consider When Buying a Business & Some Recent Changes That Can Help

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Whether you’re interested in expanding your existing business or looking to get in to an entirely new sector, purchasing a business comes with a complex set of issues, not the least of which is financing.  After most formalities have been dealt with—such as purchase price, investigating the inner-workings of the business, and so forth—the question remains as to how the necessary money needed to purchase the business will be acquired.  If the money is not on hand, or available via family and friends, you will most likely have to go through the process of getting a loan from a traditional lending institution, such as a bank or credit union.

A Small Business Administration (SBA) loan is one of the most common types of loans for acquisition financing, especially if you’re looking for a longer-term repayment contract and a low interest rate.  The process of obtaining such a loan, however, can be complicated due to rigid qualification measures and the increased amount of time it takes for the process to finalize.  With that said, the SBA recently released modifications to its Standard Operating Procedure (SOP), drastically changing some of the guidelines used in determining whether someone qualifies for an SBA loan.  Of particular importance were the following changes:

  • Equity requirement reduction from 25% to 10%. The SBA now requires that the lendee put down only 10% of the total project cost in order to meet their equity requirement.  Though the previous amount was just on the acquisition cost, the 15% reduction nonetheless makes it easier to qualify from a money-on-hand perspective.
  • Faster seller note collection. Previously, sellers could only collect on notes after two years; the new SOP allows such payments starting day one after a sale unless the note was used as part of the 10% equity requirement.  If that is the case, the note will be on standby for a period matching the SBA loan.  This effectively increases the burden of seller financing.

Though the foregoing guideline changes will undoubtedly change the SBA loan landscape over time, because banks are still free to set many of the terms associated with the SBA loans they make, the changes will neither be sweeping nor immediate.  The changes should therefore be read as simply allowing banks more room to work with in the often-ridged setting of loan processing and approval.  It is also advisable that, when considering the purchase of a business, adequate legal counsel is consulted.

This article was sponsored by Vlodaver Law Offices, LLC, an experienced business solutions and transactions law firm in the Twin Cities. If you would like a free legal consultation, contact us.

Formal LLC Dissolution: A Guide to Avoiding Future Headaches

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Deciding to close a business is never an easy process. However, if the right steps aren’t taken, this process can turn into a nightmare and have many unintended consequences. Practically speaking a business can be closed by simply shutting down operations. However, until a business is properly “dissolved,” it remains open legally. A failure to properly dissolve the business may result in additional taxes, penalty fees or even leaving the members susceptible to future legal liabilities.

Prior to beginning the process of dissolution, it is important to understand possible reasons for dissolution. In Minnesota, the owners or “members” of a limited liability company (LLC) have the option of voluntarily dissolving the LLC at any time after it is formed. This typically comes when the members decide that the business purpose has been completed or the business ceases to be economically sustainable. The members may also choose to dissolve the business because they’ve found themselves at a standoff with fellow members regarding necessary decisions concerning the business operations of the LLC and they think that they simply need to cease doing business. No matter the reason, if the members are in agreement, the dissolution process can begin.

The formal dissolution of an LLC is done in accordance with state law. In Minnesota, the basic stages of dissolution typically proceed in the following order. First, the approval of the members must be obtained. There are formalities which need to be followed. The voting method for this approval will typically be provided in the LLC operating agreement. Next, a statement of dissolution should be filed with the state. This can be a relatively easy step, but is critical to dissolving the business as it puts creditors and other interested parties on notice. Once the statement of dissolution is filed, the members of the LLC should begin “winding up” the business itself. This may include: selling of outstanding assets, collecting any outstanding debts, pay any outstanding liabilities, and finalizing other affairs of the business. Lastly, a statement of termination should be filed with the state. This statement provides the state with the proper contact information for the dissolved business in the event any further action is required. There are other requirements along the way.

Following these steps to formally dissolve and wind up the affairs of the LLC helps ensure that taxes, fees, and penalties do not continue to accrue against the LLC. Additionally, this process allows for continued member protections against personal liability for known and unknown liabilities of the business. Finally, by dissolving your business correctly, your future business interests remain protected.

To avoid legal challenges regarding dissolution, the LLC members should carefully follow the legal steps discussed as well as consult the articles of organization and operating agreement that was filed when the LLC was first created. It is for this reason that it is highly recommended that you consult an attorney when making the decision to dissolve your business and for assistance in doing so.

This article was sponsored by Vlodaver Law Offices, LLC, an experienced business solutions and transactions law firm in the Twin Cities. If you would like a free legal consultation, contact us.

Personally Identifiable Information

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In recent years, as an increasingly large amount of our information is stored on computers and throughout the internet generally, the notion of cyber security, especially in relation to Personally Identifiable Information (PII), has become a progressively important and even daunting concept.  Under Minnesota statute 325E, “personal information” means an individual’s first name or first initial and last name in combination with (1) their social security number, (2) their driver’s license or MN identification card number, or (3) their account, credit, or debit card number when in combination with any required security code or password that allows someone access to an individual’s financials.  In other words, it’s information that, if in the wrong hands, can do a lot of damage to someone, especially in a financial sense.

On the front end, there are many ways in which a person or company can limit their exposure to the risk of others accessing PII.  Generally, third-party vendors carry a particularly huge risk and because of this, contracts pertaining to privacy, indemnity, and the right to audit are widely recommended.  Additionally, and perhaps most basically, when dealing with a third-party vendor, be inquisitive—ask about their security processes, the firewalls that are in place, and encryption methods.  Questions like these may not only lead to increased confidence in a given third-party vendor, but also could result in a larger conversation about risk management or even new ideas for your own security of PII.  More internally-based precautions to consider would be getting some kind of cyber security insurance, looking into the actual physical security of certain hardware, properly training personnel on network security protocol, and having an identifiable plan for if things go wrong.

But just what happens when a breach actually occurs and PII is exposed?  A widely accepted six-step incident response cycle was developed by Kurtis Holland in 2014 with this very question in mind.  First, it is ideal to have prepared for an incident, as evidenced through a plan.  Second, you must be able to identify the breach, usually by way of an anomaly or detection software.  Third, contain the breach as much as possible in order to mitigate the risk.  Fourth, utilize either internal or external IT professionals in order to eradicate the malware.  Fifth, resume normal functions and fully recover.  Sixth, and perhaps most importantly, evaluate the incident that occurred and if necessary, make the proper adjustments to avoid it happening again.  It is also worth noting that when PII has been acquired by an unauthorized person, it is statutorily required that the person or business breached sufficiently disclose the incident in a timely manner. How to do so in compliance with the law, while still protecting your business is an important process.

When data breaches do occur, one can expect things such as lawsuits to follow not long afterwards.  For example, when the infamous Target breach of 2013 happened, effecting approximately 41 million people and thus one of the bigger data breaches in recent history, what resulted was that the company had to pay $18.5 million settlement to 47 states and the District of Columbia.  It is for this reason that it is highly recommended that you discuss things such as PII, cyber security, and breach liability with an experienced lawyer.

This article was sponsored by Vlodaver Law Offices, LLC, an experienced business solutions and transactions law firm in the Twin Cities. If you would like a free legal consultation, contact us.

RCBA – Real Estate Section: Now What? Transitioning Old LLCs to the New Act Act

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Practical guidance on how to help companies formed under Chapter 322B (Minnesota’s prior LLC statute) adapt to Chapter 322C (the new statute effective for all companies January 1, 2018). How to turn old Member Control Agreements in to new Operating Agreements, including questions related to Chapter 322C.  The event will take place from 12:00 PM to 1:00 PM on January 16, 2018 at the First National Bank Building’s Training Room in downtown St. Paul.

Please contact us with any questions or for additional information.

RCBA – Real Estate Section: Cyber Security for Dirt Lawyers: What Real Estate and Construction Lawyers Need to Know About Cyber Threats

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Cyber security is not just for big companies and industries; breaches can affect small businesses, as well.  Big and increasing risks are out there.  Learn how to limit the risk, and what to do in case of a breach.  The event will take place from 12:00 PM to 1:00 PM on December 19, 2017 at the First National Bank Building’s Training Room in downtown St. Paul.

Please contact us with any questions or for additional information.

Strategic Thinking for Leases & How Lawyers Can Help

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In the wake of Amazon’s latest acquisition of Whole Foods, the fate of traditional, brick-and-mortar retailers may not be as bleak as it once seemed.  The world’s largest online retailer is facing certain difficulties in the realm of lease agreements, the same kind of difficulties that any tenant may face when entering into such a lease.  Oftentimes clients have a perfect location picked out, with an excellent business and marketing plan worked out, and clients and customers ready to go, however, they get a major surprise when they receive the lease from the Landlord.  Many tenants as well as landlords forget about the implications that a lease agreement holds down the road for future competition of subsequent tenants.

Stores such as Bed Bath & Beyond, Best Buy, and Target all have legal rights to halt certain operations proposed by Amazon by way of Whole Foods markets when it comes to where they may open or what they can do at various locations across the country because of their leasing rights and restrictive covenants in related agreements.

The carving out of certain provisions in leases such is a routine practice in the industry.  Tenants with enough leverage will negotiate with Landlords to have some protections put in place in order to avoid certain competition.  It is common to see proposals of various restrictions, such as no other grocery stores, electronic stores, toy stores, or discount retailers allowed in a mall so long as the tenant is leasing there.  Landlords frequently give up their business rights to substantially alter malls and therefore sacrifice tenant mix – but they do so as part of a careful negotiation.

The main issue that Amazon is facing, however, is that of neighboring retailers having clauses that, although do not bar the retailer completely, substantially limit its capabilities newly offered by Amazon.  Such limitations have the capability of vastly altering, or in some cases, prohibiting, the things that make a company unique.  Though the future for Amazon and Whole Foods is unclear, I think there will be a lesson learned of heightened focus on negotiations in general.

The question remains then, how can retailers adequately protect themselves from the e-commerce giant that is Amazon, or any competitor for that matter?  In general, a lawyer can aid tremendously in the process by providing the know-how, skills, and ultimately the language necessary for such protection.  As evidenced by the above, carefully drafted lease agreements are key and are able to withstand even the biggest and most powerful companies.  In a world where Amazon is seen as a dominant and intimidating player in a multitude of markets, this instance has taught us that companies much smaller can not only survive, but thrive in an environment where physical Amazon stores exist, albeit with adequate lease agreements.

This article was sponsored by Vlodaver Law Offices, LLC, an experienced business solutions and transactions law firm in the Twin Cities. If you would like a free legal consultation, contact us.

Panel: Craft Beer, Restaurant, and Other Start-Up Challenges at Twin Cities Startup Week 2017

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Royee will be presenting at the Twin Cities Startup Week 2017 Panel: Craft Beer, Restaurant, and Other Start-Up Challenges at Headflyer Brewing in Minneapolis.  The panel will discuss their experiences with their own start as well as tips on funding your own start-up.  Come join Flagship Bank for a beer and networking.

Please contact us with any questions or for additional information.

RCBA — Real Estate Section: Tax Forfeited Property

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Everything practitioners need to know about tax forfeited property: delinquent taxes, forfeiture, redemption, public auction and terms, rehabbed structures, title defects, and the attorney’s role.  The event will take place from 12:00 PM to 1:00 PM on October 17, 2017 at the First National Bank Building’s Training Room in downtown St. Paul.

Please contact us with any questions or for additional information.

Key Areas of Concern When Dealing with a New Vendor

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Whether you are a well-established company or just starting out, outsourcing certain services may be in your best interest; big box retailers, for example, need not concern themselves over the creation of a customer-facing app to sell their products and all of the intricacies that accompany the technological world.  In order to create said app, or do virtually any other service for that matter, businesses often hire other companies better suited to do so, whose job it is to specialize in such matters.  When engaging in these outside vendor hiring processes, it is important to take into consideration a multitude of different factors, such as reliability, insurance, assurances, and termination rights.

A vendor’s reliability is perhaps the most important factor to take into consideration when first addressing whether to do business with them.  Make sure you conduct due diligence on the company and assess their past record of entering into contracts such as yours.  Have former clients of customers favorably or unfavorably reviewed them?  Are they rated by the Better Business Bureau?  Take a look at such testimonials and ratings in order to gauge the company’s reputation and overall reliability going forward.

Another way to protect your business from the potential harm of outside vendors is to require them to obtain multiple kinds of insurance coverage.  In particular, cyber insurance can be especially helpful if the vendor in question is to have access to private electronic data, such as the personal information of customers or employees.  Cyber insurance typically covers such things as computer and data loss recovery, credit monitoring, notification expense, and other related forms of liability.  Additionally, businesses oftentimes require certain amounts and other types of insurance coverage, even conditioning their vendor contracts on being named as an additional insured party in those policies.  Paying attention to how such requirements are drafted within the contract are just as important as requiring them in the first place.

Third party service providers, perhaps now more than ever, are being required to provide a multitude of assurances to their clients, promising such things as confidentiality, risk management, compliance with expectations, and integrity.  Companies are more frequently appointing people within their organization to attend to the management of the quality of service rendered.  It is important to lay out your expectations and required assurances at the outset of any vendor-vendee relationship, as it provides a permissible roadmap of situations to come, specifying what is and is not acceptable practice.  Contractual requirements and carefully laid out details help manage expectations. Details are always helpful because the parties can help ensure that everyone understands the “rules” and alleviate concern with new relationships on how the other party may act.

Likewise, and relatedly, the termination rights of parties are also important to consider.  As a business, it is important that you have the legal right to move on from a contract that is, for a valid reason, unfavorable to you or later on becomes unfavorable to you.  Try to anticipate potential issues that may arise, such as a material breach by either party, and provide for that in contract form.  Businesses may even wish to discuss the termination of a contract based purely on inconvenience, with a potential expense being incurred on the terminating party.  In essence, you want to make sure that you are not stuck in a bad situation by predicting future problems, and figuring out a way to settle them in a way both parties can agree to, in contract form, before they ever arise.  Likewise the vendor may require fallbacks to protect their interests. Such provisions can be negotiated by both parties to achieve an agreement which works for everyone involved.

This article was sponsored by Vlodaver Law Offices, LLC, an experienced business solutions and transactions law firm in the Twin Cities. If you would like a free legal consultation, contact us.

RCBA – Real Estate Section: Real Estate Legislative Update

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Royee will be introducing attorney Kevin Dunlevy, from Beisel & Dunlevy, P.A., at the next Ramsey County Bar Association Real Estate Section event to discuss legislative updates related to real estate. Kevin Dunlevy will focus on both what happened in 2017, and what is likely to happen in the 2018 legislature. The event will take place from 12:00 pm to 1:00 pm on September 19, 2017 at the First National Bank Building’s Training Room in downtown St. Paul.

Please contact us for more information!

Beware the Oxford Comma

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Upon first glance, the fact that the US Court of Appeals for the First District recently upheld an appeal by five Maine delivery truck drivers of dairy products may not seem like a huge deal—it was essentially held that the drivers in question were entitled to overtime pay, something that their employer had thought they were exempt from because of Maine’s applicable law.  However, the reasoning behind the actual irrelevance of the law in the circumstance lay within its use, or rather lack thereof, of a comma separating the last two items of a list, otherwise known as an Oxford comma.  Though this case did not take place in Minnesota, the lesson it provides is manifestly true in all areas of contract law and drafting, that being: grammar truly does matter.

According to Maine’s wage and hour law, as set forth in Chapter 7 of Title 26 of the Maine Revised Statutes, an employer is not compelled to disperse overtime pay if its employees are engaged in the following activities:
The canning, processing, preserving, freezing, drying, marketing, storing, packing for shipment or distribution of:
(1) Agricultural produce;
(2) Meat and fish products; and
(3) Perishable foods.

The issue arose with regard to the lack of a comma after the word “shipment” above, meaning the drivers argued that it should be interpreted as meaning “packing for shipment” or “packing for distribution” and that since the work performed dealt only with distributing milk and not packing it in any way, their employer was not exempt from paying them overtime.  Conversely, the employer believed that the law should be read as if there was a comma after the word “shipment,” therefore splitting the tasks not eligible for overtime pay into “packing for shipment” and “distribution” generally.  An alternative version of the law, with the Oxford comma included, would in pertinent part read: “The canning, processing, preserving, freezing, drying, marketing, storing, packing for shipment, or distribution of . . . .”  This interpretation would better delineate the fact that both those involved in packing for distribution as well as simply distribution are subject to the law, rather than two kinds of packing.  Without it, however, the law as it stood remained unclear.

Ultimately, the court came down on the side of the dairy drivers, declaring that “ambiguities in the state’s wage and hour laws must be construed liberally in order to accomplish their remedial purpose[.]”  To longstanding proponents on either side of the classic Oxford comma debate, this comes as a weighty precedent in its favor.  A non-legal example of the comma’s relative importance can be seen in sentences such as: “This book is dedicated to my parents, Elvis Presley and God.”  With that said, opponents say the use of it is oftentimes unnecessary and generally displeasing in a visual sense.  In general, however, it is important to note that what should be aimed for is clarity, not blind adherence one way or the other.  This is perhaps especially true in the legal field where so much can be misinterpreted or misunderstood from an outsiders’ perspective already.

In brief, though the events that took place and the legal consequences that followed did not occur in Minnesota, they certainly could have.  The ramifications of the dairy employers’ reliance on a single missing comma ended up costing them approximately ten million dollars, and as such it goes to show us all about the importance of transparency in writing overall good grammar.

This article was sponsored by Vlodaver Law Offices, LLC, an experienced business solutions and transactions law firm in the Twin Cities. If you would like a free legal consultation, contact us.

Ten Things to Consider When Taking a Product or Service to Market

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1. Basic business structure. First and foremost, it is important to make sure that your enterprise is incorporated correctly, whether that be as a sole proprietorship, partnership, LLC, or otherwise.  Making sure that you have completed the applicable governing documents in order to legitimize the overarching business is essential to making sure that a product launch runs smoothly and without legal issue.

2. Separating yourself and employees from competition. Many products or services grow out of pre-existing ones, however, it is critical that those in charge of the operation, as well as any employees, separate themselves from possible conflicts of interest or potential competitors of the product or service in question.  Doing basic background checks of employment history is a common way in which new employers come to know of any hindrances of an employees’ ability to work, such as non-compete agreements or confidentiality agreements.

3. Clear contracts. Contracts with processors, retailers, suppliers, and otherwise all need to be in good standing and properly executed by the time a product goes to market.  Ideally, they should be kept up to date and crucially specific, going well beyond the basics of what is being bought or sold, for how much, and when.  They should also abide by all applicable laws and customs and therefore consulting a reputable attorney is critically important when accomplishing this task.  All too often companies will utilize a generic contract that provides miniscule amounts of protection (if any) and that leaves clients with too much exposure to risk.

4. Licensing.  If you are a relatively small company and would perhaps like to broadly expand yet you don’t have the resources to do so, you may want to consider licensing as an alternative approach to taking your product to market yourself.  Licensing is a tool that allows you to essentially enter into a legal agreement with another and have them pay you for your ownership of a product or idea.  It’s important to note here, however, that licensing agreements bring with them a myriad of other legal considerations to think about in and of themselves so it is important to not think it is the perfect legal solution.

5. Laws around sales and marketing. Sales and marketing are integral parts of making a new product launch a successful one.  However, even though the ever-expansive internet may make reaching target markets exceptionally easier than ever before, the laws surrounding just what you can and can’t do are equally broad.  For example, you must be careful not to include copyrighted infographics or photos in marketing as well as make sure any user data you may be collecting or using for such purposes is, in fact, legal.

6. Confidentiality. It is generally a good idea to keep new products or services, especially those of a “new” or “unique” nature, relatively private in order to preserve them until they are ready for the broader market.  From a legal perspective, it is important to prevent public disclosure, otherwise you may lose your ability to file for intellectual property rights protection.  Non-disclosure agreements are also commonplace in such scenarios, even when dealing with information that is merely sensitive and not specifically product-related.

7. FDA approval. If you are considering taking a market that is generally susceptible to applicable United States Food and Drug Administration Laws, it is very important to make sure you are abiding by all applicable rules in relation to that enterprise as well.  The FDA approval process is notorious for being not only costly but time-consuming, so make sure to allot for such provisions in both your overall budget and timeline.

8. Trademarks and patents. Trademarking and patenting certain concepts or ideas is often a good idea in terms of protecting your own interests, though it also reassures you that your business is unique in nature and is not already trademarked or patented as well.  It is a good idea to comb through the website of the United States Patent and Trademark Office, either by yourself or with the help of a lawyer, at https://www.uspto.gov/ and do a bit of background research.  You might also consider looking internationally in this regard if you plan to expand as well.

9. Understanding liabilities. Be sure to know the risks associated with your product, and reasonably protect yourself against them.  For instance, it may be in your best interest to specifically limit your liability in contracts by placing carve out clauses relating to such in the various agreements you use.  Likewise, indemnification clauses are another common way businesses protect themselves, namely by stating that if a specific action occurs, a different party, like a supplier for instance, is held responsible.

10. Hiring and experienced lawyer. Lastly, and as you’ve seen, partially woven throughout this list, it is important that you consider consulting with an experienced business attorney when embarking on taking a product or service to market.  Entrepreneurs face specific challenges when beginning a business venture, and receiving adequate, competent legal advice is vitally important to starting off on the right foot.

This article was sponsored by Vlodaver Law Offices, LLC, an experienced business solutions and transactions law firm in the Twin Cities. If you would like a free legal consultation, contact us.

RCBA – Real Estate Section: Contaminated Real Estate – Purchase Agreements/Leases

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Royee will be introducing attorney Eric D. Larson, the General Counsel of the St. Paul Port Authority, at the next Ramsey County Bar Association Real Estate Section event to discuss real estate issues related to purchase agreements and leases.  Larson will focus on provisions addressing contaminated real estate and environmental project management.  The event will take place from 12:00 PM to 1:00 PM on April 18, 2017 at the First National Bank Building’s Training Room in downtown St. Paul.

Please contact us for more information!

 

Five Things to Think About When Dealing with Purchasing Contracts

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  1. Determine what factors are most important to you and your business. Whether it’s price, quality, terms of payment, or otherwise, it’s important to remain introspective into your own company and discover what is truly the most important factor in your own circumstance.  Undoubtedly, price will oftentimes be the most common determinative factor, but it’s often helpful to list out all factors in order to determine the best supplier fit.  If, for instance, prices are relatively the same across suppliers, but the delivery schedule of one is much more favorable to your business over another, it’s important to note and prioritize that.  Likewise, if a price is suspiciously low, you may want to look at other important factors to you to make sure that such a supplier is not taking shortcuts elsewhere.  Creating a list of business go-to items will help the legal analysis for the contract.
  1. Take a look at indemnification provisions. If something goes wrong with the purchased product, you may want to make sure you are protected by the supplier company.  Indemnity clauses obliging one party to pay for any damage or loss incurred, are oftentimes commonplace in purchasing contracts, but it is important to make sure that they are correctly incorporated into such a contract and that you, the buyer, are adequately protected.
  1. Consider what warranties and representation provisions are in play. When a seller contracts with a buyer for something, representations and warranties are implicit within the sale.  For example, the seller is representing him or herself as the owner of such product, with the legal right to do so, while the warranty may be that it is free of defects and if a defect does occur, the seller may fix it up to a certain future time.  Delve into the specifics of these things to make sure they are preferable and realistic in your own situation.
  1. Don’t limit yourself to one supplier. It is easy to fall for the apparent ease of dealing with a singular supplier, but don’t let that discourage you from playing the field.  Competitive pricing for differing products exists, so make sure to talk to multiple suppliers before settling down on just one, and perhaps even let them know you are quoting different sources.  If suppliers know you are doing your homework and not simply settling for convenience, they are more likely to grant you a better deal.  Conversely, however, it’s also possible that a single vendor may give better deals to those who do lots of business with them or who sign on to long-term contracts, so make sure to take those discounts into consideration as well.
  1. Choose a type of supplier agreement. When considering different suppliers and looking into future timelines, one may want to reflect on whether perpetual or finite period of time contracts are best.  While contracts that run in perpetuity may further streamline negotiations, they can sometimes create problems when a party’s circumstances, whether financial or otherwise, change over time or if one party feels their terms are unfavorable.  By contrast, finite contracts may require a great deal more work when it comes time to renew a business relationship. They may result in having to find a new supplier however, this also means that each party ends up with more freedom and flexibility as well as the ability to legally get out of unfavorable contracts under more reasonable timelines.

This article was sponsored by Vlodaver Law Offices, LLC, an experienced business solutions and transactions law firm in the Twin Cities. If you would like a free legal consultation, contact us.

USLS – Start Me Up!

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Royee is collaborating with the University Student Legal Service, other experienced attorneys, and the Holmes Center for Entrepreneurship to present a legal panel and advisory session on the basics of business formation and operations to business students at the University of Minnesota. This is one of many Start Me Up! programs that Royee has organized to help students understand how to be smart and strategic when forming new ventures. This event takes place on Thursday, March 23 at 4:30pm, in the Carlson School of Management, Room 2-219.

New JOBS Act Regulations, Equity Crowdfunding, and Alternatives

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Looking to invest in a startup online?  Have your own entrepreneurial idea that may require additional funding?  There have been recent changes in the law that may affect just that.

Certain provisions of the Jumpstart Our Business Startups (JOBS) Act recently came into effect as of May 2016.  Most importantly, Title III of the Act reduced restrictions around equity crowdfunding.  Small businesses are now able to raise more capital through online investments by being accessible to all potential investors.  Now, any individual can invest their money in these early-stage businesses, with the only caveat being that the amount they can invest ultimately depends on their net worth.  This is different than prior rules because it used to be prohibited for any individuals with a net worth of under a certain standard to invest at all, whereas now there are, in essence, tiered amounts permissible for all.  Conversely, if you’re going to be on the other side of the transaction and are looking for investors in your company, it’s important to note that the company itself is subject to minimum disclosure requirements as they pertain to the totality of cash raised.

Equity crowdfunding, however, also involves a great deal of risk.  In addition to the possibility that an investment may be significantly, if not entirely, lost due to the venture failing, it likewise is seen as a more expensive option in general.  It also may be difficult to read and understand all available information and data provided without the assistance of a financial or legal professional.  Such an endeavor may also take up a lot of company bandwidth, and there may be unforeseen pressures associated with the venture.  Due to these factors, it’s possible that such an extensive legal undertaking may not necessarily be for you.  If that’s the case, many alternatives are available:

  1. Borrowing from a bank is likely the most common scenario one imagines when building out his or her company.  Banks may grant loans to individuals or companies at a pre-determined rate of interest, oftentimes offset by a security interest or collateral.  There are many loan options but not all business can qualify for a loan.  Working with an experienced business attorney and business banker will be key if you go this route.  Sometimes, however, the company is too new or has some unique aspect which prevents it from getting a loan, and so another option may be private investors.
  2. Borrowing from private investors, such as friends and family, is another viable option.  One should decide at the outset whether this kind of payment is structured like debt or equity, and treat it as such.  Putting the parameters of the agreement in writing is also highly encouraged.
  3. Active partners may help contribute financially to a business while also taking on some of the work associated with it.  This option may benefit a business by growing the expertise within it while freeing up time, however, the control and overall dynamic of the business may change and future profits may need to be aptly divided.

This article was sponsored by Vlodaver Law Offices, LLC, an experienced business solutions and transactions law firm in the Twin Cities. If you would like a free legal consultation, contact us.

Small Business Mergers & Acquisitions

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Mergers and acquisitions (M&A’s) aren’t just for big corporations. Small businesses can, and frequently do, merge with or buy out competitors. If you’re contemplating an M&A transaction as a buyer or seller, here are a few tips to get the process started.

If you’re the Buyer, you should know:

  1. What contracts the Seller has and whether they will be terminated. A merger or acquisition agreement can provide that the Buyer will be the legal successor of the Seller, and will assume all the Seller’s legal obligations. However, it’s best to figure out what those obligations are early on. If the Seller has contractual obligations that the Buyer doesn’t want to continue, the Seller will need to pursue termination of those contracts.
  1. Who’s paying taxes. Most contracts transferring large assets allocate tax responsibility, including assessments against land, to the Seller. There’s not a hard rule, however, so it’s best to have a written agreement that tax payments remain the Seller’s responsibility until the purchase or merger is complete. This minimizes risk in the event the transaction becomes protracted or is never accomplished.
  1. That you can cancel company shares. For example, a merger agreement can provide that at the time the merger becomes effective, corporate shares simply cease to exist. They could be replaced by a proportionate share of stock in the new company, but there’s nothing requiring a buyer to do so.
  1. That buying out or merging with a competitor isn’t the only way to purchase its assets. An asset purchase agreement is a routine way for businesses to sell a portion of their assets—for instance, a product and associated trademarks—without needing to acquire the whole business.

 

If you’re the Seller, you should know:

  1. That selling your business without merging doesn’t mean you have to terminate its current form. A corporation acquired by another corporation, for example, could simply become a subsidiary of the buyer corporation.
  1. That if you do terminate your business in its current form, there’s probably a defined legal process for it. For example, specific rules govern the terminating or “winding up” of an LLC, including paying out shareholders. For a corporation, you might need to file a notice of dissolution with the Secretary of State that the corporation no longer exists. Many states’ Secretary of State websites have resources for dissolving various businesses.
  1. Whether the buyer expects you to sign a non-compete agreement. If a competitor is buying you out, it’s safe to assume they don’t want you establishing a new competing business in the near future. Non-compete provisions can even survive the termination of a contract like a merger agreement, so it pays to be attentive to where, how soon, and how much you can exercise your expertise after selling your business.
  1. Whether you’re indemnified against future lawsuits. An ideal acquisition or merger agreement would clearly state that you’re not obligated to help the Buyer defend any claim arising against the Buyer related to the Seller’s business after the acquisition or merger takes place, pay costs and attorneys’ fees, or pay any damages awards.

 

Lastly, both Buyers and Sellers can benefit from the advice of an experience attorney to help tailor a merger or acquisition agreement to a business’ individual needs. This article was sponsored by Vlodaver Law Offices, LLC, a business solutions and transactions law firm in the Twin Cities. If you would like a free legal consultation, contact us.

Considerations When Expanding Your Business

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Expanding businesses face choices about whether to add new partners, owners, or shareholders. Unlike simply hiring new staff, adding members to your company’s core may affect the business’ organizational structure. It also entails power- and profit-sharing dynamics that can be detrimental to some businesses.

Given the riskiness of surrendering partial control of your business, as well as the legal and financial headaches of getting rid of a co-owner or partner you don’t like, it is wise to consider alternatives. Here are some common reasons we hear for adding new core members, as well as some other options to meet your business’ needs.

1. I need to offer more services to generate more clients.

Problem: While broadening your service options may require adding new talent, it’s best to know for sure that the person you’re adding—and the services—are a good long-term fit. It can be painful to have a new partner leave within a year. It can be worse to realize that the new service area isn’t actually generating much business.

Alternative: Hire an independent contractor. Basically, this means contracting with someone to provide specific services—such as sales or consulting in a specific area—and ordinarily comes with a time limit. You can be very creative on the payment structure and you get a chance to observe whether you want them around long-term. The perks of this approach are that it’s easy to terminate a business relationship with someone you don’t like or don’t need long term.

Do keep in mind that there is a difference between an independent contractor and an employee, and compensation requirements are very different. Hiring “independent contractors” whose job duties make them look more like employees can cause trouble later if you haven’t been compensating them as employees.

2. I need the financial boost of having a partner buy in.

Problem: Adding partners or shareholders for purely financial reasons doesn’t allow you to prioritize their skill level or experience. Too often the new partner becomes a “silent owner” who exercises considerable control over your business but isn’t easing your workload.

Alternatives: Seek funding through a small business loan, not through a risky partnership deal, and test out potential partners through the independent-contractor framework described above. Or, if you have an investor you trust, set up a profit-sharing agreement. They get a percentage of profits; you get up-front cash while retaining control over your business. You can also set up different classes of shares/stock with and without voting rights. There are some issues on how this is done, but it is feasible.

3. I need someone to share my workload.

Problem: This doesn’t necessarily mean you need to add core members; it might just mean you need more employees. Especially if you’re still figuring out how to manage a high volume of business, you may not want to give up substantial control of the business just yet.

Alternatives: If your problem is sheer workload, try the independent-contractor arrangement described above—it allows you to temporarily offload tasks but gives you an option to terminate relationships at a definite time in the future. When the contract period expires, you can assess whether the work volume has subsided or is likely to persist.

If your problem is too many potential clients, try setting up referral fee agreements with businesses that aren’t your direct competitors. You’ll be compensated when people or businesses you’ve referred become clients of the outside company, and the collaborative relationship may also help direct business to you when business slows down.

Business owners can benefit from the advice of an experienced attorney to help with organizational decisions about dividing ownership or sharing profits. This article was sponsored by Vlodaver Law Offices, LLC, a business solutions and transactions law firm in the Twin Cities. If you would like a free legal consultation, contact us.

Top Considerations to Make When Securing Financing for a New or Growing Business

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Whether you are a current small business owner or an aspiring one, business financing is an important topic. Without financing, businesses often cannot expand rapidly or even get off the ground in the first place. As the saying goes, it takes money to make money. In this post, we survey the five most common sources of business financing and discuss the most important practical and legal considerations business leaders should make when pursuing each.

Family and Friends

One of the most common sources of financing for small businesses is family and friends. Very small or even new businesses may find that seeking help from neighbors and loved ones is both easy and preferable to other financing options. Although it can be awkward to ask others for help, you might be surprised at who in your network may be willing to help you succeed. Often, friends and family financing involves written promissory notes, gifts, or even small investment in exchange for a stake of the company. Usually, friends and family will be willing to provide you financing in a way that won’t overburden your fledgling company.

Depending on the friendly financier, interest rates and other loan terms (if a promissory note is involved) can be extremely favorable. Such may be the case when wealthy friends or family members are willing to help you start or grow your business. However, one of the greatest risks of friends and family financing is that it can dramatically change the nature of your relationship and even lead to conflict. Thus, despite the financial and legal advantages this source may offer, it should be pursued with caution.

Bank Loans

When friends or family are not available, most entrepreneurs turn to their local bank for a loan. Bank loans are the most common sources of funding for small businesses. Typically, bank loans involve moderate interest rates and short repayment times. Because many small businesses fail, these terms seek to offset the bank’s lending risk. In addition, banks usually require that small business owners chip in a significant portion of start-up or project costs; banks often will not lend 100% of financing needs.

In addition to these characteristics, bank loans usually involve additional legal considerations. For example, most banks will require that the loan be guaranteed by the business’s owners. This means that if the small business fails to pay back the loan, the owners are still on the hook—even if the small business goes bankrupt. Also, banks often require the small business to put up collateral for the loan, as a form of security in case the small business defaults on payments. In the case of default, the bank can then repossess the collateral-property. Depending on the business and amount involved, a bank may seek a security interest in only a few pieces of property to all the assets of the business. Thus a bank may not be as easy of a process as a friend or family, but obviously it is the most traditional and structured process. Although a bank loan may be a little intimidating, a borrower knows that the bank will be a solid institution to approach and receive structured guidance from and perhaps more formality will help make the business you are seeking funding for act more “business” like.

Government Grants and Loans

Some small businesses may find that they qualify for government loans. These sources of financing are essentially bank loans, but without high interest rates, short repayment times, and security interests—sometimes even without personal guarantees. Government loan programs secure favorable loan terms by guaranteeing the loan themselves. Thus, instead of the owners making a personal guarantee, the government makes one instead. Many small businesses will likely find that they qualify for some amount of government loans through the Small Business Association.

The state and federal government also offer grants to small businesses. These grants are usually targeted at increasing opportunity to minorities or encouraging the creation of new businesses in needed industries and in rural areas. In many cases, the grant money is provided at no cost, and without any obligation to repay. However, these grants usually are for smaller sums unlikely to fully cover all financing needs. Therefore, government grants are a good supplement for other sources of funding. You can review available grants at www.grants.gov and mn.gov/deed.

Crowdfunding

The newest form of business financing is crowdfunding, which entails seeking a large amount of funds from many people who individually contribute small amounts. As crowdfunding has increased in popularity, it has expanded at the state and federal level and can now finance projects involving only a few thousand to millions of dollars. However, different crowdfunding paths involve very different legal considerations.

The most popular fundraising usually takes place online at websites such as Kickstarter.com. There, anyone (including small businesses) can create a fundraiser. These sites often require that the fundraising be for singular projects, such as the creation of a new product or the building of a new facility. Those who pledge money to the fundraiser are often entitled to some kind of benefit depending on the project. But most importantly, no one who contributes money receives any kind of ownership interest in the company. If you have a compelling project that many people would be excited about, online crowdfunding might be a good first shot at financing.

For those seeking to raise hundreds of thousands to millions of dollars, other crowdfunding programs exist. New in Minnesota this year is MNvest, a program that allows small businesses to crowdfund up to $2 million. Unlike online crowdfunding, though, contributors are investors and own a stake in the company. On the federal level, the JOBS Act allows for crowdfunding through the Securities and Exchange Commission. This crowdfunding is similar to MNvest, but allows small businesses to seek investment from residents of all states and up to $5 million. Small businesses interested in crowdfunding should carefully consider the reporting and regulatory requirements of raising capital in this way, as these may be difficult to comply with and costly.

Equity Financing – Angels and Venture Capital

Lastly, small businesses looking to grow rapidly and needing millions of dollars of funding may turn to “angel” and venture capital investors. These kinds of investors pool large sums of money and invest in multiple start-ups and small businesses at a time and can offer significant financing. Note, however, that this kind of financing is equity financing, which means that the investors gain a stake in the company. And when it comes to angels and venture capital, the stake required is often substantial.

When angels and venture capital firms invest in companies, they usually require certain concessions from the original business owners. In addition to receiving a large stake of ownership, they may require preferred shares that give them dividend and liquidity preference above other owners. In addition, they may seek the ability to select directors for the board of directors and to take an active role in oversight and even management of the business. Some may obligate the main entrepreneurs to stay with the company for a specified period of time so as to reduce risk that the entrepreneurs will leave for other opportunities. While these concessions may seem like a lot to give up, angels and venture capitalists can bring important people and connections to a business (in addition to much-needed financing). Such benefits may be absolutely vital for a company to take off in a short amount of time. Thus, choosing an angel or venture capital investor is extremely important and usually involves significant searching and negotiation.

If you plan to be involved in business financing, you should work with an attorney to help guide you and advise you on associated legal risks. This article was sponsored by Vlodaver Law Offices, LLC, an experienced business solutions and transactions law firm in the Twin Cities. If you would like a free legal consultation, contact us.

What the New Federal Defense of Trade Secrets Act Means for Minnesota Businesses

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If you’re a businessperson, chances are you come into contact with trade secrets every day. Trade secrets are, generally speaking, any piece of information that derives value from not being known to or readily ascertainable by other persons who can use them and which are protected from disclosure by reasonable efforts. Trade secrets are anything from specific customer lists to algorithms for computer systems. And even unpatented inventions are often trade secrets.

Trade secret protections are protected primarily by state law, but recently Congress passed the Defend Trade Secrets Act (DTSA), which adds some federal protections. For most small-to-medium businesses, the DTSA will not have much of an impact; the DTSA only provides additional protections for trade secrets that are exchanged over state lines and supplements state trade secret protections. But for Minnesota companies that share trade secrets and other confidential information with other businesses and persons outside of the state, the DTSA provides additional protections, but imposes some additional requirements.

Immunity Provisions in NDAs

One such additional requirement is the need for parties to provide notice of certain disclosures that are immune from liability under the DTSA. When companies share trade secrets with each other (usually in collaborative arrangements), they often sign confidentiality or non-disclosure agreements (usually referred to as NDAs). Many NDAs contain clauses that require that the parties not disclose any confidential or trade secret information under any circumstances. Under most state laws, this provision is completely valid and has no effect on the remedies available to disclosing parties in the event their confidential information or trade secrets are disclosed to the public by unscrupulous recipients. However, the DTSA limits the effectiveness of these clauses in federal trade secret cases.

Under the DTSA, in order for a trade secret owner to obtain exemplary (punitive) damages or attorney’s fees (essentially reimbursement for the legal costs of suing to protect the trade secrets), all NDAs must contain certain notices of immunity. The DTSA provides immunity for disclosing trade secrets to any person who discloses trade secrets “in confidence” to a federal, state, or local government official, “either directly or indirectly to an attorney . . . for the purpose of reporting or investigating a suspected violation of law” or in a “lawsuit or other proceeding,” so long as the filing is “under seal.” In effect, this immunity provision overrides the “no disclosure whatsoever” approach to NDAs. It further requires that parties must provide notice of this immunity in their NDAs. If the notice is not given, exemplary damages and attorney’s fees are not available to anyone seeking to protect their trade secrets or receive compensation for misappropriation. Since these remedies can be fairly substantial, it is in a business’s best interest not to foreclose the possibility of receiving these remedies.

Effective Date

As stated above, the DTSA does not override or change state trade secret law, so most small businesses are unaffected by the immunity and notice provisions. For larger businesses, however, it makes good proactive sense to begin including an appropriate notice of immunity clause in NDAs. Since the effective date of the law is May 11, 2016, any NDAs entered into after that date should include this language. NDAs entered into before this date need not include a notice of immunity provision.

If you plan to be involved in any sharing of confidential information or trade secrets, you should work with an attorney to draft NDAs in accordance your specific needs and goals and the applicable law. This article was sponsored by Vlodaver Law Offices, LLC, an experienced business solutions and transactions law firm in the Twin Cities. If you would like a free legal consultation, contact us.