A Series of Articles On How Crowdfunding Affects Estate Settlement Plans For Owners of Closely-held Private Companies
Thomas E. Vass, The Private Capital Market, Inc.
First Article: Basic Wills and Probate for Technology Company Executives
Second Article: Coordinating Ownership Transfer With Family Estate Settlement Plans
Third Article: Transitioning The Business With Family Limited Partnerships
Fourth Article: Insurance Issues Related to Capital and Death
Introduction to the Series: Under Title II of the JOBS Act, commonly known as Accredited Investor Crowdfunding, technology company executives can publicly solicit potential investors. The major change in the new way of crowdfunding capital from the traditional venture capital method is that there will not be a period of time for private negotiations between the company and different groups of investors, under Reg D Rule 506(c).
In the new method, the CEO will establish the terms and conditions of the investment at the very beginning of the offering process, and like the Field of Dreams, if the investors like it, they will invest.
In order to avoid the allegation of fraud in a public solicitation, the technology company must prepare the terms and conditions of the offering before making public statements about the offering. Otherwise, what is said by the executive in public to one set of investors may turn out to be a false representation, if the company changes the terms with a second set of investors, in private, non-public negotiations over the terms.
Getting the offering terms and subscription agreements right from the start has serious implications for the estate settlement plans of the owners of technology companies. In other words, there is a critical nexus of financial and legal issues for the CEO between crowdfunding and estate settlement that the owners need to get right, before the crowdfunding project begins.
This series of articles is a first effort to explore how estate settlement plans of technology executives change as a result of crowdfunding. This is a new area of law and finance, and the analysis provided in the four articles is speculative and untested by experience, so senior executives should be cautioned to seek legal counsel on how to adjust their current estate settlement plans, if they intend to engage in a crowdfunding project.
Article One: Basic Wills and Probate For Technology Company Executives
The Will As The Basic Building Block For All Estate Planning
Everyone who dies needs to have a will. This advice is true for technology executives, too.
Creating the will is the first step among many steps to take for making certain that assets and income are transferred to family members or to other beneficiaries, and that the technology company can continue to function after the death of the CEO or owner.
A will is a written declaration by an individual?called the testator?of his or her intentions for the disposition of assets after death. A local probate judge at the county courthouse will review the will and if everything seems correct, will order that the title to property named in the will is transferred to the beneficiary.
In other words, just like general warranty deed is used by the county clerk of court to transfer the legal ownership of real estate between buyer and seller, the probate court uses the will to execute the legal order to transfer ownership title of estate property to the beneficiaries named in the will.
The written declaration of intent must be prepared a long time before death, and the will must be updated every year by the technology firm owner to reflect changes in ownership interests in company property that is to be transferred.
The CEO, and each senior executive of the technology firm must create a will, and one of the questions asked by the CEO every year at the annual company picnic is if the other senior managers have updated their will to reflect any changes in equity ownership or debt of the company related to the executive.
This annual update of the will by technology executives touches on a related touchy issue for the new crowdfunding rules. At the very last moment of preparing the new rules for crowdfunding, the SEC inserted ?Bad Boy? provisions related to Dodd-Frank legislation.
Any person, in the entire chain of events, both inside and outside the company, related to a Reg D Rule 506c offering, must disclose their prior history of regulatory compliance, and all the Bad Boys must be excluded from the offering process.
If some event had arisen in the prior year, that the CEO or other owners had not been made aware of related to being a Bad Boy, then the CEO would need to know about that event, and the Bad Boy would need to amend their will to reflect a change in their ownership interests in the company.
This provision applies to Bad Girls, too.
The best idea is for the CEO to create and amend the will, before the company begins the crowdfunding project, and to modify the parts of the will that may relate to the ownership interests in the company as a result of raising capital.
The will is the basic legal building block of estate settlement, and its terms affect all the other legal documents that may be created, like trusts, as a part of the estate settlement.
Important Legal Documents Related To The Will
An important document that has a name similar to the probate will is called the ?Living Will.? Unlike the probate will, which describes intent to transfer property at death, the living will describes the desire of the person for health care in the period of time before death.
A living will is a document that allows people to specify the life-sustaining treatments they would find acceptable in the final days of terminal illness or incapacity. Forty-eight states and the District of Columbia have living-will laws (all states except Massachusetts and Michigan).
A legal document related to the living will is called the durable health care power of attorney, which grants a delegation of? legal decision-making powers to another person.. The power of attorney gives the other person the ability to make decisions as if it was the person who granted the power.
It?s durable because the power conveyed to the agent does not lapse if the principal becomes incompetent.
In most cases, the durable power of attorney for health care provides for:
?The right to remove a physician
?The right to have the incompetent patient discharged against medical advice
?The right to medical records
?The right to have the patient moved
?The right to engage other treatment
Coordinating The Business Buy-Sell Agreement With The Will
If a person died without a valid will, he or she is said to have died intestate, and the probate court will
distribute his or her property under the intestate succession statutes of the state, without any
consideration for the decedent?s unique personal situation.
Without a will, it may be legally impossible to manage the company after the CEO dies because no person has the legal authority to make decisions for the business.
Even with a valid will, continual operation and administration of the company may be impossible, and the best idea is to create a legal agreement to pass the ownership interests of the CEO to other partners or owners. The separate buy-sell agreement must be described in the will or there may be legal disputes about how the business property is managed or transferred after death.
The intestacy statutes only take into consideration family relationships; they do not take into account such factors as managing a company. taxes, administration costs, or estate shrinkage.
Long before a company embarks on a crowdfunding project, the CEO and all the other owners of the company need to modify their wills and amend their buy-sell agreements to reflect what happens during and after the investment of new capital into the company.
Questions? Please contact Thomas Vass for answers to your questions about your estate planning or crowdfunding. tvass@businesscapitaladvice.com
About Thomas Vass: Thomas Vass is a regional economist with a research interest in the relationship between regional technological innovation, regional capital markets and regional economic growth. He is the author or Predicting Technology:? Identifying Future Market Opportunities and Disruptive Technologies (Wingspan Press, 2007).? He is a registered investment advisor, and his investment management work involves a commercial application of the Feser Technology Cluster methodology to selecting technology stocks for investment portfolios and identifying private capital investments in regional economies. He is the holder of a patent on technology stock selection. (Vass 7,251,627 July 31, 2007, Method of identifying a universe of stocks for inclusion into an investment portfolio), and the manager of a subscription based equity crowdfunding website, The Private Capital Market. He graduated with a BA from the University of North Carolina at Chapel Hill and has a Masters of Regional Planning, also from UNC-CH. He is located in Calabash, North Carolina.
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