Chicago Business Lawyer Blog

As we reported recently on our Chicago Business Lawyer Blog, Groupon, the online coupon phenom, is facing a class-action lawsuit regarding overtime pay. We used it as a cautionary tale about the need for tech startups in Chicago to invest in the kind of experienced legal help necessary to keep them out of legal trouble through the incubation and gestation period.

Now the New York Times is reporting on "red flags" raised during IPO negotiations. Finance is another critical area where contacting a Chicago business lawyer can pay huge dividends while keeping your rights protected.

The Times reports the suit and a number of other accounting and disclosure gaffes have been brought to the attention of the Securities and Exchange Commission, darkening the company's Initial Public Offering Prospects and raising questions about its credibility. When Goldman made the successful pitch as one of the underwriters of the IPO this summer, the company was being valued at $30 billion. Analysts now believe the company would be lucky to fetch an evaluation of more than $10 billion.

The IPO is also debuting as the company's triple digit growth has slowed.

Also at issue is the unearthed business history of Groupon's chairman Eric Lefkofsky, which the media describes as a lawsuit-prone entrepreneur who flipped a dot-com in 1999 that quickly went bankrupt on its new owners. He also reportedly took home $319 million of an investment round in January that fetched $950 million. Most of the rest was paid to employees and investors, which the Times cited as a red flag to other would-be investors.

Some of this is undoubtedly legitimate. But never forget that perception is often nine-tenths of reality. Once a company stumbles, it can be hard to get back up for all the piling on. Experienced legal advice and careful planning can often help a company avoid some major pitfalls and common errors.

Industry watchers are now questioning why Wall Street investment firms didn't catch the red flags earlier, or whether they may have turned a blind eye to problems in the quest for profit. "Underwriters are supposed to be gatekeepers, not just a sales and marketing agent," said Lynn E. Turner, a former chief accountant for the S.E.C.

The information Groupon filed with its prospectus is also now being called into question. According to that information, the company has $250 million in the bank and lost $102 million last year on revenue of nearly $1 billion. The need for additional cash, either through an IPO or otherwise, quickly becomes apparent. It has also left some scratching their heads at the $30 billion valuation. Especially when matched against $376 million in assets and $681 million in liabilities -- including nearly $400 million currently owed to vendors.

And despite spending nearly $500 million on advertising in the first six months of the year, the company's revenues are up only 13 percent in August, compared to 96 percent during the first six months of the year.

In its quiet period ahead of the IPO, the company has not commented publicly but its founder expressed optimism in a recent note to employees.

Continue reading "Groupon Tale Continues to Offer Caution to Small Business Startups in Chicago" »

If you are an entrepreneur starting a Chicago business, you are probably interested in attracting talented people to help run your venture. One way of doing this is by granting founder's stock at the start-up stage. This will save you a lot of money since you will pay very little, if anything at all, to whomever you issue such stock. The stock's recipient will also acquire a high earning potential over the long term. If you want to take advantage of such a win-win situation and issue founder's stock, then you should keep the following three considerations in mind: 1) the vesting schedule; 2) the acceleration of vesting; and 3) tax traps.

The vesting schedule is a key consideration in granting founder's stock. First of all, what does it mean for a stock to "vest?" Vesting refers to the amount of time necessary for a founder or employee to actually acquire the right to own the shares they have been issued. The longer you have the stock, the greater your earning potential. If a founder's stock does not vest, then there is the possibility for free-riding. For example, pretend you begin a Chicago business with a co-founder yet the co-founder abandons it after 4 months while you continue working for the company over the next few years before it is sold. It would clearly be unfair for you and the absentee co-founder to be paid the same. Founder vesting ensures this does not happen. When considering vesting, it is important to keep in mind that founder's stock is the inverse of a stock option since founder's stock is subject to repurchase or transfer back. Such a right is, however, discretionary rather than automatic. This means that a company may reserve the right to repurchase but that it does not have to.

Founders are frequently concerned about what will occur to the vesting of their stock if the company is bought or if they are fired without cause. These two situations are usually considered in the context of single or double trigger acceleration. Single trigger acceleration occurs if the founder's stock agreement provides for the acceleration of vesting in one of these two situations while double trigger acceleration occurs if the agreement provides for the acceleration of vesting in both of these situations. It is generally not favorable to have single trigger provisions associated with the end of employment since equity within a startup should be earned. The argument is that if a founder no longer provides services for the company, his or her stock should not continue vesting. Some founders may stipulate having a part of their stock accelerate if the founder leaves the company for good reason or if he or she is involuntarily terminated. Generally, however, if a founder is terminated for cause or voluntarily quits, there is no acceleration.

Although vesting is a key consideration when issuing founders' stock, it is also important to not forget about the tax consequences of issuing such stock. It is expected that stocks will increase in value. As the owner of a business, you must monitor your taxes to ensure that you do not owe taxes on this increased stock value. Since an "83(b) election provision" means that the founder recognizes income on the value of the stock at the lower purchase price, it is important to include an 83(b) election in your stock purchase agreement. You must, however, file an 83(b) election with the IRS within 30 days of purchasing your founder's shares.

Typically, there are important contractual aspects of issuing founder's stock. Each recipient will have to sign a confidentiality, non-competition, and non-solicitation agreement. In addition, each recipient will also have to sign a stock purchase agreement governing the terms and conditions surrounding vesting and the repurchase of stock.

If you are starting up a new business, it is important for you to consider founder's stock as a possible option. It provides a way to obtain talent while conserving cash for other purposes during critical development needs.

This item was prepared by summer research assistant Yelena R. For your equity or other start-up business law question, please contact Chicago business lawyer Jeremy Gibson.

As a former journalist, one of my most persistent and consistent rituals is as leisurely reading of the Sunday newspaper (print version preferably) as circumstances permit. Over the years, I enjoy the Corner Office feature of the New York Times business section, where CEOs and similar types discuss their career and leadership experiences.

This past Sunday's column featured a particularly succint summary of how to run an organization effectively from Shivan S. Subramaniam, chairman and CEO of FM Global, an insurance company. His message resonates with my own experiences as a member of three different firms and a litigator handling commercial lawsuits. The bottom line is honing the message and priorities, communicating them and then trusting people to implement them, even if they do so in their own style.

Asked about early leadership lessons, Mr. Subramaniam noted:

One is that people don't necessarily do things the way you would do them. And if they don't follow precisely the way you think about something, that doesn't necessarily mean that they're wrong. That took some maturity to understand -- also, that not everybody will behave the way you behave.

But the bigger picture is to make very sure that everybody in the company has the same goal in mind. That was always the more important thing I learned over time. It matters less what people do or how they do it, but do we all agree on the same goals?

Over the years, that has led to us having very simple goals at our company. We call them "key result areas" or K.R.A.'s. We're multinational -- we've got 5,100 people, 1,800 of whom are engineers. We're very analytical. But we have three K.R.A.'s, nothing terribly fancy. And everybody focuses on them. One is on profitability. One is on retention of existing clients. And one is on attracting new clients. That's it.

You can talk to people in San Francisco, Sydney or Singapore, and they'll know what the three K.R.A.'s are. All of our incentive plans are designed around our K.R.A.'s, and every one of those K.R.A.'s is very transparent. Our employees know how we're doing. And, most importantly, they understand them, whether they're the most senior manager or a file clerk, so they know that, "If I do this, it helps this K.R.A. in this manner."

As a related point, Mr. Subramaniam commented on learning something from one of his imporant role models:

He's the one who really started to teach me about the importance of simplicity. Things like, "If you can't explain it to me in a couple of sentences -- what the idea or what the concept behind it is -- it's obviously something you don't know how to do. If you've got to write a whole page to describe something, that doesn't make a lot of sense."

In concluding, Mr. Subramaniam distilled and explained his management philosophy:

My philosophy of leadership is that four or five of us can come up with a much better decision than just I can alone. And if you follow that philosophy, you'll probably have a very good, talented management group around you. People can always perform a whole lot better than how you think they're going to perform. You need to really give them the opportunity to do that.

Ultimately, Mr. Subramaniam's remarks, which emphasize the importance of what's important and not being a micromanager, reminded me, oddly enough, of a similar dynamic in learning how to deal with commercial litigation.

One of my very first tasks as a new Chicago business lawyer was to advise a client with a small business on a busy street about his rights when a contractor installed a new driveway with some imperfections and variances from the specifications of construction contract. I found out that a court was unlikely to take action if there had been "substantial performance" of the agreement and something along the lines that "the law does not trifle with trivialities." So, I learned how to tell a client something that he or she did not want to hear, but was in his or her own best interest: "relax."

Ever since then, that has informed my approach to evaluating performance, whether in terms of an employee or other party to in a contract or business law dispute. Usually, if the important things have been covered, even if not quite perfectly or exactly how you would do it, then that's pretty good.

Jeremy A. Gibson is an experienced Chicago corporate lawyer, who handles the preparation, negotiation, interpretation and implementation of contracts and agreements for small and large businesses. In addition to the Loop, he is available to meet about business law matters in Deerfield, Oak Brook, Rosemont, Schaumburg and elsewhere.

I was talking to a businessman the other day about an investment he was considering. He is looking at one of those self storage facilities. It seems like an attractive opportunity at the right price. It's fully leased with many longtime tenants for its almost 200 units. It appears to be a relatively simple and stable business model, with relatively few workers, utilities or expenses. The purchaser gets not only the operation but the real estate as well. This seems promising and no red flags jumped out.

However, even though I try to be very practical about risks and expenses, I encouraged him to be very thorough and consider zoning, geotechnical and environmental assessments. Why? Because when you're entering into a merger or acquisition or loan or similar transaction you have to worry about more than your own worries. You have to consider what the next investor, purchaser or lender is going to think or do. In other words, you don't want to get stuck with the hot potato or left standing when the music stops.

For example, I have had a long-time specialty in managing environmental risks and matters for mergers, acquisitions, divestitures and financings. It's clear that when the deal centers around factories, refineries, mines and the like no one is going to question doing extensive due diligence about the potential for chemical contamination to present material hidden or contingent liabilities. But, with less alarming properties and businesses there's often an understandable tendency to want to avoid the expense of environmental studies or tests. Still, if there's a decent chance that these issues will come up down the road anyway, then it is far better to bite the bullet and deal with it upfront, rather than have an issue be unearthed when you're now stuck with problem.

Once I was involved in litigation that arose when the purchaser of a sand and gravel pit later discovered that a previous owner had his trucks collect waste drums on their return trips and then bury them in a corner of the property. This eventually resulted in a multi-million dollar remediation. There's no guarantee that standard environmental investigations would have diagnosed this condition, but it would have been preferable to have made the attempt. And, this can apply to other aspects of a business that can present time bombs, including potential employment, product liability, regulatory compliance and contractual obligation risks.

So, if you are considering investing in new business or property, remember that it's important to worry about the concerns of the other guy, in addition to your own, to avoid getting stuck in the middle.

The Chicago business attorneys of Jeremy A. Gibson & Associates, P.C. are experienced in mergers & acquistions and other due diligence scenarios and are available to meet you in our Chicago, Deerfield and other satellite offices.

Recently, I consulted with a new client about some corporate matters. The client provides certain routine and specialized maintenance services to building owners and operators. In the course of discussing the business, I obtained a copy of the company's standard services agreement with customers. This form had been used with a number of customers for a long time without incident. But, it was a time bomb.

If you are a vendor or seller there are several basic protective steps you can take with contracts that literally can save your business. And, virtually all purchasers will find them acceptable most or all of the time because these measures are reasonable and done by the purchasers themselves when acting as a supplier. However, this client had not focused on this matter.

In short, every vendor or seller should make some effort to: (1) disclaim all warranties except those that are specifically provided; (2) limit aggregate liability to the amount of the purchase or some other reasonable amount; and (3) avoid liability for consequential or punitive damages. If this is not done, then the vendor or seller potentially faces unlimited or very high liability if something goes wrong and the purchaser's business is interrupted or suffers lost revenues or profits. For example, what if the maintenance client's personnel accidentally disconnected or damaged network wiring that caused lost data or brought down online sales? It's unlikely this client expects to have such high potential liability where it is getting paid a relatively small amount; but that can happen without the right contract provisions.

These are just some of the items in the fine print of contracts that can be easy to ignore or gloss over but actually can be critically important for when that one in a thousand or million event happens. So, take some care to make sure you have appropriate contract and agreement forms and have them reviewed every so often.

We have extremely deep experience with all types of contracts and agreements, including the risk management points discussed above. Contact us to speak to a Chicago contract attorney about your particular needs. We are available for meetings in Chicago and Deerfield and many surrounding towns.

Recently, there has been a lot of unwanted attention on the credit default swap market and its role in contributing to the economic meltdown and need for Wall Street bailouts. It is beyond our scope today to comment on whether one person's portfolio insurance or hedging is another's bet at a casino. However, I can say from personal experience that there is a sensible and useful role for insuring the unknowns involved with the purchase and sale of a business.

On several occasions, I have arranged so-called "representation and warranty" or environmental insurance policies in connection with mergers and acquisitions matters. These facilitated reaching the closing by providing assurances that certain risks would be capped and assets would be available if contingencies materialized. In other words, if it turned out that there were hidden problems with the acquired assets or problems that were worse than expected, such as accounting, product liability or regulatory compliance issues, then there would be a mechanism in place.

For example, when a family business that had numerous shareholders was being sold, both the buyers and sellers found the insurance option appealing. The sellers wanted to fund their retirements and estate plans and not have potential post-closing liabilities hanging over their heads for the typical one to three or more years that indemnifications remain in place. Likewise, the buyer, and its lender, preferred to seek a claim against one large, creditworthy institution rather several, dispersed individuals of uncertain wherewithal.

In another instance, the seller was a subsidiary of a foreign corporation and was liquidating its U.S. businesses and assets. The buyer also was a foreign company and was inexperienced with evaluating and assessing the potential liabilities of acquiring a manufacturing business. So, the buyer insisted upon procurement of an insurance policy to cover the risks that long-term cleanups of groundwater contamination would exceed the available estimates.

Insurance can be an excellent tool for helping close deals. But, it is important to understand that it is not a magic wand. Before a reputable insurer will take these risks from the shoulders of the parties, it will want to do thorough due diligence, which can be time consuming and require additional work by lawyers and other advisors. And, of course, the insurer will charge a substantial premium. Still, the comfort from having a solution in place from day one, can be well worth the effort and expense.

Jeremy A. Gibson & Associates, P.C. handles mergers and acquisitions matters such as the one discussed above. We are available to serve and meet with clients throughout the Chicago, Illinois area, including Arlington Heights, Buffalo Grove, Deerfield, Des Plaines, Evanston, Glenview, Highland Park, Hinsdale, Lake Forest, Libertyville, Mount Prospect, Naperville, Northbrook, Oak Brook, Palatine, Rolling Meadows, Schaumburg, Skokie, Oak Brook, Oak Park, Vernon Hills, Waukegan, Wheeling and Wilmette. Contact us anytime for a complimentary consultation with a Chicago corporate lawyer.

Online retailers should prepare for a new front as state lawmakers and revenue authorities become more creative in finding ways to make sure that Internet transactions don't escape sales or similar taxes. Catalog companies should pay attention to this as well.

State officials have been frustrated by their inability to require e-commerce vendors like Amazon and the like collect sales taxes when they do not have a physical presence in a state. (Note: for clarification, consumers in states where Amazon or a similar vendor has a distribution center, for example, do have to pay sales tax.) In recessionary times, this seems like a major loss of revenue. And, local bricks-and-mortar retailers, who must collect sales taxes, feel at competitive disadvantage to their virtual peers.

Some states have mounted litigation to overcome Supreme Court precedent about taxing out-of-state merchants. But others aren't waiting for resolution of such efforts and are trying a new tack. They are looking to the "use" tax, which is what consumers are supposed to pay when purchasing from out-of-state sellers. However, it has been much easier to enforce the sales tax from relatively few retailers, compared to policing the use tax against all citizens.

In a twist, there are recent reports that state authorities are trying to require online retailers to provide customer data so that tax bodies can pursue use tax claims against them. For instance, North Carolina recently made a request for such information to Amazon that sent alarm bells ringing, including about potential privacy claims.

It is too early to say how this will all play out. However, sooner or later, in this time of state budget deficits, it is quite likely that the loophole for online (and catalog) sales will be plugged one way or another.

Jeremy A. Gibson & Associates, P.C. handles trademark, trade secret, domain name and other intellectual property matters such as the one discussed above. We are available to serve and meet with clients throughout the Chicago, Illinois area, including Arlington Heights, Buffalo Grove, Deerfield, Des Plaines, Evanston, Glenview, Highland Park, Hinsdale, Lake Forest, Libertyville, Mount Prospect, Naperville, Northbrook, Oak Brook, Palatine, Rolling Meadows, Schaumburg, Skokie, Oak Brook, Oak Park, Vernon Hills, Waukegan, Wheeling and Wilmette. Contact us anytime for a complimentary consultation with a Chicago business attorney.

Life can seem so much simpler when you are a one-man or one-woman band, such as if you are a sole proprietor or owner of a business. There are no committees or meetings to deal with and you can do exactly what you want, how you want, when you want. However, there just are many times when can't or don't want to go it alone and two or more can do so much more together than apart. That's when you are talking about a "partner" relationship, whether your situation involves a true partnership (which is not so common anymore), corporation, limited liability company ("LLC") or a joint venture.

All of those different structures generally present the same sets of important planning and management issues, regardless of the legal form. And, in the vast majority of cases, it will make sense to discuss and prepare some form of relationship agreement, whatever the name. For a corporation, it will be a shareholder or stockholder agreement. For an LLC, it will be an operating agreement. For the latter situations, it will be a partnership or joint venture agreement (unless all issues are covered in the documents for any entities formed by the venture). Typically, the level of commitment is such, and the potential upside or stakes are such, that it is important not to leave arrangements unwritten or defer them until revenues or profits reach a certain level.

What might be so important that it can't wait? Here's just a short list of key topics to consider:

• Capital contributions and commitments. It is important for prospective shareholders, members or partners to have well-grounded plans for the level of investment expected of each at the outset and anticipated milestones.
• Distributions. If the common enterprise has some success and does generate profits, then an area of potential disagreement is whether to take money out or keep investing it. This will depend upon the financial and tax needs of each partner.
• Conflicts of interest. Often partners have outside business activities and interests that may well overlap and even potentially compete with the common venture. The expectations and priorities as to potential competing business opportunities and time demands should be fully explored.
• Management and control. Every business presents countless actions to take and decisions to make. Often partners have different roles and levels of participation. More often than not, some level of supermajority approval or partner consent is required for shareholder, board, officer, personnel, finance, business plan, acquisition, contract, real estate, litigation and other matters involving some threshold level of money or materiality.
• Sale or transfer of interests. Often the most essential partner matter is addressing what happens when the business seeks an additional new investor, a partner dies, a partner wants to sell his or her stake or a third party want to purchase the entire business. A host of common (and sometimes complex) techniques has developed for such situations, including "rights of first refusal" or first offer, "drag along," "tag along," "preemptive right" and "buy/sell" provisions.

I can speak from handling past partner arrangements, that it is very helpful to have worked through these issues early. For example, when a manufacturing joint venture was ended after years of collaboration, the partner agreements helped provide a much smoother separation. In fact, for that very reason, partner understandings should be viewed as serving much the same purpose as prenuptial agreements. After all, it is unlikely that any partnership will last forever.

We will cover some of the above points in more detail in the near future. In the meantime, the business attorneys of Jeremy A. Gibson & Associates, P.C. bring extensive experience and insights to such corporate matters as corporation shareholder or stockholder agreements, LLC operating agreements, partnership agreements and joint venture partnership agreements. They are available to serve and meet with clients throughout the Chicago, Illinois area, including Arlington Heights, Buffalo Grove, Deerfield, Des Plaines, Evanston, Glenview, Highland Park, Hinsdale, Lake Forest, Libertyville, Mount Prospect, Naperville, Northbrook, Oak Brook, Palatine, Rolling Meadows, Schaumburg, Skokie, Oak Brook, Oak Park, Vernon Hills, Waukegan, Wheeling and Wilmette. Contact us anytime for a complimentary consultation.

Beware anyone who seems to always or instantly have the answers at hand when it comes to your corporate, contract, litigation or other commercial law questions. Because any executive or responsible business law attorney should know that the first response usually should be: "It depends." Because there are so many variables, and every client has different objectives and needs, each project or situation really demands a certain amount of custom tailoring.

Now, that's not meant to be an excuse either for taking forever to make a decision or sky high legal bills. (In fact, my early years focused on regulatory matters convinced me that it is counterproductive to spend too much time or money on legal issues, in part, because everyone loses focus and gets confused by complexity.) The point is that for a prudent balance of quality, risk management, speed, effort and expense when it comes to legal management, there are some basic default principles to always consider - purposefully but quickly.

1. Follow the 80-20 Rule (unless this case is the exception). This is so important there are countless other short-hand expressions for this concept: keep it simple stupid; don't let the tail wag the dog; the point of diminishing returns; and don't let the perfect be the enemy of the good. In essence, usually focus only on the most important, common and fundamental points.
2. Plain is Beautiful. Clear, simple English is much to be preferred to archaic or dense legalese. Much, if not most, of what business lawyers do involves words and communicating meaning. So, more can be less if it makes everyone work harder.
3. Start Near the Finish. Lawyers often are involved in adversarial and sometimes hostile situations - negotiating an M&A or licensing deal, defending a governmental investigation or prosecuting a complaint. But, that doesn't mean you have to be afraid of working with the other. Rather than adopting a scorched earth policy and beginning with a totally one-sided draft, it usually is faster, better and cheaper to open with something closer to a fair or "market" version. Of course, you can keep the key business points favorable to you at the outset. But, by It sends a message that you are about effectiveness.
4. Size Does Not Always Matter. We often consciously or not scale our efforts according to the size of a transaction or claim. However, there are times when the complexity or risks bear no relationship to the amounts involved. For example, a small real estate purchase has the potential for environmental liabilities well in excess of the price.

Unless there's a good reason not to, this is how we try do it at my Chicago and suburban business law firm, whether it is a start-up, deal or lawsuit at stake. We try to concentrate our and your resources where it really counts, by quickly and carefully customizing our efforts to the circumstances.