When an investor provides equity to a company, they acquire an ownership interest. As a result, they are entitled to certain benefits such as decision-making rights and access to financial information. A founder must deal with each investor’s requests and demands while still trying to operate a fledgling company. As the investor list grows, so too will the requirements. It could become very challenging to focus on the company while also attending to all of the investors.

One common structure to address these issues is through a Special Purpose Vehicle (“SPV”). A SPV is a legal entity that allows multiple investors to pool their money to invest in the start-up. Each investor buys an ownership in the SPV rather than investing directly in the start-up. The SPV, in turn, invests in the company. However, there are pros and cons to an SPV for both the start-up and for individual investors.

For the Start-Up Company

A SPV greatly simplifies the company’s capitalization table. Imagine that instead of having to list forty owners that each own 1% of the company, there can be one SPV that owns 40% of the company. Further, the founder would only deal with one entity rather than forty individual voices. On the other hand, this arrangement may afford the SPV with a significant ownership interest in the company. As a result, the SVP can exert a much louder voice in the direction of the company.

For the Investor

As the corollary to the above point, a SPV may provide an individual investor with much more leverage with the company than the investor would otherwise have on its own. In using the above example, instead of having a 1% ownership interest, the investor effectively has the same rights as a 40% owner while still contributing the same capital amount as before. The SPV, however, adds a level of complexity and cost as there will be agreements setting forth the terms and management of the SPV itself. An investor will not have individual rights in the company anymore. The SPV will also likely be managed by a third party so an investor will not have direct access to the company.

Whether you are looking to  start a company or invest in one, there are advantages and disadvantages to a SPV that need to be weighed carefully. Contact one of our Mergers & Acquisitions and Business & Corporate attorneys today to discuss how you may be affected by these factors.

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This information is provided for general informational purposes only and should not be construed as legal advice. Readers should consult with qualified legal counsel regarding their specific circumstances before taking any action based on the information presented.

The post Special Purpose Vehicles: A Solution for Too Many Investors? appeared first on McCarthy Lebit - A Cleveland/Ohio Law Firm.

Even though renting is less of an investment of your time and finances than purchasing a property, commercial leases should not be overlooked, as failure to understand and negotiate your lease can end up costing you later.  So when you’re handed that lease, here are a few questions you should ask yourself before signing on the dotted line:

• What is the best type of lease for your business? A gross lease is the most traditional type of lease with the tenant paying rent and the landlord paying taxes, insurance, and maintenance expenses. A net lease transfers some or all of the expenses to the tenant. For example, in a single net lease, the tenant will pay the base rent plus property taxes, while a double net lease would include property taxes and insurance, and a triple net lease would include property taxes, insurance, and maintenance costs.
• Is it too expensive? The rental rate states the amount of rent and when it will be paid. Most leases also include late payment provisions that impose additional charges if you fail to pay the rent when it’s due or within a specified grace period. If your business experiences seasonal or irregular sales activity, try negotiating a flexible rental rate that corresponds to the changes in your cash flow.
• Is the lease term flexible? Try not to tie yourself to a long lease term; your business may grow faster than you expect or the location might not work out for you. A short-term lease with renewal options is usually safer. A renewal option specifies whether you have the option to renew the lease when it expires and, if so, specifies the amount of rent to be paid. A renewal option can give your business protection against large rent increases when your first lease term expires.
• Who pays what? You may have additional expenses besides rent, which may include: (a) Common Area Maintenance fees to maintain common areas shared by other tenants within the same building or office space; (b) utilities; and (c) maintenance and repairs of your leased space.
• What improvements can be made? You may want to do make some improvements to retrofit your space to fit your needs. Make sure it is clearly outlined in the lease what alterations you are allowed to make, who is responsible for paying for them, and who will own them after the lease ends (generally, the landlord does).
• Can I transfer my interest? Look carefully at the assignment and subleasing provision to determine if, and under what conditions, you are entitled to assign or sublease the premises to another. Subleasing offers protection if you are no longer able to pay the rent, or if you have expanded to the point where you need to move into larger space. Assignability is also favored for many reasons; one being that if you sell your business, you will want to assign the lease to the new owner.
• What happens if you default? It is important to understand the default process as outlined in your lease. You should negotiate your lease to require written notice followed by a grace period (which allows a cure period to make a late rent or comply with another lease requirement) before the landlord may exercise default rights. There will be consequences once a default is uncured so make sure you read and understand your landlord’s remedies upon default.
• Are you personally liable? Landlords often require a personal guaranty of the lease. If you can’t negotiate the guaranty language out of the lease altogether, and you are willing to risk personal liability, try to limit the guaranty if possible.

These questions are just a few of the many that need to be asked to ensure that your business has the greatest probability for success. While it is important to review and understand the language of your commercial lease, some of the more complicated provisions may be best suited for an attorney who can advise you, and if necessary, negotiate those provisions on your behalf.

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This information is provided for general informational purposes only and should not be construed as legal advice. Readers should consult with qualified legal counsel regarding their specific circumstances before taking any action based on the information presented.

The post Commercial Lease Considerations for Small Businesses and Startups appeared first on McCarthy Lebit - A Cleveland/Ohio Law Firm.