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ACTIONS TO TAKE DURING THIS CRISIS

July 7, 2020

Dear Clients and Friends: With all these changes in life going on, there are aggressive actions that you can you take to protect yourself, and your family, your friends, and your employees. Here are some ideas: Review your leases for a Force Majeure clause (a provision in commercial contracts that excuses the renter from performing when certain situations arise beyond the renter’s control making performance impractical, inadvisable, unreasonably expensive, illegal or impossible). Please note that these clauses often require special notices or timing. Then, contact your landlord in writing, to notify him/her of this situation and your inability to perform. Landlords must work with their tenants in a reasonable way. Contact the lender on your business or home loan to negotiate abeyance or delayed payments. Don’t wait for the government to mandate it. Many loan contracts receive such treatment due to a doctrine called Frustration of Purpose. In such a case, the purpose of the contract was frustrated by an event (pandemic) that would excuse its performance. For example, if your business was ordered to close as a non-essential business, you can argue that the reason for entering into the loan was to operate the business – which is no longer possible. Review and determine how to handle your accounts receivable and accounts payable. Work to make your cash flow match up with revised commitments. Contact the finance company carrying your car loan. Similar to the above, you may not be able to pay your car payments or even use the car. Therefore, you should be relieved of your payment obligations – even temporarily. If you plan to reduce staff, be sure to catch up on the latest employment support plans being made available by the Federal, state, and local governments. Furlough versus termination versus reduction of work time have very different consequences. Go through all of last month’s business and personal bills and see which can be reduced or eliminated. You will be surprised at how many things can be changed without dramatically impacting your employee benefits or work and personal lifestyle. Make sure all of your assets are in the name of your family trust, both for you and for your employees. If something happens to you or your spouse/significant other, or an employee, the costs and time involved in settling the estate can be prohibitive. If all of your assets are in your trust, the transition is usually seamless. Also, make sure your health care directives are up to date with the right decision-makers named. In the meantime, make sure that you are doing the best you can to be positive and aggressively pursuing solutions for yourself, your family, your friends, and your employees.

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Summary of Government Financial Assistance to California Small Businesses and Individuals

July 7, 2020

Dear Clients and Friends: We are diligently working to keep you apprised of the new laws applicable to small businesses and individuals. Below is a summary of the new laws passed over the last week allowing for significant assistance to almost all small businesses. You will find the rules are relaxed significantly, including no personal guarantees, no requirement that you have tried to find funds elsewhere, and a quick turnaround time for funding that allows you to rehire employees. Also, some portion of these loans will be forgiven when used for the right purposes, mainly payroll. We will continue to advise you on the implementation of these laws in the weeks and months ahead. Call or email us with any questions. (1) Coronavirus Aid, Relief, and Economic Security Act (“CARES”) Financial assistance and loans to individual taxpayers, businesses, and entire industries affected by COVID19, and expansion of unemployment benefits. We focus on small businesses with this summary. Adds $349 billion in additional funds for SBA loans under Section 7(a) of the program and expands its scope. Relaxes loan eligibility criteria, increases loan limits, and expands allowable uses of the loan proceeds. Grants to entrepreneurs to help with small businesses (especially minority and women-owned). Expands access to SBA Economic Injury Development Loans (“EIDL”) through December 31, 2020 for small businesses, private nonprofits, and individuals operating as sole proprietors or independent contractors as of January 31, 2020. There are no personal guarantee requirements on all loans up to $200,000, no requirement of having to be in business for a year, and no requirement that you can obtain credit elsewhere. EIDL Applicants can receive as grants an advance up to $10,000 within three days of receipt of the application to be used for COVID-19 related paid sick leave, payroll to retain employees, pay costs related to interrupted supply chains, rent or mortgage payments, and repay obligations related to revenue losses. Grants do not have to be repaid. EIDL received $10 billion from CARES. Provides bankruptcy protection to debtors. Loans and Relief for Small Businesses Expands loan eligibility through June 30, 2020, through its “Paycheck Protection Program”: For any business under 500 employees (or the number of employees established by the SBA) Individuals operating as sole proprietorships, self-employed, or Independent Contractors, and Business in accommodation and food services industry under 500 employees in one location Businesses that borrow must certify: The current economic uncertainty makes the loan necessary to support ongoing operations; and The loan proceeds will be used to retain workers and maintain payroll or make mortgage, rent, and utility payments Businesses can use the loan for payroll, insurance premiums, continuing to pay healthcare benefits during paid sick/medical/family leave, employee salaries, commissions, utilities, rent, mortgage payments, and interest on debt obligations incurred before February 15, 2020. Business no longer have to “be able to obtain credit elsewhere.” Under the Paycheck Protection Program, Businesses can Borrow the lesser of: $10,000,000, or 2. 2.5 times the business’ average monthly payroll costs in the one-year period before closing of the loan. -The loans will have a maximum interest rate of 4% including all lender fees. -Collateral […]

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Client Update: Paycheck Protection Program Status and Expansion to Independent Contractors and Self-Employed

July 7, 2020

Dear Clients, Colleagues, and Friends: As those who have been involved in the Paycheck Protection Program (“PPP”) process know, it has been frustrating. Employers eligible for PPP have experienced limited windows to apply and conflicting directions from the SBA and their banks. When the PPP is planned to open to Independent Contractors and Self-Employed on April 10, 2020, we anticipate similar results but hope that the SBA and banks may have figured out their shortcomings by then. Therefore, we encourage our Independent Contractor and Self-Employed clients to prepare the PPP application as if it will be accepted on Friday, April 10 by a bank with which you currently have a business checking account, and keep monitoring the status of their specific bank. Applications are available here: https://www.sba.gov/document/sba-form–paycheck-protection-program-borrower-application-form We also received information that the government will add an additional $250 billion to the $349 billion originally slated for PPP in forgivable loans. Please remember that for the loans to be forgivable, they must be used for payroll. More information is available here: https://home.treasury.gov/system/files/136/PPP–Fact-Sheet.pdf In addition, the California Employment Development Department (“EDD”) will extend unemployment benefits to Independent Contractors and Self-Employed individuals who have been impacted by the pandemic. Please visit their page for updates: https://www.edd.ca.gov/about_edd/coronavirus-2019.htm Should you have any questions about your specific scenario, PPP application, or payment formula, please reach out to our office at (310) 475-0321 or email. We are all safely working from home and reachable by phone or email.  

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FINANCING A NEW COMPANY: DEBT AND EQUITY DECISIONS

July 7, 2020

Dear Clients, Colleagues, and Friends: There are many forms of debt financing available to startups and young companies. Often it is a loan from a family member. This is the most common form of debt financing. There are no other commitments involved other than the terms of the note. Usually, the terms include a low-interest rate and payment due back to the note holder either on-demand or in a short period of time. You want this loan to be from your new entity, if you can, to limit your personal liability. If only the company (LLC or Corp) signs, you are not personally responsible. We all know about equity financing. This is where you sell stock to your investor. The hardest part of selling equity in a startup, once someone decides they want to invest, is to determine the value of the shares. Pre-Money valuation is the value of the company before the investment is made. Post-Money valuation is the value of the company after the investment has been made. You add the investment to the Pre-Money valuation to determine Post-Money valuation. Very simple. The higher your Pre-Money Valuation the less of the company that you have to give away to the investor. You determine the percentage that is given to the investor by dividing the amount of the investment by the Post-money valuation. Sometimes you cannot get a high enough Pre-Money valuation, and therefore would have to give away too much of the company at the start. In this case, you can talk about a Convertible Promissory Note. This is money loaned to the company that upon the happening of some event is converted to stock in the company. The value of the stock at this conversion is determined by a series of rules that are built into the convertible note. It is far more complex than the simple promissory note given to a family member. Some of the terms that are included in a convertible promissory note include: Amount of the note Outside date that the note is due, even if further funding is not met, and what happens if this date is reached What events need to occur for automatic conversion The discount that is given to the note holder upon automatic conversion Amount of new financing needed to automatically convert the note to stock Minimum Pre-money value of the company on conversion Maximum Pre-money value of the company on conversion When can the note holder convert on his own decision Provision that allows the note to adjust its terms for the better if a better deal is given to someone else Under what conditions can the company prepay the note Is there security for payment of the note What rights does the note holder have to see corporate documentation, including financials Under what conditions can the note holder accelerate payment Protective provisions regarding issuing additional stock in the company, Preemptive rights Class of stock to be purchased on the conversion Rights of that class of stock Appointment of board position for the note holder Who will pay fees for negotiating and drafting the note, and Other […]

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California Gets Back On-Track – Tips to Re-Ignite Your Business

July 7, 2020

Dear Clients, Colleagues, and Friends: As the California economy opens up again and companies begin to invite employees to the workplace, common questions arise from employers on what they are permitted to do with respect to their returning employees. In addition, many questions remain on how the Paycheck Protection Program (“PPP”) loan may be used to qualify for forgiveness. Below, we provide five of the most common questions recently asked in hopes that it gives you some helpful tips – used for informational purposes only. Should you have any follow-up questions on the topics or on any related matters, do not hesitate to call or email us. 1. If your employee took paid or unpaid COVID-related leave, can he/she return to the old job upon return to the office? Yes. In most circumstances, an employee returning from a Families First Coronavirus Response Act (“FFCRA”) paid sick leave or family leave must be restored to the same or equivalent position prior to the office closure. However, the employer may deny accepting the employee back to his/her former position if (i) the employee would not have otherwise been employed if, due economic reasons, the employer would have terminated that position (e.g. due to a company layoff), or (ii) if denying restoration is necessary to prevent “substantial and grievous economic injury” to the employer’s operations. Under the FFCRA, an employee working for an employer with fewer than 25 employees may be denied restoration to his/her former position if: (i) the employee took leave under the Emergency FMLA for child-care reasons; (ii) the employee’s position no longer exists because of economic conditions or other changes caused by the public health emergency during the leave period; and (iii) the employer makes reasonable efforts to contact the employee if an equivalent position becomes available during the one-year period after the employee’s leave. 2. Is an employee eligible for unemployment if he/she had to quit due to reasons related to COVID-19? Yes. An employee is generally not eligible for unemployment if he/she quit without good cause. However, if he/she quits for reasons related to COVID-19 (for example, having to stay home to take care of a sick family member, for kids that are out of school, or for children when no childcare can be obtained), he/she may be eligible for unemployment benefits under the CARES Act. Please note that quitting without good cause simply to obtain unemployment benefits is considered fraudulent and may result in having to pay back the benefits and prosecution. 3. For the Paycheck Protection Program (“PPP”) to be forgiven, how must the company use the funds? For eight weeks from the date of funding, at least 75% of the funds must be used towards “Payroll Costs,” and the other 25% must be used toward Rent and Utilities. Contact us for a spreadsheet or any related guidance. “Payroll Costs” include: -Salary, wages, commissions, or tips (capped at $100,000 on an annualized basis for each employee); -Employee benefits including costs for vacation, parental, family, medical, or sick leave; an allowance for separation or dismissal; payments required for the provisions of group health care benefits including […]

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