Event: World Financial Symposiums Growth and Exit Strategies for Software and IT Companies Conference

Wednesday, January 30th, 2013

9:00 a.m. – 5:00 p.m.

Davis Wright Tremaine

1201 Third Avenue, Suite 2200
Seattle, WA 98101

The World Financial Symposiums Growth and Exit Strategies for Software and IT Companies conference, sponsored by Davis Wright Tremaine, GeekWire, WTIA and Corum Group, will be held in Seattle on January 30 for the second time in WFS’s decade of educating technology leaders.

The conference will bring together executives and investors in software, IT, Internet, mobile and related technology companies. You’ll have an opportunity to interact with some of the top names in Seattle’s tech and finance communities.

You’ll hear from:

  • Major buyers
  • Private equity investors
  • Venture capitalists
  • Angel investors
  • Analysts
  • CEOs who have recently sold

Please contact Courtney Goss at courtneyg@worldfinancialsymposiums.com for more information. Mention DWT code DWTVIP2013 to waive the registration fee.

 

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How To Form A Washington Social Purpose Corporation

By now you have probably heard or read about Washington social purpose corporations (see, for example, my article in GeekWire: http://www.geekwire.com/2012/big-positives-washingtons-social-purpose-corporations/).

And now you might be wondering how to actually form a Washington social purpose corporation. The purpose of this article is to help you better understand the social purpose corporation incorporation process. Of course, we recommend you always consult with a lawyer along the way as well.

Prepare the Articles of Incorporation

First, to form a Washington social purpose corporation, you have to prepare articles of incorporation for filing with the Washington Secretary of State. The articles of incorporation have to include the following:

  • A name for the corporation that includes that words “social purpose corporation”, or “SPC” as an abbreviation for those words.
  • A statement that the corporation is organized as a social purpose corporation under RCW 23B.25 (http://apps.leg.wa.gov/rcw/default.aspx?cite=23B.25).
  • A statement setting forth the general social purpose or purposes for which the corporation is organized (for a discussion of this requirement in more detail, see “General Social Purposes” below).

For example, the general social purpose or purposes for which the corporation could be organized could be expressed in the Articles as follows:

 “This corporation is organized for the general social purpose of promoting the positive short-term or long-term effects of, or minimizing the adverse short-term or long-term effects of, the corporation’s activities upon the corporation’s employees.”

Another example:

 “This corporation is organized to carry out its business purpose under RCW 23B.03.010 in a manner intended to promote positive short-term or long-term effects of, or minimize adverse short-term or long-term effects of, the corporation’s activities upon the local, state, national and world community.”

  •  If the corporation has designated one or more specific social purpose or purposes, a statement setting forth such specific social purpose or purposes. (For a discussion of this requirement in more detail, see “Specific Social Purposes” below).
  • A provision that states the following:

“The mission of this social purpose corporation is not necessarily compatible with and may be contrary to maximizing profits and earnings for shareholders, or maximizing shareholder value in any sale, merger, acquisition, or other similar action of the corporation.”

 General Social Purposes

Every social purpose corporation must be organized to carry out its business purpose in a manner intended to promote positive short-term or long-term effects of, or minimize short-term or long-term effects of, the corporation’s activities upon any or all of:

  • the corporation’s employees, suppliers or customers;
  • the local, state, national, or world community; or
  • the environment.

Specific Social Purpose or Purposes

The statute allows, but does not require, social purpose corporations to have one or more specific social purposes, in addition to the required general social purposes.

For example, a  specific social purpose could be to promote a specific type of environmentally conscious farming. Another could be to promote open source software. Another could be to end human trafficking.

Other Optional Provisions in the Articles

The statute does not prescribe that the shareholders of a social purpose corporation adopt a set of third party standards by which the SPC measures its future success in achieving its social purposes.  However, the organizers of the SPC may choose to do so by including a requirement in the articles of incorporation that the SPC must adhere to a specified third party standard. Similarly, the statute gives directors and officers the authority to take into account the specified social purposes in making corporate decisions without fear of liability for sacrificing profitability in favor of the social purposes.  But the statute does not require that the board or officers consider each social purpose in all of their corporate decisions.  If the shareholders do not want the board and officers to have this flexibility, they can include in the articles a provision that requires the board and officers to consider the impacts of every corporate action or proposed corporate action on each of the designated social purposes.

File the Articles of Incorporation with the Secretary of State

Once you have prepared your articles and included, at a minimum, the  information required by the statute, the next step is for the incorporator to sign the articles and file them with the Secretary of State.

Steps Following Filing of the Articles

One you have received the articles of incorporation back from the Secretary of State, you can proceed with the remainder of the organization of the social purpose corporation, including:

  • Having the incorporator appoint the initial board of directors (if they weren’t named in the articles)
  • Holding the organizational meeting of the board of directors to:
    • appoint officers
    • adopt bylaws (there are no unique requirements that a social purpose corporation must include in the bylaws)
    • authorize the initial share issuances and stock subscriptions
    • authorize the opening of bank account
    • authorize the commencement of doing business
  • Obtaining a taxpayer identification number
  • Opening a bank account
  • Applying for business licenses

Conclusion

Forming a social purpose corporation is a little more difficult than forming a regular for-profit corporation. More thought and care needs to go into the articles. However, for the entrepreneur who wishes to conduct his or her business in a more socially responsible or sustainable way, the Washington social purpose corporation offers significant benefits over a regular business corporation that are worth considering.

Posted in Business Entities, Business/Corporate Law, Social Purpose Corporations | 2 Comments

How Long Does the New Qualified Small Business Stock Benefit Last?

I was asked by someone the other day, “Are you sure that the 100% tax exclusion for investments in qualified small business stock that Congress passed as part of the fiscal cliff bill lasts until the end of 2013? My friend told me that it expired at the first quarter of 2013.”

Answer: Yes, I am sure.

You can view the final bill here: http://www.gpo.gov/fdsys/pkg/BILLS-112hr8enr/pdf/BILLS-112hr8enr.pdf

The 1202 benefit can be found in Section 324 of the bill.

I quote it for you below.

SEC. 324. EXTENSION OF TEMPORARY EXCLUSION OF 100 PERCENT
OF GAIN ON CERTAIN SMALL BUSINESS STOCK.
(a) IN GENERAL.—Paragraph (4) of section 1202(a) is amended—
(1) by striking ‘‘January 1, 2012’’ and inserting ‘‘January
1, 2014’’, and
(2) by striking ‘‘AND 2011’’ and inserting ‘‘, 2011, 2012,
AND 2013’’ in the heading thereof.

[By virtue of these amendments, paragraph (4) of Section 1202(a) as amended now reads as follows:

(4) 100 percent exclusion for stock acquired during certain periods in 2010, 2011, 2012, and 2013
In the case of qualified small business stock acquired after the date of the enactment of the Creating Small Business Jobs Act of 2010 and before January 1, 2014—
(A) paragraph (1) shall be applied by substituting “100 percent” for “50 percent”,
(B) paragraph (2) shall not apply, and
(C) paragraph (7) of section 57 (a) shall not apply.]

(b) TECHNICAL AMENDMENTS.—
(1) SPECIAL RULE FOR 2009 AND CERTAIN PERIOD IN 2010.—
Paragraph (3) of section 1202(a) is amended by adding at the
end the following new flush sentence:
‘‘In the case of any stock which would be described in the
preceding sentence (but for this sentence), the acquisition date
for purposes of this subsection shall be the first day on which
such stock was held by the taxpayer determined after the
application of section 1223.’’.
(2) 100 PERCENT EXCLUSION.—Paragraph (4) of section
1202(a) is amended by adding at the end the following new
flush sentence:
‘‘In the case of any stock which would be described in the
preceding sentence (but for this sentence), the acquisition date
for purposes of this subsection shall be the first day on which
such stock was held by the taxpayer determined after the
application of section 1223.’’.
(c) EFFECTIVE DATES.—
(1) IN GENERAL.—The amendments made by subsection
(a) shall apply to stock acquired after December 31, 2011.
(2) SUBSECTION (b)(1).—The amendment made by subsection
(b)(1) shall take effect as if included in section 1241(a)
of division B of the American Recovery and Reinvestment Act
of 2009.
(3) SUBSECTION (b)(2).—The amendment made by subsection
(b)(2) shall take effect as if included in section 2011(a)
of the Creating Small Business Jobs Act of 2010.

Posted in Federal Law & Regulation, Taxes | Comments Off on How Long Does the New Qualified Small Business Stock Benefit Last?

Can’t I Let Non-Accredited Investors In My Round?

non-accredited investorI was recently pressed by someone, “Can’t I let non-accredited investors in my Rule 506(b) round? The rule says that I can have up to 35 non-accredited investors.”

While it is true that Rule 506(b) says you can have up to 35 non-accredited investors, it goes on to say that if you allow even 1 non-accredited investor in your round you have to comply with very detailed and comprehensive disclosure obligations. In contrast, if you are raising money from only accredited investors, there are no specific disclosure obligations required.

Rule 502(b) states, “The issuer is not required to furnish the specified information to purchasers when it sells . . .to any accredited investor.” Whereas non-accredited investors require “disclosure documents that are generally the same as those used in registered offerings.” (See Rule 502 and a reference to the second quote, Rule 506)

[C]ompanies must give non-accredited investors disclosure documents that are generally the same as those used in registered offerings.

When you read, “disclosure documents that are generally the same as those used in registered offerings”–read, you are going to have to incur a lot of expense. More than you will typically desire to incur based on the amount of investment from non-accredited investors that you will receive. This is one of the reasons why startups in my experience almost always limit their fundraising to all accredited investor offerings.

Another reason, a new one, is that if you generally solicit your offering under Rule 506(c), you can’t accept funds from any non-accredited investors. The potential trouble is this–if you are conducting what you plan to be a Rule 506(b) offering, you might change your mind mid-stream and decide that you want to generally solicit and generally advertise your offering. If you had accepted any non-accredited investors in your round, you would not be able to do this. Thus, accepting any non-accredited investors will inhibit your flexibility going forward.

Posted in Federal Law & Regulation, Financings | 11 Comments

Wage and Hour Tips For Startups

By Chrys A. Martin

Start-up companies face a number of unique employment law issues.  Many times they are not large enough to fall within the purview of certain state and federal employment laws, but as they grow, they will become subject to these laws and may not be fully aware of them.  Generally, start-ups do not have a professional HR staff or a general counsel to consult.  Therefore, it is important that emerging company owners have a thorough working knowledge of the various employment laws that can trip them up.

Every employer is subject to state and/or federal wage and hour laws, despite size.  These laws can be complicated and confusing.  If they are violated, employees can get a windfall recovery of  back wages, penalties, interest and attorney fees that can eclipse the wages owed.  The points below are intended to address some of the most common wage and hour questions.

Is Your Employee “Exempt” or “Non-Exempt?”

Whether or not an employee is entitled to overtime pay depends on whether they are “exempt” or “non-exempt.”

There are three narrow categories of white-collar exemptions:  Executives (supervisors), administrative employees, and professional employees.  In addition, outside sales professionals and certain highly paid computer professionals may be exempt.  Each job description has to be carefully analyzed against the legal test.  The exempt employee must be paid on a bona fide salary basis regardless of hours worked.  All other employees are non-exempt and must be paid hourly and paid overtime.  There are some slight, but important differences between state and federal law on many of these exceptions. The following deals just with federal law, so consult your legal counsel about differences in the law depending on where your employees are located.

Exemptions: Executive, Administrative, and Professional

Federal wage and hour laws exempt certain types of employees from additional overtime pay for working more than 40 hours in a week.  Once an employee qualifies as “exempt,” the employer must be careful to maintain this exempt status or else risk overtime claims and related penalties under federal or state statutes.  The common term for the most frequently used exemptions is “white collar”.  There are additional exemptions for computer professionals and outside sales that will be addressed in subsequent blogs.  The white collar exemptions require that the employees meet two tests: (1) the salary basis test and (2) the duties test.

Salary Basis Requirements

White collar exempt employees must be paid on a salary basis. Paying an employee on a salary basis requires that the employee receive a predetermined amount of pay each week, regardless of the quality or quantity of hours worked. Thus, employees must receive the same salary whether they work more or fewer than 40 hours a week. An improper salary deduction may destroy the employee’s exempt status. Employers are always permitted, under state and federal law, to give employees additional compensation beyond salaries.

Minimum Salary: Current federal regulations require exempt employees be paid a salary of at least $455 per week ($23,660 per year).

Permissible Deductions From Salary: Federal law permits deductions from an exempt employee’s salary only in the following circumstances:

  • Absences of one day or more for personal reasons other than sickness or accident;
  • Absence of a day or more due to sickness or disability if made in accordance with established policy;
  • Disciplinary suspensions for violations of safety rules of major significance;
  • Disciplinary suspensions for infractions of workplace rules (harassment, drug and alcohol violations);
  • For partial work weeks in the initial or terminal weeks of employment; and
  • When leave banks are exhausted, deductions from salary may not be made for partial-day absences, except:
    • In particular circumstances set forth elsewhere in the regulations (generally allowing salary reductions in FMLA qualifying circumstances and prohibiting other salary deductions, except in full-day or whole-week increments);
    • For public employees only, deductions from salary for partial-day absences may be made if there is an established policy of public accountability; and
    • Public employer may make deductions for partial day absences when the employee who takes an unpaid leave for personal reasons or illness does not use accrued leave, and provides for deductions for furlough absences authorized by law.

Duties Requirements

In addition to the salary basis requirements, exempt employees must also meet duties requirements. Because federal and state laws differ slightly regarding duties tests, the employer must comply with both when evaluating an employee’s status as exempt or nonexempt. Here are the general “duties” rules for the exemptions.

Executive Exemption: In addition to being paid a salary of at least $455 per week, an executive must:

  • Have a primary duty of managing the enterprise in which the employee is employed or of a customarily recognized department or subdivision;
  • Customarily and regularly direct the work of two or more full-time employees or their equivalent; and
  • Have the authority to hire, fire, promote or demote other employees or have particular weight given to suggestions and recommendations as to the hiring, firing, promotion or demotion or any other change of status of other employees.

The regulations also recognize as exempt any employee who owns at least a 20% equity interest in the enterprise in which the employee is employed.  This exemption will cover many start ups.

One difficult issue for retailers has been that supervisors in retail establishments frequently have both exempt supervisory duties and non-exempt duties. Under the federal rules, a retail supervisor can maintain exempt status even though the supervisor also performs tasks such as serving customers, cooking food, stocking shelves, and cleaning the establishment, if the manager’s (or assistant manager’s) primary duties include activities like scheduling employees, assigning work, overseeing product quality, ordering merchandise, managing inventory, handling customer complaints, authorizing payment of bills or performing other management functions. This is particularly true where the individual has the discretion to decide when to perform exempt work versus non-exempt work.

Administrative Exemption: In addition to being paid a salary of at least $455/week, an administrative employee’s primary duty:

  • Must involve office or non-manual work directly related to the management or general business operations of the employer or its customers. Examples in the regulations include work in areas such as finance, accounting, budgeting, auditing, quality control, purchasing, marketing, personnel management, public relations, or database administration as well as those who act as advisors or consultants to the customers.
  • Must include the exercise of discretion and independent judgment with respect to significant matters. Factors to be considered include, for example:
    • Whether the employee can formulate, interpret or implement management policies.
    • Whether the employee has the authority to commit the employer to matters of significant financial impact.
    • Whether the employee can deviate from established policies without approval.
    • Whether the employee is involved in planning long or short-term business objectives.
    • Whether the employee investigates and resolves matters of significance on behalf of management.
    • Whether the employee represents the company in handling complaints, etc.
  • The regulations clarify that “exercise of discretion and independent judgment” does not necessarily mean that the employee has final authority. Rather, “discretion” may consist of recommendations for action, rather than the final decision to take that action. Furthermore, discretion and independent judgment must be more than the use of skill in applying well-established techniques, procedures or standards in manuals.
  • Additionally, the new federal regulations provide useful examples applying the standards. These examples include insurance claims adjusters, certain employees in the financial services industry, team leads for major projects, certain executive assistants, human resource managers, and purchasing agents.

Professional Exemption: In addition to being paid a salary of at least $455 per week, a professional must either:

  • Have a primary duty of performing office or non-manual work requiring knowledge of an advanced type in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction, and whose duties require consistent exercise of discretion and judgment. The regulations discuss a number of examples and include the following positions within the exemption if they involve completion of a degree program: certified medical technologist, registered nurses, dental hygienists, physician’s assistants, accountants, chefs, athletic trainers, and licensed funeral directors.
  • Or have a primary duty requiring invention, imagination, originality or talent in a recognized field of artistic or creative endeavor. This includes musicians, composers, cartoonists, painters and some journalists.

Computer Professional Exemption: In addition to the other white collar exemptions, computer professionals who do not possess the requisite degree or education to qualify as professionals, may be exempt under a separate category. Be sure to check state law to determine whether it contains a similar exemption or any differences from the federal version.

  • Compensation: To qualify for the special computer professional exemption under the FLSA, employees must be paid at least $27.63/hour if paid on an hourly basis, or must meet the minimum salary of $455/week required for the professional exemption if paid a salary. In other words, they may be paid on an hourly or a salary basis.
  • Primary Duties: If the compensation prong is met, the employee’s primary duties must include some or all of the following work:
    • Application of systems analysis techniques and procedures, including and consulting with users, to determine hardware and software functional specifications;
    • Design, development, documentation, analysis, creation, testing or modification of computer systems or programs based on and related to user specifications;
    • Design, documentation, testing, creation or modification of computer programs related to machine operating systems; and / or
    • A combination of the above duties, the performance of which requires the same level of skills.

Outside Sales Exemption: A sales employee is exempt only if he or she:

  • Is customarily and regularly engaged away from the employer’s place of business making sales or obtaining orders or contracts for services or facility use. The regulations emphasize that the outside sales employee is “an employee who makes sales at the customer’s place of business or…at the customer’s home.” It does not include sales by mail, telephone or Internet unless that contact is incidental to the personal sales call.
  • Has the primary duty of making sales or obtaining orders or contracts for services.

Retail or Service Establishment Employees Paid by Commission: Under the FLSA commission employees of retail or service establishments (RSEs) are exempt from the FLSA overtime requirements if at least 50 percent of their earnings are from commissions and they are guaranteed pay in excess of time and one-half the minimum wage for all hours worked.

Highly Compensated Employees: The federal regulations include a special, streamlined rule for employees paid $100,000 or more annually. These highly-paid employees are automatically exempt if they perform non-manual work and if they have any identifiable executive, administrative or professional function as described in the standard duties tests discussed above. In other words, they do not have to meet all the elements of the standard duties test to qualify for exempt status.

CONCLUSION

In conclusion, it is critical for startup employers to pay their employees correctly since a small violation can carry huge penalties and create financial difficulties for a small business.  Consult your legal counsel or an HR consultant who is an expert in wage and hour law.  Pay your employees correctly, do not “cut corners” in this area of the law!

Chrys Martin focuses her practice on employment law and employee benefits issues. She offers her clients 31 years of experience in complex employment and ERISA litigation, including class actions. Chrys applies her depth of knowledge in litigation to counseling employers and training management in pragmatic risk avoidance.

Posted in Startup Law, Startups | Tagged , , , | Comments Off on Wage and Hour Tips For Startups