1. Entity Candidates Sole Proprietorship C Corporation (“C”) General Partnership (“GP” or “P”) Limited Partnership (“LP” or “P”) S Corporation (“S”) Limited Liability Company (“LLC”) Professional Limited Liability Company (“PLLC”) Limited Liability Partnership (“LLP”) Limited Liability Limited Partnership (“LLLP”) Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com 3-2

2. Fundamental Organization Issues Hats – owners, managers, employees Equity owners – who and what rights Operational Management authority Major transaction authority Fiduciary duties High legal risk areas – securities, antitrust, employment Transition planning Structural issues Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com 2-6

3. Private Business Owner Classifications Soloist Toilers Golfers Hybrid Big Fish Family Affair Personal Service Organization Emerging Public Company Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com 2-6

4. Basic Organization Documents Corporations Pre-incorporation agreement Articles of Incorporation Bylaws Organization Resolutions: Officers, Directors, stock issuance, employment agreements, bylaws, bank account, etc. Shareholder Agreement (Buy-Sell) Employment Agreements Stock certificates and record Asset and liability transfer documents Required government and tax filings LLCs and Partnerships LLC Operating Agreement or Partnership Agreement Asset and liability transfer documents Required government and tax filings Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com 4-1

5. Client Non Buy-Sell Planning Process Step One: Layout Potential Issues Step Two: Identify Client’s Hot Issues Step Three: Determine Key Facts that Impact Hot Issues Step Four: Identify Potential Solution Techniques Step Five: Select Best Solution Technique(s) Step Six: Develop Rationale for Convincing Co-Owners Step Seven: Present to Co-Owners (Lawyer’s role may range from passive advising, to strategic negotiation, to hardcore sales) Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com 4-2

6. Important Non Buy-Sell Owner Issues Scope of Enterprise - liability exposure, “Tag along” issues Business Plan Changes - diversion, expansion, speed-ups Debt - Changing, expanding, personal guarantees Additional Capital - dilution risks, mandatory New Equity Owners - disruption, dilution, synergies Owner Roles - service commitments, inner circle Owner Employment Rights - tie to equity, expulsion Business Location - headquarters, changes Outside Owner Activities - competitors, supplies, customers Related Party Transactions - conflicts, disclosures, prohibitions Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com 4-3

7. Important Non Buy-Sell Owner Issues Tax Elections - cost recovery, inventories, fiscal yr, etc. Confidentiality Covenants - extent to owners? AP Management - discount fast or normal slow? Cash Distributions - priority or no or low expectations? Loss Allocations - deficit restoration obligation, three hurdles Professionals - selection process and criteria Indemnification - words vs. reality, insurance Dispute Resolution Procedures - fast, cheap vs. slow, costly Life After Rights - fast, easy restarts Sell-Out Options - who and how many must bless Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com 4-4

8. Solution Techniques Definitive Contract Supermajority Vote Designated Board or Management Committee Specified Conditions Individual Veto Right Opt-Out Rights Buy-Out Trigger Cumulative Voting Preemptive Rights Different Equity Interests Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com 4-5 Debt Levels

9. Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com 6-1 Objectives of Buy-Sell Structure Keep stock away from undesirable owners Establish fair mechanism for valuing stock of departing owner Assure smooth transitions of control and ownership issues as owners come and go Assure “market” for shares at appropriate exit points Assure expulsion rights of group, if desired Assure funding mechanisms and procedures Establish estate tax valuation

10. Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com 6-2 The Buy-Sell Triggers Death Voluntary termination Expulsion Divorce Bankruptcy Employment termination Disability

11. Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com 6-9 The Big Mistakes 1.Misused Right of First Refusal 2.Misused Showdown Clause 3.Failure to honor unique rights – too much democracy 4.Bad life insurance structuring 5.Dumb payment terms 6.Ignore the downside 7.No anticipation of S Election Requirements

12. Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com 8-1 Employment Agreement Myths Advantage Employee An Up-Front Downer It’s Easier After the Honeymoon Always Long and Legal

13. Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com 8-2 The Critical Employment Agreement Issues 1. Term – At Will, Drop-Dead ( No Cut), Evergreen (Renewable) 2. Termination: How impact term Required showing for clean exit– “Cause” or “Good Reason” Consequences if no showing- Full Pay, Time-frame pay Liquidated damages, actual damages Anti-bad faith penalty 3. The Job Description Title Responsibility, Reporting What, Where, How Downward possible?

14. Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com 8-3 The Critical Employment Agreement Issues 4. Compensation Minimum concept for executive protection Base pay revisions Performance incentives Timeframe adjustments Objective factors: Potential amounts, counterparts, factors Much discretion with employer? Perks and benefits 5. Non-competition provision following termination Triggering event – any termination, employee election only, employer “for cause”, employee without “good reason.” Scope – only customers, any competitive activity, industry Time & Geographic area - reasonableness Document employer bona fide interests Specific enforcement

15. Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com 8-4 The Critical Employment Agreement Issues 6. Proprietary and IP interests Work product exclusive property of employer Non-disclosure covenants Anti-moonlighting covenant (limits and scope) Specific IP covenants 7. Arbitration – Pros and cons 8. Protective provisions Prior commitments (no prior hang-ups) Integration clause (this is it) Choice of law (Substance and procedure) Legal representation

16. Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com 15-10 Duncan and Sandy Smith Plan Daughter Trust Son Trust Daughter Trust GC Trust – 1 GC Trust – 2 GC Trust – 3 GC Trust – 4 GC Trust – 5 GC Trust – 6 Duncan and Sandy Living Trust Personal Residence Trust Family L.L.C. (Growth) Family L.L.C. (New) Dynasty Insurance Trust Charitable Remainder Trust C Corporation Holding S Corp (Parent) Alma Mater Qualified Retirement Plan QSSS Corp (One) QSSS Corp (Two) Income Charitable Deduction Assets Remainder Contributions Distributions Compensation Distributions Home Term Use Assets Cash Remainder Income Units Income, support

17. 4-38 Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com 1. Exemption from Registration 2. Re-sales of Securities 3. Anti-fraud Securities Laws: Three Big Issues

18. 4-40 Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com Section 5 of ’33 Act: Securities offering require registration. Section 4 of ’33 Act: Securities sold by issuers, underwriters and dealers are subject to Section 5. Two big exemptions:  Section 4(2) non-public offering exemption (private placement)  Section 3(a)(11) “intrastate offering exemption Registration Game

19. 4-41 Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange, (a) To employ any device, scheme, or artifice to defraud, (b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or (c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security. Antifraud – 10b-5

20. 4-42 Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com 1. How much do we need? 2. What deal can we offer? 3. What money sources are available to us? 4. How do we stay legal? - Compliance legal - Mitigate personal liability exposure The Start-Up Money Questions

21. 4-45 Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com The fewer the better. The smarter the better. The wealthier the better. Money loss reactions – prepare for the worse; assume the worse. Your risk avoidance can be very expensive. Never count the other guys money. Never forget the “deal moment”. Some Truisms

22. 4-46 Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com Accredited Investors: - Issuer insiders (promoters, officers, directors) - Corps, partnerships and trust with over 5 mill assets - Natural persons with over 1 mill net worth or over 200k (300k if married) of income in prior two years. Sophisticated, Non-Accredited: Knowledge or experience in financial and business matters, capable of evaluating the merits and risks of investment. (Rep may qualify person) All-Others: The dumb, poor crowd Legal Investor Types

23. Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com 13-1 Overriding Goal of US Antitrust Preserve, protect and maintain public confidence in free market system by deterring and eliminating economic oppression.

24. Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com 13-2 Efficient allocation of goods and services Prevent “deadweight loss” Stop “wealth transfer” from market power Promote innovation – “dynamic efficiency” Two fading-fast goals:  Protect market entry for individual firms  Decentralize economic power Social Goals of U.S. Antitrust

25. Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com 13-3 Antitrust Statutes Broad statements, ala constitution Courts have huge interpretive freedom Courts used “charter of freedom” to gradually define what we call “Antitrust law” An ever evolving process – at varying speeds and often in varying directions Tangled with microeconomic analysis that cries out for commentators and experts Cases heavily fact driven

26. Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com 13-6 Private Antitrust Suits Treble damages - deterrence and greed Uniquely American High watermark late ’70s – 20 to 1 Today – 10 private to 1 government Tougher now – fairness, efficiency values; standing, injury, causation issues The debate continues

27. Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com 13-8 Perils and Naked Truths It’s not about politics It’s the stakes, not the odds Winning can be losing Per Se taboos – price and output restrains No formal contract required More market power means higher risks Rule of Reason - no easy bright light