Private Company Flexibility and Growth Act Introduced In House

Legislation has been introduced in the House that would increase the 500 shareholder threshold for SEC reporting to 1,000 and exclude “accredited investors” from being counted toward that limit.

The bill is actually short. You can read it below. It is great that efforts are being made in Congress to make life easier for companies. Now if Congress would just fix the problematic provisions of Dodd-Frank which made it harder to qualify as accredited and conduct all accredited 506 offerings, and allow general solicitation, repeal Section 409A, and reverse the presumption on Section 83(b) elections….

For great, more detailed blog coverage of this proposed bill, see Jim Hamilton’s blog article on this from yesterday.

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GPS Act

The law can never be simple, it seems. If you are interested in the 4th Amendment, you might have been pleased to hear that legislation has been introduced to require the government to get a warrant before it can install a GPS device on your car. Ok, that sounds fine. But if you read the text of the bill you will find lots of language regulating private businesses, including private causes of actions for violations with statutory penalties (See Section 2605 on pages 13 and 14). Why not just introduce a simple bill that said–the government is required to obtain a warrant before it can track someone via a GPS unit?

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When NOT To Raise Revenue-Based Financing

Guest Post by Randall Lucas, rlucas@revenueloan.com

As an investor with RevenueLoan — the Seattle-based pioneer of Revenue-Based Financing (RBF) for growing businesses — I spend most of my time telling people, in one way or another, how they SHOULD use RBF to finance their businesses.

(Revenue-Based Financing is a way for entrepreneurs to raise money by “selling off” a percentage of revenue, not a percentage of the company. It often can be more attractive than either debt or equity … but I’m biased because it’s my job.)

However, I’m acutely aware that I’ve got a hammer called RBF, and sometimes everything looks like a nail. So, with that in mind, I feel it’s good sometimes to look at the failings and mismatches of RBF, and so I present this list of times when you should NOT raise Revenue-Based Financing.

1. Declining Marginal Margins. If your gross margins are flat to declining with scale — meaning that you make less profit on each incremental dollar of sales — you should run screaming from Revenue-Based Financing.

This would be the case for certain kinds of businesses where you pick the “low-hanging fruit” early, and where the rest of the customers are hard and expensive to reach. Or, where the market is so small and saturated that trying to push more product actually will move prices down.

Why not Revenue-Based financing in this case? Simple. If you owe a financier 10% of your revenue, but your marginal gross margin drops to 10%, you’ll be in a pickle where the optimal thing to do is to stop selling — and that’s a damn weird bind to put an entrepreneur or a company into. “Perverse incentives” kick in at that point — and neither you nor the financier is likely to be happy.

2. One-Way Ticket to Crazytown. If the VC train has left the valuation station — and it’s on a one-way ticket to crazytown — you might find yourself able to raise funds at a premoney valuation that even YOU, the optimistic entrepreneur, don’t believe in.

If that’s true — and it’s definitely been the case in ancient (late ’90s) and arguably in recent (late 2000s) history — then selling off a percentage of your revenues is almost certainly a worse deal for you. After all, the reason why RBF is a win for investors is that it repays on a variable basis, based on revenue collection, making for (usually monthly) cash flow returns.

RBF returns aren’t calculated based on an inflated valuation (or a deflated one, either). So, RBF is probably going to be closer to “fair” value than a stratospheric premoney valuation. And if you’re getting the best of a wildly unfair deal … you probably don’t want to negotiate against yourself.

(That said, it’s not a good idea to shoot for a jacked up valuation for its own sake; the risk of later disappointment with a “down round” is usually too great.)

3. Buying Bonds. OK, so you probably aren’t buying Treasury bonds, exactly — but you might be in need of funding to buy a building, or some other asset that produces a regular and predictable return. A traditional bank should be able to help, and if they can, then don’t you dare call up RevenueLoan or any of our brethren in the RBF world.

Why not? Simple. If the asset produces regular enough returns that a bank can lend against it — then you can bet that LOTS of banks will lend against it, and they’ll implicitly or explicitly be bidding against one another. There’s a market price, and a low bidder — and it’ll almost certainly be cheaper than RBF.

That’s not because RBF is inherently more expensive — it’s not, really — but it’s because a large part of the value of RBF comes from its variable nature. If the asset you’re buying has perfectly predictable returns, you don’t get any benefit from funding it with a variable-payment RBF. You’d rather pay a lower effective interest rate with fixed payments, rather than “buy an option” to let the payments float (which is essentially what RBF does for you).

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Randall Lucas is an investor with Seattle-based RevenueLoan, a pioneer of the Revenue-Based Financing model. He is a reader and occasional contributor to Startup Law Blog, and also writes at blog.revenueloan.com and blog.rlucas.net.

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Section 83(b) Elections

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Summertime Blues: Limits on Using Unpaid Student Interns and Volunteers

summertime bluesBy Gregory S. Fisher, John C. Post, and Mary E. Drobka

Summer is the time of year when businesses often use student interns. Many businesses erroneously assume that student interns are not employees, particularly if they “volunteer” or if they are earning college credit for work performed. While it is true that college students under certain circumstances may be classified correctly as non-employees, not all qualify.

This advisory highlights key issues and best practices related to using student interns and the limits on using volunteers. Child labor or other student-learner subjects are beyond the scope of this brief summary.

Be familiar with the six-factor test

The U.S. Department of Labor (USDOL) applies the following six-factor test regarding student interns. All six factors must be met, otherwise an employment relationship exists and the student intern is considered an employee who must be paid under the Fair Labor Standards Act (FLSA).

  1. The training, even though it includes actual operations of the facilities of the employer, is similar to that which would be given in a vocational school;
  2. The training is for the benefit of the trainees;
  3. The trainees do not displace regular employees, but work under close observation;
  4. The employer providing the training derives no immediate advantage from the activities of the trainees, and on occasion the employer’s operations may actually be impeded;
  5. The trainees are not necessarily entitled to a job at the completion of the training period; and
  6. The employer and the trainees understand that the trainees are not entitled to wages for the time spent in training.

This “trainee” test also applies to school-to-work learning programs under the School-to-Work Opportunities Act of 1994. Please see USDOL guidance on trainees and on school-to-work programs.

Volunteers – private sector vs. public sector

Individuals may volunteer their services for charitable, religious, or other nonprofit community or public services organizations without creating an employment relationship, so long as certain conditions are satisfied. Thus, private sector for-profit employers generally may not use unpaid volunteers to perform work for them. In contrast, public employers may use volunteers, including individuals who are already employed by the public entity, so long as such individuals are not volunteering to perform work that they are already performing as part of their regular job for the public employer, and other conditions are satisfied. Please see USDOL guidance on volunteers.

But the student “volunteered” to get experience so I am not liable, right?

Wrong. College students looking to get a leg up in the marketplace may try to “volunteer” to work. But, even if the student is getting course credit for work, that alone does not allow the employer to ignore the requirements of the FLSA. Unless the relationship meets the entire six-factor test, the student must be classified as an employee, and the employer must comply with the FLSA and any applicable state wage and hour laws regardless of the student’s motivation.

Pay requirements

If a student should be classified as an employee, the student must be compensated no differently than any other employee. Unless other statutory exceptions and exemptions apply, the student would usually be eligible to be paid at least the minimum wage and overtime. Federal law allows for payment of a sub-minimum wage for certified student-learners. See 29 C.F.R. §§ 519.1, et seq.; 29 C.F.R. §§ 520.500, et seq. However, unless your state law includes a comparable provision, you may not be able to use this federal sub-minimum wage.

Practical tips

An internship must have a significant educational or vocational component.

    The employer must prove that the nature of the intern’s activities is directly related to the educational and vocational objectives of the training and that the activities do not unreasonably displace the tasks performed by employees.
    An intern should earn college credit or have a learning experience by being able to observe the practical application of classroom instruction in the workplace. The experience must do more than merely enhance the student’s marketability by giving him or her a line on the resume.

The program must benefit the students more than the employer.

    The burden of administering the program and supervising the student interns should outweigh any incidental benefit provided to the employer.

The interns or trainees may not displace regular employees or do their work.

    The student intern should be shadowing regular employees, not stepping into the place of a worker, directly performing the main work of the business, or actually working along side regular employees while receiving little or no training.

The interns must be closely supervised.

    Supervisors of interns must commit significant amounts of time to mentoring, teaching, and critiquing the activities of the interns.

Where can I get more information?

Check out the USDOL’s Fact Sheet #71.

In 2006, the USDOL published a useful opinion letter addressing the six-factor test in the context of university externs.

Still thinking of utilizing an intern?

    • Begin with the assumption that any person performing any job or task for you should be classified as an employee.
    • Never assume that anyone may lawfully “volunteer” or perform any work for you without being covered by wage and hour laws, particularly if you are a for-profit business.
    • Do not assume that every college student earning credit can be classified as an intern or trainee.
    • Confer with employment counsel before classifying a student as an unpaid “intern” or “volunteer.”
    • Be clear with interns, both in written and verbal communications, that the internship will not be paid and will not necessarily lead to employment.
    • Forms don’t control, but they are helpful in a close case. Have counsel assist with drafting an internship agreement in which the student-intern acknowledges that the six factors are present, particularly the absence of a wage.
    • When in doubt, classify a worker as an employee entitled to minimum wage and overtime.
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