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Make sure you understand the boilerplate language in a contract before signing
Despite the fact that boilerplate provisions are frequently neglected in contracts as basic non-negotiable phrases, they often create vital rights and can be adjusted to benefit one party over the other. Before signing any contract, make sure you read and understand all of the clauses and, if necessary, negotiate to amend them What is a Boilerplate Provision? The phrase "boilerplate" refers to some common terms that are frequently found at the end of a contract. These clauses detail how a dispute between the contractual parties will be resolved, including who will pay attorney's fees, the right location for bringing a lawsuit, and whose law will apply in the event of a dispute. Which boilerplate clauses are included and how they're written can have a big impact on your contract's rights and liabilities. An indemnification agreement, for example, might be written as a cross indemnity, in which both parties agree to indemnify each other, or as a one-way indemnity, in which only one party agrees to indemnify the other. If you wind up in a contract disagreement or lawsuit, you don't want to simply sign off on these conditions without properly understanding them. Contracts with Standard Boilerplate Provisions Here are some examples of boilerplate clauses and what they typically cover. However, depending on the exact language used and the items covered in the clause, these requirements can vary greatly.
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30/12/2021 0 Comments Contract Breach: Material BreachHow can you determine if your contract has been "irreparably violated" according to the law?
A "material" breach of contract is one that strikes so deeply to the heart of the contract (a failure to perform the contract) that it renders the agreement "irreparably broken" and negates the purpose of the deal in the first place. The break must go right to the heart of the parties' agreement. If there is a major breach (sometimes known as a "total" breach), the other party can simply terminate the agreement and seek damages from the other party in court. Courts frequently consult the Restatement (Second) of Contracts for aid in determining whether a breach is material, as well as other court decisions arising from contract disputes. The considerations listed below are generally relevant in establishing whether a contract breach was a substantial breach. Is the other party being denied "The Heart" of the bargain? For example, if the BMW dealer promised you a radio and stylish hubcaps, but the car you received lacked both, it is unlikely to be a significant breach because you were not deprived of the main goal of your deal—the car. You wouldn't be able to get out of the agreement (though you could demand the dealer remedy the situation in some way). A substantial breach would occur if a used-car vendor guaranteed you the exact Ford Mustang driven by Steve McQueen in Bullitt and then delivered a different Mustang. Your transaction wasn't about the make and model of the car in this case; it was about one specific vehicle. Is it possible to compensate the other party for their loss? Will money be able to address the problem, and if so, how much will it cost? It's less likely to be substantial if it can be repaired with reasonable effort or expenditure while the contract is still in place. Consider the BMW with no hubcaps and no radio mentioned earlier. Because the dealer could easily solve the problem by installing the promised features, you wouldn't be allowed to cancel the contract. What is the Loss (or Forfeiture) for the Breaching Party? What has the breaching party done so far to keep its end of the bargain? This aspect is frequently influenced by timing: how far along the parties are in carrying out their contractual responsibilities when the contract is breached. Consider a homeowner who commissions a custom kitchen from a contractor. If the homeowner announces a breach of contract when the kitchen is nearly finished, the contractor will lose a lot more time and money than if the breach was announced before construction began. If the majority of the contractual requirements have been met, you will be less likely to be able to claim a serious breach of contract and hence cancel the relationship. What Are the Chances of the Breaching Party Making Things Right? The less likely a violation of contract is substantial, the more likely the violating party can and will repair the problem. If the other party demonstrates that problems are likely to be resolved, such as by providing security for its promised payment or other reasonable assurance that it will honor the agreement, or if the economy or market shifts in favor of performance, the breach of contract is less likely to be material. Signs of financial weakness or payment defaults, on the other hand, indicate that the problems are less likely to be resolved (and make it more likely that you could rely on a material breach of contract to cancel the contract). Is it possible that the Breaching Party acted in bad faith? When a case is taken to court, the judge is more likely to presume a serious breach of contract if the breach was purposeful or came from bad faith or unfair dealing. An executive who was insubordinate and refused to obey directives, for example, was deemed to have significantly breached his employment agreement by a court. A breach caused by carelessness ("negligence") or circumstances beyond the party's control, on the other hand, is less likely to be considered a material breach of contract. Is the non-breaching party "ready, willing, and able" to fulfill its obligations? It's not enough to simply assert that the other party breached the contract materially. If the contract's responsibilities haven't been fulfilled yet, the non-breaching party must be "ready, willing, and able" to do so. For example, in one case, a New York man agreed to pay $610,000 for a "as is" vacation home. When the sellers refused to complete the transaction, the buyer sued for breach of contract. The buyer lost because he was unable to demonstrate that he was "ready, willing, and able" to fulfill the contract's requirements, which included significant modifications to the heating and plumbing systems. In other words, he refused to accept the house "as is." What Is In The Contract? Certain contracts specify what constitutes a significant breach of contract. Instead of relying on a judge's judgment or interpretation of the law in the event of a dispute, the parties might incorporate a phrase in the contract declaring that a breach of particular contract clauses will be regarded as serious breaches. For example, a provision may say that certain actions will be regarded as substantial breaches of the contract, such as failing to make payments, failure to retain insurance, or failure to meet specified sales targets. Because delays in performance and payment aren't always considered substantial breaches, some contracts include a clause that says "time is of the essence," implying that these types of delays will be regarded material breaches. Yoel Molina, Esq. (AKA “Mo”) Feel free to join our WhatsApp group if you want to know more about his and more! Contracts can be broken at any time if one party signals that it is unable or unwilling to fulfill its responsibilities
Any contract can be regarded broken ("breached") if one party unconditionally refuses to perform as promised under the contract, regardless of when that performance is meant to occur. A contract's "repudiation" refers to this unequivocal refusal. When one party to a contract implies that it will not meet its contract obligations—either by words or actions—the other party might claim a breach of contract (failure to perform under the contract) and seek remedies such as payment. An anticipated breach of contract is a term used to describe this situation. Continue reading to understand more about repudiation and anticipatory breach of contract. When Does Repudiation Occur? When it comes to contract law, courts often recognize three sorts of repudiation: The other party is given a firm and unequivocal refuse ("express repudiation"). "I'm not going through with the deal," the other party must essentially inform you. A qualified or ambiguous refusal is insufficient. (For example, "I won't be able to deliver the fruit till the drought ends.") The rebuke must be unequivocal, direct, and directed at the other party. ("I will not be bringing the fruit as promised," for example.) An action renders the performance of the other party impossible. When it comes to rebuke, deeds speak louder than words. Let's say a couple was meant to pay off two debts with the proceeds from their business. Instead, the pair ran the company into the ground, racking up numerous extra debts and rendering repayment of their original loans impossible. Their rash and voluntary conduct amounted to a rejection of the loan agreements. The property that is the subject of the transaction is sold to a third party. When a contract for the sale of property is breached, repudiation occurs when one party transfers (or agrees to transfer) the property to a third party. For example, if you signed a contract to buy a house and then find out that the other party sold it to his brother, your contract has been repudiated (even if you never heard a word about it from the other party). Contracts for Sale of Goods - Special Rules A method for dealing with anticipatory breach is prescribed by the Uniform Commercial Code (UCC), which governs the sale of goods. You have the right to demand "sufficient guarantee of performance" of the contract if you have cause to suspect the other party will not fulfill its commitments. You have the option of deferring your own contract performance until the assurance is received. If the other party fails to comply with your assurance request within 30 days, the contract is officially terminated ("repudiated"). EXAMPLE Daniel placed an order with Compco in April for 100 PCs. On May 1, he is expected to pay $50,000 and receive the machines on July 1. "Unless chip manufacturing accelerates," Compco's CEO tells a television reporter on April 29, "Comco may have difficulties filling its summer orders." Daniel seeks Compco's promise and refuses to pay the $50,000 due on May 1. Daniel ends the contract when Compco fails to answer to Daniel's request for assurance by the end of the month. As you can see, a qualified repudiation ("Compco may have difficulty filling its summer orders") is enough to put the contract on hold, at least until the other side gives the needed assurances. Many observers have suggested that these requirements for obtaining and delivering assurance should apply to all contracts, not just those governed by the UCC. Repudiation: Can You Take It Back? A party may repudiate a contract and then withdraw the repudiation if the opposing party has not made a "material change" in their position as a result of the repudiation. EXAMPLE Mary is expecting 100 cases of cauliflower from Peter. Peter's tractor breaks down, and he informs Mary that he will be unable to fulfill the order. Mary strikes up a fresh cauliflower arrangement with Sam right away. Peter buys a new tractor two days later and informs Peter that he can fulfill the request. But it's too late to recant the rebuke because Mary relied on it when negotiating his new contract with Sam (a "material change" in his position). When Only Payment Remains The criteria stated in this section don't apply if the sole contract obligation left is for one party to pay money to the other, which may appear to be an odd oddity. In these situations, the party requesting payment must wait until the payment's due date has passed. (If one party has cause to suspect they will not be paid, there is no claim of anticipatory breach.) EXAMPLE Sam agrees to give David $2,000 on June 1 if David steam cleans his houseboat. On May 15, David completes the steam cleaning on time, and Sam informs David that he is unable to pay her. Because the only contract duty left is payment, David will have to wait until June 1 to file a breach of contract lawsuit. EXAMPLE The following are the same facts as before: Sam agrees to give David $2,000 on June 1 if David steam cleans his houseboat. This time, David begins work, but within an hour, Sam informs her that he is unable to pay her. Because David hadn't finished her steam cleaning, he didn't have to wait until June 1 to suit for breach (her obligation). She has the right to sue for anticipatory breach of contract. The Non-Breaching Party's Duty to Mitigate Another aspect of anticipatory breach is that if one party breaches the contract, most courts expect the other party to act quickly to prevent incurring excessive charges or expenses. This is known as "mitigating damages," and it basically implies that you can't just sit around and wait for things to become worse. This also explains why some parties refuse to fulfill their obligations under a contract: It allows the opposite party additional time to lessen their losses, perhaps lowering the amount of money damages granted in a breach of contract action. In our houseboat example, if Sam cancels two weeks before David begins work, she may be able to locate another client to fill that slot, limiting or even wiping out whatever damages she may have been able to collect from Sam as a result of the breach. It's essentially a "no harm, no foul" situation if David can make up the money with another work. Yoel Molina, Esq. (AKA “Mo”) Feel free to join our WhatsApp group if you want to know more about his and more! 28/12/2021 0 Comments Contract Amendment ExampleUse this Sample Amendment if you're changing an existing contract.
This Sample Amendment to Contract can help you swiftly and painlessly incorporate any modifications to an existing agreement. In the "Completing the Amendment" section below, you'll also discover instructions on how to fill out the form. (See Nolo's article Amending an Existing Contract for more information on changing an agreement that's already in writing) Amendment to Contract 1. This amendment (the "Amendment") is made by _________________ and _________________, parties to the agreement _________________ dated (the "Agreement"). 2. The Agreement is amended as follows: ________________________________________________ 3.Except as provided in this Amendment, the Agreement remains in full force and effect and shall continue in accordance with its terms. If this amendment conflicts with the Agreement or any previous amendment, the contents of this amendment will take precedence. ____________________________ By: __________________________ Printed Name: _________________ Title: ________________________ Dated: _________________ ____________________________ By: __________________________ Printed Name: _________________ Title: ________________________ Dated: _________________ Completing the Amendment Here are some pointers on how to fill out the Sample Amendment and add it to your contract: 1. Introductory paragraph. The first paragraph is an introduction. Type your name or the name of your organization, as well as the name of the person on the other side (an individual or a company). 2. Describe the amendment. Type the changes to the original contract using one of three methods: redlines and strikeouts, completely changing a clause, or just summarizing the changes. Check out Nolo's article Amending an Existing Contract for more details on various amendment procedures. 3. The concluding paragraph. This paragraph (number three) should be added to ensure that the contract stays unchanged other than the adjustment. 4. Your amendment should be proofread and signed. Each of you should sign and write the date beneath the written party names. Each person's name and title, such as "Chief Operating Officer" or "General Partner," should be written below. You'll want to double-check that the individual signing the contract has the authority to do so, as well as that you've met any signing or notice requirements specified in the original contract. In most cases, any revisions must be signed by the contracting parties. Other signatures or notices may be necessary in some circumstances, such as corporate revisions or amendments to financial agreements. 5. Taking Care of Changes. Because contracts may be amended numerous times, it's a good idea to number each amendment, such as "Amendment No. 1" or "First Amendment." Furthermore, revisions should be submitted and kept with the original agreement so that anyone looking at the file may see that it has been changed. Yoel Molina, Esq. (AKA “Mo”) Feel free to join our WhatsApp group if you want to know more about his and more! 27/12/2021 0 Comments Basics of Contract NegotiationNegotiating a contract's business and legal terms
Risks and Revenues are at the heart of any negotiation In a typical contract negotiation, each party makes certain concessions in order to obtain what it truly desires. Despite the fact that there are always a slew of minutiae to iron out, most contract discussions reduce down to two key considerations: risks and revenues Here's an illustration. In a residential lease agreement, a landlord wants to get a good rental income (revenue) while simultaneously ensuring the right to evict the tenant quickly and protect the property if something goes wrong (risks). Sam, the landlord, understands that his risks are reduced if he rents to Camille, a qualified tenant with excellent references who has lasted at her prior rental for fourteen years. Camille's offer to sign a one-year lease for a lesser rental price is taken into consideration by Sam. Sam understands that a bad tenant might cost him months of missed income (not to mention lost time and legal fees). He accepts Camille's lower offer since the decreased danger she poses is worth a lower profit margin The Legal vs. the Business Side of Negotiations Typically, contract talks are divided into two stages: the essential commercial terms are negotiated first, followed by the legal requirements. Let's return to the landlord-tenant scenario, where Sam agrees to rent his house to Camille. Camille negotiates a one-year lease for $1,500 per month during a walk-through at the rental home. She agrees to pay the first and last month's rent, as well as a security deposit, in advance. In a month, she will be able to move into the house. Sam and Camille exchange a handshake, with Sam promising to send Camille a "normal" lease agreement. Camille receives the written lease a week later. It has all of the essential terms she and Sam agreed to at the house, but it also contains several items she finds offensive, such as an attorney fee provision and a demand that she seek insurance. She dials Sam's number, and the two of them discuss the situation. Sam eventually agrees to waive the attorney fee clause, and Camille agrees to purchase renter's insurance. Camille signs the lease after Sam revises it. When Does a Contract Become Enforceable? Is it when the parties have reached an agreement on business terms or when the legal terms have been finalized? There is no contract under contract law until all of the deal's material aspects have been negotiated and agreed upon. As a result, a legal dispute over whether or not a contract exists will reduce down to whether any of the unresolved legal questions are material to the transaction. Let's return to Sam, the landlord, and Camille, the potential tenant. Let's say Sam refuses to budge on any of his regular lease requirements, but Camille has already given notice at her present apartment since she mistook her handshake with Sam for a contract. If the attorney fee and insurance clauses are material aspects of the arrangement, she has the legal right to compel Sam to follow through on the agreement or pay her damages. If the parties have agreed on the deal's business parameters but want to go forward before working out the legal aspects, they can use an escrow account or condition the release of funds on the signing of a written agreement. This prevents the hassle of having to chase down money you put down if the purchase falls through. If the negotiations fail, everyone gets their money back and moves on. Lawyers and Negotiation You may have encountered the following scenario if you own or run a business. Your company feels it has reached an agreement on the business terms of a deal with another company. Both parties enlist the help of their lawyers to iron out the issues, but as soon as the lawyers are engaged, everything goes to hell. This could be due to the fact that when lawyers negotiate, they are dealing with three potentially opposing considerations. They want to do the following:
Although most lawyers concentrate on the first and second considerations, some lawyers are content to let talks drag on as long as the clock ticks. The client can influence this stage of the negotiation to some extent by discovering which issues are still in play, prioritizing the risks that matter, and guiding the attorney accordingly. What Kind of Negotiator Are You? There are many different bargaining styles, as you may have seen on TV series like The Apprentice. The two most popular styles are adversarial ("I will control you") and collaborative ("I will work together with you") ("Together we will prosper"). Of course, real individuals use the various negotiating approaches, bringing their temperaments, emotions, and personalities to the table along with their conditions. One negotiator may raise his voice and threaten to storm out of the room, while another speaks calmly and objectively. Roger Fisher and William Ury, authors of the book Getting to Yes, pioneered the current approach to contract negotiation at Harvard University. According to these writers, a constructive negotiation with little emotional outbursts is most likely to yield the best results. Anger and other related emotions obscure judgment, generate competitiveness, impede mutually beneficial outcomes, and may lead to a vindictive approach to problem-solving. Bargaining Position: The "Take It or Leave It" Situation The respective bargaining positions of the parties are one factor that influences the result of contract negotiations. A side with vastly stronger bargaining power, such as a landlord dealing with a housing shortage or a company recruiting during a recession, is not required to negotiate. Instead, these heavy hitters typically offer the weaker side with a contract and instruct them to "take it or leave it." In the case of contracts of adhesion (non-negotiable form contracts), this can backfire because the less-favored party may later claim that a clause is unfair or unreasonable. It is not always in your best interests to dictate all of the conditions if you are in a stronger bargaining position. According to J. Paul Getty's father, "You should never strive to make all of the money in a transaction. Allow the other person to profit as well, because if you have a reputation for constantly making the most money, you won't be able to get many transactions." Yoel Molina, Esq. (AKA “Mo”) Feel free to join our WhatsApp group if you want to know more about his and more! If you're hiring your first employee, you'll need to file paperwork with various government agencies and pay taxes to them.
Congratulations on hiring your first employee! It's critical to get off to a good start as an employer by making sure you follow all of the new legal requirements. Being an employer comes with a slew of new responsibilities, ranging from tax forms to government registrations to insurance requirements and beyond. Our to-do list for new employers can be found below. 1. Obtain a tax identification number for your company. When you hire employees, you must obtain an employer identification number (EIN) that you can use on your tax returns and other IRS documents. To obtain an EIN, fill out IRS Form SS-4. The IRS website, www.irs.gov, has the form available for download. 2. Register with the labor department in your state. You'll have to pay state unemployment compensation taxes once you hire employees. These funds go to your state's unemployment compensation fund, which helps workers who have lost their jobs in the short term. A list of state unemployment insurance tax agencies can be found on the Department of Labor's website. 3. Get workers' compensation insurance. Workers' compensation insurance should be in place to protect employees from on-the-job injuries. The vast majority of states require workers' compensation insurance, though some make exceptions for very small businesses. 4. Set up a payroll system to withhold taxes. You need to withhold and submit a portion of each employee's income to the IRS, and pay social security and health insurance taxes to the IRS. For more information, see IRS Publication 15, Circular E, Tax Guide for Employers on the IRS website www.irs.gov. (You may also need to withhold taxes for your state. For more information, please contact your state tax authority; for links to each state authority, please visit the Association of Tax Administrators website www.taxadmin.org /State tax authority.) 5. Have each employee fill out IRS Form W-4, Withholding Allowance Certificate. Employees will use Form W4 to tell you how many allowances they have applied for for tax purposes so that you can deduct the correct tax from their salary. (You do not need to submit a form to the IRS.) This form can be found at www.irs.gov. If an employee wants to change the allowance, you should ask the employee to fill out a new W4 form every year. 6. Fill out Form I-9, Employment Eligibility Verification for each new employee. The United States Citizenship and Immigration Services (USCIS, formerly known as INS) requires employers to use this form to verify whether any employees they hire are eligible to work in the United States. (You do not need to submit this form to USCIS, but you must keep it on file for three years and provide it to immigration and customs officials called ICE for review.) You can obtain this form online at www.uscis.gov. Please note that these are completed The form should be stored in a separate I9 folder for all employees, not in each employee’s personnel file. 7. Report each new employee to your state's new hire reporting agency. The New Employee Reporting Program requires employers to report information on all new employees for the purpose of identifying parents who owe child support. Each state has a different new hire review agency. To find the name and address of your state's new hire reporting agency, see the New Hiring State page on the Children and Families Administration website (www.acf.hhs.gov). 8. Post required notices. Some government agencies require employers to publish notices of workers' rights to their employees. For more information on federally required posters, see the Department of Labor website at www.dol.gov/elaws/posters.htm. DOL's "Poster Advisor" will help you determine which posters to display in your workplace. In addition, you must comply with your state's department of labor poster requirements. A list of state labor departments is included on the website of the Federal Department of Labor 9. File IRS Form 940 each year. You must complete IRS Form 940 to report your federal unemployment taxes for any year you paid $1,500 or more in a quarter or for any year an employee worked for you. for 20 or more weeks of the year. You can find the form at www.irs.gov 10. Adopt workplace safety measures. Virtually all employers must comply with the requirements of the Occupational Safety and Health Act (OSHA) by providing, among other things, a hazard-free workplace, training employees to do their jobs safely, notify government administrators of serious workplace accidents, and keep details of safety records. For more information on these rules, see the Occupational Safety and Health Administration's website at www.osha.gov 11. Create an employee handbook. Although not required, it is best to have a manual outlining your company’s employee policies and clearly stating that employment is free, unless the employee has signed a written employment contract. 12. Set up personnel files. For each employee you hire, create a file to save work-related documents, such as application forms, job vacancies, IRS Form W4, performance evaluation, and employee benefit registration forms. Medical records should be kept in a separate confidential file and kept in a locked cabinet. The I9 form that records the employee's immigration status should also be kept in a separate file. 13. Set up employee benefits. If your company has an employee benefit plan, such as health insurance or a 401(k) plan, you will need a registration process so that employees can register, name their dependents, and select options. Yoel Molina, Esq. (AKA “Mo”) Feel free to join our WhatsApp group if you want to know more about his and more! When it comes to business and contracts, there are about as many different kinds as you could imagine. That’s because they are used for so many different things. Some are fairly straight forward and you can put them together yourself when you need them for your business.
On the other hand, others are somewhat more complex and are far more important to get absolutely correct. With such contracts, you may wish to enlist the services of an experienced business attorney who knows contract law and can make sure you are protected and that your contract is legally enforceable before it’s too late. Here are some great tips and helpful advice to make sure you are successfully using contracts as you should be. Tips on Negotiation One thing that’s good to keep in mind is that a contract is an agreement, and thus, there will always be a bit of negotiation involved. Therefore, it’s in your best interest (and the best interest of your business) to make sure you are negotiating properly and effectively. Here are some things you’ll want to keep in mind to ensure you do just that: ●Make sure you go into a negotiation with a clear objective. If you like, list out your goals. ●Research everything you need to know beforehand, including figures, facts, and relevant laws. ● Try to build some sort of trust between you and any other included parties. Trust is a great aid to effective communication. ●Decide beforehand what areas you are willing to compromise, but also make clear to yourself what is essential that you get from the negotiation. ● Listen to everything the other party says – don’t just wait for your turn to talk. ● Keeping everything ordered will help things proceed more effectively. Consider using a checklist or a first-draft of an agreement to facilitate this. Tips on Drafting a Business Contract There are some things you’ll want to keep in mind when it comes to drafting the language of your business contracts. It will help if you have a few things down first: ● Your contract needs to be focused, specific, and clear to be effective. ● Use short sentences to avoid ambiguity. ● Make sure everyone’s names are absolutely accurate or it won’t be legally enforceable. ● Define/stipulate each of the important terms you’ll use in your contract. ● Properly prepare for a dispute or litigation by specifying attorney fees, choice of laws, and should informal dispute resolution be preferred as a first step. ● Ensure everyone signs the contract. ● Number all of the pages so that it will be easy to see if pages were added/subtracted after a signing. ● You may want to review a sample contract or use a template to get started. Yoel Molina, Esq. (AKA “Mo”) Feel free to join our WhatsApp group if you want to know more about his and more! Sweat equity can bring essential resources to a struggling business, but make sure you assess the benefits and drawbacks.
Sweat equity can be utilized to compensate employees, boost a company's value, or make real estate upgrades. It can help you acquire talents and talent that you otherwise wouldn't be able to afford as a startup. It may help you get more money from investors than your company could normally raise based on its sales. It also has the potential to improve the profit from the sale of real estate. However, you must enter a sweat equity agreement with your eyes wide open, or you may find that you have given up more than you have earned. What is Sweat Equity? When money is scarce or the dollar value does not reflect the whole value of a business or project, sweat equity is a technique of giving a dollar value to effort, skill, or time. Employees that are paid with sweat equity instead of salary are given stock or options. Sweat equity is a term used by entrepreneurs to describe the value they place on the time and effort they put into starting a firm. Real estate investors can also employ sweat equity to increase their profits from a home sale by performing repairs and upgrades themselves. How Does Sweat Equity Work in Startups? Let's imagine you have the best cookie recipe in the world, passed down from your grandmother, and you're planning to start the next big cookie company. You've mastered the art of baking cookies. You've found a supplier with the best ingredients, worked out a deal with a top commercial kitchen, and have a truck ready to distribute the cookies to stores. You need packaging and marketing to get your business off the ground, but you've spent all of your cash and your company is still not making money. You don't have the funds to pay a wage, but your best friend from college works for a well-known packaged goods firm as the director of marketing and design. You decide to team up, and instead of paying your friend a salary, you agree to offer him a share of the company. Before you even sold your first cookie, you used your sweat equity to provide your company with top-notch competence. Assume you require additional funds to put the package into production and launch a cookie marketing campaign. Because your company is now worth more with packaging and marketing experience added than it was before, the sweat equity agreement you just made with your closest friend can also help you get further capital from outside investors. How Is Sweat Equity Calculated? There is no fixed formula for calculating the worth of sweat equity, especially if your organization has yet to generate any revenue. Let's say the owner of our cookie firm put aside $100,000 to start the company and estimates that the time and effort spent creating a business strategy, investigating ingredient sourcing and cooking facilities, and connecting with suppliers and retailers is worth another $100,000. According to these calculations, the company is worth $200,000. Our business owner may claim that the best buddy is giving up a $50,000 annual income in exchange for a 25% ownership stake in the firm valued at $200,000, based on the $200,000 value of the company. The employee may believe that his or her packaging and marketing knowledge is more valuable and request a larger stake. Alternatively, they may both feel that packaging and marketing are so important to the company's success that the best friend's sweat equity is worth a full partnership with a 50% interest. To lower the sweat equity to a lesser percentage of ownership, some business owners choose to pay a portion of the salary in dollars. Sweat equity can also be paid with common stock shares and stock options using a similar formula, but regardless of the form of equity, the factors to consider include:
Remember that sweat equity is taxable, so you should be able to defend the way you calculate the value of sweat equity. Calculating Sweat Equity for Investors When you're looking for investors, calculating the value of sweat equity can be even more difficult because sweat equity is only worth what an investor is willing to pay. Let's return to the case of the cookie company. You estimated the company's value to be $200,000 before your friend joined, and an investor who wanted a 20% ownership would have to pay you $40,000. Let's pretend your best friend accepted your sweat equity proposition and is now on board with you. You have a killer recipe, baking experience, a production source, and a delivery vehicle, as well as a package design and a marketing plan, and you believe your company is now worth $300,000 with the extra expertise. Due to the additional sweat equity, the same investor who bought a 20% stake for $40,000 would have to pay you $60,000 for the same proportion of the company. But, before you put that extra $20,000 in the bank, you'll need to find an investor who agrees with your projections, because sweat equity is only worth what an investor is prepared to pay for it. Sweat Equity in Real Estate To raise the sale price of a property, a homeowner or real estate investor may use their own labor and efforts to make repairs and modifications. Instead of employing a general contractor or other expert, they can decide to build a deck or remodel a bathroom themselves, and factor in their effort and time when determining a sale price. A homeowner or investor will only get a bonus if a potential buyer agrees that their efforts contributed value, just like in a commercial enterprise. The sweat may not result in increased equity if the task does not end up looking professional. Pros and Cons of Using Sweat Equity
What to Include in a Sweat Equity Agreement? Any sweat equity agreement should be made in writing and include:
Yoel Molina, Esq. (AKA “Mo”) Feel free to join our WhatsApp group if you want to know more about his and more! Understanding what type of insurance you require is critical to your company's success.
Unexpected calamities may strike a firm at any time, from fires to personal injury claims. While incorporating your business protects your personal assets in the event that the company fails, insurance provides extra security for both you and the firm. Some insurance is required, while others are optional but highly advised to assist reduce the chance of disaster. Types of Business Insurance Various types of insurance are available depending on the type of business. Your choices will be influenced by a variety of circumstances, including:
With these considerations in mind, most firms should consider a few basic forms of insurance. General Liability Insurance: If your firm causes bodily harm or property damage, general liability insurance covers you. This covers harm that occurs in your business, as well as injury that arises as a result of your products or services. Property Insurance: Property insurance protects your business's assets, such as equipment, computers, and inventory, in the event of a disaster such as theft, fire, or vandalism. Commercial Auto Insurance: If you have a vehicle that is utilized for business purposes, your personal insurance policy may not cover it. If you or any of your workers are involved in an accident, commercial vehicle insurance can ensure that you are covered. Data Breach and Cyber Liability Insurance: This covers costs like litigation and settlement fees if you are sued as a result of a data security breach. Disaster Insurance: Tornadoes, earthquakes, and hurricanes are examples of severe natural catastrophes that are covered by disaster insurance. Note that property insurance may not cover some natural catastrophes, so you'll need this extra coverage to be safe. Business Owner's Policy: A business owner's policy combines several forms of insurance, such as property and general liability, into a single policy for cheaper prices and convenience. Commercial Umbrella Insurance: In the event that your liability coverage is exhausted, umbrella insurance offers additional coverage on top of your existing insurance. Required Insurance When You Have Employees You may be obliged by state law to get extra coverage if you have one or more employees. If you have less than three workers, some states may not need you to carry this insurance, while others may require it even if you just have one part-time employee. You may incur consequences, including severe fines, if you do not have adequate coverage. Workers' compensation insurance is the first thing to think about, as it covers an employee's medical costs, rehabilitation, and lost wages if they are injured on the job. You may be obliged to acquire this via the state, or you may receive it through a private regulated insurance firm, depending on your state. Unemployment insurance is the second criterion. This helps employees who have been laid off due to no fault of their own. Unemployment insurance differs from other forms of insurance in that payments are frequently given to the state in the form of a tax. The amount you'll have to pay will most likely be based on a percentage of gross salaries paid, the number of current workers, and the number of previous employee claims. Professional Insurance In order to be licensed in the state, you must have extra insurance for some professions. Attorneys and doctors, for example, may be obliged by state law to have malpractice insurance. If you don't have this insurance, you might face fines from state licensing authorities or perhaps lose your license to practice in the state. Professional insurance is not required by law for other professions such as bookkeepers and consultants, although it is strongly advised. Errors and omissions insurance is another name for this. It safeguards your business from consumer claims based on professional advice or services supplied by you or any of your staff. How Much Will Business Insurance Cost? The cost of your insurance will be determined by a number of things. For example, having a higher deductible, which is the amount you must pay before the insurance kicks in, may allow you to negotiate a cheaper monthly price. Having a smaller total policy limit will also likely cut your monthly premiums. To ensure you have adequate coverage, take the time to investigate the recommended coverage amounts for your occupation and the value of your company assets. When determining a quotation, insurance providers will most likely consider a number of criteria. The amount you'll have to pay each month depends on the location of your business, the length of time you've been in operation, and whether or not you've had any previous claims. Before you commit to any insurance, keep in mind that you may shop about and get estimates from several firms. Once you have insurance, it is critical to check your coverage on a regular basis as your company expands. Yoel Molina, Esq. (AKA “Mo”) Feel free to join our WhatsApp group if you want to know more about his and more! 22/12/2021 0 Comments What Is a Convertible Promissory Note?What are the consequences of using a convertible note instead of a conventional promissory note to borrow money for your company?
Convertible notes are promissory notes with a secondary business purpose other than debt representation. Convertible notes have all of the features of a standard promissory note, such as an interest rate and a security promise (if applicable). The difference is that under a convertible note, the lender (also known as the creditor or holder) has the option to convert all or part of the outstanding debt into the corporation's shares in specific situations When Would I Use a Convertible Promissory Note? It is commonplace for corporations to use convertible notes in business dealings. Here are a few likely scenarios:
Prepayment A convertible note, like a conventional promissory note, must deal with the question of prepayment. Having the option of making prepayments without penalty is usually in the best interests of the company. However, as with any loan, prepayment would prohibit the lender from getting the agreed-upon future interest payments. Furthermore, in the case of a convertible note, a lender may refuse to accept prepayment if it believes the firm has potential and would prefer to keep its options open to become a future stakeholder. Prepayment is a topic that must be discussed between the lender and the company, and it must always be addressed in the convertible note's terms. Treatment of the Note For accounting purposes, the outstanding balance of the loan is classified as debt, not equity, until the lender converts the note into company stock. This means that the lender normally has no stockholder rights, such as voting rights, distribution rights, and so on, until the note is converted. Triggers for Conversion The terms of the convertible note can provide that the loan is converted into stock based on a variety of triggering events, which can include the following:
The ability of the holder to convert the note into business equity is a significant issue that the company (as borrower) and the holder must carefully consider. Given that stock ownership is typically the primary means for a party to exert control over company management while also earning a profit, the holder will desire as much flexibility as possible when it comes to conversion circumstances. Similarly, the borrower will want to get as many conversion delays and/or constraints as feasible. Note that in the event of a liquidation, debt holders receive priority over equity holders in the distribution of remaining cash and assets, posing a danger to the creditor. As a result, if the debt is converted into stock, the holder will lose priority if the company is dissolved or declares bankruptcy. Methods of Conversion The next stage is to determine how many shares the debt is convertible into when the holder initiates a conversion. This is obviously important not only to the lender, but also to the remaining stockholders, who want to be as diluted as possible. In the calculation of outstanding debt, all methods of conversion commonly include accumulated and unpaid interest. The type of stock into which the note is convertible (whether common stock or a series of preferred stock) must also be agreed between the lender and the corporation. Keep in mind that the computations below may not always result in complete numbers of shares being issued to the lender, resulting in fractional shares. The convertible note's terms should state whether fractional shares should be rounded up to the next whole share or treated differently. The following are various options for calculating the conversion of outstanding debt into shares of the corporation:
Adjustments for Stock Splits or Recapitalization Note that the terms of the convertible note, including those for conversion, should be subject to change in the event of stock combinations, stock splits, or recapitalizations, unless doing so would be detrimental to the firm (as the borrower) or you (as a potential lender). Yoel Molina, Esq. (AKA “Mo”) Feel free to join our WhatsApp group if you want to know more about his and more! |
AuthorYoel “Mo” Molina, I am a lifelong resident of Miami, Fl. I am a graduate of Miami Senior High, Class of 1992, Georgia Institute of Technology, B.S. 1997 and University of Maine School of Law, J.D. 2001. I have been practicing law in Miami Since 2001. I am a former training prosecutor in the Miami-Dade State Attorney’s Office. I have experience in jury trials, appeals, and administrative hearings. I have appeared before judges across the State. My experience ranges from civil litigation matters, collection matters, foreclosure, business and corporate, contracts, real estate, leases and employment matters.. Archives
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