ENTR Law Prof Smith Exam #2 Spring 2021

Sarah hires several employees to work in her new venture, which is located in Florida. These U.S. employment contracts will be governed by: The CISG Article 2 of the UCC The common law All of the above

the common law

Why put a contract in writing?

• Clarify understanding • Prevent misunderstandings later • Written record of the terms • Gives rise to legal rights and duties • Reduce the chance of a lawsuit • Enhance the value received by each party

A product may be dangerous because of a Manufacturing defect Design defect Inadequate warnings All of the above

All of the above

Before making a final decision on which sources of funding to pursue, entrepreneurs should consider: Whether the company would benefit from investor representation on the board of directors How long it is likely to take before the company is cash-flow positive The degree of control over the company they wish to retain All of the above

All of the above

Contracts enable entrepreneurs to: Strengthen relationships Increase predictability Specify the consequences of nonperformance All of the above

All of the above

Legally astute entrepreneurs work with their counsel to craft contracts that: Facilitate the marshaling of resources Increase realizable value Appropriately allocate legal and business risk All of the above

All of the above

Section 2-201 of the UCC provides that contracts for the sale of goods for $500 or more are unenforceable unless: A written indication of the quantity of goods being sold. A written statement recognizes that an agreement exists There is a written signature against the party whom enforcement is sought All of the above

All of the above

Special rules governing e-commerce have been developed to: Which jurisdiction's law governs online sales What rights consumers have to personal data Address issues such as how electronic contracts are formed All of the above

All of the above

When deciding to invest in a start-up, a venture capitalist will look for an enterprise: With the potential to grow to a significant size quickly That will generate an annual return of investment in excess of 40% With a scalable business model All of the above

All of the above

Which of the following exemplify a human resources strategy that is incorporated into the value proposition and business plan to achieve flexible workplace arrangements? Using outsourcing services Hiring independent contractors Hiring freelancers All of the above

All of the above

Which of the following is an antidilution provision? Structural antidilution Right of first refusal Full ratchet All of the above

All of the above

Which of the following offer a reason for a company to hire independent contractors as opposed to employees? Not having to pay Social Security taxes Not having to pay overtime wages Not having to pay Medicare taxes All of the above

All of the above

Which of the following should be included in a written contract? Timing issues The identity of the parties The parties' obligations All of the above

All of the above

The E-Sign Act and UETA

Almost any mark or process intended to sign an electronic contract or record will constitute a valid electronic signature. • Includes a name typed at the bottom of an email message • Seller may have to offer the buyer the opportunity to confirm or revoke • Click-Wrap with readably available terms

The UCC imposes a guarantee that the goods offered by the seller are fit for the particular purpose for which the seller recommended them. This is referred to as: An implied warranty of fitness for particular purpose Puffing An implied warranty of merchantability An express warranty

An implied warranty of fitness for a particular purpose

The UCC imposes a guarantee that the goods offered by the seller are reasonably fit for the general purpose for which they are sold. This is referred to as: An express warranty An implied warranty of merchantability An implied warranty of fitness for particular purpose Puffing

An implied warranty of merchantability

A worker who provides unsupervised, specialized work that is needed only sporadically is a clear-cut example of: An independent contractor An employee An independent contractor and an employee None of the above

An independent contractor

Corporate Venture Capital

As investment, to accelerate innovation and/or explore acquisition targets

Some businesses may be able to self-finance, or fund their growth through utilization of their own net income and cash resources. This is sometimes called: Bootstrapping The elevator pitch Capitalizing Leveraging

Bootstrapping

Two primary sources of US contract law:

Common Law and Article 2 of the Uniform Commercial Code

If a company wishes to give all its investors the same rights and restrictions, the company should issue only: Preferred stock Common stock Treasury stock Convertible promissory notes

Common stock

Drafting Contract Language

Contractual wording is very literal. "All" means everything; "shall" means it must be done; and "may" means it is permitted but not required. "And" means that both elements must be satisfied, whereas "or" means that satisfying either element is sufficient. The term "and/or" should be avoided, as it tends to be ambiguous. The phrase "A and B, or either of them" is clearer.

debt

Debt is money provided in exchange for the owner's word (sometimes backed up by tangible assets as collateral as well as the personal guarantees of the owner) that the original investment plus interest at a predetermined fixed or variable rate will be repaid in its entirety over a set period of time.

The following are types of contracts that usually must be in writing to be enforceable, except: Contracts that cannot be performed within one year Employment contracts that are less than one year in duration Contracts for the sale of goods for $500 or more Contracts that involve the transfer of interests in real property

Employment contracts that are less than one year in duration

equity

Equity capital is money provided in exchange for the ownership that ideally appreciates in value as the company grows. The investor may also receive a port of the company's annual profits, called dividends, based on the their ownership percentage.

Small Business Investment Companies (SBICs)

For profit equity firms licensed and regulated by the Small Business Administration

All of the following are defenses to strict product liability, except: Good faith Assumption of risk Comparative fault State-of-the-art defense

Good faith

A clause that states "this agreement constitutes the entire agreement of the parties and supersedes all prior and contemporaneous agreements, representations, and understandings of the parties" is called a: Liquidated damages clause Integration or merger clause Nonreliance clause None of the above

Integration or merger clause

Normal process for Angel/VC Investment:

Introduction (elevator pitch) • Informal • Platforms (gust.com or angellist.co)/(venturebeat.com or crunchbase.com) • Network - including experienced attorney • Review (executive summary) • Screening meeting (business pitch) • Investor/VC meeting (business pitch+) • Due Diligence (business plan+)

All of the following are true of "friends and family" financing, except: It is a good way to introduce friends and family with low net worth to high-risk investing It is often a relatively cheap and quick source of capital It can yield support based on personal relationships It is usually preferable when management wants to maintain control

It is a good way to introduce friends and family with low net worth to high-risk investing

Article 2 of the UCC governs the sale of goods in every state, except: Illinois New York Louisiana California

Louisiana

It is critical to the success of any venture to hire and retain workers who are: Motivated Talented Motivated and talented None of the above

Motivated and talented

All of the following are basic requirements of a contract, except: An agreement between the parties formed by an offer and acceptance The parties' promises are supported by something of value One of the parties lacks the legal capacity to enter into a contract The contract has a legal purpose

One of the parties lacks the legal capacity to enter into a contract

All of the following are types of unfair competition, except: Disparagement Unauthorized use of rights of publicity Promissory estoppel Passing off

Promissory estoppel

Pros and Cons of Equity Financing

Pros: • No personal guarantees are required • No collateral is required • No regular cash payments are required • There can be value-added investors • Equity investors cannot force a business into bankruptcy • On average, companies with equity financing grow faster Cons: • Dividends are not tax-deductible • The entrepreneur has new "partners" in the business • It is typically very expensive • The entrepreneur can be replaced

Pros and Cons of VC Funding

Pros: • VCs have more funds available • VCs have experience growth and selling ventures • VCs have large networks • VCs make good board members • VC-backed ventures have cache • With VC-funding 90% fail - drops to 33% with VC-funding Cons: • VCs demand tougher terms • VCs demand control and mold ventures • VCs might demand change in leadership

Statements at the beginning of the contract that summarize the parties' intentions and are preceded by the term "whereas" are called: Conditions Recitals Representations and warranties Choice of law provisions

Recitals

When an investor asks for the right to force the company to repurchase its stock at some point in the future, this is called requesting: Redemption rights Warrants Conversion rights Voting rights

Redemption Rights

If a supplier is creating something new and innovative for a buyer, the buyer can use a contract to secure a: Convertible debt Right of exclusivity Stock option None of the above

Right of exclusivity

A venture capitalist who invests in an enterprise that is at the raw startup phase has provided financing during this stage of development: Seed Early stage Later stage Mezzanine

Seed

Pitch Deck

Should concisely describe: • the market • the unmet need in the market • the compelling solution offered by the entrepreneur • the strategy for connecting the need, the solution, and the customers • the technology or other proprietary aspects of the solution that will give this venture an edge over the competition • the experience of the team that demonstrates that the plan can be implemented • how much money is being raised and what the company plans to accomplish with the funding Shouldn't be: • Too long • Poorly organized • Unbalanced • Lack focus • Have too small of a market

Most states have adopted a type of legislation call a ____________, that requires parties to put certain types of agreements in writing. Promissory estoppel Statute of frauds UCC article 2 Statute of limitations

Statute of frauds

Well-drafted _____________ help reduce uncertainty by setting prices and quantity, specifying dates for delivery of the identified supplies and inventory, binding the parties and providing remedies for nonperformance. Stockholder subscription agreements Supply contracts Non-compete agreements Bylaws

Supply Contracts

The primary source(s) of contract law in the United States includes: The CISG The common law Article 2 of the UCC The common law and Article 2 of the UCC

The common law and Article 2 of the UCC

Statute of Frauds

The sale of goods for more than $500 is unenforceable unless the following are in writing: • A statement recognizing an agreement exists • The signature of the party against whom enforcement is sought, unless notification is provided with 10 days to respond • An indication of the quantity of goods being sold

Legal Purpose

To be binding, an agreement must have a legal purpose

All of the following are items related to convertible promissory notes, except: Warrants Maturity date Conversion terms Principal amount

Warrants

Two primary sources of US contract law:

common law, Article 2 of the Uniform Commercial Code

Using a program like Microsoft PowerPoint to convey key components of a business plan involves developing a: Prospectus Business plan SEC filing statement Pitch deck

pitch deck

Offer and Acceptance

• An offer is a statement by the offeror that indicates a willingness to enter into a bargain on the terms stated • In the case of a bilateral contract, acceptance occurs when there is an exchange of promises whereby the person to whom the offer was addressed (the offeree) indicates a willingness to accept the offeror's proposed bargain • Acceptance of a unilateral contract does not occur until the offeree has completed the required act

Miscellaneous Other Topics

• Analyzing possible contract disputes • Effect of bankruptcy • Remedies • Monetary damages - expectation, reliance, restitution, consequential and liquidated • Duty to mitigate damages • Non-Monetary - specific performance, injunctions and rescission • Promissory Estoppel - limited relief • Quantum Meruit - in the absence of a contract

Consideration

• Anything of value that is exchanged by the parties • Additional consideration is required if contract is modified • Illusory Promises - no restriction on promisor's actions

Magnuson-Moss Warranty Act

• Applies to interstate and foreign commerce • No seller is required to make an express warranty • If sell does - must state full or limited warranty • A full warranty must meet certain conditions • "tie-in sales provisions" are prohibited

Strict Liability in Tort for Defective Products

• Applies when defect causes injury • Applies to all in the chain of distribution • Injured may also sue for negligence and breach of warranty • Proof of defect involves: • Product was defective when it left hands of defendant, and • The defect made the product unreasonably dangerous • Types of Defects: • Manufacturing • Design • Failure to Warn • Who is Liable?

What VCs Look For:

• Attractive potential for growth in sales • Ability to grow with scale (scalability) - not lifestyle businesses • Way to ward off or delay competition • Credible Management Team

Types of Contracts

• Bilateral and Unilateral • Explicit and Implied • Oral and Written

Advertising

• Common Law - breach of contract and tort of deceit • Statutory Law - Lanham Act - false or misleading claims • Regulatory Law - FTC • Quality Claims • False Testimonials and mock-ups • Deceptive Pricing

Employee Privacy

• Computer Use and Email • Health Insurance Portability and Accountability Act (HIPAA) • Workers' Compensation • Occupational Safety and Health Act (OSHA) • National Labor Relations Act (NLRA)

Types of Written Contracts

• Customized Long-Form Agreements • Letter of Agreement • Standard-Form Contracts • Attachments (Exhibits) • Addenda

Before raising money, you should consider:

• Degree of control you wish to retain • Amount of equity dilution you are willing to bear • How long it is likely to take before you are cash-flow positive • Whether you would benefit from an investor on the Board • How security regulations might impact your fundraise • Whether a join-venture or strategic-alliance might be good • Is boot-strapping a possibility?

Limiting Liability

• Don't make express warranties • Disclaimer of implied warranty of merchantability • Disclaimer of implied warranty of fitness • AS IS or WITH ALL FAULTS • Refrain from professing expertise • Limit remedies to repair or replacement, for a specified period

Other conditions

• Duration and revocation • Options Contracts • Mirror-Image Rule • Intent to Be Bound • Effect of Counteroffers

Employment Agreement (document):

• Duties • Compensation (cash & equity) • Benefits (healthcare, retirement plans, etc.) • Stock Options and Stock Grants • Duration and termination of employment • Verification of authority to work in the US • Proprietary information and inventions agreements • Non-competition clauses • Non-solicitation clauses • Integration clause • Mandatory arbitration of employment disputes

Other Employment Issues:

• Employment at Will • Wrongful Discharge • Public-Policy Exception • Implied Contracts • Implied Covenant of Good Faith and Fair Dealing

UCC Article 2 Warranties

• Express warranty - promise and basis of the sale • Puffing • Implied warranty of merchantability • Pass in the trade, fair average quality, fit for ordinary use, run with variations permitted, adequately packaged, conform to label • Implied warranty of fitness for a particular purpose • the buyer had a particular purpose for the goods • the seller knew or had reason to know of that purpose • the buyer relied on the seller's expertise • the seller knew or had reason to know of the buyer's reliance

Other Employment Legislation:

• Fair Labor Standards Act (FLSA) • Exempt vs. Non-Exempt • Workers' Compensation • Occupational Safety and Health Act (OSHA) • National Labor Relations Act (NLRA)

Unfair Competition

• False Advertising • Passing Off • Disparagement • Right of Publicity

Other Protective Arrangements

• Founder vesting • Employee Stock Option Pools • No-Shop provisions

Consumer Privacy

• Governed by regulations (Federal Trade Commission and others) • Self-regulation as a strategic advantage • Requires a very proactive/strategic approach • Identify Theft - data breaches • Children's Online Privacy Protection Act of 1998 • Many other US privacy acts and more developing • European Union Privacy Protections - very strict

Strategic Recommendations to Reduce Risk:

• Hire smart - select employees carefully • Document the relationship • Implement good policies and practices • Terminate with care

General Contract Terms

• Identification • Signatures • Intent to enter into a contract (recitals) • Date • Terms of the agreement

Venture Capitalists

• In the business of providing equity capital to entrepreneurs, with the expectation of high returns • Private exchange or deal for equity - sometimes for part and sometimes for all of the company • External investors (limited partners) commit a certain amount of capital (typically $1M+) to a new venture fund • Managers work their network of entrepreneurs, attorneys, limited partners and industry contacts for leads • Managers do screening, selection and oversight • Usually invest in a specific stage (seed, early, rapid growth, mature) • Usually investment a minimum of $250K+ to millions • Expect high returns - 5X in five years and expect to exit then (40% annually) • May bring expertise as well (value-added investor), probably in a specific industry • Will likely want a board seat • Often have plan to provide follow-on capital

"Three" principal criteria for independent contractors

• Independent contractor agrees with client on what the work product will be and then the contractor controls the means and manner of achieving it • Independent contractor offers services to the public at large, disbursing payments from the client, paying expenses and providing his/her own tools. • The relationship of the parties is evidenced by a written agreement that specifies that the worker is an independent contractor and is not entitled to employee benefits, the services provided are not key to the business and the relationship is not permanent.

Accredited (sophisticated) Investors

• Individual net worth greater than $1M (excluding residence) • Individual income of at least $200K in past and current year • Joint income of at least $300K in past and current year • Must be confirmed with a form called and Investor Questionnaire

Angels and Angel Groups

• Individuals or groups of individuals with wherewithal (must be accredited) • Usually invest at seed or start-up stages • Usually in the $50-300K range • Expect high returns - 5-10X in five years • Often entrepreneurs or form entrepreneurs • May bring expertise as well (value-added investor) • May want a board seat • Motivated by potential returns, tax benefits and potential of involvement/influence • Often have limited follow-on capital

Additional Clauses

• Integration or Merger clause • Nonreliance clause • "no supplement, modification, or amendment of this agreement shall be binding unless executed in writing by both parties"

Pre-Hiring Practices:

• Job Advertisements • Applications and Interviews • Gender • Age • Race • National origin, citizenship and Right to Work • Religion • Disability and physical traits • Conviction and arrest records • Education • Credit references and reports

Specific Contracts

• Leases • Rental charges • Provisions - what's included and what's not included • Restrictions on subleasing • Contracts for the purchase of Real Property • Always consult an experienced real-property lawyer • Loan Agreements • Logistical details of receiving the loan • Conditions Precedent • Covenants • Repayment Terms

Direct Public Offerings

• Less than $5M, Small Corporate Offering Registration (SCOR), Regulation A, or Intrastate Program • Much less complicated, less paperwork and restrictions • Shareholders are usually affinity groups - customers, employees, suppliers, distributors, etc. • Downsides: no public market, limited appreciation without a market, limited liquidity

Initial Public Offerings

• Minimum of $5M in stock to the public (individuals and institutions) • Strictly regulated by SEC • Public equity markets: NYSE, NYSE MKT LLC (formerly AMEX), Nasdaq • Reasons: raise cash to fuel growth, use stock for recruiting, use stock for acquisition, liquidity exit • Challenges: long and complicated process, institutional investors have short-term focus, lock-out period for key management (can't sell stock)

Capacity and Authority

• Minors and mentally incompetent • Representatives of entities • Officers of corporations (not board directors) • Governmental authorities

Oral Agreements and Statue of Frauds

• Most states allow for oral agreements, except when • Statute of Frauds: • Contracts that cannot be performed within one year • Contracts that involve the transfer of interests in real property (including options to purchase real property and leases) • Contracts by which a person agrees to guarantee the payment of another person's debt • Prenuptial contracts whereby individuals who are going to be married agree how assets are to be allocated if they divorce • Contracts for the sale of goods for $500 or more

Preliminary Agreements

• Non-binding - neither party is under obligation to negotiate in good faith to reach an agreement • Sample preliminary agreements • Term Sheets • Memorandum of Agreement (MOA or MOU) • Letter of Intent (LOI) • Letter of Agreement (LOA) • Indication of Interest (IOI)

Joint employment:

• Occurs when both the client company and employment agency are both employers under the principles of common law, and they share or codetermine those matters that govern the essential terms and conditions of employment • When both are considered employers, then both are obligated under NLRA regulations • Client company should push indemnification in the agreement if possible

Sources of Equity Funding

• Personal • Business Partners & Employees • Family & Friends • Crowd Funding • Grants & Awards (may be non-dilutive) • Incubators & Economic Development (may be government financing) • Customers, Suppliers & Partners (strategic alliances) • Angel Investors/Groups • Venture Capital • Private Equity / Family Offices • Public Offerings

"Private Placements"

• Personal, family, friends, angels, angel groups • Governed by Section 4(2) of the U. S. Securities Act of 1933 and Regulation D • Not raised on the open market - no general solicitation (exception is crowdfunding) • Offering party must know investors directly or indirectly (attorney, investment banker, etc.) • Must be accredited (sophisticated) investors • Some Regulation D Restrictions • <$1M, unlimited investors, no qualification required, no reporting or information required • $1M-$5M, 35+ accredited investors, restricted resale, reporting required if non-accredited investors • Will be formally offered using a Private Placement Memorandum

Rights of Preferred Stock

• Preferences on liquidation • Preferences on dividends, cumulative dividends • Participating preferred • Rights of subsequent series (pari passu) • Redemption rights • Conversion rights • Antidilution provisions • Special voting rights • Milestones • Registration rights • Information and visitation rights • Right of first refusal and co-sale rights • Drag-along rights

Choice of Law

• Provision in written contract - which state's law governs • In absence - which state has strongest relationship

Terms of the Agreement

• Representations and Warranties • Conditions • Logistical Considerations • Payment Terms • Timing of Performance & Liquidated Damages • Notice and Opportunity to Cure • Duration and Notice of Termination • Renewability of the Contract • Allocation of Risk • Binding Arbitration • Mediation • Choice of Law and Forum • Attorneys' Fees

Primary Types of Crowdfunding

• Rewards-based - entrepreneurs presell a product or service to launch a business concept without incurring debt or sacrificing equity/shares • Equity-based - the backer receives shares of a company, usually in its early stages, in exchange for the money pledged • Debt-based (micro lending) - involves granting small loans to people in need. These loans are generally used by entrepreneurs with a business idea or those who need extra cash to expand • Donation-based - collective effort of individuals to help charitable causes

Other Discrimination Acts:

• Section 1981 of the Civil Rights Act of 1866 • Age Discrimination in Employment Act (ADEA) • Immigration Reform and Control Act (IRCA) • Americans with Disabilities Act (ADA) • Family and Medical Leave Act (FMLA) • Genetic Information Nondiscrimination Act

Implications of misclassification of independent contractors:

• Tax issues including penalties and fines • Compensation/benefits issues • Intellectual property protection issues • Class-action lawsuits

Some Common Terms

• Term Sheets - a bullet-point document outlining the material terms and conditions of a potential business agreement, establishing the basis for future negotiations between a seller and buyer. • Convertible Promissory Notes - is a form of debt that converts to equity when either a certain event has occurred or a certain date has passed. • Common Stock versus Preferred Stock (convertible) • Employee Stock Option Plans and Rule 701 Offerings • Public Offerings - the sale of equity shares or other financial instruments such as bonds to the public in order to raise capital. • Exemptions from Federal Security Regulations • Private Offerings • Blue Sky laws - state-level, anti-fraud regulations that require issuers of securities to be registered and to disclose details of their offerings.

Things to consider about Crowdfunding

• There are hundreds of crowdfunding sites on with web, most specializing in a particular market or approach, all with different rules • Many of these are actually revenue generating, rather than either debt or equity • Crowdfunding may be a good way to test the market • Remember, it is a public effort, so if you do it, the campaign should be well-planned and executed

Four basic requirements for a contract:

• There must be an agreement between the parties formed by an offer and acceptance • The parties' promises must be supported by something of value, known as consideration • Both parties must have the capacity and authority to enter into a contract • The contract must have a legal purpose

Article 2 of the UCC

• Types of Contracts Covered. • Article 2 only covers the sale of goods. • Governs all states except Louisiana • What Are "Goods"? All things (including specially manufactured goods) which are movable at the time of identification to the contract for sale." • Identification to the Contract: the designation-by marking, setting aside, or other means-of the particular goods.

Contract Formation

• UCC not as strict as Common Law - intent to close a deal • Missing Terms - Gap Fillers • No "mirror image" rule • Knockout Rule • Approval Clauses • Shrink-Wrap Agreements • "Meeting of the minds" • Consideration

Electronic Contracts

• Uniform Electronic Transactions Act • The E-Sign Act • Exclusions • Wills, codicils and trusts • Adoption, divorce and other matters of family law • Certain provisions in UCC • E-Sign excludes other official notices

Employment Discrimination:

• Variety of federal, state and local laws and regulations • Equal Employment Opportunity Commission (EEOC) • EEOC focus areas • Title VII of the Civil Rights Act of 1964 • Reasonable religious accommodation • Damages • Types of discrimination • Disparate treatment • Disparate impact • Harassment • Retaliation

Some IRS Guidelines:

•The nature and degree of control or supervision retained or exercised by the employer •The extent to which the services in question are an integral part of the employer's core business (the more integrated the worker's services are in the employer's day-to-day operations, the less "independent" the worker is deemed to be) •Whether the employer provides the training •The amount of the worker's investment in facilities and equipment •The kind of occupation •Whether services are exclusive, or the worker may pursue other engagements •The worker's opportunities for profit or loss •The method of calculating the payment for the work (by time worked or by the job) •The skill, initiative, and judgment required for the independent enterprise to succeed •The permanence and duration of the working relationship •Whether vacation, sick leave, or other types of leave are given •Whether the worker accumulates retirement benefits or is given medical benefits from the employer •Whether the employer pays Social Security and Medicare taxes •The intention of the parties, including any written agreement between the parties, regarding independent contractor or employee status.