Building efficient online businesses

Question: What are the most tax effective ways for founders to “Pay themselves” for efforts in a startup after the initial startup share allocation round. Is there a more effective method apart from options?

Answer: Well, option grants are a tried and true method of post-funding Founder compensation, but not all options are created equal. Option grants to Founder employees working for a funded corporation should be made under the terms of a stockholder- approved employee incentive plan (“Plan”) that permits the issuance of incentive stock options (“ISOs”). With ISOs, the tax on any increased value of the underlying shares between the dates of option grant and option exercise is deferred until the underlying shares are sold—not on option exercise. In addition, with ISOs, the tax on such increased value can be paid at the preferential long-term capital gains rates, rather than the higher ordinary income rates, depending upon how long the underlying shares are held after ISO exercise (although the paying corporation would not be entitled to any compensation deduction for the value of the gained realized on sale of the shares underlying such ISOs). This is quite a difference from non–ISO options, or [click to continue…]

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Question: What legal language does a typical disclaimer on a website have to have? (For review websites, product or business reviews.)

Answer: The type of disclaimer to be used on a web site is a very fact sensitive issue. You must first establish the nature of the transactions taking place on the website, and then select the disclaimer that best fits that situation. Not a one size fits all.

In the case presented here, we have a web site that will publish endorsements of products and other services. There is recent guidance from the Federal Trade Commission (FTC) on the subject of endorsements and testimonials. The context of the discussion is that the FTC considers endorsements and testimonials to be a form of advertising for the product or service being discussed, and applies “Truth in Advertising” concepts to those pronouncements and discussions. As a result, when there exists a connection between the endorser and the seller of the advertised product that might materially affect the weight or credibility of the endorsement (i.e., the connection is not reasonably expected by the audience of the endorsement), such connection must be fully disclosed.

So, in the event that a particular “endorsement” appears on a website that a reasonable consumer might not expect to be publishing  reviews of products or services that are sponsored by providers of the subject products and services, the fact of that sponsorship  must be disclosed. That disclosure can take the form of a Disclaimer on the website that is so placed that the reasonable site visitor can find it and be able to relate it to the subject  endorsements. If all the reviews on a website are “sponsored”, then a more general Disclaimer should appear quite prominently on the website, and perhaps also in the website’s Terms of Service.  A typical Disclaimer might take the following form: “THE VIEWS EXPRESSED ABOVE BY [IDENTIFY THE ENDORSER] ARE SPONSORED BY [IDENTIFY THE SPONSOR] AND MAY NOT REFLECT EITHER THE INDEPENDENT VIEWS OF [IDENTIFY THE ENDORSER] OR AN OBJECTIVE REVIEW OF THE PRODUCTS AND SERVICES DISCUSSED.”

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Question provided by – Esther Kuperman, Owner of Marketers Anonymous (BrightMap – Marketers Anonymous).

Answer provided by – Peter Rothberg, Partner at Duane Morris, Ultra Light Startups sponsor and counsel.

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