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    Business Partnerships

    Partnerships

    Partnerships can create an opportunity for your business to grow and thrive. Sentient Law knows that the ins and outs of such a venture can be challenging for many business owners. Attorney, Matthew Rossetti, is the premier “Slicing Pie” expert in the United States; he will ensure that you structure your partnership right from the very beginning. Whether you are building your business from the ground up or looking to add a partner to your existing business, he will guide you through the entire process. Here, we’ve provided some key information to help ease you through the nuances of understanding partnerships. 

    Making it legal

    A formal, legal agreement between you and your partner(s) will allow you to manage and operate your business as co-owners. You will also share in the profits and liabilities. It is important to be safe, be good, and be prepared. Sentient Law uses a custom dynamic business formation model to create a perfectly fair equity split in the early stages of a company. This makes sure that everyone owns the percentage of the business that they deserve. In other words, you get out what you put in.  This is achieved by calculating the input values of each partner. Monetizing and verifying the value you have brought to the company incentivizes each partner to contribute to the business. Setting up this organic agreement means you’ll never have to concern yourself with wondering how to fairly and proportionally divide your company’s ownership.

    There are several types of partnership arrangements

    Be sure to explore and choose the most suitable arrangement for your business. The most important types of partnerships to consider are:

    • General Partnerships:  All partners represent the company when dealing with outside parties. Each partner has equal control and the right to participate in decision-making and the management of the business. Furthermore, the risks and returns are distributed equally, unless otherwise stated in your partnership agreement.
    • Limited Partnerships (LP): A limited partner has no authority and will not earn equal returns. Their personal assets are protected by limited liability in legal situations, unlike a general partner. Not to be confused with Limited Liability Partnership (LLP). 
    • Limited Liability Partnerships (LLP): This is a popular business formation because it allows for collaboration without holding all partners responsible for one partner’s mistakes. In this type of structure, some or all of the parties have limited liability, protecting their personal assets if legal issues arise.
    • Joint Liability Partnerships: In a joint liability partnership, all partners are equal. They share in all the responsibilities of the business, including liability for financial and legal issues.
    • Several Liability Partnerships: This is a complex arrangement. The weight of responsibility can shift, depending on the specific duties and responsibilities of each partner. Liability could fall to a partner for lack of due diligence and the legal responsibilities can be divided depending on where the obligation lies. 

    Who’s who and what’s what?

    Going into a partnership can leave you a bit confused as to what your role is in the company. To clear things up, here are some terms that may help you understand your role and may serve as a guide when seeking out potential partners.

    • Founder: The person or persons that created the company. The owner is not necessarily the founder. Your new partner can be an owner as well, however, if you forged this entity you are the founder.
    • Investor: Any person, company, or entity that invests capital into a business and expects to earn a rate of return. An investor may put money into the business or purchase stocks from other investors. The main objective is to maximize profits and minimize risk. Investors may contribute with labor, provide loans, buy shares, or perhaps even guarantee to pay creditors.
    • Angel Investor: Typically wealthy, these are individuals that provide a startup with seed money or capital for expansion, in exchange for ownership or equity. They are often willing to invest hundreds of thousands of dollars into a business if they believe they will reap the rewards of your success. However, angel investors are not always motivated solely by making a profit. These are often professionals that are well into their careers and are inspired to give something back and driven by doing a good deed for an aspiring entrepreneur. Angel investors are often referred to as informal investors, angel funders, private investors, seed investors, or business angels.
    • Equity Stakeholder: Although stakeholders are commonly thought to be large inventors that can afford to hold a viable stake in a company, there is much more to be considered. In actuality, anyone that invests in a company and whose actions determine the outcome of its business decisions is a stakeholder.  These investors have a long-term interest in the performance of the company. They don’t have to be actual equity holders, they can be shareholders, creditors and debenture holders, employees, customers, suppliers, the government, and more. Simply put, stakeholders rely on the success of a business to keep the supply chain going.

    It’s never too late to start using the “Slicing Pie” approach

    You may already have an existing partnership agreement. Due to ever-changing life events, your existing agreement may no longer be the right fit for you and your partners. If you have an LLC and it is pre-revenue, amending your agreements is straightforward and simple for Sentient Law. Depending on the circumstances, almost all partnership agreements can be amended with the consent of all parties involved. Matthew Rossetti will work with you to create a perfectly fair and balanced agreement and equity split. Set up a 30-minute consultation today to discuss how he can help you.

    Attorney, Matthew Rossetti, specializes in start-up businesses and the formation of companies. He is the premier “Slicing Pie” expert in the midwest. Rossetti uses a custom dynamic business formation model to create a perfectly fair equity split, in the early stages of a company. Set up a 30-minute consultation for guidance.

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    Top 5 Online Business Ideas – Start-Up Edition

    The Time and Money Conundrum

    When you have the money you don’t have the time when you have the time you never seem to have the money. So many people, like yourself, have been baffled by this conundrum for so long. You work long, stressful hours to make the type of money that would allow you to grow your family or take those amazing vacations that you’ve been fantasizing about. Now that you’ve stockpiled your earnings and are ready to start planning, you realize that you can’t afford the time because you have sacrificed time for money. On the occasion that you have as much free time as anyone could ever hope for, you find yourself wishing that you had the type of career that could bankroll your wanderlust or support your desire to focus on family. Alas, you come to realize that you have sacrificed money for time. Having to choose between time and money would be a tough pill to swallow if you had to. Contrary to popular belief, you don’t have to.

    Buying Time Freedom and Independence

    Creating an online business can bring you the type of lifestyle and financial freedom you’ve been longing for! You can become a highly active full-time entrepreneur or keep your workload light by sharing some of the responsibilities with a partner. The greatest thing about having an online business is anyone can do it from almost anywhere. The sky’s the limit.

    Business Partner and Being Prepared

    Many entrepreneurs enjoy the thrill of being highly active and fully involved in the day-to-day of their business. It can be very rewarding to be the face and voice of your company by handling your own sales and marketing, along with networking and cultivating great relationships with your clients. There is also a sense of security when it comes to being the sole person in charge of accounting and finance. Going it alone has its perks for those that are great at managing their time and understand the skills needed to provide your business with a solid foundation.

    For some, handling all aspects of the day-to-day grind can seem overwhelming or in time, become overwhelming as your business starts to take off. A lot of people work better in teams, consider having a business partner to share some of the load. Partnerships provide an opportunity for you to focus on your strengths and to draw from someone else’s expertise, in areas that you are not highly skilled. In many instances, startups are unable to pay people upfront. It will be important to figure out when and how you will do that, once your company starts to see profits. Sentient Law specializes in using a dynamic equity framework to fairly distribute equity to your startup team. This allows partners to calculate the value of their time, making sure everyone is compensated fairly.

    Get your wheels turning with these Top 5 Online Business Ideas.

    1. Digital Products or Courses
    2. Virtual Coaching
    3. Dropshipping
    4. Box Subscription Business
    5. E-commerce Retailer

    Removing Mental Roadblocks

    Even though we are all constantly using online products and services, when it comes to launching a personal online business it can be intimidating. Self-doubt can quickly stifle your enthusiasm and bring creating and planning to an immediate halt. Why not you? You have all of the skills required to create and grow a successful online business. The first thing you must do is open your mind.

    While it is true that you should work with what you know, just because you are in finance, does not mean your online business needs to have anything to do with finance. Explore other areas where you are knowledgeable. For example, you may also know what a great shave should consist of. In that case, you could sell amazing razors, and other shave tools and products. Think outside the box.

    Another hurdle that people tend to face is the notion that their online business should spark from some sort of deep and meaningful passion. As lovely as that sounds, if you are someone who has had a career for at least five years, you probably already know, deep and meaningful careers can become just as daunting and monotonous, as with any other. Focus more on what will bring you the type of income that would allow a deep and meaningful life. Remember, money is a tool to buy time, freedom, and independence.

    What’s the Right Business for Me?

    Ask Yourself These Questions:

    • What am I good at?
    • What do I know?
    • What type of lifestyle do I want to lead?
    • What do I want my day to day to look like?
    • How much am I willing to invest in my business (multiply by 3)?
    • What do I know about this product or service?
    • Do I want to do this on my own?
    • Do I want or need a partner(s)?
    • Will I have employees?

    What Are You Waiting For?

    There couldn’t be a better time than right now, to start your online business. You have already proven to yourself that you are ready to take the first steps in owning your own business by visiting our website and reading this blog. By now, you understand that it is possible to have freedom and independence when it comes to both your money and your time. After clearing some common mental roadblocks, your mind is open to opportunities you’ve never thought of before. You are armed with 5 fantastic online business ideas and hopefully, you have come up with a few of your own. Questions have been asked and answered as to some of the specifics about your new business and you are ready to take the next steps. Now it’s time for you to make it official and choose the best business formation for your new company. Sentient Law is here to walk you through the process and answer any questions that you may have.

    Attorney, Matthew Rossetti, specializes in start-up businesses and the formation of companies. He is the premier “Slicing Pie” expert in the midwest. Rossetti uses a custom dynamic business formation model to create a perfectly fair equity split, in the early stages of a company. Set up a 30-minute consultation for guidance.

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    After the Equity Split: Compete or Non-Compete

    By Matt Rossetti

    Original article written for SlicingPie.com

    One of the often-overlooked features of the Slicing Pie model is the logical outcomes regarding a person’s ability to compete with the startup after a separation. Getting a fair deal for everyone is more than just splitting equity correctly.

    In any company, there are four basic conditions under which a person can be separated from the firm:

    1. He or she can be fired for good reason
    2. He or she can be fired for no good reason
    3. He or she can resign for good reason
    4. He or she can resign for no good reason

    These are universal conditions, although they have different names in different places. In the UK and Europe, I often hear the terms “Good Leaver” for conditions B and C, and “Bad Leaver” for conditions A and D. I also hear fired or terminated for cause or no cause. Use whatever language works, the important thing is that different separation conditions have different logical outcomes when it comes to fairness. The outcomes should always do two things:

    1. Reflect the fair market value of each person’s contribution. This is their “bet.” Bets are always worth what they’re worth, they don’t have special powers.
    2. Align everyone’s interests so that each participant has incentives to act in the best interests of the business. No person should ever be given an incentive to act selfishly or greedy.

    You can read what happens to a participant’s slices here, but when it comes to whether a person should be free to engage in direct competition with a former employer, it breaks down like this:

    If a person is fired for good reason or resigns for no good reason, he or she should not compete with the company or solicit employees. This removes the incentive to deliberately undermine the company’s activities. For example, it wouldn’t be fair for someone to work for a startup during the proof-of-concept stage only to quit and start his or her own company once the business model is figured out.

    Conversely, if a person is fired for no good reason or resigns for good reason, the company should not take any action that would hinder the person’s right to engage in competitive activity. The company can, of course, enforce patents, trademarks, copyrights and trade secrets including in-process innovations, customer lists, and other confidential information. For example, it wouldn’t be fair for someone to work for a startup during the proof-of-concept stage only to get fired once the business model is figured out and then preventing him or her from applying his or her skills and knowledge to a new company.

    Enforceability

    Of course, companies ask employees to sign non-compete agreements all the time and enforceability varies in different states and countries. According to Slicing Pie lawyer, Matt Rossetti: “Non-competes are a severe restriction on commerce and an individual’s ability to make a living. Because of this, the prevailing trend is to limit or bar the enforceability of non-competes.”

    But legal isn’t the same thing as fair. It’s important to adhere to what is fair, even if local laws provide opportunities to act unfairly. Just because you live in a place where a non-compete isn’t enforceable doesn’t mean it’s fair to do so.

    (I should note, however, that breaking the law should always be avoided.)

    The Fair Logic in Action

    Merrily and Anson start a lemonade stand and developed a special secret formula for making lemonade.

    Scenario One: Anson slacks off on the job and, after two clear warnings, he is fired for good reason. It would not be fair for him to open a competing lemonade stand. If he wanted to be in the lemonade business, he should have corrected his behavior.

    Scenario Two: Merrily decides she no longer needs Anson, so she fires him for no good reason. It would be fair for Anson to start a competing stand. If Merrily did not want this, she should have thought twice before firing him for no reason. Anson may not steal the secret formula or any other intellectual property, but he is free to come up with a new formula and go into business.

    Scenario Three: Merrily decides they are going to sell kittens instead of lemonade. This is a different business, so Anson would be able to resign for good reason and, as in Scenario Two, would be free to start a lemonade stand. This probably won’t bother Merrily because she abandoned the lemonade concept, but Anson still can’t steal the secret formula. In this case, it would probably be more practical for Merrily to quit the lemonade stand, but she may want to return to selling lemonade, so she wants to retain the trade secret.

    Dealing with Ideas

    The next two scenarios are common sources of founder disputes because they deal with the idea upon which the company was founded.

    Scenario Four (it starts getting more interesting): Let’s pretend that during the planning stage for the business Anson invented the secret formula. Merrily decides she no longer needs Anson, so she fires him for no good reason. It would be fair for Anson to start a competing stand. Anson may not use the secret formula even though it was his idea. The company owns the intellectual property (IP) he developed on the job. Anson will have to come up with a new formula to go into business.

    The key legal concept here is called an assignment of rights or work made for hire. Slicing Pie logic assumes an assignment of rights. But all startups should have an assignment of rights contract or at least a clear policy in place.

    Scenario Five: Let’s pretend that Anson invented the secret formula prior to starting the business with Merrily who agrees to treat the formula as a trade secret. Merrily decides she no longer needs Anson, so she fires him for no good reason. It would be fair for Anson to start a competing stand. But this does not necessarily mean Anson can extract his IP. In this case, Anson’s rights would be defined by the license agreement he has with the company. If the license agreement was exclusive, he could not use it for his new company, but he would continue to receive the fair market royalties as allocations of slices or cash. If the agreement was non-exclusive, Anson could license the IP to his new company.

    Sadly, many founders with pre-existing IP don’t put an agreement in place with the new company. If you feel that you substantially own documented IP upon which a company was founded, it would behoove you to engage an attorney and do a licensing deal with the newly-formed company. This applies to trade secrets, patents, trademarks, and copyrights.

    If the fair market value of time and materials were included in the Pie, it should be treated as a work made for hire and the IP would assume to be owned by the company. The owner of the IP should decide, in advance, whether developing the IP was an independent act or simply part of his or her role in the business. In most cases, a person should be able to get slices for time and materials and a royalty.

    Startup companies are always changing, but Slicing Pie always delivers an objectively fair deal to participants.

    Aligned Incentives

    Adhering to the competition logic in Slicing Pie employees think twice before slacking off or quitting and startup managers think twice before firing someone or breaking commitments (which provides good reason to resign). People are free to make their own decisions with full knowledge of the logical consequences that will result. Any agreement that goes against this logic will provide opportunity for one party to benefit at the expense of the other—that’s not fair!

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    The Truth about Slicing Pie

    Originally Published on Forbes.com here.

    Overcoming The Misconceptions Of Dynamic Equity

    By Matt Rossetti

    These days, most startup attorneys I meet have at least heard of the slicing pie model for equity distribution, but many have yet to use it. There are a few common misconceptions that cause them to steer clients away from slicing pie toward more conventional equity split models. In this article, I will address a few of the common concerns and hopefully dispel them as myths.

    Dynamic equity is not Impossible

    When I first learned about slicing pie I was, like many of my peers, skeptical of its promise to not only deliver a fair equity split but to also provide a framework for avoiding common equity disputes. I was fortunate to meet the model’s inventor, Mike Moyer, who referred a few clients and encouraged me to develop a legal solution. Since then I’ve done over 1,000 consultations on the model and it has become my default recommendation for equity distribution in bootstrapped startups.

    Before trying the model, I found that no matter how carefully founders planned, at least 50% of them had a dispute over their equity split that required legal intervention within the first year or so of formation. Many of my colleagues who serve early-stage companies are all too familiar with this exceedingly common problem. In my experience, the slicing pie model has virtually eliminated equity disputes among founders and problems that do arise can usually be addressed within the framework.

    There are three basic areas of concern that prevent attorneys and founders from applying the model: concerns about future issues, concerns about implementation and concerns about non-compliance with the model.

    1. Concerns About Future Issues

    Teams often express concerns about future issues that may arise, especially when it comes to how the model is perceived by third parties such as investors and taxing authorities. The fear is that future investors will view the model as too ambiguous or complex and that it might trigger undesirable tax events.

    Having seen companies using the model grow and move through multiple funding rounds, I have yet to encounter an investor who takes issue with the model or cites it as a reason to pass on an opportunity. On the contrary, the idea that each founder is entitled to equity in proportion to their contribution is usually viewed in a positive light by investors, especially when they explore the underlying logic and cut through the perceived complexity.

    A key point to consider is that not all resource consumption garners a higher valuation. For example, a company that hires a janitor to take out the trash for $20 an hour and 10 hours per week did not just become $4,400 more valuable. Similarly, since the model terminates before any major financial transactions that require a valuation, tax consequences are about the same as any other model.

    2. Concerns About Implementation

    The slicing pie model requires a tabulation of the fair market value of the contributions from each participant. The prospect of tracking these inputs is often distasteful for founders who relish freedom from the structure of corporate life. In practice, the model simply accounts for transactions that most companies track as a matter of course. For instance, most successful companies track payroll, expenses, sales, investments and other financial activities. A key difference, however, is that most monitoring systems are based on financial transactions and most founders do not feel the need to track non-financial events such as not getting paid or not getting reimbursed for expenses. Unfortunately, the absence of this discipline can skew the teams understanding of their own business model. Once teams understand how important this activity is, this concern is no longer a hurdle to implementation, especially given the availability of tools to manage slicing pie record keeping.

    Other implementation concerns focus on the conversion of the slicing pie hypothetical split into actual ownership of shares or membership interests in the company. This process, from a legal standpoint, is quite simple and often occurs in the context of a structural change in the organization as it matures or takes on professional VC funding. Once the shares or membership interests are formally issued, they are subject to more conventional terms set by management or the angel or Series-A investor.

    3. Concerns About Non-Compliance

    The last major area of concern deals with a series of what-if scenarios. For example, what if a participant reports more time than they actually spend. Or what if someone demands a set percentage of shares. Most of these fall into the category of management issues, rather than an issue with slicing pie. For instance, a person who is unproductive or dishonest will eventually be terminated for good reason and the model will impose logical consequences. The slicing pie model allows managers to make rational business decisions and provides protection for all participants.

    The other form of non-compliance, which is more difficult to manage, occurs when a participant attempts to renegotiate the terms of the deal in their favor, usually by holding the company hostage. A recent example from my own practice was a CTO who shut down the company’s software product and email system unless he was granted a fixed equity stake in the business. Sadly, this scenario is not completely uncommon under any framework and usually represents a situation in which one person overvalues their own contribution while undervaluing the contributions of others. Slicing pie’s alignment with fair market values most certainly mitigates this risk, yet some egos don’t respond well to logic. In my experience, a frank, lawyer-to-lawyer discussion can disarm what could otherwise be an explosive situation.

    In spite of what you may or may not have heard about the slicing pie model, the most common misconceptions can be easily addressed with a concerned client. The benefits of implementing the model far outweigh any perceived problems and going with conventional methods carries far too much risk. I highly encourage anyone who counsels early-stage companies to familiarize themselves with the benefits and help clients to implement so that they can avoid the common pitfalls of unfair equity splits and the infamous founder’s dilemma.

    If you are interested in using a dynamic equity framework to fairly distribute equity to your startup team, please contact us today via email to [email protected] or by phone at (312) 650-9087.

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    Matt Rossetti – Five Reasons an Attorney Should be Reviewing Your Business Documents

    Don’t just do it yourself! Here are 5 reasons to hire an attorney including commentary by the founder of Sentient Law and Forbes Legal Council Member, Matt Rossetti.

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    Matthew Rossetti: When should your startup consider consulting an attorney?

    When You’re in a Heavily Regulated Industry

    If your startup is doing business in a heavily regulated industry, then find an attorney with the proper experience. It is also prudent to make certain that any attorney who claims to be a “specialist” is actually certified as such if a certification program is available to them in their jurisdiction. –Matthew RossettiSentient Law, Ltd.

    Matthew Rossetti