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

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.

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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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

How to successfully Raise Capital

Are you finally at the point where you need to develop a better process to raise capital?

Every successful task requires a good process. The more difficult and time consuming a task the more essential an effective process becomes. When it comes to raising capital, this can translate to whether your company hits its goals, achieves the desired valuation. With this in mind, what can you do to improve your performance?


Setting the foundation

With our clients, we advise them based on our past success and failures. This advice is a well-constructed soup to nuts process that entrepreneurs and early stage companies process that can be followed every in every round.

Key elements we instruct on, include:

·      Researching your potential investors

·      Getting advice early and often

·      Crating all the necessary collateral like pitch decks and executive summaries

·      Nurturing relationships

·      Choosing the terms

·      Following up

·      Negotiation

·      Closing the round

·      Delivering on promises to each investor.

Be Patient

When planning to raise capital, it is important to understand that investors aren’t going to invest in your company without having an established and valued relationship. Equally important to understand is that not every investor is the right investor. Therefore, taking the time to build relationships is key to future success as these individuals will often take on advisory roles or board seats. With that in mind, expect that raising a round will take months in the best of times. With the global Covid19 pandemic disrupting markets and spooking investors, it can take longer. So being patient and setting appropriate expectations will help ease minds as the next market disruption can happen at any moment.

As you go down this road, you will need to treat the capital raise process like sales. Each lead requires constant nurturing and follow up in order to close. Larger deals can take up to a year so even when you’re not raising capital you should be strengthening relationships.

Remember, set appropriate expectations, be patient, and start preparing for that next round today.

Uncertainty

When planning your process, it should be noted that there is no guarantee of success relative to your timelines, valuation, and financial benchmarks. This shouldn’t come to a surprise as every aspect of the entrepreneurial journey is riddled with roadblocks.


To that end, if you are willing to take on the advice form mentors and be humble and resilient you can get to the finish line. Willingness to adapt and change strategies will always be key tools to realize the goals set forth in your business plan and executive summary. Once again, expect unforeseen challenges like changes in the global markets to happen and be willing to do what it takes and be unreasonable when it comes to success.

When will it end?


Raising capital isn’t fun but it’s essential if you want to build growth and success. Making sure that you hold on to a positive state of mind will make a huge difference in overcoming each challenge. This is important to pass on to your team as they will be looking to you for guidance and leadership. Visualizing failure breeds apathy in those around you, whereas living future success in the moment will create a culture of resilience and tenacity.

Create a great pitch deck

Selling you vision requires a quality deck that follows a well-defined template. Without a great pitch and deck, it will communicate a weak message to investors that are inundated with deal flow. Consider the point that you are only as strong as your weakest asset. This is equally important in the quality of your team that must constantly execute despite lacking money or resources. 


Don’t be the smartest person in the room

Even people at the top of their fields look to get better or gain any advantage to stay at the top. Just look at Tony Robbins and Tom Brady. They are world renowned, very successful, yet they continue to find an edge. If they’re doing it so should you. Surround yourself with coaches, and experts to remove blind spots. When it comes to raising capital, seek out those that have a track record of success and absorb all that you can. Remember, you are competing with potentially hundreds or thousands of other entrepreneurs in your space for limited investor capital.


Network! Network! Network!

We live in a noisy world full of notifications, news feeds, texts, emails etc. Therefore, knowing how to get through to investors requires a lot of follow up work and relationship building. Be creative when it comes to getting through to those key investors. Learn who they are influenced by, learn who their gatekeepers are and use every type of communication to follow up with them in an attempt to build relationships with your targets.

Knowing what you don’t know

Every entrepreneur starts off with a different composition of skills, and weaknesses. Likely, raising capital is not among your strengths. Therefore, as you learn all the things you need to know to build a successful organization, add raising capital to that list! Sure, you can go and hire an investor relations ninja. However, being prepared to fight as though your life depends on it requires being knowledgeable when it comes to communicating, negotiation, networking and follow up. Regardless of your industry, being a constant student will improve your chances of not being ignored.

Launching a new business? Putting in long hours?

Congratulations.

Now for the not so good news: You’re likely going to have a few bumps and hurdles along the way.

As an entrepreneur the possibilities for errors are endless: Like failing to file important compliance documents. Or overlooking an important tax filing deadline. How about blowing through all of your startup funding.

When these and other mishaps occur, it’s so easy to write them off as simply another case of “we didn’t know what we didn’t know.”

But here’s the good news:

Every mistake you make is a learning moment

Below are seven of the most common pitfalls startup entrepreneurs make when launching a new business.

Regardless of whether you’re a newly minted entrepreneur or have been into your business for the past 2–3 years, we invite you to capture some notes and heed the call to action on what you read below.

Pitfall #1: Too Much, Too Fast

You’ve started your business and the adrenaline is flowing. Things have reached a fever pitch. You’re feeling ambitious and on top of the world. And yes, of course, you’re expecting immediate results.

“Next week we’ll be profitable,” you tell yourself. And then you have a Chinese Bamboo Tree moment.

When you find yourself in this trap, it’s important to keep in mind that we often OVERESTIMATE what we can achieve in “Year One” while UNDERESTIMATING what we can do in say Year Five.

The lesson here:

Mistakes are going to occur. So you may as well learn from them.

Pitfall #2: Putting off Setting Up a Corporate Entity:

If you have a highly conservative accountant they will likely tell you that you can get away with simply registering with your Secretary of State as a sole proprietor. But there’s more to this story so listen up: Setting up a business entity ( LLC, S Corporation, or C Corporation) right out of the gate may be an important step for you to consider for one major reason, namely, it can serve as a form of liability and personal asset protection in the event that you’re sued.

Pitfall #3: Not Having a Good Bookkeeping System

Here’s an often overlooked fact: Having a great bookkeeping system (i.e. keeping those receipts) will not only allow you to maximize your tax writeoffs but save you a ton of headaches and extra CPA costs at tax time.

Back in the day, the modus operandi was to toss all of your lose receipts in a bag and hand them off to your bookkeeper monthly for reconciliation. Today we have great online sites and apps that can assist with digital downloads of bank statements and receipts. So there are no excuses for not having a good system in place.

Pitfall #4: A Lack of Startup Funding

It’s well documented that the number one cause of business failure is a lack of funding and working capital. Therefore it is an important piece to get a handle early on in terms of what will it take to keep your business running on a day-to-day basis. Otherwise, this disconnect could lead to funding shortfalls that might quickly put your business in peril.

Your Secret Sauce for better funding outcomes: Learn about the importance of Cap Tables.

Pitfall #5: Poor Sales Execution and Growth Mindset: As a startup, building a sales funnel can often lose importance in our list of priorities even though we are well aware of its importance. It goes without saying that this can lead to disastrous consequences.

Grant Cardone in his bestselling book entitled The 10X Rule: The Only Difference Between Success and Failure admonishes us to take massive action in the work that we do, saying that it is vital for the success of our business.

Here is a brief video of Grant discussing his 10X Growth Mindset!

Pitfall #6: Taking Shortcuts With Your Product or Service

The late inspirational speaker and thought leader Jim Rohn noted in one of his early seminars, “You get paid for bringing value to the marketplace, and if you’re not very valuable you don’t make much money.

The same is true for your business: The MARKETPLACE VALUE of your product or service is what will ultimately determine your business success. In other words, if you focus on all of the other details of your business versus working on the quality of your product or service, your business will likely see an early demise.

Pitfall #7: Lack of Strategic Direction

Here’s the key: Find your business sweet spot and then stay in your lane. Because if you disperse your energy in too scattered of a fashion, you will experience the Law of Diminishing Returns and your business will crumble.

Here’s a great book to read on this point: Blue Ocean Strategy: How to Create Uncontested Market Space and Make Competition Irrelevant by W. Chan Kim and Renee Mauborgne

Are you struggling to find a lead investor for your business?

Finding the right investor is more than just identifying those that invest in your industry and life cycle stage. Investors, and in particular lead investors, are commonly going to take an active advisory role in your company.

Alignment with your lead investor on values, belief systems, and overall goals is essential. When you are faced with this decision, realizing this is a long-term relationship that will impact your company’s future is an important aspect to your success.

What Defines a Lead Investor?

The definition of a lead investor varies on who you ask:

1. Someone that helps work with the entrepreneur to organize the other investors and any soft commitments.

2. The first person who invests in a particular round. However, this does not necessarily mean that your first investor will provide the greatest amount of capital.

3. Someone who provides the highest amount of capital in a syndicated round.

Regardless of which definition resonates with you the most, it is important to know that our lead investor will be an important one to the success of your business. Keeping that relationship positive and professional will expand your capital even further down the road in various aspects.

Why is Choosing the Right Lead Investor so Important?

Beyond providing essential operational capital, lead investors have other effects on a company. To start, securing a lead investor will provide a level of comfort to other potential investors. Nobody wants to be the first to show up to the newest and hottest night club, right?

Similarly, every investor or investment fund combs through their deal flow, looking for the right opportunity. Having a noteworthy first or lead investor can shorten a financing round, for it conveys a sign of trust.

Without a lead investor, other potential investors will have reservations, even in the best of market circumstances. As we’re all experiencing this challenging financial climate, entrepreneurs need to take every possible step to reduce the perception of risk.

Securing a lead investor is critical in that trust-building process. They signal that there is a future promise of an ROI and solidify the team and business model are strong. Partnering with a lead investor who places a sizable initial investment signals confidence, and like a gravitational magnet, pulls in other investors more easily. This helps propel your valuation and closes your round at the desired amount

Finally, investors travel in circles. Landing your lead investor gets you access to their network of influence, again improving the likelihood of closing your round more quickly.

Where are the Lead Investors?

While success depends on networking and follow up (Remember: The noisy wheel gets the deal!), there are a large number of tools to help streamline this critical part of the job.

For starters, entrepreneurs can purchase subscriptions to sites like CrunchBase and Pitchbook. These sites provide endless amounts of data, from who has raised capital, when, and how much. They also show the investors that are backing each company.

Finding investors can be done without purchasing expensive tools. Sitting down and doing research on Google or inside LinkedIn can reveal investor networks in your area. Most large cities or entrepreneurial communities have investment funds, accelerators, and groups that are always searching to build upon their deal flow.

After putting in the work to network, build relationships, and develop your pitch, entrepreneurs can also apply to pitch competitions, further exposing them to high net worth individuals. If you still need help, you can always hire an investor relations ninja to help open doors and make introductions

Finally, if all of this isn’t working, you can work on the other side of the equation and network with recently funded companies. Communicating with other founders in your space and life cycle stage can help open opportunities for networking and capturing investors, all while possibly teaching you valuable information about their experience with their personal process.

The Importance of a Good CRM

The best way to find a lead investor is through prioritization of your leads and management of those relationships through a CRM, or Customer Relationship Management platform.

The main benefit of utilizing this tool is to organize and assist with communication and to respond to any requests promptly, such as providing information or updating pitch materials to potential investors.

Key metrics to prioritize investors by include:

· Their track record as a lead investor

· Their ability to syndicate

· Knowledge and experience in your space/business stage

· Ability to interact with and manage other investors if necessary

· The amount of capital they have to deploy

This certainly isn’t an exhaustive list, and there will be other factors to consider. As you go through the process of raising capital, remember that patience and positivity are essential. Raising money is a brutal process, and the road is riddled with many who will say no. Just keep building and remember that timing is everything, and eventually, your day will come.

A common narrative among the world’s most prized companies is their early development as startups. In the past, creating a large and successful enterprise was seen as a major undertaking.

Today's new businesses launch in small industrial spaces, spare bedrooms, even in garages. Globally, small businesses make up a significant portion of the vast, global economy. In the U.S. alone, businesses of 500 employees or less comprise nearly half of the economy.

Despite these small beginnings, many startup owners are seeking exponential growth of their business, often with a single-minded vision of being acquired by a larger company.

In his number one Wall Street Journal bestselling book, Gary Keller extolls a concept called "The ONE Thing." In it, he poses the question:

“What’s the ONE Thing you can do such that by doing it everything else will be easier or unnecessary?”

At Equa, our laser-focused intent and “one thing” is to help mitigate the friction associated with new business formation, management, and ownership. We seek to help businesses begin on a solid foundation, one that allows them to accelerate their market entry while eliminating costs.

Large, well-funded companies often have a wealth of resources to fuel their strategic growth, thereby gaining a decided advantage in the marketplace. Equa hopes to bring balance to this startup playing field by delivering a cost-effective, streamlined destination for business management activities such as documents, banking, and compliance.

The Equa platform allows members to form a new business entity, obtain a bank account, and secure a tax ID within minutes. All of this significantly reduces the amount of time and money associated with forming and managing a business.

The Building Blocks

Equa's Founder and CEO, Shawn Owen, says the company’s primary focus is to deliver a quality user experience to those starting a business or entrepreneurial venture. In other words, how to bring efficiency to the end user whether it’s an owner, business manager, investor — anyone who is the part of an organization.

Comments Owen: “Anytime you can make something more efficient and save people time and money, they love it."

But the bigger picture, he says, is the notion of a central source of truth. In other words, once you have everyone’s information in one place, why not evolve it into all the other forms of agreements that people make.

“There is always a series or sequence of agreements tied to business transactions. Keeping these in one place allows you to free up time for your “One Thing” which is to deliver a great product.”

Owen also underscores the theme of simplicity for business owners:

“When you get too technical people get scared. By way of example, think about something as simple as Bitcoin. When you talk about what Bitcoin is in a simple way, people are like, ‘I get it. It’s digital gold or whatever.’ But when you get too deep into the details, it can actually be very complicated. So. at the end of the day, we want to avoid confusing people and keep their lives simple.”

Continues Owen: “One of the things I have always wanted to see and I think most people who are technology advocates also want to see is a user interface and experience that’s easy enough for even a grandmother to use. In other words, they are intuitively able to use it without having to know too much.”

He concludes: “Our goal is to make the user experience our number one focus so a person would never have to know anything about the underlying technology. As long as someone gets just the basics, they’ll be able to use it.”

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

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