What is Legal?
Legal is an association is a collection of people who have agreed to associate together for a certain object or goal. Unincorporated associations are generally organized by the action of a group of individuals(two or more individuals) who agree together by associating themselves under a common name for the accomplishment of some goal (which must be lawful) towards the mission of a common objective. Pursuant to common law, an unincorporated association is not an entity, and has no status distinct from the individuals composing it. It is a body of individuals acting together in order to carry out a common enterprise without forming a corporation. However, associations usually conduct themselves and operate like a corporation in most functions.
Even though unincorporated associations technically do not exist as a legal entity separate from its members, many state legislatures have recognized the separate existence of an association by statute. Therefore, in some jurisdictions, unincorporated associations, by statute, are given the status of legal entities and are empowered to acquire, hold, and transfer property, or to sue and be sued as an entity. As commonly understood, a club is merely a group organization or association of individuals who meet together for social, relationship based purposes or some other common goal. Associations commonly share similar incentives, mutually beneficial outcomes or loosely defined perks that are derived from agreeing to associate as a group, outside of any stated goals.
Statutes have been passed in some states setting forth requirements as to the form and manner of execution of articles of association and bylaws of an association or club.
Provisions of bylaws of an association or club are valid and binding on the members as long as they are not immoral, illegal, or against public policy.
Generally, the more routine matters involved in governing an incorporated association or club should be placed in the bylaws. Where there is a choice between putting provisions in the bylaws or in the articles of association, the bylaws will sometimes be chosen because they are not a matter of public record. It should be remembered, however, that while not all provisions may be contained in the bylaws, in most states any provision that may be contained in the bylaws may also be contained in the articles of incorporation and a provision in the articles is superior to a contrary provision in the bylaws.
Similar to corporate law, where the articles of incorporation will always superseded the bylaws and other more granular internal governing documents, the articles of association for an association, group or club, can be thought of as the highest form of governing document before any more granular internal bylaws, guidelines etc.
What is an ORM?
Ownership Rights Management (ORM) is a technology for managing all your organization's relationships and interactions between owners, and all other parties that the owners of the organization are in agreements with, or may enter into agreements with.
The goal is simple: Improve organization agreements. An ORM system helps organizations stay connected to governments, vendors, employees, and customers, streamline collaborative decision making and improve profitability.
When people talk about ORM, they are usually referring to an ORM system, a tool that helps with contact management, equity management, ownership rights management, collaborative productivity, and more.
An ORM solution helps you focus on your organization’s relationships with individual people and entities — including customers, service users, colleagues, or suppliers — throughout your lifecycle with them, including finding new customers, winning their business, and providing support and additional services throughout the relationship, hiring and firing of employees and contractors, and managing relationships with owners, shareholders and investors.
Cap tables can get complicated quickly making Pro-forma and scenario analysis near impossible unless built right from the start. Preferred stock can be complicated and to start lets breakdown how preferred stock works in different common scenarios.
If you have preferred stock on your cap table, do you really know how preferred stock affects your equity? Do not get surprised when it’s too late to go back in time and make changes. Make sure you have it all figured out early.
Understanding the mechanics of preferred stock is critical starting with the most widely used preferred terms, what they mean, and how they work.
Preferred securities usually always have a liquidation preference. This means that preferred stockholders have a right to get their money back before anyone else. Preferences are usually expressed as a multiple of the amount of capital invested. If the preferred stock has a “1x” liquidation preference, then preferred shareholders are entitled to receive an amount equal to one time(s) their investment before other shareholders receive any of their investment back.
Usually, if shareholders elect to receive their liquidation preference, they lose their right to participate with the rest of the shareholders. Liquidation Preferences usually only play out in a downside, failed, or negative scenario as a protective measure. In any good scenario, the preferred shareholders will choose to participate according their ownership (pro rata) if the company sells for a profitable amount more than their original investment.
This simple example show’s how this plays out. Suppose a VC Investor bought 100,000 shares of Preferred stock for $5.00 per share, and the Preferred stock has a 1x liquidation preference. Assuming that you own 100,000 shares of common stock, here is what the cap table would look like:
Shareholder Preferred Common % Ownership You 0 100,000 50% VC Investor 100,000 0 50%
If the company sold for $650,000, my 1x liquidation preference entitles me to $500,000 of proceeds. This means there’s $150,000 left for you, even though we both own 50% of the company.
Now, suppose that the Preferred stock has a 2(x) liquidation preference. The VC Investor owning the 100 shares of Preferred stock is now entitled to one million dollars of the exit proceeds before you get anything even though the VC only invested $500,000. Using the same exit example scenario of $650,000, the VC gets 100% of the proceeds and you get nothing. A liquidation preference of more than 1(x) is less common but does exist.
Now in the original example let us explore when the Preferred stock has a 1(x) liquidation preference when your company sells for $1,500,000. If the VC Investor chose to take the liquidation preference, the VC Investor receives $500,000 of the proceeds, and you get $1,000,000. In this case, the VC would choose to lose the liquidation preference and instead would rather split the proceeds according to our ownership (50/50), so both shareholders get $750,000 each.What is the value to the owners of Preferred stock with liquidation preference? In one word, it is Protection. The value is in protecting the shareholder in a downside scenario. The risk of betting on entrepreneurs, who may have little to no real money invested in the company, is very high, and the liquidation preference is one way to offset some amount of the risk as a trade-off for protection.
Participation rights mean that in addition to taking the liquidation preference, preferred stockholders also participate pro rata in the remaining amount to be distributed in a liquidation scenario.
This example will show us using our same cap table from above, only now the Preferred stock has a 1x liquidation preference and participation rights. If the company sells for $1 million, the liquidation preference again entitles the VC to $500,000 right off the top, which leaves $500,000 left for you.
Because the VC has participation rights, the remaining $500,000 is split between you and the VC based on the overall outstanding ownership percentages of (50/50). This means the VC now gets an additional $250,000 and you get $250,000. In total the VC will get $750,000 and you will get $250,000.
Participation rights (also sometimes called “double dipping”) can add additional upside to the owner of the preferred while still allowing for additional protection. Why would investors get this kind of privilege? In this scenario it becomes even more important that both the common shareholders and the preferred shareholders equally understand the rights and how they affect different scenarios.
A participation cap can be an additional component of the participation rights. The Cap is the limit on the amount of proceeds an investor can receive from participation rights. The term Participation Cap can also be expressed as a multiple of the invested capital. Simply put, this is a hard cap on the amount of additional upside the participation rights can participate in.
For example, if the Preferred stock has participation rights and a 3x participation cap, and there was a liquidity event; then if the preferred shareholders exercised their liquidation preference, and also participate in the remaining proceeds distributed pro rata, they would receive an amount equal to three times their invested capital.
Furthering the example, assume the company sold for $2,750,000. In this scenario, the VC would take their $500,000 liquidation preference, then they would start to participate in the remaining amount pro rata. However, the VC has participation rights that are capped at 3 times their invested capital, so they max out at $1,500,000 in distributions, and then you get your $1,250,000 distribution after their payout.
Incentive stock options are most commonly used to invest workers in their company's success. A stock option is a right that is granted that allows the owner of the option the ability to buy a quantity of a company's stock at some point in the future at the current price per share.
This motivates the worker to help improve the company towards a rise in stock value. Qualified and disqualified ISO's promote the same incentive principle, but with a couple of practical and important tax-related differences.
A "qualified" ISO allows you to escape personal taxation of any profit made in the exercising and subsequent sale of the ISO's. This comes in the form of two separate tax savings. At the point the option is exercised, you are exempt from paying tax on the gain between the option-grant price (when the option was issued), and the time-of-exercise-price of the stock(when the shares are purchased).
Secondly, at the time you sell the stock, the profit on the sale qualifies for taxation as a long-term capital gain, usually a lower rate than personal income.
An ISO must meet two holding criteria to qualify for tax breaks:
1) An ISO is disqualified if it is sold less than two years after the date the option was granted. This disqualification obligates you to pay tax on the spread between the exercise and market prices.
2) An ISO is also disqualified if it is sold less than one year after the date of exercising. Profit is then taxed as earnings rather than a capital gain.
A "disqualified" ISO may not have any tax savings, and may take a double hit on taxes. The spread between issue and exercise prices is taxed at your regular income rate in the year of exercising.
For example, an option for 1,000 shares at $1 per share will cost you $1,000 to exercise. If stock currently trades at $2 a share, you are taxed on the $1,000 spread as though it were income. The same is true if you sell your stock within a year of exercising the option to purchase the shares. Twelve months after the date of exercising it becomes taxed as a capital gain.
Favorable tax treatment comes at a cost of increased risk for qualified ISOs. Conditions for qualified sale of the stock can be met in a minimum of two years from the time of issue. Thus, a quick profit on a fast turnaround of options is tempered by the increased tax burden.
While there can be substantial tax savings on qualified stock options designed for long term holding, the risk of the stock price decreasing may or may not be favorable to the holder of the options.
What is GDPR?
Where can I find more information on GDPR?
Why does GDPR matter?
What are we doing to be compliant?
We are proactively building privacy tools. Specifically, we are:
If you have questions please email firstname.lastname@example.org
This page/post should not be considered legal advice.
What is KYC/AML?
KYC or 'Know Your Customer' is defined as the process of identifying a customer's identity through the verification of ID documents like a driver's license or passport.
AML or 'Anti Money Laundering' refers to steps taken by financial institutions and governments to prevent money laundering and terrorism.
Set up your organization with customized workflows to define and improve the efficiency of the actions your shareholders, owners, employees, investors, and partners will take.
Actions are a key product in our Collaborative Consensus productivity suit.
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What is a Capitalization Table (Cap Table)?
A “Cap Table” (short for “Capitalization Table”) is a document, typically in the form of a spreadsheet or table, that offers a snapshot of an organization's equity capitalization and total market value.
Cap tables aim to capture shareholder equity and other sorts of information including common equity shares, preferred equity shares, warrants, and convertible equity, et al.. With this, cap tables become a vital decision-making tool for assessing equity ownership, market capitalization, and potential market value.
Fully Diluted (FD) Shares
“Fully diluted”(FD) shares are the total number of common shares of a company currently issued or outstanding plus all shares that could be claimed through the conversion of issued convertible preferred stock, Convertible Instrument's and the exercise of outstanding options and warrants.
The calculation of “fully diluted” shares helps an individual stock owner determine their “fully diluted” ownership percentage, which is the number of common shares owned by that owner divided by the total fully diluted shares, assuming all outstanding potential dilution events. This calculation captures the total pool of potential common shares.
Corporate governance is the system of rules, practices, and processes by which an organization is directed and controlled. Corporate governance essentially involves balancing the interests of all stakeholders of an organization, including customers, the community and the government. Equa is passionate about empowering excellent governance for all of our organizations.
Governance refers specifically to the set of rules, controls, policies, and resolutions put in place to dictate corporate behavior. Proxy advisors and shareholders are important stakeholders who indirectly affect governance, but these are not examples of governance itself. The board of directors is pivotal in governance, and it can have major ramifications for equity valuation.
An organization's corporate governance is important to investors since it shows a company's direction and business integrity. Good corporate governance helps companies build trust with investors and the community. As a result, corporate governance helps promote financial viability by creating a long-term investment opportunity for market participants.
Communicating a firm's corporate governance is a key component of community and investor relations. On Apple Inc.'s investor relations site, for example, the firm outlines its corporate leadership—its executive team, its board of directors—and its corporate governance, including its committee charters and governing documents, such as bylaws, stock ownership guidelines and articles of incorporation.
Most organizations strive to have a high level of corporate governance. For many shareholders that have invested in companies, it is not enough for a company to merely be profitable; it also needs to demonstrate good corporate citizenship through environmental awareness, ethical behavior, and sound corporate governance practices. Good corporate governance creates a transparent set of rules and controls in which shareholders, directors, and officers have aligned incentives.
The board of directors is the primary direction setter responsible for influencing corporate governance. Directors are elected by shareholders or appointed by other board members, and they represent shareholders of the company. The board is tasked with making important decisions, such as corporate officer appointments, executive compensation, and dividend policy. In some instances, board obligations stretch beyond financial optimization, as when shareholder resolutions call for certain social or environmental concerns to be prioritized.
Boards are often made up of inside and independent members. Insiders are major shareholders, founders, and executives. Independent directors do not share the ties of the insiders, but they are chosen because of their experience managing or directing other large companies. Independents are considered helpful for governance because they dilute the concentration of power and help align shareholder interest with those of the insiders.
The board of directors must ensure that the company's corporate governance policies incorporate the corporate strategy, risk management, accountability, transparency, and ethical business practices.
Bad corporate governance can destroy confidence in a company's reliability, integrity, or obligation to shareholders—all of which can have implications on the firm's financial health. Tolerance or support of illegal activities can create scandals like the one that rocked Volkswagen AG starting in September 2015. "Dieselgate" revealed that for years, the automaker had deliberately and systematically rigged engine emission equipment in its cars in order to manipulate pollution test results, in America and Europe. Volkswagen saw its stock shed nearly half its value in the days following the start of the scandal, and its global sales in the first full month following the news fell 4.5%.
Public and government concern about corporate governance tends to wax and wane. Often, however, highly publicized revelations of corporate malfeasance revive interest in the subject. For example, corporate governance became a pressing issue in the United States at the turn of the 21st century, after fraudulent practices bankrupted high-profile companies such as Enron and WorldCom. The result of this in 2002 was the passage of the Sarbanes-Oxley Act, which imposed more stringent record-keeping requirements on companies, along with stiff criminal penalties for violating them and other securities laws. The aim was to restore public confidence in public companies and how they operate.
How does Equa Start ensure security?
Equa Start ensures security by delivering end-to-end encryption and strict permissioned access to your organization's documents, cap tables, and stakeholder transfers.
How are the Equa Start document templates created?
The library of document templates available on the Equa platform have been created by skilled attorneys who understand the nuances of business formation and the interests of each party involved. Collectively, our attorneys have written, reviewed and approved the tools offered here so you can save money on legal fees. Equa does not restrict clients from granting permissions to outside attorneys of your choice to assist in customizing documents for your specific businesses.
What is Equa Sign?
Equa Sign allows you to make important decisions through a voting process, similar to a corporate board meeting. Equa Sign simplifies the process by obtaining alignment on important decisions by preventing delays. All votes occur instantaneously within the Equa platform, and this can happen regardless if stakeholders are physically present at a meeting location.
What is Scenario Analysis?
Scenario analysis is the process of estimating the expected value of a portfolio after a given period of time, assuming specific changes in the values of the portfolio's securities or key factors take place, such as a change in the interest rate. Scenario analysis is commonly used to estimate changes to a portfolio's value in response to an unfavorable event and may be used to examine a theoretical worst-case scenario. Investopedia
Note: Administrators have the ability to grant access to the designated stakeholders of the voting process.
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