The Unique Benefits of Treating Personal Goodwill as Property in Corporate Acquisitions

Corporate acquisition talks may not get far if buyer and seller disagree over transaction structure, which can have significant after-tax effects. But the parties may have overlooked an item that, due to its potential tax treatment, could be the key to facilitating the acquisition. That item is the selling shareholder\u27s personal goodwill. Personal goodwill exists when the shareholder\u27s reputation, expertise, or contacts gives the corporation its intrinsic value. It is most likely to be found in closely held businesses, especially those that are technical, specialized, orprofessional in nature or have few customers and suppliers. If personal goodwill is treated as property that can be sold ancillary to the sale of the corporation\u27s assets or stock, it can produce a more favorable after-tax result for both buyer and seller. An effective transfer ofpersonal goodwill is also necessary to give buyer the benefit of its bargain This author adopts the view that personal goodwill, like business goodwill, should be deemed marketable property. Under this view, buyers receive a step-up in basis in the goodwill and can amortize it for tax purposes. C corporation sellers can sell the goodwill ancillary to the sale of their corporations and avoid double taxation. All sellers may receive favorable capital gains treatment on the sale

Debt as Venture Capital

Venture debt, or loans to rapid-growth start-ups, is a puzzle. How are start-ups with no track records, positive cash flows, tangible collateral, or personal guarantees from entrepreneurs able to attract billions of dollars in loans each year? And why do start-ups take on debt rather than rely exclusively on equity investments from angel investors and venture capitalists (VCs), as well-known capital structure theories from corporate finance would seem to predict in this context? Using hand-collected interview data and theoretical contributions from finance, economics, and law, this Article solves the puzzle of venture debt by revealing that a start-up’s VC backing and intellectual property substitute for traditional loan repayment criteria and make venture debt attractive to a specialized set of lenders. On the firm side, venture debt helps entrepreneurs, angels, and VCs avoid dilution, improves VC internal rate of return, assists VCs in monitoring entrepreneurs, and follows from capital structure theories after the first round of VC funding

Individual or Collective Liability for Corporate Directors?

Fiduciary duty is one of the most litigated areas in corporate law, and the subject of much academic attention, yet one important question has been ignored. Should fiduciary liability be assessed individually, where directors are examined one-by-one for compliance, or collectively, where the board\u27s compliance as a whole is all that matters? The choice between individual and collective assessment can be the difference between a director\u27s liability and her exoneration, affects how boards function, and informs the broader fiduciary duty literature in important ways. This article is the first to explore the individual/collective question and suggest a systematic way of approaching it. The article is both descriptive, in examining how some courts have answered this question (often implicitly), and normative, in asking whether the courts\u27 tentative answer makes for good corporate governance policy

How Do Start-ups Obtain Their Legal Services?

This Essay is the first to examine, using responses to online surveys, the use of in-house versus outside counsel by rapid-growth start-up companies. It also explores, from the vantage point of the start-up’s entrepreneur, some reasons for that choice. The Essay tests several hypotheses derived from the economic and entrepreneurship literatures about the benefits of in-house versus outside counsel in the unique context of start-up firms

Debt as Venture Capital

Venture debt, or loans to rapid-growth start-ups, is a puzzle. How are start-ups with no track records, positive cash flows, tangible collateral, or personal guarantees from entrepreneurs able to attract billions of dollars in loans each year? And why do start-ups take on debt rather than rely exclusively on equity investments from angel investors and venture capitalists (VCs), as well-known capital structure theories from corporate finance would seem to predict in this context? Using hand-collected interview data and theoretical contributions from finance, economics, and law, this Article solves the puzzle of venture debt by revealing that a start-up’s VC backing and intellectual property substitute for traditional loan repayment criteria and make venture debt attractive to a specialized set of lenders. On the firm side, venture debt helps entrepreneurs, angels, and VCs avoid dilution, improves VC internal rate of return, assists VCs in monitoring entrepreneurs, and follows from capital structure theories after the first round of VC funding

The (Not So) Puzzling Behavior of Angel Investors

Where do entrepreneurs turn for funding once their credit cards are maxed out, friends and family are no longer taking their calls, but it is still too early for venture capitalists to invest? They turn to angel investors. Angel investors are wealthy individuals who personally finance the same high-risk, high-growth start-ups as venture capitalists but at an earlier stage. Well-known angels include Microsoft co-founder Paul Allen, EDS founder H. Ross Perot, and Dallas Mavericks\u27 owner Mark Cuban. But the prototypical angel may still be rich old Uncle Joe, the wealthy, distant relative or family acquaintance. Angels come in many forms, yet together they constitute an essential source of entrepreneurial finance, providing some $25 billion to new ventures each year. Not only are angels important for the amount they provide to new start-ups, but for when they provide it-at a crucial stage in the start-up\u27s growth that allows entrepreneurs to build the financial bridge from friends-and-family funding to venture capital

Individual or Collective Liability for Corporate Directors?

Fiduciary duty is one of the most litigated areas in corporate law and the subject of much academic attention, yet one important question has been ignored: Should fiduciary liability be assessed individually, where directors are examined one-by-one for compliance, or collectively, where the board\u27s compliance as a whole is all that matters? The choice between individual and collective assessment may be the difference between a director\u27s liability and her exoneration, may affect how boards function, and informs the broader fiduciary duty literature in important ways. This Article is the first to explore the individual/collective question and suggest a systematic way to approach it. This Article offers both a descriptive examination of how some courts have answered this question (often implicitly), and a normative analysis asking whether the courts\u27 tentative answer makes for good corporate governance policy