When Corporate Governance Fails

Humans have organized the world through an infinite string of agreements and social contracts. Whether people agree to stop at a red light or get in line at the grocery store, a functioning society depends on these kinds of agreements. Managing organizations like nonprofits and corporations require layers of agreements between stakeholders.

At formation, organizations must abide by government policies by registering with the state and obtaining a tax registration ID. If these rules aren’t explicitly outlined by the regulatory body, they are covered by an operating agreement. Fully understanding the contents of your operating agreement and knowing your organization’s needs can save you many sleepless nights.

Aside from the largest liability of not having an operating agreement, to begin with, another common mistake includes assuming that all signatures have been collected to make the document legally binding.

As your trusted tax advisor will tell you, different organizations fall under different tax categories and your operating agreement needs to align, accordingly, from the start. Further, most businesses “set it and forget it” when it comes to their operating agreements. Similarly, changes in IRS tax policy may necessitate changes to your operating agreement. Equa brings dormant agreements to life via its cutting-edge technology.

The second major agreement that organizations must pay significant attention to is the capitalization table, often referred to as the “cap table”. Since this is a ledger deciphering who owns what and how much, the cap table needs frequent analysis to ensure accuracy as it can impact company valuation, capital raises and even recruiting talented executives.

Many cap tables are created using spreadsheet software and most cap tables have errors stemming from duplicated files that have been shared among multiple owners. Depending on basic spreadsheet software to account for true ownership when dealing with vested shares, options, dividends, transfers, buybacks and cancellation of vested shares due to employee termination can result in an accounting nightmare. Furthermore, correcting mistakes involves costly attorneys and accountants. Unfortunately, these mistakes are usually overlooked until a company is pursuing a capital raise. However, in today’s competitive capital markets, money may dry up while investors wait for a resolution to this oversight.

This is where Equa can help!

As a technology company, Equa understands these problems and has built an incredible team of entrepreneurs and developers to automate the management of operating agreements, as well as the organized maintenance of a cap table. Our technology empowers any organization to swiftly make decisions covered by an operating agreement. Every vote is captured and recorded securely and in real-time through our web application and mobile app.

Fundamentally, this process reduces friction by adding velocity and accountability to organizational management such as owner or director level decision-making processes. Our technology also includes a single source of truth that allows a fully transparent and auditable ledger of an organization’s ownership. The combination of Equa's advanced agreement and ownership management provides peace of mind to busy business owners. Further, our tools provide them with the ability to timestamp and permanently store their decisions in a system for easy dispute resolution and reconciliation in the future.

Equa: Frictionless agreements. Cap Table Management. Business Simplified

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Maintaining a clean, paper trail of securities transactions is a prevailing issue for many companies. At the nexus of this is SEC Rule 144, which stipulates that certain conditions must be met in order for the sale of securities to take place.

The effective tracking of securities is vital for private companies seeking to enter the public marketplace. Steering clear of knotty compliance issues and delays pursuant to any SEC due diligence reviews is paramount.

A key qualifier for the Rule 144 exemption is meeting the holding period for each security issued prior to resale. Pursuant to the Securities Exchange Act of 1934, an issuing company that’s also a reporting company has a qualifying holding period of six months. For those companies that are not in a reporting capacity, the qualifying holding period is one year.

This holding period commences on the original issuance date of the security, irrespective of resale or conversion. Many private companies, however, fail to track and account for this on their capitalization tables. This can be problematic if an audit is ever conducted.

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What Is an Option Pool?

An option pool consists of shares of stock reserved for employees of a private company. The option pool is a way of attracting talented employees to a startup company - if the employees help the company do well enough to go public, they will be compensated with stock. Employees who get into the startup early will usually receive a greater percentage of the option pool than employees who arrive later.

The initial size of the option pool may decrease with subsequent rounds of funding because of investors' ownership demands. The creation of an option pool will commonly dilute the founders' share in the company because investors (angels and venture capitalists) often insist on it.

KEY TAKEAWAYS

How Option Pools Are Structured

The shares that comprise an option pool typically are drawn from investor stock in the company rather than the shares earmarked for investors. This may be 15%–25% of the overall outstanding shares and may be determined when the startup receives its earliest funding round as part of the overall terms put in place.

It is also possible that a company, over the course of its development and subsequent funding rounds, may establish additional option pools after the initial one is put in place. The size of the pool may be dictated or advised by the venture backers to be a portion of the pre-money or post-money valuation of the company. Negotiations over the scope of the option pool can affect the startup’s overall price. For example, investors may want an option pool offered post-money option to be priced at the pre-money valuation, which could lower the price for the company.

Other Considerations

The shares disbursed from the option pool may be determined by the roles of the employees as well as when they are hired. For example, senior management that is brought on board near the founding of the startup may receive a percentage of the entire pool, whereas later employees in more junior roles might be granted just fractions of a percent.

The option pool grants shares that, like other types of stock options, often require a period of time before they are vested. This means the employee will not be able to benefit from these shares possibly for several years. By delaying their ability to reap monetary value from their portion of the option pool, the belief is that the employee will contribute more to the overall health and growth of the company in order to see the greatest possible gains when the shares vest.

A corporate entity is a business structure formed specifically to perform activities, such as running an enterprise or holding assets. Although it may be comprised of individual directors, officers, and shareholders, a corporation is a legal entity in and of itself.

Generally speaking, there are three general forms of legal entities through which business can be conducted: (1) sole proprietorship, (2) corporation, and (3) partnership.

There is also the limited liability company (LLC), a business structure that can integrate the pass-through taxation of a partnership or sole proprietorship with the limited liability protections of a corporation. LLC’s are technically not a corporation under state law. Rather they are legal structures that deliver jurisdictional limited liability protection to business owners.

These various forms of entities are legally able to enter into agreements or contracts, purchase property, assume obligations, open a bank account, incur and pay debts, sue and be sued in their own right, and issue stock under their business umbrella.

Businesses throughout the world utilize corporate entity structures. A corporation’s most important attribute is its limited liability provision. This allows shareholders to accrue profits through dividends and stock appreciation without being personally liable for company debt.

Establishing a Corporate Entity

Corporations are created through an incorporation process initiated by either a single shareholder or a group of shareholders with ownership rights to the corporation. This begins with the filing of Articles of Incorporation in the state jurisdiction where the corporation is seeking to be registered.

A filing can occur in a state outside of where the corporation is located. States like Delaware, Wyoming, and Nevada have favorable incentives for companies registering in their geographic locations. These corporations, however, are required to register as a “foreign” corporation in the state where they actually reside and engage in their business operation.

In these out-of-state scenarios, a corporate entity is typically required to designate a registered agent (a person or company designated to serve as the legal contact of record).

Another benefit of corporations is their ability to provide for unending succession. So, they may technically exist in perpetuity unless dissolved.

A corporation can be set up as a non-profit, as in the case of a charity. However, the vast majority of corporations are established with the intent to provide a return for its shareholders.

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A “Cap Table” (short for “Capitalization Table) is a document, typically in the form of a spreadsheet or table, that offers a snapshot of a company’s equity capitalization and total market value.

While commonly used by startups and early-stage businesses, cap tables have utility for all types of companies. In the case of a new startup, the founders are typically the only ones represented on the cap table. This is because they’re the sole equity holders. But as a company matures, the volume of cap table entries expand pursuant to growth in the number of investors as well as company ownership changes.

These documents aim to capture shareholder equity and other sorts of information including common equity shares, preferred equity shares, warrants, and convertible equity. With this, cap tables become a vital decision-making tool for assessing equity ownership, market capitalization, and market value.

Given the financial significance of this information and the fact that companies are constantly evolving, it is paramount for a cap table to be accurate, tailored, and kept current and up-to-date.

One of the common pitfalls with cap tables is that a manually updated Excel spreadsheet can morph into more than one version.

By way of example, the company chief financial officer might manage one copy while outside legal council holds another version. So if a staff member exercises their option and the company forgets to provide an update of this to the lawyer (or vice versa), the two records become inconsistent. It’s here where the reconciliation of these records can become time-consuming and costly

There are many factors and emerging trends that impact capitalization. Therefore accurate and up-to-date cap table provides are paramount for fostering strategic direction and business growth.

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Corporate bylaws are a vital element of a newly formed company, providing key rules and regulations for operational effectiveness. They aredrawn up and codified by the board of directors when a corporation is being formed. This document helps to ensure that a business runs consistently from its inception.

Bylaws thus become the critical document to aid the board of directors in their oversight of the corporation.

Terms included in a corporate bylaw are dictated by the guidelines set by a particular state. These typically include important information such as the following:

In most states, limited liability companies (LLCs) are required to create an LLC operating agreement. These operating agreements, essentially function as a set of corporate bylaws, offering guidelines for how an LLC operates as well as owner responsibilities. The documents are often key for responding to legal issues and are legally binding.

Typically LLC’s and corporations are not required to file bylaws and operating agreement documents with the Secretary of State office. They may, however, be requested by lenders, banks, attorneys, and potential investors for various business activities.

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Articles of Incorporation provide the basic legal framework by which a company operates in a particular state or jurisdiction. Considered a public record, it codifies key business activities, owner names, and stock information for the company.

For an LLC, this document is referred to as an “operating agreement.”It describes the operational activities for the company as well as owner responsibilities.

To register a business as a separate entity, Articles of Incorporation must be filed with the Secretary of State’s office in the locale in which the company intends to do business. LLC’s, however, are not required to have an operating agreement or even file one.

Each state has its own requirements for the filing of forms. Accuracy in reporting application information is critical as errors and omissions can put a business at risk for legal issues.

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Starting a business is an exciting endeavor. The possibilities for success are unlimited.

But the road to success is not easy. It requires long hours, dogged persistence, and the expenditure of funds.

With the takeoff of your entrepreneurial venture, you may have noticed the impact it’s having on your time and finances. This requires your constant attention in order to ensure that these vital resources are not depleted.

Developing a business plan without an effective cap table or other financial tools often lead to unfortunate business failures. Without a mechanism for accurately tracking historical financials, it becomes a challenge to accurately assess new company revenue and costs.

The good news is that while these critical obligations may be a challenge, they are certainly manageable with the right systems in place.

Here at Equa, we provide a broad range of solutions for managing the time and financial demands of your business. Targeting the simplification of business agreements, our platform allows members to create a new business, obtain a bank account, and secure a tax ID within minutes. This allows business owners to significantly reduce the amount of time and money involved in establishing and managing a company.

Starting a business can be a time and money vacuum. Given the explosive growth of small businesses and registered entities worldwide, Equa is on a trajectory to becoming the pre-eminent one-stop global destination for documents, banking, and compliance.

Says founder and CEO Shawn Owen“We are excited to offer an enterprise cloud solution that allows businesses to draft, sign and manage all of their operational agreements. We also provide tools for managing an organization’s capitalization table and ownership structure.”

He concludes: “Ultimately, the real magic is in the ability to manage ongoing edits or evolution's needed for any action or transaction from your dashboard at the click of your fingertips. We aim to make corporate governance and high finance easy and fun while providing business leaders with an efficient system for managing their time and financial demands.”

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Consciously or unconsciously, there are three desires every business owner strives for: They are time, money and significance.

Sadly, however, most find themselves at the whim of a never-ending flow of demands on the entrepreneurial journey. As a result, their businesses often never reach a place where they can untether themselves to enjoy the fruits of their labor.

Chuck Blakeman, author of the bestselling book Making Money is Killing Your Business: How To Build a Business You Love and Have a Life, Too, reminds his readers that the primary reason many people start a business is not to focus on making money at the exclusion of everything else. Rather it’s to build an enterprise that’s financially self-sustaining so that it aligns with one’s personal freedom and contributions in life.

Selected by the National Federation of Independent Business as its №1 Business Book of the Year, Blakeman provides a first-hand account of the stumbles and mistakes he’s made as a business owner. He delivers a practical, no-holds-barred set of ideas that are easy to comprehend and put into practice.

Formulating a Business Process and System

Blakeman is also a huge proponent of documenting your business systems, what he refers to as a “Process Map.” Instead of asking “How do I do this?”, he says the question should be “How do I do this for the last time?”

Ultimately, says Blakeman, those who determine how to do things for the last time and adopt an ongoing commitment to maximum productivity and efficiency in their work receive both time and money back from their enterprise. “No biggy,” he says — “it’s just your freedom and your life that is at stake.”

Below is a TEDx talk that Blakeman gave that underscores these themes as a part of the new Participation Age business model that he espouses.

Equa's quest to simplifies agreements aligns well with the Participation Age philosophy that Blakeman subscribes to. Utilizing a process that facilitates a roadmap from creation to execution, they will assist you in building a constellation of contracts that become a living adaptable core foundation for your business.

When launching a new business and the agreements that support it, the last thing you want is to find yourself in a sea of documents and paperwork. Equa will help with the heavy lifting here, breathing life into your living documents when they’re required for critical business decisions. In the end, you’ll find yourself with more time and money as your most important documents are managed on the Blockchain, the most revolutionary technical advancement of our lifetime.

To learn more about Equa and sign up for a free trial, please visit us at www.equa.global

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