All small-business owners should be able to tell someone what their business is about in 30 seconds or less; i.e., they should have an “elevator pitch.” All small-business owners should also have a business plan.
If a company is seeking to raise capital, its business plan should be a formal, detailed, written document. It is also advisable that the company seeking to raise capital have an Executive Summary of its business plan that is no longer than five pages, reveals none of the company’s trade secrets, includes confidentiality and safe harbor provisions, and includes just enough information so that a prospective investor can determine whether to pursue the potential investment in greater detail. Clients should be discouraged from including their Executive Summary in their business plan. Prospective investors will typically have reviewed it before receiving the detailed business plan, so the summary adds nothing but an obstacle to new information.
Sample letters in this chapter provide language for sending a client a template for drafting an Executive Summary, responding to an inquiry for more information after an Executive Summary review, and potential issues in connection with the same.
With more and more small busineses looking to the Internet for do-it-yourself documenation for company formations and critical contracts, business lawyers often aren’t consulted until there is an issue or problem.
If possible, legal counsel should use the opportunity of the issue or problem at hand to help her client avoid others. For example, clients often adopt whatever “boilerplate” happens to be in the example they find when drafting their own contracts. As a result, they are likely to end up with inconsistent provisions regarding notice, dispute resolution, limitations on damages, attorneys’ fees provisions, confidential information, indemnification and waivers, and even applicable law and jurisdiction. Help clients understand the potential impact of such provisions, determine their preferences with regard to each, and assist them in applying them in a consistent manner.
The sample letters in this chapter address some of the planning and contracting issues that frequently arise in the small-business setting, such as:
Also included is a sample Letter of Intent (or LOI) used to establish the terms of a prospective definitive agreement.
Forwarding a Template for an Executive Summary
{Date}
{Name}
{Company Name}
{Address}
{City, State, Zip Code}
RE: Drafting an Executive Summary
Dear {Salutation}:
Attached please find an Executive Summary template you can use to approach prospective investors. You may want to require a nondisclosure agreement before you share a detailed business plan with anyone.
I would be happy to review your draft Executive Summary for suggested changes from a legal perspective. At the very least, please retain the restrictive language on the front of the template and the safe harbor language at the end.
Your Executive Summary should be revised each time there is a material change to any of the information contained in the summary. Be sure to review your summary periodically with an eye toward necessary changes.
Finally, please remain mindful of the type of prospective investor you approach, as we discussed in connection with the securities law requirements for your proposed stock sale.
Please do not hesitate to call me with any questions in regard to the above.
Very truly,
FIRM NAME
Lawyer Name
Enclosure
Responding to Inquiry After Executive Summary Review
{Date}
{Name}
{Company Name}
{Address}
{City, State, Zip Code}
Dear {Salutation}:
As you may know, this firm is outside general counsel for COMPANY. I am in receipt of your signed Nondisclosure Agreement with COMPANY. Thank you.
I understand you have reviewed COMPANY’s Executive Summary and have requested additional information. Therefore, COMPANY has requested that I forward the enclosed copy of the Company’s Business Plan to you and cooperate fully with any due diligence requests you may have in connection with your consideration of a potential investment in COMPANY.
I look forward to hearing from you.
Very truly,
FIRM NAME
Lawyer Name
cc: COMPANY
Enclosure
Contracting for Website Development
{Date}
{Name}
{Company Name}
{Address}
{City, State, Zip Code}
RE: Suggested Terms for Agreement with Website Developer
Dear {Salutation}:
Please let your website developer know that its agreement should state its responsibility to ensure that the website it creates for COMPANY does not infringe the rights of others (including copyright rights in images), and it will indemnify COMPANY against any infringement claims. It is also important that the agreement include an assignment of all its rights to the website software and content to COMPANY and that developer does not retain any rights in the same.
When you receive their proposed development agreement, please forward a copy to me for review before signing. I understand you are on a tight time frame, but given the importance of the company’s website to the overall success of the business, it is worth a brief delay and the small additional expense to ensure that you are protected. I will endeavor to turn it around quickly. In the meantime, please do not hesitate to call me with any questions.
Very truly,
FIRM NAME
Lawyer Name
Setting Up a Meeting to Discuss Form Contracts and Boilerplate
{Date}
{Name}
{Company Name}
{Address}
{City, State, Zip Code}
RE: Jury Trial Waivers
Dear {Salutation}:
Jury trial waivers are favored by those who do not wish to forfeit their right to appeal by submitting to binding arbitration and desire a trial, if they have to have one, that is less expensive and less time-consuming than a jury trial. However, a recent decision in California makes many jury trial waivers unenforceable. Acknowledging that the result is out of step with the law in other states and federal jurisdictions, the California Supreme Court held in Grafton Partners v. Superior Court (2005) that pre-dispute contractual jury trial waivers are not enforceable under California law.
Until this discrepancy between federal law and the laws of other states is addressed through subsequent interpretation or legislative amendment, please consider amending any existing contracts you may have that include a jury trial waiver. A statement along the lines of the following can be added to new or existing contracts to help ensure that disputes are not tried before a jury.
“In the event the parties’ waiver of a trial by jury is deemed invalid, the parties hereby agree that any action or claim arising out of any dispute in connection with this agreement, any rights, remedies, obligations, or duties hereunder, or the performance or enforcement hereof or thereof shall be determined by judicial reference.”
Please call me at your convenience to discuss incorporating this or a similar term into your vital contracts with jury trial waivers.
Very truly,
FIRM NAME
Lawyer Name
Legal Limitations on Interest on Loans
{Date}
{Name}
{Company Name}
{Address}
{City, State, Zip Code}
RE: California Usury Law
Dear {Salutation}:
As you may know, California usury law is set forth in Art. 15, § 1 of the California Constitution, although exemptions are scattered throughout the California statutes.
Subsection (1) governs loans primarily for personal, family, or household purposes, and Subsection (2) applies to all other loans. The latter limits interest to the higher of 10% OR 5% plus the then-current Federal Reserve rate. A lender may charge a borrower an extra and reasonable amount for additional incidental expenses in negotiating, brokering, making, and securing a transaction without such charges being treated as interest. A determination of reasonableness would likely involve looking at the points commercial lenders charged for similar loans at the time the loan was made. To the extent that points are in excess of that amount, they could count toward the usury limit.
That being said, there are a number of exemptions from usury law limitations, such as 1) for loans made or arranged by any person licensed as a real estate broker and secured in whole or in part by liens on real property, where the broker is compensated for doing so (discussed further below); 2) for loans by licensed industrial loan companies; 3) for loans by licensed finance lenders; 4) for shared-appreciation loans; and 5) under California Corporations Code Section 25118 (discussed further below).
Exceptions that may be useful to COMPANY include:
1. The exception for loans arranged by a California licensed real estate broker and secured in whole or in part by liens on real property may be applicable from time to time, but probably would not be a practical solution for most of your anticipated transactions. The term “arranged” has been interpreted by the courts as meaning more than just a scrivener or escrow provider. So, a broker would have to be really involved in the loan for this exception to apply. If you anticipate relying on this exception, we can provide you with more detailed guidelines.
2. Loans made under California Corporations Code Section 25118, which provides an exception from the usury law for certain loan transactions where the borrower has $2 million or more in assets or is borrowing $300,000 or more. The purpose of this rule is to exempt certain bridge loan transactions from usury law, but it does not exempt lenders from the application of the California Finance Lenders Law, which prohibits any person from “engaging in the business of a finance lender or broker” without a license. The requirements for obtaining a lender’s license are set forth in Section 22100, et seq. of the California Financial Code and do not appear to be particularly onerous. The law requires applicants to have and maintain a minimum net worth of at least $25,000 and a $25,000 surety bond. In general, principals of the applicant may not have a criminal history or a history of noncompliance with regulatory requirements. If you are planning to make loans as a regular part of your business, then this may be your best approach.
We would be happy to assist you in obtaining a lender’s license for COMPANY and documenting future loans for the company. If you are interested, we can provide an estimate of the time and expense of obtaining a license.
Please don’t hesitate to call me with any questions with regard to the above.
Very truly,
FIRM NAME
Lawyer Name
Terms for Design Escrow Agreement
{Date}
{Name}
{Company Name}
{Address}
{City, State, Zip Code}
RE: Terms for Design Escrow Agreement
Dear {Salutation}:
I have reviewed the Three-Party Escrow Service Agreement you forwarded and agree that the Release Conditions are too broad. The Release Conditions, together with the right to dispute the existence of a condition, should be along the lines of the following:
(i) Depositor dissolves or liquidates, or takes any corporate or other action to achieve dissolution or liquidation, or Depositor ceases to conduct business in the normal course; or
(ii) both (A) Depositor is a debtor in a bankruptcy proceeding or other proceeding for the general settlement of its debts, or a receiver or other official is appointed for all or substantially all of Depositor’s assets, or Depositor makes a general assignment for the benefit of creditors, and (B) Depositor is unable to perform its obligations pursuant to the Supply Agreement.
I believe the provisions limiting the escrow agent’s liability are also too broad. The escrow agent should be liable for any damages arising out of its negligence, willful misconduct, or violation of the escrow agreement.
Please feel free to call me to discuss this further or let me know if you would like these changes incorporated into the agreement.
Very truly,
FIRM NAME
Lawyer Name
Termination of Manufacturing Contract
{Date}
{Name}
{Company Name}
{Address}
{City, State, Zip Code}
RE: Termination of Manufacturing Agreement
Dear {Salutation}:
This firm represents COMPANY. I am writing with regard to the agreement entered into on or around [DATE] between COMPANY and MANUFACTURER for the manufacture of COMPANY’s proprietary candy bars.
Please consider this letter formal notice that the agreement has been terminated pursuant to paragraph 9b thereof, which provides that the agreement may be immediately terminated if a party has “failed to perform or meet any material term or condition” of the agreement and has failed to cure such breach within 30 calendar days. It is my understanding that MANUFACTURER failed to produce COMPANY’s products within the required time frame and that such failure was ongoing for more than 30 days.
Timing for delivery was clearly a material component of the agreement. The requirement of MANUFACTURER to deliver COMPANY’s products in a timely fashion is referenced throughout the agreement. Specifically:
Paragraph 1d provides in part that MANUFACTURER could deliver partial orders “so long as an applicable order is completed and delivered within the time specified”;
Paragraph 4a contains MANUFACTURER’s guarantee that orders would be completed within four weeks of receipt of COMPANY’s deposit; and
Exhibit A and B of the agreement set forth a four-week deadline for production by MANUFACTURER.
The failure of MANUFACTURER to produce COMPANY’s products within the required time frame has forced COMPANY to delay customer deliveries and seek an alternative manufacturing source. Delays and back orders have seriously jeopardized the value of the COMPANY brand and have resulted in lost revenues and lost opportunities.
I’d like to take this opportunity to remind you of your ongoing obligations to COMPANY with regard to exclusivity. MANUFACTURER may not use the formulas for COMPANY products or manufacture COMPANY products for any other customers. The agreed-upon limit on similarity was 40%, meaning MANUFACTURER cannot produce a product with a formula that is more than 40% similar to the formula of any COMPANY product. Any products MANUFACTURER produces hereafter must be “noticeably different” from COMPANY products. We hereby acknowledge your delivery of copies of the formulas for COMPANY products to COMPANY.
I’d also like to remind you of your confidentiality obligations under the agreement. Section 11 imposes strict confidentiality obligations on MANUFACTURER with regard to COMPANY confidential information. Despite this obligation, it has come to my client’s attention that MANUFACTURER has disclosed to third parties that MANUFACTURER has had trouble producing COMPANY’s products—information that could be used against COMPANY by its competitors and discourage customers from placing orders. COMPANY is trying to succeed in a very competitive business environment, and any loss of confidentiality can have a significant negative impact on the company’s business. Please immediately cease and desist from any further breach of your confidentiality obligations under the agreement.
Finally, my client has advised me that MANUFACTURER has requested compensation for ingredients it purchased in anticipation of manufacturing products for COMPANY. However, under both paragraph 1b and Exhibit A and B of the agreement, the procurement of ingredients is MANUFACTURER’s responsibility and, therefore, will not be reimbursed by COMPANY.
To avoid the necessity of taking formal legal action to enforce its rights under the agreement, COMPANY requires assurance from MANUFACTURER that it will observe its obligations of exclusivity and confidentiality to COMPANY going forward and that MANUFACTURER does not dispute COMPANY’s rightful ownership of the formulas for its products. Although the agreement has been terminated, the provisions regarding exclusivity and confidentiality survive the termination of the agreement under paragraph 15i of the same. Please give COMPANY such assurance by signing the acknowledgment below and returning it to me no later than the close of business on [DATE].
Very truly,
FIRM NAME
Lawyer Name
ACKNOWLEDGMENT:
MANUFACTURER hereby acknowledges its ongoing obligations of exclusivity and confidentiality to COMPANY under that certain Manufacturing Agreement between them dated [DATE], and further acknowledges COMPANY’s ownership of the formulas for its products, which MANUFACTURER has delivered to COMPANY in accordance with the terms of the Manufacturing Agreement.
|
Dated: ________________ |
MANUFACTURER |
Demand to Party That Prematurely Terminated Contract
{Date}
{Name}
{Company Name}
{Address}
{City, State, Zip Code}
RE: VENDOR
Dear {Salutation}:
This office represents COMPANY. COMPANY advises us that VENDOR has purported to terminate its contract with COMPANY. This letter is a formal demand that, by no later than DATE and TIME, VENDOR issue a written retraction of the purported termination.
If VENDOR does not issue a retraction of the purported termination within the time frame provided herein, we will file the enclosed complaint in Superior Court stating causes of action against VENDOR for material breach of contract and violation of Sections 17200 et seq. of the California Business & Professions Code, the Unfair Competition Act.
This letter is sent with a full reservation of all rights and remedies.
Very truly,
FIRM NAME
Lawyer Name
Response to Unfounded Contractual Demands
{Date}
{Name}
{Company Name}
{Address}
{City, State, Zip Code}
RE: BUSINESS
Dear {Salutation}:
This firm represents COMPANY. I am in receipt of your letter on behalf of BUSINESS, dated DATE, addressed to COMPANY in which you make certain demands on COMPANY arising out of a contract. However, it is our understanding that there is no existing contract between COMPANY and BUSINESS. If you have a contract or other writing between COMPANY and BUSINESS on which your client relies in making its claims, please forward it to me for my review.
Please be advised that should any litigation be instituted against our client, it will be vigorously defended. All further correspondence in this matter should be directed to my attention.
Very truly,
FIRM NAME
Lawyer Name
Forwarding Premarital Agreement to Client
{Date}
{Name}
{Company Name}
{Address}
{City, State, Zip Code}
RE: Signed Premarital Agreement
Dear {Salutation}:
Enclosed please find a fully executed version of your Premarital Agreement with FIANCE. I will retain a copy of the enclosed in your file, as well as in COMPANY’s records.
Best wishes to both of you for a long and happy marriage.
Very truly,
FIRM NAME
Lawyer Name
Enclosure
Forwarding Documents for a Real Estate–Secured Loan
{Date}
{Name}
{Company Name}
{Address}
{City, State, Zip Code}
RE: Real Estate–Secured Small-Business Loan for COMPANY
Dear {Salutation}:
Enclosed please find copies of the following documents, which will be presented to you for signature at your scheduled loan document signing on [DATE] at the title office you have selected for the closing:
Deed of Trust
Memorandum of Lease
Servicing Agent Agreement
Note
Loan Agreement
Authorization Agreement for Preauthorized Payment (Debits)
Form W-9
Please bring a voided check with you to the document signing to attach to the authorization for debits. I would be happy to review the enclosed with you and answer any questions you may have prior to your signing. Please let me know what is most convenient for you.
Very truly,
FIRM NAME
Lawyer Name
Enclosures
Letter of Intent
Letter of Intent
This letter of intent (LOI) is made effective this ___ day of _____, 20__ (Effective Date) by and between CUSTOMER and COMPANY. Customer and Company hereinafter are also individually referred to as “Party” and collectively as “Parties.”
Whereas, Customer and Company have been engaged in ongoing discussions regarding the possible application of Company’s electronic component products into Customer’s products;
Whereas, the Parties desire to negotiate one or more definitive agreements regarding such matters, conditioned to a positive evaluation of Company’s solution by Customer; and
Whereas, the Parties’ ongoing discussions necessitate a written understanding of the general terms and conditions that would form the basis of a definitive agreement, and the Parties wish to exchange certain confidential and proprietary information related to these discussions before such definitive agreement (hereinafter “Definitive Agreement”) can be finalized;
Now, therefore, the Parties agree as follows:
1. General
a. Non-binding. This LOI represents only a current good-faith intention of the Parties to investigate and continue discussions regarding a possible relationship between the Parties and is not, with the sole exception of sections 1a and 4, intended to be a binding agreement, nor shall either Party have any obligations or liability to the other Party for failure to execute a Definitive Agreement. Except as provided under sections 1a and 4, a binding agreement with respect to the subject matter herein will arise only when all material terms and conditions have been set forth in a conclusive, fully integrated Definitive Agreement.
b. Business Relationship. Customer and Company will use commercially reasonable efforts to negotiate a business relationship where the Parties will engage in a joint effort to effectuate the events contemplated herein. To that effect, the business case is described in Exhibit 1.
2. Negotiation of Definitive Agreement
a. The Parties intend to evaluate the feasibility of incorporating Company’s components into Customer’s products. In case of successful evaluation, the Parties will endeavor to negotiate, execute and deliver, on or before [DATE], definitive documents reflecting the business terms set forth herein.
b. It is anticipated that the Definitive Agreement will contain customary provisions in addition to, but consistent with, the above business terms, including, but not limited to, provisions regarding confidentiality, acceptance, warranties, limitation of liability, termination, and the like.
3. Rights in Absence of Executed Definitive Documents
a. Only the terms and conditions contained in Sections 1a and 4 are binding and fully enforceable.
b. With the sole exceptions of Sections 1a and 4 herein, unless and until definitive documents are executed and delivered, no Party shall have any rights, obligations or liabilities of any kind whatsoever with respect to the business terms set out above.
4. General Provisions
a. Upon execution of the Definitive Agreement, the provisions of this LOI and all prior discussions will be superseded by such Definitive Agreement.
b. This LOI shall be effective on the Effective Date and will remain in effect for a term of 6 months from the Effective Date, unless terminated sooner as provided herein. The term of this LOI may be extended by the mutual written agreement of the Parties. Either Party may terminate this LOI by providing the other Party ten (10) days’ prior written notice. The provisions of Sections 1(a) and 4 shall survive any expiration or termination of this LOI.
c. Following the signing of this LOI, Customer and Company will participate in joint customer visits to gain commitments for the integrated products.
d. Company agrees that it will not initiate discussions regarding similar products with other potential customers while this LOI is in effect. This provides Customer an opportunity to be the first vendor to present integrated products to its customers. In return for this exclusive period, Customer will provide a proposed integrated product design with a goal of announcing the product by [DATE] and going into production with this product by [DATE]. Notwithstanding the foregoing, it is hereby acknowledged that Company has had previous discussions with the potential customers identified in Exhibit 2 and may continue discussions with these companies directly or through an intermediary.
e. The execution, delivery, and performance by the Parties of this LOI have been duly authorized by all necessary corporate action and each individual executing this LOI.
f. This LOI may be modified only by means of a writing signed by both Parties. Only expressly authorized representatives of any corporate Party may agree to any such modification or change.
g. This LOI is solely for the benefit of the Parties and is entered into based on the unique characteristics of the Parties. It is not assignable or transferable without the written consent of the other Party, which may be withheld for any reason at such other Party’s sole and absolute discretion. Any purported assignment in violation of this section is void.
h. All notices required or allowed under this LOI shall be deemed to be properly served upon receipt by mail, personal delivery, or internationally recognized overnight courier service (e.g., FedEx, UPS).
i. Each Party represents that it has full power and authority to enter into and perform its obligations hereunder.
j. Neither Customer nor Company may assign, delegate, or otherwise transfer all or any of their respective rights or obligations hereunder without the prior written consent of the other Party, provided that either Party may assign its rights and obligations hereunder to any parent, subsidiary, or affiliate (Affiliates).
k. This LOI shall constitute the entire agreement between the Parties with respect to the subject matter hereof. This LOI supersedes all prior oral and written communications, agreements, and understandings of the Parties with respect to the subject matter of this LOI and shall not be modified or amended except by a writing signed by authorized representatives of both Parties. The Nondisclosure Agreement between the Parties dated [DATE] remains in full force and effect.
l. NEITHER PARTY MAKES ANY WARRANTIES, EXPRESS OR IMPLIED, STATUTORY OR OTHERWISE, WITH RESPECT TO ITS CONFIDENTIAL INFORMATION, INCLUDING, BUT NOT LIMITED TO, ANY IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, OWNERSHIP, TITLE, OR NONINFRINGEMENT OF THIRD-PARTY RIGHTS. NEITHER PARTY SHALL HAVE ANY LIABILITY WHATSOEVER TO THE OTHER FOR ITS DISCONTINUANCE OF NEGOTIATIONS OR ITS DECISION NOT TO ENTER INTO A DEFINITIVE AGREEMENT. FURTHER, IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER FOR ANY INCIDENTAL, SPECIAL, OR CONSEQUENTIAL DAMAGES ARISING OUT OF OR RELATED TO THIS LOI OR ITS PERFORMANCE OR NONPERFORMANCE HEREUNDER, INCLUDING, BUT NOT LIMITED TO, LOST PROFITS OR INJURY TO BUSINESS REPUTATION BASED ON ANY BREACH, DEFAULT, OR NEGLIGENCE OF SUCH OTHER PARTY OR ITS EMPLOYEES, AUTHORIZED REPRESENTATIVES, OR AFFILIATES IN RESPECT TO THIS LOI, EVEN IF SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
m. Neither Party shall export, re-export, or transship any information or product acquired or generated under this LOI in violation of any applicable export control laws and regulations promulgated and administered by the governments of the countries asserting jurisdiction over the Parties or their applicable transactions.
n. The Parties agree that this LOI shall be governed by and construed in accordance with the laws of the State of Delaware, and that in any action, special proceeding, or other proceeding that may be brought arising out of, in connection with, or by reason of this LOI, the laws of the State of Delaware shall be applicable and shall govern to the exclusion of the law of any other forum, without regard to the jurisdiction in which any action, suit, or proceeding may be instituted.
o. This LOI does not grant or otherwise confer, and shall not be construed as granting or otherwise conferring, any license, right, or other interest, either directly or indirectly, by implication or otherwise, to either Party or any third party in or to any patents, copyrights, trademarks, trade secrets, or other intellectual property of the other Party and/or its Affiliates.
p. The Parties agree that no announcement of the proposed cooperation will be made until the execution of the Definitive Agreement. However, should the cooperation contemplated by this LOI become public knowledge, or the Parties have reasonable cause to believe that they have become or are about to become public knowledge, neither Party shall issue any form of release or statement, the contents of which have not been previously approved by the other Party in writing.
Executed effective as of the Effective Date.
Customer/Company
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By: ____________________ |
By: ____________________ |
|
Name: ____________________ |
Name: ____________________ |
|
Title: ____________________ |
Title: ____________________ |