Real Estate Considerations When Starting an Adult-Use Marijuana Business

            One of the biggest hurdles for those looking to break into Michigan’s emerging adult-use (recreational) marijuana market is finding a location for the marijuana business.  There are several factors that inform this decision both within and without the control of an entrepreneur seeking to enter the recreational marijuana market.  In additional, it is advisable to consider the location of your recreational marijuana business before, or at the very beginning of, the application process for a marijuana license.

            First, there are the practical considerations when selecting the location of a marijuana business.  For example, those seeking to start a growing facility will require a large structure to accommodate the cannabis plants that will be grown, a secure transporter will likely need a small structure but a large parking lot, and a retailer may require a structure and parking lot that is somewhere in the middle.  Even the class of grower from the example above will inform the applicant as to the type of space that will be suitable for their business.  The applicant will also have to determine whether he or she desires to purchase or lease the property where the marijuana business will be conducted.

            An applicant for one of the several adult-use marijuana licenses must also take into consideration the requirements imposed by the Michigan Regulation and Taxation of Marihuana Act (MRTMA) when looking for a location to run their business.  Property where a proposed marijuana business will be located cannot be in an area that is zoned exclusively for residential use and cannot be located within 1,000 of a pre-existing public or private K - 12 school unless a local ordinance shortens this distance, among other things.

            Finally, the applicant must ensure that he or she is in compliance with the ordinances of the municipality where the property is located.  It is imperative that the applicant first knows whether the municipality at issue has not opted out of the MRTMA.  Assuming that the municipality has not opted out of MRTMA, an applicant must comply with the approval ordinances of the municipality.  Some municipality’s ordinances are more burdensome than others; as such, it is very important to work with a professional that is familiar with municipal law.  In addition, it is imperative to be aware of the number and type of marijuana businesses that a municipality will allow within its limits.  This is important for two reasons: 1) a municipality’s cap on the number of retailers, for example, that may conduct business within its borders and how many of those municipal licenses have already been issued will dictate whether an applicant can even set up shop at the desired property; and 2) it will give the applicant an idea of how much market share the applicant will have the area.  A municipality will also likely have ordinances that require marijuana businesses to be a certain distance away for churches, alcohol retailers, or another marijuana facility.

            The application process for the emerging adult-use marijuana is still in its infancy and is being streamlined to make it more efficient every day.  However, choosing a location for a marijuana business is intimately tied to the licensure process at both the state and municipal levels.  For this reason, it is highly recommended that an applicant seek the assistance of a professional who is familiar with the MRTMA, the application processes at the state and municipal levels, and municipal law that dictates the number and permissible zones at which a marijuana business may be located.

Steven J. Enwright is an attorney and partner at Lippitt O’Keefe, PLLC in Birmingham, MI.  Steve advises clients in a wide variety of industries on business matters including general corporate counseling, mergers and acquisitions, start-up counseling, venture capital, corporate finance, technology licensing, and a variety of contract law matters.

Contact Steve at senwright@lippittokeefe.com

Jared M. Groth is an associate attorney at Lippitt O’Keefe, PLLC in Birmingham, MI.  Jared assists his partners in advising clients in a wide variety of industries on business matters including general corporate counseling, mergers and acquisitions, start-up counseling, venture capital, corporate finance, technology licensing, and a variety of contract law matters.

Contact Jared at jgroth@lippittokeefe.com

Foundational Agreements for Start-Ups

            There are some types of contracts that virtually every business will utilize at some point in that business’s life.  These are considered foundational agreements as they are of great importance to a business’s efficient and effective operation. A few common examples of foundational agreements include: non-disclosure agreements, employment agreements, and testing agreements, just to name a few. The process of preparing, negotiating and finalizing these agreements provide a great way for all of the parties to clarify their desires, expectations and objectives.

            Non-Disclosure Agreements – Informing your client of the value of a non-disclosure agreement before any ideas are shared is imperative.  The client always should ask: “Should I have an NDA with this person/entity?” The consistent use of NDAs—even with friends and family—is generally a good idea because the client’s ability to obtain patent protection may hinge on whether the client publicly disclosed relevant information.

            Employment Agreements & Independent Contractor Agreements – Generally it is a good idea to have every employee and contractor of a company enter into a formal agreement. A buttoned-down talent acquisition process sends the message that “this company takes pride in its people, products and ideas” and it helps promote a culture of mutual respect between owners, employees and contractors.  It is important to understand and address “work for hire” issues in these agreements. Even in the employment context, it is a good idea to include a blanket provision clearly stating that all works created (e.g., software code) is a “work for hire” for which the company is the owner. Also, consider inserting a provision that expressly transfers to the company any such works or inventions created by the employee or independent contractors in connection with their services to the company.

            Testing Agreements – Your clients’ works and inventions may undergo some form of beta testing by third parties.  In such circumstances, instead of a standard NDA, consider using a customized “testing agreement,” which not only protects your intellectual property and confidential information from unwanted disclosure, but can also be tailored to permit the testers to disclose certain types information (like their experience with the work or invention) in the form of a review on certain approved blogs or forums. It is important, however, to ensure that no breach of confidentiality occurs in the process.

            The above examples are just some of the agreements that a start-up business may utilize for the purpose of running efficiently and effectively.  Furthermore, the number, scope, and matters covered by these agreements will vary widely depending on the size, scope, and business objectives of the particular company.  The final installment of this blog series will provide a brief discussion regarding acquiring third party intellectual property rights.

Steven J. Enwright is an attorney and partner at Lippitt O’Keefe, PLLC in Birmingham, MI.  Steve advises clients in a wide variety of industries on business matters including general corporate counseling, mergers and acquisitions, start-up counseling, venture capital, corporate finance, technology licensing, and a variety of contract law matters.

Contact Steve at senwright@lippittokeefe.com

Planning and Managing Layoffs During the COVID-19 Pandemic

            As CEO of a company impacted by the COVID-19 pandemic, you may have to make the painful decision of downsizing your personnel.  What follows are considerations in both the process of planning for a layoff and how to actually conduct the layoff.

Considerations When Planning a Layoff

            Consider a furlough (a leave of absence).  This gives the company time to stabilize finances and to re-open furloughed positions.  Additionally, it provides impacted employees ample time to find new jobs while dramatically reducing the costs to the employer.  Finally, the impacted employee gains the benefit of the optics of being employed while hunting for another job and get continued benefits.

            When planning a furlough, keep the impacted employees’ health benefit plans in mind.  Most employees’ health benefit plans end on the last day of the month. Thus, consider designating the last day of employment for impacted employees to be the first day of the next month; this would provide impacted employees with an additional 30 days of health benefits.

            It is important to be consistent with the company’s severance policy.  Additionally, a severance amount based on tenure is preferable to basing severance on seniority.  Conduct all layoffs at one time.  Furthermore, multiple rounds of layoffs demoralize those that remain and erode trust and confidence in the CEO.

            The date of notification of layoff generally should be the last day that the employee has access to workplace resources (office, laptop, email, badge, etc.).  However, it is reasonable to allow employees in certain roles or seniority levels continued access for professional or business reasons.  However, when making this decision, consider the company’s culture, roles being impacted, maturity of the workforce, level of comfort with the impacted employees having access to systems, and legal implications.

            Make sure to be clear that the company still owns any property being used by an employee working remotely.  Issue a communication in writing setting forth which property belongs to the company.  Require that the property be returned at a specific, future date (via mail with postage provided by the company or by drop-off at the end of a shelter-in-place).  Emphasize that a laptop may not be used by the employee after notification of layoff.  Depending on the company’s IT policy, transferring ownership of the laptop may be included as a part of the severance payment. Consider the financial, security, and IP risks of this approach.

            Ensure that layoff decisions and processes are approved by the board with counsel present (whether “present” means physically at the meeting or remotely).  Make sure to go through all legal considerations concerning who and how you layoff. Examples include: 1) Individuals on visas; 2) Adverse impact reporting; 3) California and Federal Worker Adjustment and Retraining Notification Act (WARN); 4) Required forms or documentation from your state’s unemployment office; 5) Releases in exchange for severance pay (assuming the separation is permanent).  Finally, confidentiality throughout this process is of the utmost importance.  Bring the communication leader on board at the end of the process to help draft and prepare internal communications for all employees as well as potential press inquiries.

Considerations as Layoffs are Conducted

            As the CEO, own the communications regarding the layoffs and take responsibility for what is happening.  As it pertains to layoff notifications, do not issue too many and be as private as possible.  If the company is large, leadership team members may be responsible for some of the notifications; thus, it is important to ensure that they are trained and educated to conduct layoffs in a compassionate and empathetic manner.

            As soon as notifications are complete, communicate to the entire company directly so they know notifications are complete.  The communication should be previously prepared.  Even though the communication is meant for the employees who remain, assume this communication will be read by impacted employees and the general public.  Explain the change, the reasons for the change, and the appreciation of the outgoing employees’ contributions.  The communication should also announce an all-hands meeting ASAP (either later the same day or early the next day) so the go-forward team has an opportunity to hear from you.

            There are several considerations to take into account when laying off an employee.  The communication with the impacted employee should include at least two representatives of the company, one of whom is a trained HR professional.  If the layoff is conducted remotely, do not provide an invitation to the remote meeting with the HR professional; it’s not subtle.  Instead, send a second and subsequent invitation to the HR professional to join the meeting.  If layoffs are conducted in an office, ensure that any room calendar showing all of the meetings is out of view.  Do not reuse a Zoom or WebEx personal meeting room in back-to-back meetings; create new meeting rooms for each conversation.  Prepare a script, rehearse that script, and do not deviate from that script.  Less is more in these situations, so avoid small talk with whomever is joining the call.  You will likely have to communicate the notification twice because many persons quickly enter a state of shock or dismay.  Make sure the room you utilize is private and quiet where there will be no distractions.  Finally, have an electronic document package with all layoff and severance related materials at the ready to either send during the call or immediately after the call.

Steven J. Enwright is an attorney and partner at Lippitt O’Keefe, PLLC in Birmingham, MI. Steve advises clients in a wide variety of industries on business matters including general corporate counseling, mergers and acquisitions, start-up counseling, venture capital, corporate finance, technology licensing, and a variety of contract law matters.  Contact Steve at senwright@lippittokeefe.com.

Updating Force Majeure Provisions

            In light of the COVID-19 pandemic, it may be time to for contract drafters to review and update their force majeure provisions.  The basic function of a force majeure clause is to excuse a party to the contract from liability if some unplanned event occurs that is reasonably outside of the affected party’s control.  A force majeure clause may be as simple as that, or there may be many caveats and contingencies before a party is deemed not to be liable for their nonperformance.  No matter the complexity, a force majeure provision will often list specific events that constitute a “force majeure.”  Common events listed are acts of God, floods, fires, war, and earthquakes; the list may be illustrative or an attempt to be exhaustive.  Additionally, force majeure events may be natural, or they may be caused by man.

            Two events that are not often seen in force majeure provisions are “epidemic” and “pandemic.”  In light of what the world has been experiencing, maybe it is time the terms “epidemic” and “pandemic” are specifically included in force majeure provisions more frequently and in a much wider array of contractual relationships.  The COVID-19 pandemic has affected nearly every arms-length relationship on the planet.  From massive global supply chains to engaged couples reserving a wedding venue, the COVID-19 pandemic has either prevented many parties to contracts from performing or has cast many others’ abilities to perform their contractual obligations into a state of uncertainty for the foreseeable future.  A quality of an adept contract drafter is his or her ability to [attempt to] account for all possible outcomes and allocate the risk within the written agreement for the purpose of protecting their client to the best of his or her ability.  While it is not possible or pragmatic to think of every possible scenario that would trigger a force majeure, the addition of two more words in a force majeure provision doesn’t seem too burdensome, especially when weighed against the burden of recent events.

Steven J. Enwright is an attorney and partner at Lippitt O’Keefe, PLLC in Birmingham, MI. Steve advises clients in a wide variety of industries on business matters including general corporate counseling, mergers and acquisitions, start-up counseling, venture capital, corporate finance, technology licensing, and a variety of contract law matters.  Contact Steve at senwright@lippittokeefe.com.

Private Equity and Portfolio Companies may be left out in the cold under CAREs Act

            The unprecedented $2 trillion Coronavirus Aid, Relief, and Economic Security Act (CAREs) is the largest stimulus package in U.S. history. The primary intent of CAREs is to help small businesses across the country ride out the storm during the difficult financial times resulting from the global COVID-19 pandemic. CAREs stimulus aid includes (a) $349 billion for the Paycheck Protection Program (PPP) designed to give payroll relief to small businesses by way of federally guaranteed loans that can be forgivable; (b) $10 billion for Economic Injury Disaster Loans to fund ordinary course expenditures and working capital; and (c) $17 billion in relief for borrowers with currently outstanding SBA loans.

            As noted above, hundreds of billions of dollars will be accessible to small and midsize business through the PPP to be administered by the Small Business Administration (SBA) to assist with covering payroll and operational expenses during the current outbreak and consequent economic fallout.

            The safety net created by CAREs, however, appears to have a hole that may unfortunately result in one segment of the business community missing the opportunity of accessing the sizable funds to be distributed. Companies seeking loans through the PPP generally must have 500 employees or fewer.  The PPP rules also treat “affiliated” companies as one entity for employee-count purposes. Accordingly, many private equity firms and their portfolio companies will be unable to receive much-needed relief funding. In other words, if the number of employees at a private equity firm combined with the employees of its portfolio companies surpasses 500, they will be unable to access loans through the PPP. As such, companies owned by many middle or lower market private equity firms may be unable to receive SBA help they desperately will need in the coming weeks and months.

            Despite this potential impediment to private equity firms and their portfolio companies receiving funding under the PPP, there are potential affiliation waivers available under the program. The affiliation rules may be waived if a business:

• is currently receiving financial assistance through the SBA’s Small Business Investment Company program. This does not mean, however, that if a single portfolio company qualifies under this waiver all portfolio companies fall under the waiver;

• is an SBA-approved franchise; or

• that is assigned NAICS industry codes beginning with 72 (accommodation and food services) that have fewer than 500 employees.

            Private equity portfolio companies that fall into the above exceptions may be eligible to receive small business aid under the PPP. 

            While participation in the PPP may be limited for private equity firms and their portfolio companies, CAREs will provide relief to many firms and portfolio companies in other circumstances.  To further discuss potential eligibility for these critical programs and other business-related questions arising out of the pandemic, please contact Steven J. Enwright, Esq. at Lippitt O’Keefe, PLLC.

Steven J. Enwright is an attorney and partner at Lippitt O’Keefe, PLLC in Birmingham, MI. Steve advises clients in a wide variety of industries on business matters including general corporate counseling, mergers and acquisitions, start-up counseling, venture capital, corporate finance, technology licensing, and a variety of contract law matters.

Alex Monahan is an associate at Lippitt O’Keefe, PLLC. He focuses his practice on business and corporate law, real estate law and commercial litigation.

Contact Steve at senwright@lippittokeefe.com or Alex at amonahan@lippittokeefe.com.

Financing Options for Start-Ups

            An essential step to a start-up’s success is obtaining access to funds sufficient to facilitate growth.   Many start-ups first look to the personal funds of the founders and then to friends and family for start-up capital. Although this may seem like the easiest approach, accepting money from friends and family presents potential pitfalls. Relationships will be at risk and family events and holidays may be a bit awkward.

            Another potential source of financing is from “angel investors” or “angels.” Angels are generally high net worth individuals or groups of high net worth individuals. Typically, angels invest dollar amounts between $10,000 and $100,000 in companies that they believe exhibit a potential for high returns. Angel groups may invest up to $500,000 or more depending on the situation. The process of receiving funding from angels may be less involved than going the venture capital route, but significant due diligence on both sides is involved.  Angels vary on their desired level of involvement with the company. Some are relatively “hands-off,” while others seek more involvement in the business.

            Venture capital firms generally will seek a rate of return of 20 times their investment and will almost always require a seat on the board, a significant ownership percentage and the ability to appoint key personnel. When dealing with VCs, the client must understand that in exchange for the funds, some level of control will most likely be transferred away from the founders. That said, VCs are typically entrepreneurial and may provide significant expertise (in addition to capital) that many start-ups desperately need.  The key is to select a VC that fits with the personality of the founders and the culture of the company. Pursuing venture funding involves extensive financial, business and legal due diligence.  In addition, the legal agreements tend to be very complex.

            Regardless of the financing path the client takes, it is important to have a solid business plan and a well-honed pitch. Investors will expect to see a professional, well-written business plan free of poor grammar and typos. In many cases it makes sense for the client to hire a professional writer to assist with the drafting of the business plan. It is also vital to make sure that the pro forma financials are integrated with the written portion of the plan—i.e., the words need to explain to the reader how the business will achieve the numbers.

            It is also imperative that the clients comply with the securities laws when raising capital. Whenever investors are given stock, membership interests, profit interests or any form of equity (and sometimes debt), it is almost always treated as an issuance of securities and both state and federal securities laws need to be addressed. If you do not have a good grasp of securities laws, bring in a seasoned securities laws attorney to assist. 

Steven J. Enwright is an attorney and partner at Lippitt O’Keefe, PLLC in Birmingham, MI.  Steve advises clients in a wide variety of industries on business matters including general corporate counseling, mergers and acquisitions, start-up counseling, venture capital, corporate finance, technology licensing, and a variety of contract law matters.

Contact Steve at senwright@lippittokeefe.com.

Choice of Entity Basics

            Selecting a type of business entity is often the first step in the business establishment process.  The choice is often dictated by the short and long term goals of the owners and the eventual operation plan for the business.  The primary types of entities include:

            Sole Proprietorship – A sole proprietorship is a legal form of a business that is owned by a single individual. This form requires no charter documents and provides great flexibility because there is no formal governance structure with which to comply. Sole Proprietorships, however, do have significant shortcomings. The biggest drawback is this legal structure does not provide the owner with any insulation from liability. The owner’s personal assets are not distinguished from the business’s assets.  Accordingly, if the business incurs a liability (a debt or an adverse judgment), the owner’s personal assets (house, savings, etc.) may be in jeopardy.

            General Partnership – A general partnership is typically formed (by default) when two or more persons enter into business together to share profits. No state filing is required. One of the benefits of this business structure is that it provides great flexibility to the owners. Partners are permitted to determine in their partnership agreement how they want to allocate profits and losses among the partners. Profits and losses can be allocated differently among partners who contribute capital, property, or services. It is important to note, however, that this flexibility is not absolute. There are limits in connection with the ability of certain partners (limited or passive) to deduct some losses. For tax purposes, partnerships are treated as “pass-through” entities—i.e. profits and losses of the partnership are passed through to the individual partners who then deduct the losses (to the extent they are permitted) and pay taxes on the income. Please also bear in mind that in a general partnership, each partner has the authority to contractually bind the partnership with third parties. Also (and perhaps most importantly), each partner is personally liable for the debts of the partnership.

            Limited Partnership – A limited partnership is a form of partnership often used to raise investment capital. It requires at least one general partner, who operates the business (and is personally liable for the debts of the limited partnership) and “limited partners” who contribute capital, have no (or little) ability to manage the business’s affairs or operations, and have no personal liability beyond their investment in the partnership. Unlike a general partnership, in order to create a limited partnership, a filing must be made with the state of domicile. Like a general partnership, limited partnerships are transparent for tax purposes—the income and losses of a limited partnership are passed through to the partners. Prior to the advent of the limited liability company (discussed below), limited partnerships were the entity of choice for many (if not most) privately held financing transactions.

            C-Corporation – A C-corporation is a standard corporation. The “C” simply distinguishes it from an S-corporation (discussed below). A corporation is formed by filing articles of incorporation with the state in which it intends to be incorporated. Ownership in a corporation is evidenced by shares of stock and the owners are shareholders. It is important to note that unlike partnerships, no shareholders have any personal liability for the debts of the corporation. Taxation is significantly different for C-corporations than it is for partnerships, S-corporations or limited liability companies. First the corporation is taxed on its profits, and then the shareholders are taxed individually on any dividends they receive from the corporation—the so-called “double taxation.” Also, shareholders of a C-corporation are not permitted to deduct losses of the corporation on their personal tax returns. C-corporations are sometimes useful with (i) foreign investors looking to avoid United States taxes, (ii) structuring “loan-out” companies (primarily used by actors or other celebrities), and (iii) when the entity is seeking private equity (or sometimes venture) financing or may undertake an initial public offering.  Many venture and private equity funds are precluded from investing in LLCs because their major investors are pension funds, profit sharing trusts and other tax-exempt entities that are subject to certain tax restrictions.  Most large businesses operate C-corporations despite certain tax incentives available through the use of an LLC (as discussed below) because a C-corporation structure provides familiarity and well-understood and established governance laws, as well as the ability to transfer shares of stock more easily than LLC membership interests (especially public stock).

            S-Corporation – An S-corporation is identical to a C-corporation for state corporate law/governance purposes. The major difference is in the tax treatment. If the shareholders affirmatively elect to be treated as an S-corporation for tax purposes (by completing and filing Form 2553 with the IRS), then the corporation will be treated as transparent and the income and losses will flow through to the shareholders. It is important to note, however, that S-corporations have numerous drawbacks, including but not limited to the following:

• An S-corporation can only have one class of stock. It is not permitted to have preferred shares, which precludes many standard equity financing structures.

• S-corporations are limited to 100 shareholders.

• With certain limited exceptions, all shareholders of an S-corporation must be individuals who are U.S. citizens or residents. This precludes ownership by any type of entity which limits financing options.

            Limited Liability Company – Limited liability companies (“LLCs”) are a hybrid of partnerships and corporations. LLCs are formed by filing articles of organization (or a certificate of formation in Delaware) with the state in which it intends to be organized and operate under a written operating agreement (or limited liability company agreement in Delaware).  An LLC is an entity owned by “members” which are legally separate from the company. In other words, the owners are not liable for the company’s debts. From both a governance structure and tax standpoint, the LLC is the most flexible entity choice; the flexibility of an LLC is discussed in more detail [here].  One of the few negatives aspects of LLCs is that some states (e.g. California, not Michigan) impose significant fees on them. LLCs are by far the most common type of entity for non-public companies.

            Each entity structure has unique features, which should be carefully considered when deciding how to organize the business. Three important features to keep in mind are: (1) insulation from personal liability; (2) tax treatment; and (3) flexibility vis-a-vis investors. The entity selection decision is one that entrepreneurs should not make alone.  It is important to consult with tax and legal advisors to weigh the various pros and cons associated with each entity type in light of each unique business situation.

Steven J. Enwright is an attorney and partner at Lippitt O’Keefe, PLLC in Birmingham, MI.  Steve advises clients in a wide variety of industries on business matters including general corporate counseling, mergers and acquisitions, start-up counseling, venture capital, corporate finance, technology licensing, and a variety of contract law matters.

Contact Steve at senwright@lippittokeefe.com.

Just How Flexible Is A Limited Liability Company?

            The business entity form that is the limited liability company (“LLC”) is known for being flexible, but just how flexible is it?  An LLC’s flexibility is twofold. First, there is great flexibility in tailoring the governance structure of an LLC to the needs and preferences of its constituent members. Second, there are multiple ways in which the members of an LLC may choose to have it taxed that is also based on their needs and preferences. 

LLC Governance

            Generally, LLC statutes are composed largely of default rules; most LLCs have a written agreement tailoring the rules to the specific needs and preferences of the LLC’s members and managers—called an “operating agreement” (Delaware calls it a “limited liability company agreement”).  The typical operating agreement addresses, among other things, management structure, allocation of profits and losses among the members, member taxation, transfer of membership interests, and dissolution.  An LLC can either be member-managed or manager-managed.  Most LLC statutes’ default rule is to have the LLC be member-managed, unless it is specifically stated that the LLC is manager-managed in articles of organization filed with the state in which the LLC is based.  Member management is similar to a partnership in that management of the LLC is decentralized.  Manager management is similar to a corporation in that management of the LLC is centralized.

Taxation of an LLC

            The Internal Revenue Service treats LLCs with at least two members as a partnership under Subchapter K for tax purposes by default.  A single member LLC is treated as a disregarded entity by default for tax purposes—in other words, the entity is disregarded for tax purposes and the sole owner is taxed as an individual.  However, members of an LLC may elect on Form 8832 to be taxed as a corporation under Subchapter C.  Furthermore, if the LLC’s members choose to be taxed as a corporation, they may further elect on Internal Revenue Service Form 2553 to be taxed as an S corporation—also known as a small business corporation.  Finally, it is possible to later change the tax status of an LLC, but the tax consequences may be severe depending on what tax status the LLC currently holds and to which tax status the LLC members intend to convert it.  As always, it is of the utmost importance to consult your tax and legal advisors before making such a decision in order that all of the benefits and detriments can be weighed.  

Jared M. Groth is an associate attorney at Lippitt O’Keefe, PLLC in Birmingham, MI.  Jared assists his partners in advising clients in a wide variety of industries on business matters including general corporate counseling, mergers and acquisitions, start-up counseling, venture capital, corporate finance, technology licensing, and a variety of contract law matters.

Contact Jared at jgroth@lippittokeefe.com

Financing Independent Films

At times, producing an independent film can seem like a Herculean task. Although having a creative vision is critical to achieve success in this industry, ideas, unfortunately, do not transform into a motion picture without money. Finding money is often the most precarious part of making a film. Typically, independent films are funded through loans, equity, or both.

Loans can come from a variety of sources, including banks, investment funds, financing companies, and private individuals. A loan, which is typically documented by a promissory note (and sometimes a loan agreement as well), is simply a promise to repay the loan amount plus interest at a time in the future. Lenders generally do not own equity in your film company and typically have no voting rights.

On the other hand, an equity investor acquires an ownership interest in the film company and its primary asset—the film. An equity investor generally receives a return on his/her investment only if the film is profitable. Equity investors can potentially reap a much greater value than their initial investment but, should the film fail to generate a profit, there is typically no obligation for the film company to repay the investor.

If you would like to discuss various strategies of funding for your film or have other entertainment law questions, please contact attorney Steven J. Enwright at senwright@lippittokeefe.com.

Six questions you must ask before engaging in an “Acqui-hire”

We all know the “garage-to-greatness” entrepreneurial stories of Steve Jobs, Larry Page, Jeff Bezos and the like. But we have to wonder – for each of these superstar founders, how many brilliant, conscientious entrepreneurs with equally exciting products failed before they reached similar greatness, simply because they couldn’t muster the investors, resources or good luck.

These less fortunate ventures and their founders may yet find their own “exit event” through a trend known as “acqui-hiring.” This portmanteau describes the process in which “Company A” acquires a modestly successful (and often underfunded) start-up “Company B-Minus” generally for the sole purpose of hiring its brain-trust. This tactic is good for Company A because it’s a quick way to assemble a team of tech-savvy big-brains ready to invent new products and develop new revenue streams. And it looks good on the CVs of the acquired talent, because instead of admitting their venture failed, they can say it was “acquired.” One downside is that the product Company B-Minus offered will likely be shelved in an acqui-hire situation. In fact, the price paid to acquire the firm is often calculated as a “price per head” without regard to any products or intellectual property that generally come along with the deal.

What is of interest to us is that this phenomenon appears to be on the rise across the globe, where economic recovery has spawned a flurry of start-ups. If you’re a company that’s on the buying or selling end of a pending acqui-hire deal, there are a number of things to consider.

Acquiring companies should ask:

·         Will I end up with what I paid for? Will the targeted talent remain after their lock-up periods end?

·         Do the costs outweigh the benefits? How will this ROI be measured?

·         Will the deal crush the morale of loyal existing employees expected to work with “outsiders” who walk in with big-time salaries? Will you need to award retention bonuses or other compensation to keep your own team intact?

The target company should consider:

·         How much intellectual property (if any) needs be included in the sale?

·         Is it important to continue developing the business or projects that inspired you in the first place? Is this realistic?

·         Is accepting this deal worth walking away from other potential opportunities?

The bottom line? As long as acqui-hire strategies provide a solid exit strategy for eager entrepreneurs and investors, they help mitigate risk and encourage innovation. That’s generally good for everybody.

If you would like to discuss how acqui-hire strategies and transactions could work for you, please contact attorney Steven J. Enwright at senwright@lippittokeefe.com

Look to the Angels

In our experience, founders of start-up companies seeking capital often focus too early and too exclusively on attracting interest from professionally managed venture capital funds. Most VC funds have significant sums of cash that they need to place within four or five years and do not view small start-up investments (generally under $5 million) as a good use of their time and resources.  Instead, it is often more fruitful for entrepreneurs with lower capital requirements to look to angel investors.

Angel investors are high net worth individuals (or sometimes more formal networks of individuals) who invest their own money as a start-up company’s initial capital infusion and usually also provide much-needed mentorship and connections. Because they expect to work with early stage companies who may not offer liquidity quickly, they are generally easier to deal with than traditional venture capital funds and have more patience for a company in a pre-revenue or unprofitable phase. 

The best place to look for angels is generally in your own backyard. Talk to friends and family members who have entrepreneurial experience, ask your business advisors (e.g. attorney, accountant, banker), and seek out local angel investment groups, which are currently proliferating.

There are also online angel network resources.  For example, The Angel Capital Association www.angelcapitalassociation.org provides access to over 14,000 angels. 

For more information on the advantages of angel investment, please contact Steven J. Enwright, Esq. at senwright@lippittokeefe.com