Weekly Updates (4-1-2015)
- joshnosal
- Apr 1, 2015
- 3 min read
————— Summary —————
4 Things to Consider When Growing Your Business
The Growth of Crowd Funding
4 Proposed Changes to Delaware Law
The S.E.C. Attacks Confidentiality Agreements
————— News —————
Math Matters: After paying the costs associated with producing and delivering services/products to the customer, what percentage is left to cover operating expenses? Make sure that the GPM of your new business is equal to or greater than your current GPM. Typically, a GPM of less than 33% makes it very difficult to return a long-term profit.
Avoid Commodities: Commoditization will often drive out of business all but the leanest players over time. As a result, any exclusivity generated by your business model or products/services provided will greatly increase the likelihood of success.
Money Shouldn’t be Spent Creating Market Demand: Apple’s iphone is an outlier. Unless customers in the marketplace are seeking your product or service now, the idea is not worth pursuing.
Do You Have the Skills for the New Opportunity: Be sure that you can sub in for employees taking on the new role. If you would be out of your element developing the new business based on your skill set, pursuing the opportunity is likely outside your wheel house and should not be considered.
Historically, very little startup funding has been available outside a few select states. However, the new SEC ruling clarifying the crowd funding option created by the JOBS Act allow for Tier I offerings to obtain up to $20 million with only reviewed financial statements and minimal government compliance. Tier II offerings will require 2 years’ worth of audited financial statements but could raise up to $50 million.
This allows startups to skip past the friends and family, the angel investor, and even the Series A round, jumping right to the first $20 million limit. Another benefit of crowd funding is risk dispersal. Most venture capital firms select their target businesses based on probability of short-term success and an easy exit strategy. With crowd funding, riskier ventures and technologies, such as those in the health care industry, will no longer fall by the way side of venture capital. This will allow many new startups to obtain funding in big cities such as Chicago that are not historically known for their venture capital environment. Although this doesn’t mean there will be a lack of need for funding from venture capital firms, it does mean those firms will be able to assert less control over young companies.
The first proposal alters the interest rate structure in appraisal right law suits. Instead of the flat 5.75% interest accrued by those exercising appraisal rights while they await a court verdict, the new proposal allow for companies to pay the undisputed amount of the merger price and only then pay interest on a difference determined by court verdict. This would discourage more active hedge funds from exercising these appraisal rights.
The second proposal would ban appraisal rights for shareholders owning less than 1% of the outstanding shares or $1 million in total, making appraisals virtually impossible for small investors and particularly difficult at bigger companies.
The third proposal codifies the corporate ability to designate exclusive jurisdiction in bylaw provisions. This proposal is heavily skewed toward Delaware because it allows these exclusive jurisdiction clauses but only to the extent they designate Delaware as having exclusive jurisdiction, at least in the cases where the company is incorporated in Delaware. This means that a corporation in California, incorporated in Delaware, could no longer designate California as its exclusive jurisdiction.
The final proposal seeks to ban fee-shifting bylaws in breach of fiduciary duty lawsuits, bylaws that have historically brought class-action litigation to halt. Although this proposal was initially raised a year ago, it was abandoned after facing some hostility from the US Chamber of Commerce. However, some argue that the current fee-shifting bylaws run the risk of deterring valid claims. Because courts can already award attorneys fees for frivolous claims, there seems to be no need for this type of bylaw.
The SEC has begun attacking “restrictive” confidentiality agreements that stifle whistle-blowers. Such agreements impose prenotification requirements before contacting the SEC. With particular note, technology company, KBR, was recently agreed to pay a $130,000 penalty to settle the SEC suit against the company’s confidentiality agreements. Although allegations against KBR were for minor violations, this development can be viewed as a warning shot from the SEC cracking down on potentially anti whistle-blower statutes.
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