In this episode of the “What Is Money?” Project podcast Sten & Shawn explore a broad range of perspectives on how money has shaped their life experiences, pains, and passions.

Enjoy!

Originally posted June 10, 2019

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

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.”

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

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.

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

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.

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

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.

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

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.

Startups, emerging enterprises, and aspiring entrepreneurs are increasing at the crosshairs of a messy challenge, namely, how to create an orderly, secure, single source of truth for their documents and agreements.

We recently asked Equa Vice-President Sten Wie, to share a few brief thoughts on the herculean efforts taking place at Equa to deliver a fresh set of solutions around this prevailing issue.

What’s the fundamental problem Equa is trying to solve?

The problem we are solving ties back to a knowledge gap among entrepreneurs and business owners around running a company efficiently and compliantly from a document system, corporate governance standpoint.

When you say corporate governance, what are you referring to?

It’s true, most people don’t know what that is. They may have a vague understanding or an operating agreement that references it and states that they have to do certain things. But they don’t understand the recipe in terms of their document system.

Can you elaborate a bit more here?

Business owners are often solely focused on building a product, idea or brand, that they are seeking to communicate to customers. While that’s great, they later find that not managing these document systems in an efficient way becomes problematic.

Problematic in what way?

Let’s say you want to add capital to your company because you’ve taken on a new partner. Or you want to issue shares or do a capital raise. It’s no mystery here that your documentation trail needs to be solid. There’s a proscribed process for doing this and doing it right. And if you don’t, you’ll be subjected to a lot of risks.

What are some other instances where due diligence around documentation is important?

If you are a company that’s vastly successful, and you want to get acquired or have now issued shares, documentation is of vital importance. In other words, you have issued stock or vested shares and handshakes have taken place. But if that paper trail is not outlined, defined and stored somewhere, then you expose yourself to a tremendous amount of liability. Even worse, you could even get sued if people become angry.

So a failure to address these shortcomings creates exposure?

Correct. It’s a simple truth that when you are leading a company that has reached a certain level of success, you will have a target on your back in one way, shape, or form. And without a process of establishing and maintaining your corporate governance, all this can now become a threat to the wealth you’ve built, to your livelihood, to your family, to everything.

So how does Equa fit in here?

Doing this well and doing it right is our motto with clients. We are essentially providing an old school software installation wizard for document management, agreements, and corporate governance.

What’s the primary value proposition?

Whether it’s an employee agreement, vendor agreement, new bylaws, whatever a group of people can create consensus around the terms of a document, that’s where we are here to help.

But why replace the architecture or systems a company currently has in place?

Great question.So here’s the deal,many of these systems made sense and worked when a company was in its early stages and had, say, two partners. Problem is they never went back to their corporate bylaws once their number of partners grew and said, OK, we need to make sure that we have one version of a document instead of each partner making revisions and not knowing what the reality is, what the true document is.

So, in other words, it’s very difficult to reconcile what the truth is when everybody can individually without oversight, without notification, edit that reality?

Correct. If you have nineteen partners and they are all editing things, how do you reconcile all of that? Often things are in paper format, in Dropbox, maybe even in Excel. But there is no path, there is no process to force everyone to do it in only one master document, in one place. This is what we mean by the term “single source of truth.”

What is the ramification of not addressing this?

Without this reconciliation and due diligence, people simply do whatever they feel they need to do with regard to a single source of truth. It’s not malfeasance or people trying to screw one another. It simply becomes a scenario where a bunch of people all acting independently in terms of what they think needs to be done.

What sorts of issues ensue from this?

As more and more people become layered into this process, it becomes extremely problematic. Because if everyone is not looking at the same single source of truth then it becomes almost as if impossible to figure things out and to bring everything together.

So ultimately, what’s the solution?

Reconciling their documents into a digital environment where everyone is looking at one truth.

Can you describe the Equa onboarding process?

It starts with setting the expectation in terms of the documents that we are going to need from your company, things like an operating agreement, bylaws, board meeting minutes, and corporate shares documents. Our philosophy is to get all of this gathered first and so we can migrate it into our system and structure it properly.

At that point, what’s the next step?

Once captured on our ecosystem all future document changes can occur in a single document instead of ten people having ten different versions of the same document. Everyone who has access to that single document can’t change it unless there’s a consensus.

And then are there principal overseers of this process?

Yes, your company leadership will determine who is going to be the administrator. You’ll also be prompted to invite your chief financial officer and legal counsel so that everyone can begin working within your one document environment.

So how will the system work once these documents have been migrated into the Equa environment?

Once everyone is working off of the Equa framework, changes can be redlined and passed back and forth through a notification system that essentially says, alright, somebody made an edit or change here. But you can’t delete text because it’s always just redlining. In other words, you make a suggestion and then that suggestion is then sent out into the notification. The beauty here is that all of the documentation is captured in one environment instead of being pulled out to email or retrieved from Dropbox.

So ultimately this represents a much more efficient process?

Yes. When you can make something that may normally take five people, two hours and boil it down to something that takes five people 30-minutes, this can represent enormous time savings. And if you multiply this every time you need to go through this process, you are also fundamentally saving so much money for your company. In the end, you are preserving wealth instead of just letting it go out the back door with all these expenses.

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