Category Archives: Small Business

Outside General Counsel Arrangements: Is 2014 the Year?


An out-of-the-box New Year’s Resolution: engaging outside General Counsel.

Is 2014 the year?

If you have ever worked for a company or organization with a General Counsel, you know the positive results that an effective one can bring. Successful General Counsels (GCs) not only offer legal advice but also give helpful business input based on their experience structuring relationships and transactions. If your company or organization has grown to the level that it would benefit from ongoing legal advice but you cannot afford a full-time, internal GC, this may be the year to consider an outside general counsel arrangement.

For a corporate-minded, outside GC, here are examples of matters that could be included in the arrangement:

- Review of contract provisions with your business partners.

- Advice on corporate and website/social media policies, corporate governance matters, board of directors policy and practice.

- Routine filings as requested.

- Consultation on employment issues and review of associated agreements.

- Review of subpoenas, summonses, complaints, or claims served upon you and advising you on the same; advise regarding potential legal actions you may contemplate taking. (This is where the phrase “I’ll call my lawyer” originated.)

- Consultation on purchase or sale of business assets or real estate, negotiating and reviewing the same.

Outside GCs can be hired on a retainer arrangement, whereby you engage the attorney for some amount of time each month (for example) for a flat fee, which can prove economical than an hourly rate. Additional work, as needed, can be provided as and when agreed.

Think of all the times in the life of your business that you have said, “I wish I had a lawyer to look at this.” If there have been enough of those times in the past year, it may be that you have reached a tipping point: a level of growth that should be applauded and corporate responsibility that should be reviewed. This is not a short-term investment; it is an intelligent one for a business or organization that intends to stay current and compliant over the long term.

Law Office of Anne Marie Segal is located in Stamford, Connecticut, provides legal counsel to businesses and individuals in Connecticut and New York and advises select national and international clients. Please visit for more information.

None of the information posted on this site constitutes legal advice or forms an attorney-client relationship, and there may be facts not discussed here that are relevant to your situation. This is a public forum. Please do not post confidential or fact-specific information regarding your legal questions on this site.

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Section 83(b) Election for StartUp Founders

So they don’t get hit with a tax crunch that could be entirely avoided with timely planning, founders of U.S. startups should be aware of Section 83(b) of the Internal Revenue Code. Here’s a post about what Section 83(b) does, when it should be elected and why it is important.

Corporate founders generally enter restricted stock purchase agreements that provide for their stock to vest over a number of years. Under a vesting schedule, the company has the right to repurchase any unvested stock at cost upon the founder’s separation from the company. The right to repurchase generally lasts for a period of three to five years, provided that the founder continues to provide services to the company.

One common arrangement is a four-year vesting period with a one year cliff. In this case, at the end of the first year a founder would receive 1/4 of the shares, and the remaining 3/4 vest monthly in equal portions over the remaining 36 months. However, founders can mix and match such grants to reflect each founder’s relative investment in and importance to the organization.

Whether it is a “four year with one year cliff” arrangement or another milestone or time-based vesting trigger, restricted stock keeps the founders engaged and involved, since they do not acquire certain rights in the stock, such as the right to sell, until the stock vests. As a result of such vesting restrictions, the IRS views the acquisition of the stock for tax purposes as the date it is released from the restrictions.

shutterstock_161329046 (tax vice)

No/Minimal Tax Upon Purchase; Tax Upon Vesting

In a typical startup, the founder purchases “cheap stock” at a low fair market value, which minimizes taxes at stock issuance. A common pre-money valuation is, for example, five million shares at $0.001 per share (one tenth of a penny), with the founders contributing a total of $5,000.00 for the shares issued to them. This assumes that there is no need for a significant cash investment to fund operations.

Founders/employees then earn their equity over time in exchange for their longevity with and services to the company. When the stock is released from restrictions (i.e., becomes fully vested), there is a taxable event. At this point, if the company is successful, the value of company stock on a post-money valuation may have significantly increased. For example, those five million shares may later be worth $1.00 per share, for a total fair market value of $5,000,000.00. If the founders’ equity contributions were diluted by, for example, a Series A preferred stock round of $4,000,000.00, the total increase in value to the founders’ shares would be $995,000.00 (i.e., the then-current $1,000,000.00 value of the founders’ stock less their $5,000.00 initial investment).

If the founders’  restricted shares all vest as of a single $5,000,000.00 vesting date in the example above, taxes would be owed collectively by the founders on the full amount of $995,000.00. Of course, if the shares vest over time, the valuation of the company will fluctuate over time, resulting in an accounting headache. In either case, it is a potential tax nightmare. This may be true even if transfer restrictions (other than vesting) or market forces dictate that the founder cannot liquidate his or her shares.

What is an 83(b) Election?

To know what purpose Section 83(b) serves, you first need to understand Section 83(a) of the tax code. Under 83(a), if an individual receives property in exchange for services, he or she pays tax on the excess of the fair market value of the property over the purchase price. This makes sense in the context of a consultant, for example, who may be wholly or partially compensated in kind (i.e., other than cash) by means of a stock grant or discounted purchase price.

A founder who has to earn his or her shares over time is also treated by the IRS as a service provider under 83(a). In other words, if the ownership of the shares must be forfeited when the founder’s relationship to the startup terminates, the IRS views the shares as having been granted in exchange for services.

Section 83(a) does not impose an immediate tax. Instead, such grants of restricted shares are only taxed when they are no longer subject to “a substantial risk of forfeiture”.

Under 83(b), a special, one-time irrevocable tax election may be filed within 30 calendar days (with no exceptions) of the date of the initial stock grant with respect to shares that have a substantial risk of forfeiture. The founder or other service provider thereby elects to pay tax (if any) upfront on the difference between the fair market value at issuance and the purchase price. This difference, often called the “spread”, is usually at or close to zero.

Note that 83(b) elections are not applicable to stock grants that are unrestricted or in those special cases where the company has the right to buy back a founder’s shares at fair market value (rather than the purchase price).

In the absence of an 83(b) election for restricted stock, a founder is liable for taxes on the increase of any vested stock – the difference between the purchase price and the fair market value on the vesting date. If shares vest over a number of months, this means there is a taxable event in each month that shares vest, tied to the fair market value as of the vesting date. This is true even if the shareholder continues to hold the shares. In addition, the holding period for long term capital gains does not begin until the shares are vested.

By contrast, with an 83(b) election in place, the founder incurs no taxable income as the shares vest over time. Only capital gains tax (on the gain) would be payable upon sale, with a holding period commencing on the date of the stock issuance.

83(b) Not For Everyone in All Situations

Elections under Section 83(b) do not benefit all holders of restricted stock. For example, an employee in a mature startup may be issued restricted stock at a steeply discounted price and will likely not want to take an immediate tax hit on the spread between the market value of the stock and the discounted price paid. If the company then fails, a substantial tax was then paid for no actual benefit. Second, there are tax complications that can arise if some of the founders contribute property (such as IP) in addition to cash.

Timing of an 83(b) Election

83(b) elections must be made in the 30-day time period following the stock grant. The election should be mailed via certified mail to the IRS Service Center where an individual normally files his or her tax returns. There are a number of formalities that need to be followed, including reporting the election on an end-of-year return, that are outside the scope of this blog post.

Founders or others holding restricted stock should consult a tax advisor or business attorney to fully understand the pros and cons of unvested stock and the 83(b) election as well as the procedures for making one.

Law Office of Anne Marie Segal is located in Stamford, Connecticut, provides legal counsel to businesses and individuals in Connecticut and New York and advises select national and international clients. Please visit for more information.

None of the information posted on this site constitutes legal advice or forms an attorney-client relationship, and there may be facts not discussed here that are relevant to your situation. This is a public forum. Please do not post confidential or fact-specific information regarding your legal questions on this site.

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New Growth and The Close of a Practice Area

shutterstock_160928342 (new plant)

Given the Halloween festivities last month, we have had a (fake) skeleton in our front yard for weeks. I am removing it today, as I publicly announce the closing of my estate planning practice to new clients as of January 1, 2014. The irony is fitting to me, even if it is graveyard humor. Instead, I plant new seeds to sow, as I detail at the end of this post.

What I Am No Longer Doing

I am no longer taking new estate planning clients from the general public as of January 1, 2014 for comprehensive planning, including wills, advance directives, powers of attorney and guardianship paperwork.

At some point years down the road, when I am even older and grayer (when I’m 64?), my practice may reopen. At the current time I plan to focus greater efforts on other areas of law (see below). In the meantime, I am forever grateful for those clients who have entrusted me with their life and end-of-life plans, and I will continue to work with them on any current matters.


I expect this question often – Why are you closing your estate planning practice?

There are a whole host of reasons. and I certainly cannot cover all of them here. Most importantly, I launched the practice after leaving the hedge fund world, without a big idea of where I would aim from there (a tactical failure, I realize) but knowing I wanted to start a law firm of my own, do greater “good” and seek lifestyle balance. I knew that I loved practicing law. I did not realize how much I actually loved corporate law, business and contract issues or appreciate how much good I could do for my clients as a corporate attorney. Now, eighteen months into private practice after seven years with a single client (the firm at which I was in-house), I have had the diversity of experience that allows me to be a better judge of myself, my talents and what I can contribute to the legal community and public in general.

Unfortunately, much of estate planning today is formulaic, other than the advanced tax planning, which is not a practice one can launch overnight. This is evidenced by how often I am marketed products to “revolutionize” and “streamline” my estate planning practice by buying out-of-the-box solutions. At the same time, there are serious, compassionate issues to be addressed, but given the economics of estate planning for regular folks, there is never enough time to do that and run a viable practice.

What I May Do Instead on the Estate Planning Front (Short or Long Term)

I am blessed and thankful to have had the opportunity to work as an estate planner for over a year, and I met a number of very caring and devoted individuals in the field as well as wonderful clients. I may continue to offer very limited private consultations and referrals and work with a select number of individuals on portions of plans that make sense for them in the context of my other legal work.

In particular, I may re-envision my estate planning practice as one of teaching and consulting, rather than drafting of documents. How this plays out in the short and long term, and interacts with my legal practice generally, remains to be seen.

In addition, I have developed an interest in living wills, in particular, and their limitations in the State of Connecticut. As one client of mine (who happens to be a devout Catholic) said, in our state they are almost drafted as a “right to die” rather than a right to choice. If you have not considered this issue, take a look at our standard advance directive (click here) with that thought in mind.

I may consider becoming involved in advocacy work that relates to this issue, again in the short or long term, although I need to better understand how the legislature and others would react to yet another overhaul in Connecticut following the revisions in 2006. For example, I have read and re-read the standard forms in New Jersey (click here) while working with a number of clients, and they offer people much more choices and subtleties of choice. I have not formulated an opinion about whether living will standards should be harmonized among some or all states or simply broadened (in the case of Connecticut) to fit a greater diversity of options. I would welcome the input of others who have thought about this issue longer and harder than me, and I would also welcome the opportunity to share my thoughts with individuals who are already working in this area.

My Law Practice

So back to the seeds to be sown. Or, more fittingly, the plant to be pruned. I am excited about the possibilities that come with narrowing my practice areas to broaden and deepen my scope within those areas. I am also excited and thankful for my clients in those areas, who have shown great faith in me as their attorney.

shutterstock_160565801 (new growth, hands with plant)

New Growth

Along with my core corporate practice and my federal trademark work, representation of non-profits is an area of growth and delight for my firm. I mention compassion above, as I have found that I am a better attorney and advocate, as well as a more peaceful person, when I believe in the individuals and causes I represent. While non-profit organizations certainly do not have the corner on the market of worthy causes, I probably do not need to tell you that they are critical actors in our collective goal of a better world.

Lest some readers try to categorize non-profit work as soft, this does not mean that I won’t show my “tough skin” on behalf of clients (for-profit and non-profit alike) in a high-stakes negotiation. Seven years in the hedge fund world taught me quite a bit of how to wield that sword when needed, and those hard-won lessons will never be forgotten. But at the same time, I find that having an open heart, with a tough skin, is the best way to serve clients.

My particular areas of interest in the non-profit world include:

– art (visual or otherwise),

– health,

– support for rape or domestic violence survivors,

-underprivileged youth,

– combating hunger, or

– any combination of the above.

Strong and Committed Practice

Along with my work on behalf of non-profits, I will continue to serve my business clients with the same high-level, committed and personalized service that they have come to expect. I have found my corporate and trademark work to be equally stimulating and engaging. In addition, I am grateful for the opportunity to have worked with a number of talented, dedicated individuals seeking my support for complex legal problems as they launch and grow their businesses, sort out personal financial and legal issues and otherwise. I look forward to engaging further with my corporate, trademark and non-profit clients as my practice further evolves through 2013 and in the New Year. As always, and especially in this month of thanks, I thank my clients, colleagues and friends for their support.
For more information about my practice, please visit
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Five Scary Legal Blowups You Can Avoid in Your Business


It’s Halloween. Kids get scared by monsters and spooky Jack O’Lanterns. Adults may relive pent-up fears from the rest of the year or (hopefully) get a playful reprieve.

Here are five scary legal blowups you can avoid in your business by careful, timely planning. Start tomorrow, after resting up from the Tricks and Treats.

1) You have an unstable or otherwise difficult business partner and do not have proper agreements. This seems like an obvious point, but unfortunately it is often overlooked. Document your rights and obligations with your business partners before disputes arise. If you visit or one of the other sites at which “real people” can post questions anonymously to attorneys, a topic you will see over and over again is how to dissolve a business relationship in which there are no legal agreements governing the relationship of the parties. A little investment upfront to work out what happens in a dispute will not only save you stress if there’s a meltdown or bombshell, or your business partner suddenly disappears or dies (which does happen), but it also will contribute to amicable relations in the good times.

2) You don’t know what your lease says. I am continuously surprised at how many friends and clients come to me with questions like – can I get out of my lease early without penalty? how do I do it? Your lease may be one of your biggest expenditures as a business. You should know what it says before you sign it, and you should write it down in a memo (or at least handwritten notes) that you file with the lease, so you remember later what it says. This goes for all big ticket contracts, in fact. Know not only how much they cost to stay in, but how much it would cost you to get out of them if needed.

5) Your address is wrong with the Secretary of State or contract counterparties  and you do not receive notice of fines or litigation. If you do not update your address, you will not be notified, and this is to your detriment. Fines and penalties can pile up, and if you do not receive notice of a litigation a default judgment can be entered against you without your knowledge or ability to defend yourself. Have an individual in your organization (and a backup) who is charged with reviewing key matters if your contact information changes temporarily or permanently.

4) You do not have a federal registration for your trademark or service mark, and someone applies for it first. If you have already invested considerable time in creating and advertising your business name and are operating in multiple states, or you have a serious intent to do so, it is worth the small investment to hire an attorney and, if he or she advises, file a federal trademark application. In the long run, it is more economical – and causes less headaches and heartaches – to either (1) have your registration completed first, without the need to try to cancel a competitor’s application on grounds that you are the prior, senior user, or (2) know before expending even further time and funds in a mark that registration may not be available. (See my prior post about choosing a mark and make sure that, if your attorney advises, you complete a trademark search as well.)


5) You have “independent contractors” on the books who are really employees. Businesses often hire individuals as independent contractors or consultants without considering the serious downside if they are reclassified as employees. Take a look at the Department of Labor’s press releases about employee misclassification for some of the enforcement activity in this area. There is no single standard to distinguish between employee or independent contractor (e.g., click here re: the FLSA or here for the NY DOL). What is clear is that simply calling someone a consultant does not mean he or she is not an employee. And the penalties can haunt you longer than any ghost on Halloween.

Law Office of Anne Marie Segal is located in Stamford, Connecticut, provides legal counsel to businesses and individuals in Connecticut and New York and advises select national and international clients. Please visit for more information.

None of the information posted on this site constitutes legal advice or forms an attorney-client relationship, and there may be facts not discussed here that are relevant to your situation. This is a public forum. Please do not post confidential or fact-specific information regarding your legal questions on this site.

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