All posts by Ryan Roberts

How to Avoid Being Ripped Off When You Lease Office Space, Part I

A commercial office space lease is a complicated legal document and is usually your startup company’s first big contract. A real estate broker is a great resource to find available office space and determine the market rents. However, your lease’s location and rent provisions account for about only 10% of the language in a commercial office space lease. The other 90% is not boilerplate language you can simply shrug off. Most of it will undoubtedly contain provisions that can will have financial ramifications for your company.

Why would your real estate broker avoid this other 90%? You have to understand how the commercial real estate game works. The owner of the building hires a real estate broker (“landlord’s rep”) to lease out the office space. When a space is rented, the landlord’s rep receives a fee equal to 6% of the total rent due under the lease. However, if the tenant hired his or her own real estate broker (“tenant’s rep”) this 6% fee is split between them both. Four main points should stick out:

1. The landlord’s rep does not want you to be represented by a real estate broker. If you call the landlord’s rep directly, not only does he or she believe they can take you for more under the lease–he or she will get paid DOUBLE for doing so.

2. The building owner is paying a 6% commission no matter what. You aren’t saving the landlord any money if you don’t hire a tenant rep, so don’t think going solo provides more room to negotiate.

3. Your tenant rep gets paid by the landlord, not you. The great part about tenant rep’s is that they don’t charge you. Thus, you should hire a tenant rep because you will get knowledge about the commercial real estate market without getting a bill.

4. Both the landlord’s rep and your tenant rep get paid only when you sign the lease. This last point is the main reason why real estate broker’s (tenant reps) are so reluctant to negotiate the other 90% of the commercial office space lease. The more you push back on the landlord, the more likely a deal will not be made. They do not want to spend an extra week or two with you to find new space. Your commercial rep would rather you not hire an attorney for the other 90% and just blindly accept it.

Tenant reps do not like working with attorneys and typically refer to us as “deal killers” (although they really mean “commission killers”). Whenever I work with a client on a deal, whether a real estate lease or company acquisition, my only concern is to get it done on favorable terms that protect my client. If I advise my client not to sign an agreement because of a particular provision, I’m not trying to kill the deal. It’s just simply a deal that my client should not enter into.

Thus, if you want the best office space deal possible and avoid being ripped off when you lease office space, you have to hire BOTH a tenant rep and an attorney. That is Step 1.

Part II of this series will focus on the commercial office space provisions that make up the other 90%, why it matters, and what to consider when you negotiate.

Why Grandma Could Start the Next Facebook

New data suggests aging baby boomers are leading the surge in entrepreneurship. In a recent article, the Fortune Small Business unit reports how a recent study found that the number of middle-aged Americans starting their own business is surging.

According to the U.S. Bureau of Labor Statistics, the ranks of the self-employed aged 55 to 65 rose 33 percent in 2006; the number of self-employed 25- to 35-year-olds fell 2 percent.

In a quarterly survey by outplacement firm Challenger Gray & Christmas ( of its clients – mostly managers and executives – the number starting firms or turning to self-employment rose 29 percent in the first quarter of 2007 over the first three months of 2006. Of those, a staggering 88 percent were 40 and older.

You can find the U.S. Bureau of Labor Statistics study (in PDF format) here.

The Scoop on Franchise Royalty Fees

Buying into a franchise is one method an entrepreneur might undertake to start his or her own business. Franchises provide the entrepreneur with name-recognition, training and operational support from day one in exchange for an initial franchise fee and continuing franchise royalty payments. While the initial franchise fee is a one-time lump sum payment, the amount of a franchise royalty payment is usually paid monthly or quarterly and can be determined a few different ways.

Percentage of Revenue or Profits. This is the standard way to calculate a royalty. Multiply total revenue by a royalty percentage (typically 2%-10%) every period. Under this method, the royalty fee fluctuates and allows the franchisee to reduce his or her royalty fee expense when sales are slow. Alternatively, this allows the franchisor to collect a larger fee when a franchisee’s sales are great. Sometimes profits are used to determine the royalty fee, but trying to determine “profit” makes using profits unappealing.

Fixed Sum. Increasingly, franchisors are moving towards fixed royalty fee amounts. The benefit of the fixed royalty fee is that both franchisor and franchisee know exactly what the royalty fee will be, allowing both parties to develop more accurate financial forecasts. An additional benefit is that the fixed fee eliminates the need to audit a franchisee’s reported sales. The fixed fee tends to hurt the franchisee when times are bad, as the franchisee will still be responsible for the $X royalty fee when sales are $0. But when times are great, the franchisee will benefit as the royalty fee is essentially capped.

Fixed Sum Based on Square Footage This is a variation of the fixed sum royalty payment and it is determined by the square footage of the franchisee’s store. Basing the royalty fee on square footage provides the franchisee with incentive to take a smaller space, which can be good if the franchisor wants to maintain a boutique-like atmosphere.

When to Use an Anti-raiding Provision

As an employer, you make countless investments in your employees. Whether your employees realize it or not, you commit major financial resources, time and training to make your staff a company asset. How do you protect your asset from being looted by a former employee? Consider adding an “anti-raiding” clause to your employment agreements.

Continue reading When to Use an Anti-raiding Provision

Please Do Not Hire Google, Esq.

You have many choices when selecting a lawyer to assist your startup company…us lawyers aren’t exactly an endangered species. But one decision you should never make is to draft legal documents yourself. These documents are just too critical to be drafted and–more importantly–issue spotted without legal education and experience.Because entrepreneurs are resourceful and capital tends to be scarce, they have a natural tendency to do their own legal work (Hello Google!). Entrepreneur, resist this urge. Continue reading Please Do Not Hire Google, Esq.

Buy-Sell Agreements: The Stock Redemption Plan

In a couple of previous posts, I discussed the value of buy-sell agreements for businesses with 2 or more owners and also one of the two major types of buy-sell agreements, the cross-purchase plan. This post is dedicated to the other main variation of the buy-sell agreement, the stock redemption plan.

Under a stock redemption plan, the corporation redeems the shares of the withdrawing stockholder. Retirement, death and disability tend to be the three most common withdrawal events found in buy-sell agreements, but corporations are not limited to those three and are free to mix and match as they see fit.

Continue reading Buy-Sell Agreements: The Stock Redemption Plan

Do You Own Your Website?

Most–if not all–entrepreneurs know that their website plays a vital role in the marketing and branding of their startup company. But do most entrepreneurs understand what they are really paying for when they hire someone to design and/or host their website? (OK, if you are a tech startup you can skip to my next post.)

Continue reading Do You Own Your Website?

100 Blogs Every Entrepreneur Should Read

The folks at Bootstrapper have published a list of 100 Daily Must-Reads for Entrepreneurs. The list is organized by categories such as capital raising, managing debt and risks, staff management, venture capital, small business issues and marketing.

I haven’t had the time to visit all 100 blogs yet, but so far I’ve been impressed with what I’ve seen. Thank God for the RSS Reader!

Buy-Sell Agreements: The Cross-Purchase

The cross-purchase is one of the two main ways (“stock redemption” the other) a buy-sell agreement can be structured to provide your company with a succession plan.

Under a cross-purchase plan, each company shareholder agrees in advance to buy the shares of the withdrawing shareholder while the withdrawing shareholder agrees to sell his or her shares to the remaining shareholders. The corporation is not involved in the transaction.

Continue reading Buy-Sell Agreements: The Cross-Purchase

Why every business with 2 or more owners needs a buy-sell agreement

A buy-sell agreement is a document that preserves continuity of business ownership when specific events occur, such as death or disability of a business owner. It is a contract between shareholders or business partners concerning the future ownership of the business and can be drafted as part of the company’s shareholder agreement or as a separate agreement.

The buy-sell agreement typically controls events triggering shareholder buyout, persons that may purchase the departing shareholder’s stock, the valuation of the departing shareholder’s stock and how the buyout will be funded.

The advantages of a buy-sell agreement are that it sets out a strike price well in advance for the departing shareholder’s stock, creates a market for the business interest (which can be extremely difficult in closely held corporations) and assures business continuity for the remaining active owners, employees, customers and creditors.