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May 7, 2013 What legal factors cause a small business to fail? “The biggest factor I would say that causes a company to have problems is just not documenting,” say Roger Royse, founder of the Royse Law firm. Learn more of What Roger has to say and how you can protect your business.
Alan: Welcome back; I’m here today with Roger Royse. He’s the founder of the Royse Law Firm with 3 offices in Palo Alto, San Francisco and Los Angeles. Roger, welcome to today’s show.
Roger: Thanks Alan, it’s good to be here.
Alan: Roger, give me your background, how did you get to where you are today?
Roger: Where I am today, well you know I’ve got quite a diverse background actually in the law. I started out practicing in the Midwest and the Great Plains out working in the oilfields and agricultural areas of North Dakota. And in the end of the 80s, I moved to New York City, furthered my education in tax law. And liked it so much, I stuck around and I worked with a big law firm on Wall Street during the end of what they call the go-go 80s, doing some of the big M&A deals. Worked on some, the transactions we worked on in New York, were the kinds of things that you would have read about on the front page of the New York Times, it was very exciting. In early 90s I came out to Silicon Valley. And since being out here it's been mostly technology, technology companies. We recently opened an office in Los Angeles a few years ago, so we've gotten involved in the entertainment industry as well, so you could say that I’ve done a little bit of pretty much a lot of the big industries in the United States. And have settled primarily here in Silicon Valley now working here in what I think of as the center of the technology company universe certainly the center of the start up and venture capital universe.
Alan: You know it said about 50% of the venture capital money in the world runs through Silicon Valley.
Roger: I believe it, I mean I drive, I tell people we work with a lot of companies and entrepreneurs from other countries and when they come to visit the Valley or when I go to visit them, I tell them that on my way to work every morning I drive past $10 billion a year of venture capital.
Alan: There seems to be a lot more and more entrepreneurs that are raising capital through crowd funding to bring their ideas to fruition. And, what is crowd funding?
Roger: Yes, oh so let's be careful about terms. Because when people say crowd funding, right now, they usually mean crowdsourcing. They mean things like Kick Starter and Indi go-go where, that everybody's familiar with. And I'm working with a new fund called Gazillian Fund, which is doing something similar. Where the company will basically solicit donations, it’s not a store but, you know, the contributor might get a, get like a baseball cap or something like that. That's what's legal now. The crowdfunding that we been hearing about in the press a lot recently is equity crowdfunding. And that's the idea that companies will be able to go out on an Internet portal and sell their securities to unaccredited investors just through the Internet. Now that is not yet law, and it's unclear as to when it will ever become law because it requires implementing regulations by the Securities and Exchange Commission. And they've been surprisingly slow to get to these regulations and probably not so surprisingly, because there are so many flaws in this law, it’s going to be quite difficult for the regulation drafter to put in place enough protections and enough direction in order for companies to go out and implement this new law in a meaningful way. So that’s the crowd funding we’ve been hearing about; it’s not yet law, it's unclear as to when it will be. While I’m on the topic, there's another provision of the law that has gotten a lot less attention but I think is going to be much more important. And that is what we call the changes to rule 506 allowing solicitation of accredited only investments. As the law is today, if a company is going to do a financing and is going to go out and solicit investors it really cannot do public solicitation it can’t do advertising it has to be personal relationships that sort of thing, the change in that, that’s in regulation D of the securities laws. The proposed change would allow advertising and solicitation of accredited only investments, meaning that the investors must be accredited. They have to have either a million dollars net worth excluding principal residence or $200,000 a year of annual income, $300,000 jointly. So, if all of the people who actually invest meet those requirements, then the company is allowed to advertise. It can sky right, it can go through the phone book and call people whatever, it can solicit. That also is not yet law, we’re waiting for final regulations. But when it does become law, that, I think is going to be very big. The one thing that is going on now that's really interesting in this industry is that there were a couple of no action letters by the Securities and Exchange Commission about a month ago, that may just open the floodgates to one-off single-member special purpose entities that are designed to go out and invest in companies. They will likely be accredited only and they will not be publicly solicited or marketed, but still, you're going to see very creative and interesting ways that companies are going to be able to go about raising money.
Alan: I’m visiting here today with Roger Royse, he is the founder of the Royce Law Firm with offices in Palo Alto, San Francisco and Los Angeles. Roger, we need to take a quick break. But when we get back, I want to talk about your new book “Dead on Arrival”. We’ll be right back after these messages.
Alan: Welcome back, I’m here today with Roger Royse. He is the founder of the Royce Law Firm with offices in Palo Alto, San Francisco and Los Angeles. Roger, moving though the next topic I want to talk about your book you recently released “Dead on Arrival”. First, what inspired you to write this book?
Roger: Well Alan, you know as I mention I've worked on with industries in various industries all over the country and indeed all over the world. And over the past 30 years that I've been doing this, I noticed that regardless of industry, regardless of the country, regardless sometimes of the people was oftentimes the same mistakes that companies would make. And especially being out in Silicon Valley working with start up companies, I would see over and over again people coming into my office that have a great idea and they got a great business plan and they’ve managed to line up the financing and they seem to have everything in place but they made some legal mistake. And it would usually be one of a fairly discrete list of mistakes that they made and most of these mistakes we could deal with we could clean up some of them. We could deal with but it might cost him little bit on valuation but some of those mistakes were just what I began to call dead on arrival mistakes. They’d come in and I’d have to give them the bad news, you're dead on arrival. You need to go back and completely start over, that's where the title of the book came from. And the book basically summarizes what the major issues are for startup companies. And I think it's important for every entrepreneur to have an idea of what to avoid and what to do, and just have a roadmap. There was really nothing out there like this to give them a sense as to what the legal landscape look like. When they should see a lawyer, what kind of lawyer to see, whether their advice that they were getting was consistent with industry practice, so that's the impetus for the book.
Alan: What are some of the important factors that causes a small business to fail?
Roger: Well yeah, so certainly there are, there are lots of pieces to the puzzle. And as you know, a good accounting and tax compliance is one of them. Certainly good business development, good marketing, there’s a lot of things from my standpoint I like it I, my job is to make sure the company has good legal bones. Right, they get started on a very solid legal foundation and often times entrepreneurs will wait a little bit too long before they put that in place. I saw a statistic recently that almost half of the companies in America don't even consult a lawyer, they just do it themselves. So there’s somewhat of a lot of landmines out there just waiting to explode; so the biggest factor I would say that causes a company to have problems is just not documenting. Just waiting too long and not getting things in writing and documented and established.
Alan: What are some of the common legal mistakes that companies should watch out for in the startup stage?
Roger: So that's, the first one of course is just a lack of documentation. Once a company decide, gets passed that they understand that they do need to document their relationships it's important that they select the right kind of entity. Right, has to be the right kind of entity, it's important that the equity split among founders be agreed to in advance and be in writing; it's important that there be technology assignments to the company. It's a real problem if a company gets way down the road and ends up in front of their potential investor and then discovers in due diligence that they don't own all the rights to the technology that they thought they did; you'd be surprised how often that happens. Employment laws are a real sleeper because almost every startup I know is noncompliant, you know it's counterintuitive, it's complex, its Byzantine, especially if you're unlucky enough to be in a state like California. So employment laws is a place where companies are well advised to seek some good legal counsel. And then of course on the securities, every once in a while we’ll see a company that will jump the gun on issuing securities or taken money from investors without securities compliance, and that can be a very serious problem.
Alan: I'm visiting here today with Roger Royse. He’s the Founder of the Royce Law Firm with offices in Palo Alto, San Francisco and Los Angeles. Roger, we need to take a quick break but when we get back I want to talk about strategic planning for company and the roll an attorney should play with companies
Alan: Welcome back I’m here today with Roger Royse. He is the founder of the Royse Law Firm with offices in Palo Alto, San Francisco and Los Angeles. Roger, in the area of a company starting to grow, and they have all their strategic initiatives, how important is all this strategic planning important for a company? When a person comes to you and says Roger, I’m going to start a company, what does the attorney look for?
Roger: Great question Alan. Unlike a lot of other lawyers, I very much believe in a team approach. I don't think that there's any one person that can solve all the problems that a company has. So the very first thing I do when I meet a new client, is I make sure that all the right seats on the bus are filled. That they got the right team members in place, part of that, like I said, is accounting, part is tax, part is HR, part is benefits, part of it might be business development and of course my part is often times the legal part. Now in the legal and tax planning that we do for a company, the very first question we have to ask, especially in the current environment, is are you incorporated in the right state and/or country. And do you have the right kind of entity, and unfortunately with what's been going on with the tax law lately, a lot of companies are finding that even small companies and startup companies, are finding that it's worth it to form intellectual property holding companies, and foreign tax havens or to form based companies in other jurisdictions. In other words, what I'm seeing in my practice is that the tax law is making a, is having a big impact on, not only the type of entity people form or what state they incorporated in, but in what country they do business in. So part of our strategic planning has a very decidedly international aspect to it.
Alan: Now for the listeners, what exactly is the company doing if Apple goes down to the British Virgin Islands or some of these other companies and what are they working towards?
Roger: Yes, I can answer that for you by giving you some numbers. I know you’re an accountant and I know you like numbers so here's a statistic that ought to just scare the heck out of everybody. About half of the Fortune 500 companies in this country pay on a regular basis an effective tax rate of 15% or less. Now, the only way that they're able to do that is by using offshore vehicles and by moving technology and intellectual property offshore. And why is that scary? Not only because of loss of the, of the revenues that the US is realizing, but the erosion of the tax base. Because when an IP in a technology moves offshore, guess what, the jobs follow it. So, clients come in to my office, and I have this happen on a regular basis. They say gee you know, we’re thinking of locating a big presence here in Silicon Valley but you know there's also Ireland which has lots of incentives and there's the Netherlands which is a really great base company for Europe. And/or maybe, they got the metrics to put in place a Cayman Islands or BVI IP holding company. And today, it makes more sense for more companies to do that, then was true 10 years ago.
Alan: I guess international is a, is an important part of anyone looking to put their strategic plan together especially with the Internet today.
Roger: Very true, the economy has changed and the tax laws has not kept up with it. We now live in an information age with a very mobile economy the last major tax overhaul we had was in 1986. Remember 1986 Alan?
Alan: Oh yea, passive loss rules.
Roger: That’s the last time. There was no such thing as Google in 1986, there was no Facebook, we could not even conceive of a Facebook. I mean the world was much different then. The tax law has changed dramatically since then, I’m sorry, the world has changed dramatically since then, the tax law has not. And it's time now for it to change because the US is certainly losing business.
Alan: Roger your firm is very progressive in fact there, you know, I appreciate all the things you’ve done with the education seminars and the webinars but it, it’s made your law firm very unique with the amount of video and other technology tools that are used out there now what, what's next for the Royse Law Firm?
Roger: Well, I’m glad you asked that. We’ve been working, I’ve been working for probably three years now on, on a tech, on a consumer facing technology solution. And we currently have, the problem with you know, as the world changes the law practice is changing as well. And legal services are just too expensive they just are, you know? The rest of the industry has gotten much more efficient, legal has lagged behind. Maybe because it's regulated, maybe because lawyers are just slow to act, well, we've come up with our own solutions that we call the Royse Law Legal Wizard. And it does a couple of things, number one it's a form generator. So, our clients can go on to our legal wizard. They can find a document; they can fill out the form; they can complete their own document and rout it to an attorney to review and make sure that it's right and all the commas are in the right place and do what we attorneys do and then send it back to the client. It drives the cost of delivering those documents way down. We are now about to launch a legal wizard that is going to provide for a questionnaire, a query basically. A set of queries that the consumer can answer in a questionnaire form. Very simple 10 questions and BAM, you've got your corporation or your LLC or your S Corp. or whatever your limited partnership. And our system is going to provide legal advice. The problem that a lot of these technology solutions have in the legal world is that they are missing this very important part of legal judgment. And the thing is Alan, guys like you and I will never be replaced by computers but there are certain things, certain repetitive task that can be replaced by computers and made much more efficient so our system relies on both the technology component as well as a real live lawyer to get a very efficient solution.
Alan: Roger, how does an individual contact your firm?
Roger: You can reach me through my website which is www.royselaw.com; we have a resource site called Royse University were we post our videos, our blogs, our articles and other content. And of course we have a relationship site for selected clients, service partners and investors at Royselink.com.
Alan: I’m visiting here today with Roger Royse. He’s from the Royse Law Firm. Roger, thanks for joining us today.
Roger: Thank you Alan.
Alan: We’ll be right back after these messages
About Roger Royse:
Roger Royse is the founder of Royse Law Firm, PC, a business and tax law firm with offices in Northern and Southern California (www.rroyselaw.com). Roger practices in the areas of corporate and securities law, domestic and international tax, mergers and acquisitions, and fund formation. Roger is a participating instructor of corporate law for the Center for International Studies (Salzburg Austria) and has been an adjunct Professor of Taxation (Property Transactions and International Taxation) for Golden Gate University and also owns several websites, including RoyseUniversity.com (a legal content site) and RoyseLink.com (a resource site for entrepreneurs and venture capitalists). Roger is the founder of the philanthropic organization “Team Motion to Dismiss Cancer” which conducts high profile auctions of meetings with venture capitalists to raise money for charity and has been recognized for his efforts on behalf of The Leukemia & Lymphoma Society by being named the 2012 San Francisco bay area chapter Man of the Year. He is a frequent speaker, writer, radio guest, blogger and panelist for bar associations, CPA organizations, and business groups. Roger is a 2011 Northern California Super Lawyer, is AV Peer-Rated by Martindale Hubbell and has a Superb rating from Avvo.