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What are valuation caps?

What are valuation caps?

What is valuation cap

 

Valuation Caps

A valuation cap is a term of a convertible note or a SAFE. It is also a great way to attract investors to any startup, providing them with an incentive to invest.

Starting a successful financing round for your business will expose you to a slew of new terms. It is essential that you grasp these terms and what they represent to secure finance on favorable terms for your company.

If you’re thinking about obtaining financing for your startup or firm, you’ve probably heard the term “convertible notes,” “SAFEs,” or “value cap” before. Here’s an explanation of what these phrases imply and how they relate to the financing process.

Relevant definitions

Convertible Note

A convertible note is a loan made to your startup or firm by an investor. It is essentially an investment vehicle that is frequently utilized by seed investors who want to delay setting a value for a business until a later round of funding or a milestone.

They are structured as loans with the goal of being converted to equity. At a certain milestone -generally the value of a later financing round- the existing loan balance is automatically converted to stock.

SAFE

A SAFE -simple agreement for future equity- is a financial contract that a business can utilize to acquire capital during its initial fundraising rounds. Some see the instrument as a more founder-friendly alternative to convertible notes.

A SAFE is designed as an investment contract between a startup and an investor that grants the investor the right to obtain ownership in the firm in the case of specified triggering events, such as further equity funding or the company’s sale.

What is a Valuation Cap?

The definitions mentioned above are useful because valuation caps depend on SAFE or convertible note holders to exist. A valuation cap provides SAFE or convertible note holders an opportunity to convert their investment into equity at the lower end of the valuation cap, or the price in subsequent funding rounds.

Simply put, a valuation cap assures that an investor’s investment to a startup or firm in the form of a SAFE or convertible note gets converted into stock at a predetermined maximum price. It is crucial to note that this maximum price is restricted — even if the value of a firm in succeeding rounds exceeds the amount stated in the valuation cap.

Let’s assume a firm engages into a SAFE or offers convertible notes to an investor with a $1 million valuation cap. If the company’s valuation reaches $2 million in the next fundraising round, the investor’s SAFE or convertible note will convert into equity at the valuation cap price of $1 million.

If there’s a $1 million valuation cap, and the next round the company it is decided that the company is worth $2 million dollars, and pay $1/share, your note will convert into equity as if the price had been $1 million.

So, in this case, if you divide $1 million by $2 million, you will get an effective price of $0.50/share. That means that you would get twice as many shares as the investors after the company’s valuation for the same price.

Benefits of Valuation Caps

Valuation caps incentivize people to invest early in potential businesses. As mentioned above, if the valuation cap, for example, is half the valuation of a startup or firm at the time of the next fundraising round, the investor will receive twice the amount of stock in return for their contribution.

A lower valuation cap, on the other hand, will offer an investor with a potentially larger equity share in the next fundraising round. A valuation cap also safeguards investors from excessively low equity conversion percentages in succeeding valuation rounds.

How to add a member to an LLC

Generally speaking, to add a new member to any LLC, you must first follow the operating agreement or the state law regarding LLCs. Though there are some additional things to take into consideration.

Most operating agreements lay out how to add a new partner on their operating agreement. However, if your LLC doesn’t have an operating agreement, you would need to follow your state’s laws concerning LLCs.

The process for how to add an LLC member involves amending the LLC’s operating agreement that brings in the new member. Current LLC members must then vote on the amendment for it to pass—and most states, as well as many LLC operating agreements, require unanimous approval. In this sense, aside from the partner’s name, you should also include their financial contribution, if any, and the new member’s share of interest in the company.

Review Your Operating Agreement

The operating agreement that governs your LLC should lay out the process of adding a new partner, including how the members vote on the issue. If it does include this information, following the process is important, as it shows the independence of your organization and its willingness to abide by its own rules. If your operating agreement does not include this process, it may be a good idea to have an attorney draft one for you. If you would rather do this yourself, many states have forms that can be tailored to the needs of your LLC.

The rule in most states is that when a new member is considered for addition, and no operating agreement exists on how to accomplish this, the agreement of all existing LLC members is needed. Any new member will automatically become a partner equal to the current members. However, adopting an operating agreement can change such rules, allowing new members to be let in by a majority vote, with their share being less than that of the more senior members.

Remember, an LLC is a distinct business entity that protects its owners from personal liability. Following formal procedures and keeping good records helps to maintain that protection and to avoid future disputes among the owners.

Decide the Specifics

After the process for bringing on a new partner is laid out, the exact details of the arrangement should be determined. In ownership structure, LLCs have almost limitless flexibility. For instance, one could own a percentage of a business that differed from his profit percentage. Ownership percentages should be discussed with current members of the LLC and the potential member to make sure that all are in agreement. Unless state default rules apply because there is no operating agreement, each member’s percentage of ownership need not correspond with the percentage of capital they invest in the company.

Once this is agreed upon, the new member’s capital contribution should be collected, then the interest the new partner will own in the company and how much this will cost should be decided. In an LLC, all members need to have a capital account representing their equity contribution to the company in the form of service, property, or money.

Vote on an Amendment to Add an Owner to the LLC

Once a decision has been reached regarding the percentage of the new member’s share, an amendment to bring the oncoming member into the LLC should be prepared for addition to the operating agreement. On this amendment, there should be listed the new partner’s name, percentage of stake in the company, capital contribution, and percentage of losses and profits she will be allocated. Once this is done, a vote should be held concerning the amendment in accordance with the process in the operating agreement.

In voting on a new partner, one should remember that other partners cannot be forced unilaterally to dilute their own shares by bringing on a new member — the agreement must be mutual, and the vote must follow the rules of your operating agreement. If there is no agreement, then the vote has to comply with your state’s LLC Act, which usually demands a unanimous consensus.

However, this vote is conducted, it should be documented in the LLC’s minutes or recorded in a resolution, and all members of the LLC (along with the newest one) should sign the amendment. This document should also state:

  • The voting rights,
  • managerial responsibilities,
  • and ownership percentage

of each member, and it should be kept in your place of business along with your other business documents.

Amend the Articles of Organization, If Necessary

When your LLC was formed, you were required to submit articles of organization to the state. When you add a new member, certain states will require you to submit a form amending your articles, while others do not. Such state requirements can be checked through the agency that handles business filings, which is usually the secretary of state.

One should also be aware of any deadlines if an amendment is necessary. Additionally, if your business management structure is being changed from a manager-managed LLC to a member-managed LLC or vice versa, you will need to amend the articles of organization, as well.

File Required Tax Forms

Although having a single-member LLC allows you to use your Social Security number for your federal tax identification number, you will be required to get a federal Employer Identification Number (EIN) when you change to a multimember LLC. You can get this by completing a free form on the IRS website, and it will act as your LLC’s tax number for both state and federal filing.

Generally, if your LLC’s structure or ownership changes, you will need to get a new EIN; however, if you are adding a new partner and already are a multimember LLC, you most likely will not need to change your EIN. If in the past, your LLC was classified for tax purposes as a partnership or sole proprietorship, additional forms will need to be filed with the IRS in order to elect corporate status. A tax accountant or lawyer can inform you of the best way to have your LLC taxed.

Check Your State’s LLC Act

If you lack an operating agreement, the state in which you set up your LLC has rules outlining the required steps for bringing in another member, as well as the documents that need to be submitted or amended by law.

Amend Your Operating Agreement

When bringing a new member into your LLC, numerous parts of the operating agreement will need updating. At the least, the sections covering the percentage of shares of each of the company’s members, the dispensation of losses and profits, the member’s capital contributions, and the voting capacity of all the members must be updated. Because an oncoming member will receive a stake of the corporation, the shares of current members’ distributions, losses, and profits will be changed, and any rules in the operating agreement related to the current members’ fiscal interests must be adjusted. 

Submit the Amendments to the Secretary of State

If amending the articles of your organization is deemed necessary, this amendment must be filed with the secretary of state or other state agency that deals with business filings. Because operating agreements do not need to be submitted to the state, the agreement can be amended without any filing being done, although there are some states that do allow you the ability to file your operating agreement. If you do choose this option, your amendment should be filed with it, too.

You should also check in with your secretary of state’s office to see if it is possible for the amendments to be filed online or if paper forms are required. Don’t forget to ask how much you must pay for the filing, although it is usually about $100.

Either the business filings agency in your state or your secretary of state will be able to tell you what the fees are and what they include. Should a certified copy of the filing not be included in the fee, then you also must pay for that in order to obtain a copy for your business records.

File the Entity Classification Election Form With the IRS, If Needed

Bringing a new partner to your LLC can result in the LLC’s classification being changed. If it does, an Entity Classification Election Form must be filed with the IRS. Unless a different election form is made using Form 8832, your LLC will be classified by the IRS in accordance with the default rule.

By default, multimember LLCs are regarded as partnerships for tax purposes, so if you want your LLC to be classified as a corporation, you must file Form 8832. Usually, as long as your LLC has two members prior to a new member being added, the income tax status of the LLC will not change by bringing on a new partner, and there will be no need to contact the IRS. 

Register the Name Change With Federal and State Authorities, If Needed

Sometimes when a new member is added, the company’s name is changed. For instance, let’s say you and a friend ran “Jim and John’s Jukebox, LLC.” Then, a mutual friend named Jake joined the business, and thus you wanted to change the name to “Triple J Jukebox, LLC.” To accomplish this, documents would need to be filed with both the IRS and the secretary of state.

The secretary of state will require the appropriate business name change form to be filled out along with a fee that could be up to $200. The IRS would require notice of the street address where your return was to be filed, with said notice being signed by all business partners involved.

Free Strategy Session?

For a quick assessment of your needs – let’s talk to discuss how Trusts can help your business.

Stock Warrant Purchase Agreements

Stock Warrant Purchase Agreements

Stock Warrant Purchase Agreements What is a stock warrant? According to Investopedia, warrants are derivatives that give the right -but not the obligation- to buy or sell a security at a certain price before expiration. The price at which the underlying security is...

Virginia Cannabis Lawyer

Virginia Cannabis Lawyer

Virginia Cannabis Lawyer Earlier this year, Virginia voted to legalize adult-use marijuana becoming the first southern state to do so. Under the newest legislation on the matter, home cultivation and personal possession will become legal as of July 2021, but retail...

Thomas Howard

Thomas Howard

Real Estate Lawyer

Whether this is your first land use issue or most recent, our office has helped people and businesses alike.

Thomas Howard was on the ball and got things done. Easy to work with, communicates very well, and I would recommend him anytime.
R. Martindale

How to add a new member to an LLC

How to add a new member to an LLC

Generally speaking, to add a new member to any LLC, you must first follow the operating agreement or the state law regarding LLCs. Though there are some additional things to take into consideration. Most operating agreements lay out how to add a new partner on their...

Subscription Agreements

Subscription Agreements

A subscription agreement is an investor's request to become a member of a limited partnership (LP). It also serves as a two-way warranty between a corporation and a new shareholder (subscriber). The company intends to sell a specific number of shares at a fixed price...

Stock Warrant Purchase Agreements

Stock Warrant Purchase Agreements

Stock Warrant Purchase Agreements What is a stock warrant? According to Investopedia, warrants are derivatives that give the right -but not the obligation- to buy or sell a security at a certain price before expiration. The price at which the underlying security is...

Virginia Cannabis Lawyer

Virginia Cannabis Lawyer

Virginia Cannabis Lawyer Earlier this year, Virginia voted to legalize adult-use marijuana becoming the first southern state to do so. Under the newest legislation on the matter, home cultivation and personal possession will become legal as of July 2021, but retail...

Ohio Cannabis Lawyer

Ohio Cannabis Lawyer

Ohio Cannabis Lawyer Are you from the buckeye state and want to establish a cannabis business? Having a good cannabis lawyer in Ohio makes the difference between getting a license or not. Even though Ohio’s medical marijuana market had a bumpy start, the market has a...

Michigan Cannabis Lawyer

Michigan Cannabis Lawyer

Michigan Cannabis Lawyer Are you from the great lake state and want to start a cannabis company or need assistance with an existing one? You probably need a Michigan cannabis lawyer. As the cannabis industry gets more recognition and the market expands, recreational...

Need A Business Lawyer?

Call our law offices with your legal questions for help on:

  1. real estate contracts
  2. business contract disputes
  3. Shareholder litigation
  4. cannabis business
  5. fraud actions
  6. mechanic's liens

 

How to add a new member to an LLC

How to add a new member to an LLC

How to add a member to an LLC

How to add a member to an LLC

Generally speaking, to add a new member to any LLC, you must first follow the operating agreement or the state law regarding LLCs. Though there are some additional things to take into consideration.

Most operating agreements lay out how to add a new partner on their operating agreement. However, if your LLC doesn’t have an operating agreement, you would need to follow your state’s laws concerning LLCs.

The process for how to add an LLC member involves amending the LLC’s operating agreement that brings in the new member. Current LLC members must then vote on the amendment for it to pass—and most states, as well as many LLC operating agreements, require unanimous approval. In this sense, aside from the partner’s name, you should also include their financial contribution, if any, and the new member’s share of interest in the company.

Review Your Operating Agreement

The operating agreement that governs your LLC should lay out the process of adding a new partner, including how the members vote on the issue. If it does include this information, following the process is important, as it shows the independence of your organization and its willingness to abide by its own rules. If your operating agreement does not include this process, it may be a good idea to have an attorney draft one for you. If you would rather do this yourself, many states have forms that can be tailored to the needs of your LLC.

The rule in most states is that when a new member is considered for addition, and no operating agreement exists on how to accomplish this, the agreement of all existing LLC members is needed. Any new member will automatically become a partner equal to the current members. However, adopting an operating agreement can change such rules, allowing new members to be let in by a majority vote, with their share being less than that of the more senior members.

Remember, an LLC is a distinct business entity that protects its owners from personal liability. Following formal procedures and keeping good records helps to maintain that protection and to avoid future disputes among the owners.

Decide the Specifics

After the process for bringing on a new partner is laid out, the exact details of the arrangement should be determined. In ownership structure, LLCs have almost limitless flexibility. For instance, one could own a percentage of a business that differed from his profit percentage. Ownership percentages should be discussed with current members of the LLC and the potential member to make sure that all are in agreement. Unless state default rules apply because there is no operating agreement, each member’s percentage of ownership need not correspond with the percentage of capital they invest in the company.

Once this is agreed upon, the new member’s capital contribution should be collected, then the interest the new partner will own in the company and how much this will cost should be decided. In an LLC, all members need to have a capital account representing their equity contribution to the company in the form of service, property, or money.

Vote on an Amendment to Add an Owner to the LLC

Once a decision has been reached regarding the percentage of the new member’s share, an amendment to bring the oncoming member into the LLC should be prepared for addition to the operating agreement. On this amendment, there should be listed the new partner’s name, percentage of stake in the company, capital contribution, and percentage of losses and profits she will be allocated. Once this is done, a vote should be held concerning the amendment in accordance with the process in the operating agreement.

In voting on a new partner, one should remember that other partners cannot be forced unilaterally to dilute their own shares by bringing on a new member — the agreement must be mutual, and the vote must follow the rules of your operating agreement. If there is no agreement, then the vote has to comply with your state’s LLC Act, which usually demands a unanimous consensus.

However, this vote is conducted, it should be documented in the LLC’s minutes or recorded in a resolution, and all members of the LLC (along with the newest one) should sign the amendment. This document should also state:

  • The voting rights,
  • managerial responsibilities,
  • and ownership percentage

of each member, and it should be kept in your place of business along with your other business documents.

Amend the Articles of Organization, If Necessary

When your LLC was formed, you were required to submit articles of organization to the state. When you add a new member, certain states will require you to submit a form amending your articles, while others do not. Such state requirements can be checked through the agency that handles business filings, which is usually the secretary of state.

One should also be aware of any deadlines if an amendment is necessary. Additionally, if your business management structure is being changed from a manager-managed LLC to a member-managed LLC or vice versa, you will need to amend the articles of organization, as well.

File Required Tax Forms

Although having a single-member LLC allows you to use your Social Security number for your federal tax identification number, you will be required to get a federal Employer Identification Number (EIN) when you change to a multimember LLC. You can get this by completing a free form on the IRS website, and it will act as your LLC’s tax number for both state and federal filing.

Generally, if your LLC’s structure or ownership changes, you will need to get a new EIN; however, if you are adding a new partner and already are a multimember LLC, you most likely will not need to change your EIN. If in the past, your LLC was classified for tax purposes as a partnership or sole proprietorship, additional forms will need to be filed with the IRS in order to elect corporate status. A tax accountant or lawyer can inform you of the best way to have your LLC taxed.

Check Your State’s LLC Act

If you lack an operating agreement, the state in which you set up your LLC has rules outlining the required steps for bringing in another member, as well as the documents that need to be submitted or amended by law.

Amend Your Operating Agreement

When bringing a new member into your LLC, numerous parts of the operating agreement will need updating. At the least, the sections covering the percentage of shares of each of the company’s members, the dispensation of losses and profits, the member’s capital contributions, and the voting capacity of all the members must be updated. Because an oncoming member will receive a stake of the corporation, the shares of current members’ distributions, losses, and profits will be changed, and any rules in the operating agreement related to the current members’ fiscal interests must be adjusted. 

Submit the Amendments to the Secretary of State

If amending the articles of your organization is deemed necessary, this amendment must be filed with the secretary of state or other state agency that deals with business filings. Because operating agreements do not need to be submitted to the state, the agreement can be amended without any filing being done, although there are some states that do allow you the ability to file your operating agreement. If you do choose this option, your amendment should be filed with it, too.

You should also check in with your secretary of state’s office to see if it is possible for the amendments to be filed online or if paper forms are required. Don’t forget to ask how much you must pay for the filing, although it is usually about $100.

Either the business filings agency in your state or your secretary of state will be able to tell you what the fees are and what they include. Should a certified copy of the filing not be included in the fee, then you also must pay for that in order to obtain a copy for your business records.

File the Entity Classification Election Form With the IRS, If Needed

Bringing a new partner to your LLC can result in the LLC’s classification being changed. If it does, an Entity Classification Election Form must be filed with the IRS. Unless a different election form is made using Form 8832, your LLC will be classified by the IRS in accordance with the default rule.

By default, multimember LLCs are regarded as partnerships for tax purposes, so if you want your LLC to be classified as a corporation, you must file Form 8832. Usually, as long as your LLC has two members prior to a new member being added, the income tax status of the LLC will not change by bringing on a new partner, and there will be no need to contact the IRS. 

Register the Name Change With Federal and State Authorities, If Needed

Sometimes when a new member is added, the company’s name is changed. For instance, let’s say you and a friend ran “Jim and John’s Jukebox, LLC.” Then, a mutual friend named Jake joined the business, and thus you wanted to change the name to “Triple J Jukebox, LLC.” To accomplish this, documents would need to be filed with both the IRS and the secretary of state.

The secretary of state will require the appropriate business name change form to be filled out along with a fee that could be up to $200. The IRS would require notice of the street address where your return was to be filed, with said notice being signed by all business partners involved.

Free Strategy Session?

For a quick assessment of your needs – let’s talk to discuss how Trusts can help your business.

Stock Warrant Purchase Agreements

Stock Warrant Purchase Agreements

Stock Warrant Purchase Agreements What is a stock warrant? According to Investopedia, warrants are derivatives that give the right -but not the obligation- to buy or sell a security at a certain price before expiration. The price at which the underlying security is...

Virginia Cannabis Lawyer

Virginia Cannabis Lawyer

Virginia Cannabis Lawyer Earlier this year, Virginia voted to legalize adult-use marijuana becoming the first southern state to do so. Under the newest legislation on the matter, home cultivation and personal possession will become legal as of July 2021, but retail...

Thomas Howard

Thomas Howard

Real Estate Lawyer

Whether this is your first land use issue or most recent, our office has helped people and businesses alike.

Thomas Howard was on the ball and got things done. Easy to work with, communicates very well, and I would recommend him anytime.
R. Martindale

How to add a new member to an LLC

How to add a new member to an LLC

Generally speaking, to add a new member to any LLC, you must first follow the operating agreement or the state law regarding LLCs. Though there are some additional things to take into consideration. Most operating agreements lay out how to add a new partner on their...

Subscription Agreements

Subscription Agreements

A subscription agreement is an investor's request to become a member of a limited partnership (LP). It also serves as a two-way warranty between a corporation and a new shareholder (subscriber). The company intends to sell a specific number of shares at a fixed price...

Stock Warrant Purchase Agreements

Stock Warrant Purchase Agreements

Stock Warrant Purchase Agreements What is a stock warrant? According to Investopedia, warrants are derivatives that give the right -but not the obligation- to buy or sell a security at a certain price before expiration. The price at which the underlying security is...

Virginia Cannabis Lawyer

Virginia Cannabis Lawyer

Virginia Cannabis Lawyer Earlier this year, Virginia voted to legalize adult-use marijuana becoming the first southern state to do so. Under the newest legislation on the matter, home cultivation and personal possession will become legal as of July 2021, but retail...

Ohio Cannabis Lawyer

Ohio Cannabis Lawyer

Ohio Cannabis Lawyer Are you from the buckeye state and want to establish a cannabis business? Having a good cannabis lawyer in Ohio makes the difference between getting a license or not. Even though Ohio’s medical marijuana market had a bumpy start, the market has a...

Michigan Cannabis Lawyer

Michigan Cannabis Lawyer

Michigan Cannabis Lawyer Are you from the great lake state and want to start a cannabis company or need assistance with an existing one? You probably need a Michigan cannabis lawyer. As the cannabis industry gets more recognition and the market expands, recreational...

Need A Business Lawyer?

Call our law offices with your legal questions for help on:

  1. real estate contracts
  2. business contract disputes
  3. Shareholder litigation
  4. cannabis business
  5. fraud actions
  6. mechanic's liens

 

Subscription Agreements

Subscription Agreements

Subscription Agreements

Subscription Agreements

A subscription agreement is an investor’s request to become a member of a limited partnership (LP). It also serves as a two-way warranty between a corporation and a new shareholder (subscriber). The company intends to sell a specific number of shares at a fixed price in exchange for the subscriber’s promise to buy the shares at the same price.

How Subscription Agreements Are Regulated

Subscription agreements are generally covered by SEC Rules 506(b) and 506(c) of Regulation D. These stipulations define the method of conducting an offering and the amount of material information that companies are required to disclose to investors.

When new limited partners are added to an offering, general partners seek the approval of existing partners before making changes to the subscription agreement. Raising capital through a Reg D investment entails far fewer stringent requirements than a public offering. This allows companies to save time and sell securities that they would not be able to issue otherwise in some cases.

Subscription Agreements With Private Placements

When a company wishes to raise capital, it will often issue shares of stock for purchase by either the general public or through a private placement. The primary disclosure form for potential general public investors is a prospectus. The prospectus is a disclosure document listing information about the business and its underlying security.

A private placement is a sale of stock to a limited number of accredited investors who meet specific criteria. The criteria for accredited status include having a particular level of investment experience, assets, and net worth. Investors will receive a private placement memorandum as an alternative to the prospectus. The memorandum provides a less comprehensive description of the investment.

In many cases, a subscription agreement accompanies the memorandum. Some agreements outline a specific rate of return that will be paid to the investor, such as a particular percentage of company net income or lump sum payments.

Also, the agreement will define the payment dates for these returns. This structure gives priority to the investor, as they earn a rate of return on the investment before company founders or other minority owners.

KEY TAKEAWAYS

  • A subscription agreement is an agreement that defines the terms for a party’s investment into a private placement offering or a limited partnership (LP).
  • Rules for subscription agreements are generally defined in SEC Rule 506(b) and 506(c) of Regulation D.
  • Regulation D lets companies doing specific types of private placements raise capital without needing to register the securities with the SEC.

Free Strategy Session?

For a quick assessment of your needs – let’s talk to discuss how Trusts can help your business.

Stock Warrant Purchase Agreements

Stock Warrant Purchase Agreements

Stock Warrant Purchase Agreements What is a stock warrant? According to Investopedia, warrants are derivatives that give the right -but not the obligation- to buy or sell a security at a certain price before expiration. The price at which the underlying security is...

Virginia Cannabis Lawyer

Virginia Cannabis Lawyer

Virginia Cannabis Lawyer Earlier this year, Virginia voted to legalize adult-use marijuana becoming the first southern state to do so. Under the newest legislation on the matter, home cultivation and personal possession will become legal as of July 2021, but retail...

Thomas Howard

Thomas Howard

Real Estate Lawyer

Whether this is your first land use issue or most recent, our office has helped people and businesses alike.

Thomas Howard was on the ball and got things done. Easy to work with, communicates very well, and I would recommend him anytime.
R. Martindale

How to add a new member to an LLC

How to add a new member to an LLC

Generally speaking, to add a new member to any LLC, you must first follow the operating agreement or the state law regarding LLCs. Though there are some additional things to take into consideration. Most operating agreements lay out how to add a new partner on their...

Subscription Agreements

Subscription Agreements

A subscription agreement is an investor's request to become a member of a limited partnership (LP). It also serves as a two-way warranty between a corporation and a new shareholder (subscriber). The company intends to sell a specific number of shares at a fixed price...

Stock Warrant Purchase Agreements

Stock Warrant Purchase Agreements

Stock Warrant Purchase Agreements What is a stock warrant? According to Investopedia, warrants are derivatives that give the right -but not the obligation- to buy or sell a security at a certain price before expiration. The price at which the underlying security is...

Virginia Cannabis Lawyer

Virginia Cannabis Lawyer

Virginia Cannabis Lawyer Earlier this year, Virginia voted to legalize adult-use marijuana becoming the first southern state to do so. Under the newest legislation on the matter, home cultivation and personal possession will become legal as of July 2021, but retail...

Ohio Cannabis Lawyer

Ohio Cannabis Lawyer

Ohio Cannabis Lawyer Are you from the buckeye state and want to establish a cannabis business? Having a good cannabis lawyer in Ohio makes the difference between getting a license or not. Even though Ohio’s medical marijuana market had a bumpy start, the market has a...

Michigan Cannabis Lawyer

Michigan Cannabis Lawyer

Michigan Cannabis Lawyer Are you from the great lake state and want to start a cannabis company or need assistance with an existing one? You probably need a Michigan cannabis lawyer. As the cannabis industry gets more recognition and the market expands, recreational...

Need A Business Lawyer?

Call our law offices with your legal questions for help on:

  1. real estate contracts
  2. business contract disputes
  3. Shareholder litigation
  4. cannabis business
  5. fraud actions
  6. mechanic's liens

 

Stock Warrant Purchase Agreements

Stock Warrant Purchase Agreements

Stock Warrant Purchase Agreements

Stock warrant purchase agreements

Stock Warrant Purchase Agreements

What is a stock warrant?

According to Investopedia, warrants are derivatives that give the right -but not the obligation- to buy or sell a security at a certain price before expiration. The price at which the underlying security is sold is referred to as the exercise price or strike price.

In this sense, a stock warrant gives holders the right to buy a certain amount of company stocks at a fixed price until the expiration date, receiving newly issued stock from the company.

The goal of a stock warrant is to increase the company’s capital while sweetening the deal for potential investors. The appeal is that if the issuer’s stock increases above the warrant’s price, the investor can redeem the warrant, and buy shares at the lower warrant price.

An example of this is a company which issues a bond with warrants attached. The holder gets a $500 face-value bond plus the right to purchase 50 shares of company stock at $10/share within 10 years. The $10/share is the strike price. If the stock rises over $10 within the time period that the warrant is available, this is a good investment opportunity.

Key points about stock warrants

  • A warrant is exercised once the holder tells the issuer they intend to purchase the underlying stock. When a warrant is exercised, the company issues new shares of stock, so the overall number of outstanding shares will increase.
  • The exercise price is fixed shortly after issuance of the bond.
  • A warrant’s premium means how much extra you will need to pay for the shares when purchasing through the warrant, rather than regularly (such as in an exchange or from another investor).
  • You need to take into consideration the conversion ratio. The conversion ratio is the number of warrants that are needed to buy or sell one stock. For example, if the conversion ratio to buy a stock is 5:1, this means the holder needs 5 warrants to purchase one share.
  • Warrants have an expiration date, when the right to exercise no longer exists.

Warrants change depending on where you are. An American-style warrant, for example, allows the holder to exercise at any time before it expires, whereas a European-style warrant requires the holder to keep the warrant and only execute on the expiration date.

Kinds of warrants

Detachable and Non-Detachable

Holders of detachable warrants can sell the warrants without selling the bonds or stock to which they were originally attached. That means that when a warrant is attached to a bond or stock, the holder can sell the warrant but still and keep the bond or stock. This flexibility makes detached warrants much more attractive. This may be especially important when warrants are attached to preferred stock.

Sometimes, investors won’t start receiving dividend payments from preferred stock as long as the stock has an attached warrant. In that case, if the warrants are detachable, holders may want to sell them and just keep the stock. Holders of non-detachable warrants can only sell the warrants when they sell the attached bonds or stock. As a note, these are sometimes also called “wedded” warrants. Non-detachable warrants are issued without any bonds or stocks accompanying them.

Covered Warrants

These are issued by financial institutions, so there are not any new stocks issued when the covered warrants are exercised. The warrants are covered because the institution either owns shares or can acquire them easily.

Call and Put Warrants

A call warrant allows the holder to buy shares from the share issuer. A put warrant allows the holder to sell shares back to the issuer.

The primary difference between a call warrant and a put warrant is that a call warrant will buy a specified number of shares from the company at a future date for a set price. A put warrant is a representation of the equity value that the buyer can sell back to the issuing company in the future for a set price.

Trading Warrants

Exercising a warrant is not the only way to make money with warrants. Investors can also buy and sell warrants.

The minimum value of a warrant is the difference between the current value of the underlying security on the market and the warrant’s strike price. This is the profit that warrant holders will receive if they exercise their warrants at the current time. Warrants that are trading on an exchange, however, may sell for a premium price greater than the minimum value if traders expect the price of the underlying security will rise in the future – just like basic supply and demand and predictions of the market. However, the premium will generally shrink as the expiration date approaches.

Difference between stock warrant and stock options

What is a stock option?

A stock option is a contract in which the holder gets the right -but not the obligation- to buy or sell stock at a specific price, prior to a specific expiration date.

Options are purchased by investors when they expect the price of a stock to go up or down (depending on the option type). For instance, if a stock is worth $40 today, and an investor believes the price will rise to $50 next month, he can purchase a $40 call option today, which would give the investor the right to purchase the stock at that price prior to the expiration date. Then the investor can turn around and sell it for $50 making $10 in profit less the cost of the option, referred as “premium”.

Differences between the two figures

A stock warrant differs from the stock option mainly in two aspects:

  1. A company issues its own warrants, and
  2. The company issues new shares for the transactions

A company may issue a stock warrant if they want to raise additional capital from a stock offering. If a company sells shares at $100 but a warrant is just $10, more investors will exercise the right of a warrant. These are a source of future capital.

Stock options on the other hand are listed on exchanges. When stock options are exchanged, the company itself doesn’t make any money from those transactions.

Also, stock warrants can last up to fifteen years, while stock options usually go for a couple of months to a couple of years at best.

In this sense, for long-term investments, stock warrants may be the way to go, while for short-term investments, stock options have the upper hand.

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What should you include in your Board Member Agreement

Usually, any good Board Member Agreement would include:

  • Services and consideration. In which it would be included the services the 51 percent member (manager) would agree on.
  • Units of the company. How many units have been issued to the manager, what’s the cost of each unit and conditions regarding the possible causes of repurchasing of them.
  • Confidentiality. What constitutes confidential information, limits the manager has using this information and the obligation to return the confidential information the manager possesses to the company in case of termination of the agreement.
  • Ownership of Intangible Property. Determining how the company is going to treat all inventions or creations conceived in whole or in part by the manager that relate in any matter to the business.
  • Return of Company’s Property. The manager’s obligation to return company’s property once its role as board chairman comes to an end.
  • Conflicting Obligations. The obligation of the manager to not engage in any other obligation or agreement that conflicts with the interests of the company.
  • Terms and Termination. Causes for which the board member agreement would terminate.
  • Impossibility of Assignment. Impossibility for the manager of assigning the board member agreement or any other agreement without the consent of the company.

If made right, a good Board Member Agreement would be able to stop any kind of future confrontation thus establishing clear boundaries to corporate owners. If your company doesn’t have a Board Member Agreement yet, you should contact us, so we can work with you and help you figure out what your best options are.  

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For a quick assessment of your needs – let’s talk to discuss how Trusts can help your business. 

Stock Warrant Purchase Agreements

Stock Warrant Purchase Agreements

Stock Warrant Purchase Agreements What is a stock warrant? According to Investopedia, warrants are derivatives that give the right -but not the obligation- to buy or sell a security at a certain price before expiration. The price at which the underlying security is...

Virginia Cannabis Lawyer

Virginia Cannabis Lawyer

Virginia Cannabis Lawyer Earlier this year, Virginia voted to legalize adult-use marijuana becoming the first southern state to do so. Under the newest legislation on the matter, home cultivation and personal possession will become legal as of July 2021, but retail...

Thomas Howard

Thomas Howard

Real Estate Lawyer

Whether this is your first land use issue or most recent, our office has helped people and businesses alike.

Thomas Howard was on the ball and got things done. Easy to work with, communicates very well, and I would recommend him anytime.
R. Martindale

How to add a new member to an LLC

How to add a new member to an LLC

Generally speaking, to add a new member to any LLC, you must first follow the operating agreement or the state law regarding LLCs. Though there are some additional things to take into consideration. Most operating agreements lay out how to add a new partner on their...

Subscription Agreements

Subscription Agreements

A subscription agreement is an investor's request to become a member of a limited partnership (LP). It also serves as a two-way warranty between a corporation and a new shareholder (subscriber). The company intends to sell a specific number of shares at a fixed price...

Stock Warrant Purchase Agreements

Stock Warrant Purchase Agreements

Stock Warrant Purchase Agreements What is a stock warrant? According to Investopedia, warrants are derivatives that give the right -but not the obligation- to buy or sell a security at a certain price before expiration. The price at which the underlying security is...

Virginia Cannabis Lawyer

Virginia Cannabis Lawyer

Virginia Cannabis Lawyer Earlier this year, Virginia voted to legalize adult-use marijuana becoming the first southern state to do so. Under the newest legislation on the matter, home cultivation and personal possession will become legal as of July 2021, but retail...

Ohio Cannabis Lawyer

Ohio Cannabis Lawyer

Ohio Cannabis Lawyer Are you from the buckeye state and want to establish a cannabis business? Having a good cannabis lawyer in Ohio makes the difference between getting a license or not. Even though Ohio’s medical marijuana market had a bumpy start, the market has a...

Michigan Cannabis Lawyer

Michigan Cannabis Lawyer

Michigan Cannabis Lawyer Are you from the great lake state and want to start a cannabis company or need assistance with an existing one? You probably need a Michigan cannabis lawyer. As the cannabis industry gets more recognition and the market expands, recreational...

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  2. business contract disputes
  3. Shareholder litigation
  4. cannabis business
  5. fraud actions
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Filibuster and Federal Marijuana Legalization

Filibuster and Federal Marijuana Legalization

Filibuster and Federal Marijuana Legalization

Filibuster and Federal Marijuana Legalization

Filibuster and federal marijuana legalization

Last years have been very important for cannabis legalization. Currently, fifteen states, two territories and the District of Columbia have legalized cannabis for adult recreational use. New York is the most recent state to legalize cannabis, which was passed in late March 2021, during New York’s 2021 session. 

And the road ahead seems promising for states Cannabis legalization, with states like Virginia or New Mexico that have proposed the implementation of recreational marijuana legalization bills that would establish a regulated commercial market. More and more states are taking the initiative to decriminalize or directly legalize recreational marijuana. 

However -on the other hand- federal legalization doesn’t look so favorable. Recently, Michigan urged Congress of the United States to clarify its position on the legality of marijuana under the Federal Controlled Substances Act. 

Under federal law -unfortunately- marijuana is still a Schedule I illegal substance. And considering that there’s a 50-50 split in the 117th U.S. Congress, federal legalization probably won’t be happening anytime soon, as the Republicans would be able to repeal it by filibustering.

What’s a Filibuster?

A Filibuster, according to the United States Senate’s glossary, is an “informal term for any attempt to block or delay Senate action on a bill or other matter by debating it at length, by offering numerous procedural motions, or by any other delating or obstructive actions”.

The most common form of filibuster occurs when one or more senators attempt to delay or block a vote on a bill by extending debate on the measure. The Senate rules permit a senator, or a series of senators, to speak for as long as they wish, and on any topic they choose, unless “three-fifths of the Senators duly chosen and sworn” (currently 60 out of 100) vote to bring the debate to a close by invoking cloture -AKA: a motion to end a debate- under Senate Rule XXII.

However, today -even though the filibuster is more common than ever- it is not necessary for a senator to talk for hours to maintain a filibuster. Nowadays, all it takes to perform a filibuster is for a senator to state his intention to launch a filibuster against a bill or motion. 

Immediately after the senator’s intention is stated, a vote has to be taken, and only after getting at least 60 votes any action could be taken on the matter, getting less than 60 votes would mean the bill or motion got blocked. 

It can be described -basically- as a move in which senators demand a supermajority to cut off debate and move to an actual vote.

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History of the Filibuster

Being able to block a measure through extended debate was generated as a side effect of an 1806 rule change. 

This tactic was infrequently used during much of the 19th and 20th centuries. In 1970, the Senate adopted a “two-track” procedure to prevent filibusters from stopping all other Senate business and thus . 

The minority then felt politically safer in threatening filibusters more regularly, which became normalized over time to the point that 60 votes are now required to end debate on nearly every controversial legislative item.

Laws that expressly restrict the time for Senate discussion, such as the Congressional Budget and Impoundment Control Act of 1974 -which established the budget reconciliation mechanism- have been used to limit the procedure. 

Changes in 2013 and 2017 now require only a simple majority to invoke cloture on nominations, although most legislation still requires 60 votes. Although one or more senators can still hold the floor for a prolonged period of time on occasion, often without the Senate leadership’s knowledge. 

However, since the Senate’s ability to act eventually depends on whether there are enough votes to invoke cloture and proceed to a final vote on passage, these “filibusters” generally only cause small delays and have little influence on the outcome.

Filibustering was actually created by accident in 1806. In 1789, the first U.S. Senate adopted rules allowing senators to move the previous question by simple majority vote, which meant ending the debate and proceeding to vote. 

At that time, Vice President Aaron Burr argued that the previous-question motion was redundant, had only been exercised once in the preceding four years and, therefore, it should be eliminated, which was done in 1806.

These changes on the Senate’s rules made filibustering possible, as it didn’t create another alternative to terminate the debate.

The senate allowed the tactic to be used until more than a century later, in 1917, when -during World War I- a rule allowing cloture of a debate was adopted by the Senate after the urging of President Woodrow Wilson, after a group of 12 anti-war senators managed to kill a bill that would have allowed Wilson to arm merchant vessels in the face of unrestricted German submarine warfare. 

From 1917 to 1949, the requirements for cloture were two-thirds of the senators voting. During this period of time, there were times where politicians recited Shakespeare and read out recipes for hours at a time, some of them occupying as long as 15 hours of debate. 

In 1949 the Senate made invoking cloture even more difficult by requiring two-thirds of the entire Senate membership to vote in favor of a cloture motion. Then, ten years later, in 1959 -anticipating more civil rights legislation- the Senate restored the cloture threshold to two-thirds of those voting.

In 1970 the Senate introduced a “two-track system”, which would allow the majority leader -with unanimous consent or the agreement of the minority leader- to have more than one main motion pending on the floor as unfinished business. 

Under this system, the Senate can have two or more pieces of legislation or nominations pending on the floor simultaneously by designating specific periods during the day when each one will be considered.

Filibusters became easier for the minority to retain as a result of this change. This also led to the modern era in which an effective supermajority requirement exists to pass legislation, with no practical requirement that the minority party actually hold the floor or extend debate.

In 1975, the Senate revised its cloture rule so that three-fifths of sworn senators (60 votes out of 100) could limit debate, except for changing Senate rules which still requires a two-thirds majority of those present and voting to invoke cloture. 

However, by returning to an absolute number of all Senators (60) rather than a proportion of those present and voting, the change also made any filibusters easier to sustain on the floor by a small number of senators from the minority party without requiring the presence of their minority colleagues. 

This further reduced the majority’s leverage to force an issue through extended debate.

Exceptions for the Filibuster

There are some bills that are not subject to the effective 60-vote requirements. These are bills that -under provisions of law- have a limited time for debating them. These limits on debate allow the Senate to hold a simple-majority vote on final passage without obtaining the 60 votes normally needed to close debate:

  • Budget reconciliation. Expedites the passage of certain budgetary legislation.
  • Trade promotion authority. Gives authority to the President to negotiate international trade agreements in a “fast track”
  • Congressional review act. Allows Congress to review and repeal administrative regulations adopted by the Executive Branch within 60 legislative days.
  • National emergencies act. Formalizes the emergency powers of the President.
  • War powers resolution. Generally, requires the President to withdraw troops committed overseas within 60 days, which the President may extend once for 30 additional days. 

How to end a Filibuster

As of today, according to the rules set for debate in the United States Senate, 60 votes are needed to end a filibuster. Once the debate is closed, senators can move forward with consideration of the measure, amendments or final votes. 

The issue is that, nowadays, with the Congress split in half, this isn’t possible, as the Republicans are unlikely to vote against the filibuster. And what’s even more, Democrats would have to tread lightly this session, to ensure they don’t upset the Republicans, as doing so could cost any chance at passing even the smallest reform. 

How could the Democrats kill the filibuster and what’s the “Nuclear Option”?

Another option that the Democrats have in order to pass federal legalization would be the so-called “nuclear option”.

The “nuclear option” is a parliamentary procedure that allows the Senate to override a standing rule of the Senate, such as the three-fifths vote rule to close debate, by a simple majority.

The option is invoked when the majority leader raises a point of order that contravenes a standing rule. The term “nuclear option” is an analogy to nuclear weapons being the most extreme option. 

The “nuclear option” would allow the Senate to override one of its standing rules, including the 60-vote rule to close debate, by a simple majority (51+ votes or 50 votes with the Vice President casting the tie-breaking vote), rather than the two-thirds supermajority normally required to amend the rules. To this day, the “nuclear option” has never been used to kill the filibuster. 

In this sense, it would be possible for the Democrats to change the rules for the filibuster. However, Senate minority leader, Mitch McConnell doesn’t want the filibuster to die, and has decided to not negotiate with Democrats until they agree to keep it in play. 

In the current state of the Senate, where there’s a 50/50 division, it would be fairly complicated to change these rules, as the Senate would need -at least- 51 votes, which means that every single Democrat would need to be on board to change the rules, which can be a bit tricky, as there are some of them who have -openly- been in favor of filibuster in the past.

What’s even more, let’s say that the Democrats find a way to eradicate the filibuster and start passing bills on marijuana legalization. According to Sen. McConnell, this could lead to a situation where any marijuana reform bill passed under Democratic control would just end up tossed off the books once Republicans take back the power.

When Republicans next control the government, we’d be able to repeal every bill that had just been rammed through. But a few years later, Democrats would try to flip it all back. So instead of building stable consensus, we’d be chaotically swapping party platforms.” – Sen. Mitch McConnell

From this point of view, it wouldn’t be the smartest idea to kill the filibuster as it would possibly take away the possibilities of legalizing cannabis on a federal level in an effective -and durable- way. 

It could take away the possibilities of passing any kind of reform the Biden administration would want to pass.

And with the landscape being the way it is, It seems like federal legalization won’t be occurring any time soon.

Free Strategy Session?

For a quick assessment of your needs – let’s talk to discuss how Trusts can help your business. 

Stock Warrant Purchase Agreements

Stock Warrant Purchase Agreements

Stock Warrant Purchase Agreements What is a stock warrant? According to Investopedia, warrants are derivatives that give the right -but not the obligation- to buy or sell a security at a certain price before expiration. The price at which the underlying security is...

Virginia Cannabis Lawyer

Virginia Cannabis Lawyer

Virginia Cannabis Lawyer Earlier this year, Virginia voted to legalize adult-use marijuana becoming the first southern state to do so. Under the newest legislation on the matter, home cultivation and personal possession will become legal as of July 2021, but retail...

Thomas Howard

Thomas Howard

Real Estate Lawyer

Whether this is your first land use issue or most recent, our office has helped people and businesses alike.

Thomas Howard was on the ball and got things done. Easy to work with, communicates very well, and I would recommend him anytime.
R. Martindale

How to add a new member to an LLC

How to add a new member to an LLC

Generally speaking, to add a new member to any LLC, you must first follow the operating agreement or the state law regarding LLCs. Though there are some additional things to take into consideration. Most operating agreements lay out how to add a new partner on their...

Subscription Agreements

Subscription Agreements

A subscription agreement is an investor's request to become a member of a limited partnership (LP). It also serves as a two-way warranty between a corporation and a new shareholder (subscriber). The company intends to sell a specific number of shares at a fixed price...

Stock Warrant Purchase Agreements

Stock Warrant Purchase Agreements

Stock Warrant Purchase Agreements What is a stock warrant? According to Investopedia, warrants are derivatives that give the right -but not the obligation- to buy or sell a security at a certain price before expiration. The price at which the underlying security is...

Virginia Cannabis Lawyer

Virginia Cannabis Lawyer

Virginia Cannabis Lawyer Earlier this year, Virginia voted to legalize adult-use marijuana becoming the first southern state to do so. Under the newest legislation on the matter, home cultivation and personal possession will become legal as of July 2021, but retail...

Ohio Cannabis Lawyer

Ohio Cannabis Lawyer

Ohio Cannabis Lawyer Are you from the buckeye state and want to establish a cannabis business? Having a good cannabis lawyer in Ohio makes the difference between getting a license or not. Even though Ohio’s medical marijuana market had a bumpy start, the market has a...

Michigan Cannabis Lawyer

Michigan Cannabis Lawyer

Michigan Cannabis Lawyer Are you from the great lake state and want to start a cannabis company or need assistance with an existing one? You probably need a Michigan cannabis lawyer. As the cannabis industry gets more recognition and the market expands, recreational...

Need A Business Lawyer?

Call our law offices with your legal questions for help on:

  1. real estate contracts
  2. business contract disputes
  3. Shareholder litigation
  4. cannabis business
  5. fraud actions
  6. mechanic's liens