Ownership/Equity Issues

Startups represented by seedling growthStartup clients often rely on independent contractors and advisors during their early stages but do not have the cash to pay them, so they turn to equity compensation. Stock options are a great incentive tool, but founders should consider the following before issuing options to advisors or independent contractors:

  1. How Much?: Most founders grant early advisors and contractors options that cover anywhere from 0.10% to 1% of the company’s fully diluted stock on a case-by-case basis. Founders should consider (i) how important the advisor or contractor is to the success of the company, (ii) how much time the advisor will commit to the company, and (iii) the maturity level of the company and its future growth prospects. Advisors and contractors may talk to one another about their option grants, so be consistent and prepared to explain the rationale behind the grants.
  2. Vesting: Just like option grants to employees, advisor grants should be subject to a vesting schedule. Advisor grants typically vest on a monthly basis without a cliff over a period of 12-24 months, although shorter or longer vesting schedules may be appropriate. In certain scenarios, vesting schedules for independent contractors may be customized so that all or a significant portion of the grants do not vest until completion of the project for which the contractor was hired.
  3. Exercise Period: Vested Incentive Stock Options (ISOs), which can only be granted to employees, must be exercised within three (3) months after the employee’s termination. This is not the case for Non-Qualified Stock Options (NSOs) issued to contractors and advisors, but most equity incentive plans require both types of options to be exercised within the three (3) month period. Experienced advisors may negotiate to extend the exercise period because they do not have the cash to exercise the options or are not prepared to pay the tax associated with exercising the options. Depending on the relationship with the advisor, it may be in the company’s best interests to extend the exercise period, especially with advisors who may be able to help the company in the future through their expertise or connections.
  4. Intellectual Property: All advisors should sign some form of confidentiality and invention assignment agreement. Although many advisors or contractors may resist, such agreements can be tailored to address the advisor’s concerns while still protecting the company ownership of its intellectual property, which is key to the company’s future success and ability to obtain venture financing.

Attention all Los Angeles area emerging companies!

Fit and confident female athlete in starting position ready for running

Want to get the most out of your people and your investment? Focus on your company’s HR and corporate governance.

Join Fox Rothschild Employment and Corporate attorneys Sahara Pynes and Emily Yukich as they host a free workshop for startups and emerging companies.

Enjoy breakfast on us as you learn how to keep growing businesses on track, create invested teams, manage risk and cultivate top-notch culture.

When:
April 24, 2018, 8:30am – 10:00am

Where:
Fox’s Los Angeles Office
10250 Constellation Blvd.
Suite 900
Los Angeles, CA 90067

Agenda:
8:30 – 9 am: Registration and Breakfast
9 – 10 am: Presentation

We invite you to register for this event, and hope to see you there.

Recently, we discussed generally the NVCA’s updated model legal documents on this blog. Of particular interest in the new forms is the NVCA’s attention to anti-discrimination and anti-harassment policies for emerging companies. Discrimination and harassment issues have impacted many industry-leading companies in the last year – and investors, board members and company executives all have aligned interests to ensure that the companies they are building are actively working to prevent discrimination and harassment.

Word cloud of harassment-related termsTwo of the documents published by the NVCA are the “Sample H.R. Policies for Addressing Harassment and Discrimination” and the “Sample H.R. Best Practices for Addressing Harassment and Discrimination”. Although the sample documents state that they were developed for use by venture capital firms and are not designed to be used as models for other companies without legal guidance, the documents provide a general framework that may be useful to many growing companies when considering how to implement such policies.

Key provisions covered by the documents include: the company’s mission statement, provisions explaining the company’s policies relating to harassment and discrimination, definitions of prohibited conduct, and examples of prohibited conduct. The documents include bracketed optional provisions that apply in certain states and localities, as well as a link to California’s anti-harassment pamphlet that must be given to all new hires.

In addition to these general documents, the NVCA has published documents that apply in several key jurisdictions where startups are frequently located. Examples include the sample Diversity and Inclusion Policies for San Francisco businesses and a Diversity Policy designed for use by businesses located in New York.

These documents provide a useful starting point for emerging companies as they develop policies relating to anti-discrimination and harassment, even if the documents are not designed to be used in the same off-the-shelf manner as the NVCA’s model legal documents.

Startups represented by seedling growthFor early-stage companies in need of capital, finding potential investors can be difficult and time-consuming, especially when conditions in the capital markets are tight. For many companies, using a “finder,” an individual or entity that identifies, introduces and negotiates with potential investors, to help locate potential investors may seem to be a promising solution to this problem. However, there are risks involved in using finders, including those arising from potential violations of the SEC’s broker-dealer registration requirements. These risks are significant and, as investors become increasingly wary of the potential consequences, could threaten a company’s ability to raise capital in the future and its prospects for long-term growth and success. Finders operating as unregistered broker-dealers also face significant risks, including the possibility of severe SEC sanctions.

On April 12 at the ABA Business Law Section Spring 2018 Meeting in Orlando, Fox partner Emily Yukich and associate Matt Kittay, as well as Martin Hewitt, prominent New Jersey attorney and chair of the ABA’s Committee on State Regulation of Securities, will provide an in-depth CLE presentation on these risks. They will discuss the main risks finders face when acting as an unregistered broker-dealer, cover a critical SEC No Action Letter on the topic (the M&A Broker Letter), and will look at certain state regimes in applying the general prohibitions and restrictions in place.

The program will take place from 9:00 AM to 10:00 AM at the Rosen Shingle Creek in Orlando.  If you’d like to attend, please register for the Spring Meeting on the ABA’s website.

The National Venture Capital Association (NVCA) publishes model legal documents for venture capital financings, including a Certificate of Incorporation, Preferred Stock Purchase Agreement and Investors Rights Agreement. These documents enjoy wide industry acceptance as baseline agreements that parties and their counsel can tailor for each deal. They also include commentary on East and West Coast practice and bracketed alternative provisions to insert/omit depending on the deal terms. Perhaps most attractive to the parties, starting from a standardized form can decrease legal hours (and, more importantly, fees) from term sheet to closing.

Venture capital
Copyright: ar130405 / 123RF Stock Photo

Recently, NVCA updated the model legal documents for the first time since 2014. Considering the wide use of these documents, these revisions are likely to impact future VC financings. Here are some of the key changes:

Certificate of Incorporation

  • Protective Provision for Cryptocurrency/Blockchain Issuances: VCs typically negotiate for veto rights over a company issuing additional equity and debt securities. Now, the model Certificate includes a protective provision giving investors the right to veto token, cryptocurrency and blockchain-related offerings.
  • Redemption Rights: VCs might negotiate for a redemption right, which requires the company to repurchase their preferred stock under certain conditions.  If the company does not fulfill a redemption request, the model Certificate now includes a high rate of interest on the redemption price of any shares not redeemed “for any reason”. Recent case law suggests that a board may be protected by the business judgment rule if it determines not to use funds to redeem preferred stock despite an obligation to do so.  (See e.g., TCV VI, L.P.  Trading Screen, Inc., Case No. C.A. 10164-VCN (Del Ch. Ct. Feb. 26, 2015); SV Investment Partners, LLC v. Thoughtworks, Inc., Case No. C.A. 2724 (Del. Ch. Ct. Nov. 10, 2010). Triggering an interest payment “for any reason” gives investors increased leverage and some compensation.

Stock Purchase Agreement

  • Provisions for Life Science Transactions: Life science companies are attractive to VCs due to their potential for rapid growth and significant ROI. The updated Stock Purchase Agreement includes provisions specific to life science transactions.  These include more robust treatment of milestone closings, including undersubscription procedures and penalties for an investor’s failure to close, and new reps and warranties related to government and university sponsored research, clinical trials and FDA approvals.

Investors Rights Agreement

  • Anti-Harassment Covenant: In a timely addition, the Investor Rights Agreement now includes a covenant requiring the company to adopt an anti-harassment policy and a code of conduct governing appropriate workplace behavior. NVCA recently published a set of model documents and resources addressing harassment and discrimination.

Voting Agreement

  • Drag Along Rights: A drag along provision can permit VCs to “drag” the junior preferred and common holders into a sale of the company.  Under certain circumstances, dragged shareholders can receive little or no compensation in a drag sale, which may prompt a legal challenge.  The updated drag provision is intended to more effectively implement drag transactions and reduce the likelihood of a minority stockholder claim.

Users already familiar with NVCA’s model documents will be glad to see the revisions are not extensive.  However, given the wide acceptance of these forms, it’s safe to say that the updates will be impactful. This is especially true with respect to anti-harassment policies, which is both a high-profile issue and has obvious benefits for all parties.  Stay tuned to Emerging Companies Insider for a follow-up blog addressing NVCA’s new model documents addressing harassment and discrimination.

Over $1.5 billion has been raised by token offerings – also known as initial coin offerings or ICOs – so far in 2017. Not surprisingly, many startups are eager to capitalize on this possible funding source.

Initial Coin Offering (ICO) concept illustrationAlthough ICOs can be a useful method of raising capital, a number of legal issues must be considered in structuring and completing an ICO. One such issue is whether the tokens being offered in an ICO will be considered securities. A report issued by the SEC late this summer highlights the issue.

The SEC’s report was related to a token offering by an organization called The DAO. In its report, the SEC concluded that the tokens issued by The DAO were securities. Prior to the issuance of the SEC’s report, some advisors were telling startups that ICOs would not raise the same sort of securities concerns as traditional capital raises. Although the SEC has not issued formal guidance or regulations in this area, the report makes it clear that at least some tokens will be considered securities and that some platforms will be considered securities exchanges.

Many practitioners argue that there is a distinction between “security tokens” (designed to raise capital) and “utility tokens” (designed with some functionality and not purely to raise capital). The analysis in determining whether a token is a utility token is complex. Some tokens with utility characteristics may even be securities.

The law surrounding ICOs and the treatment of tokens is still evolving. Startups wishing to purse an ICO should seek legal advice early in the process. The danger of not doing so can be dramatic – since the date of the SEC’s report, at least one ICO was cut short after the SEC launched an inquiry into the ICO. The founders had not considered securities implications of conducting the ICO and ultimately decided to refund the funds raised to investors.

 

Quick quiz:

  • If your startup is seeking investors, will you have more success with private equity or venture capital firms?
  • How about when you’re looking to sell that company?

Businessman giving Vulcan greeting from Star TrekThe answers are (1) venture capital and (2) private equity.  If you weren’t sure, you’re not alone; the terms are often confused or used interchangeably.  However, PE and VC firms generally have very different investment strategies.  Understanding the distinctions may help save time and money and…perhaps…save face (i.e., not everyone will judge you for confusing Star Wars and Star Trek, but others will never forget).

Like most either/or categorizations, the distinctions blur in the middle, making generalization dangerous.  But in basic terms, here is what you need to know to avoid that awkward Han Sulu moment.

Characteristics of a PE investment (or, investing by Vulcan rationality)

PE firms typically invest in existing companies with a quantifiable track record (including proven cash flow), existing products or services, and potential for value creation.  PE investors may also consider businesses that complement their existing constellation of portfolio companies.  Therefore, whether or not PE firms invest in a company is a highly data-driven decision.  PE firms purchase a majority stake (often 100%) in their target investments.  This permits them to take an active role in their portfolio companies and to create value through financial engineering and restructuring.  In broad brush terms, this investment strategy focuses on value.  PE firms purchase underperforming or undervalued companies intending to guide them to optimal performance, increase their value, and sell them for a profit.  In other words, PE firms help existing companies realize their potential and boldly go where they have not gone before.  Because this strategy applies in many circumstances, PE investments are made across a wide set of industries.

Characteristics of a VC investment (or, investing by Dagobah ecosystem)

VC firms typically invest in emerging companies, which may have no or a limited operating history, but potential for light speed growth.  Therefore, whether or not VCs invest in a company is a holistic decision involving analyzing ideas and people (i.e., the business plan and the founders’ and management team’s ability to execute it).  To mitigate risk, VCs diversify their investments by making minority investments across a universe of startups.  Because they purchase smaller stakes, VCs have less control than PE firms over the day-to-day operations of their portfolio companies; however, VC’s often retain veto rights over certain major decisions.  In broad brush terms, this investment strategy focuses on growth.  VC firms invest early in the hopes of sharing in the upside upon exit or IPO.  These criteria keeps many VC investments industry-specific (e.g. technology and life sciences).  Although startups often fail, VCs can earn attractive returns if even one rebellious company blows up and disrupts an existing empire.

Of course, PE and VC investments have similarities, not the least of which is seeking above market returns.  The primary difference is how they arrive there.  From a company’s perspective, VC and PE firms serve distinct purposes and are appropriate at different stages of a company’s life cycle.  Entrepreneurs must understand the differences between VC and PE firms and their investing philosophies to ensure they’re approaching the appropriate investors at the right time.  Of course, there is much more to consider.  This is just a high level overview intended to demonstrate that there is a difference.  In a critical moment, remembering that PE firms invest like Vulcans and VCs invest like Jedis might remind you of the key distinctions.

An abbreviated version of this article will appear in the American Bar Association’s Business Law Today, Fall 2017 Edition.

Is your startup brand so strong that consumers tattoo the logo on their arm? Or so hard to pronounce that investors, vendors and customers are disinclined to do business with you?

"Hello, my name is..." nametagAccording to a study published in the peer-reviewed academic journal Venture Capital, your company name matters even more than you think.  The study, entitled “The Effect of Company Name Fluency on Venture Investment Decisions and IPO Underpricing,” found that a startup’s name can seriously affect how a company is perceived by investors and customers alike.

Names that are easily pronounced, such as Uber and Lyft, are preferred by both early and late-stage investors. They tend to be offered more money, whether its through crowd funders, angel investors, VCs or IPO investors.  The study also found that “uniqueness” is virtue, but only with early-stage investors.  According to the study, since very little is known about a company in the early stages, unique names give the impression there is something special about the company.

On the other hand, difficult names “evoke cues of unfamiliarity and create a perception of high novelty, which is valued by these pre-venture stage investors,” according to the study. The study cautions, however, that novelty wears off by later stages, when unique names can make more risk-adverse investors feel uncomfortable.

This study adds to the list of impacts that name can have on a venture, including:

  • An easy to pronounce and remember company name could get you more funding and customers as you grow
  • Company names and logos which are “unique”, “unobvious” and/or “novel” when associated with your services get stronger trademark protections faster with the USPTO
  • Securing 360-branding including a web domain, Instagram and Twitter handle, and an issued trademark on the name and logo early in the process with the help of an IP attorney saves cost and time as you roll out your product

Often founders launch or pivot on a name only to realize the Instagram account or web domain is taken, causing confusion in the market and requiring expensive litigation or licensing deals to consolidate your brand.  A strategic approach to choosing your company name ensures a consistent and easy brand association across digital and print media as well as adding to your successes with investors and customers, saving you time and money as you go to market.

Debra L. Gruenstein writes:

Private equity firms have recently been deploying capital to purchase medical and dental practices.

Caduceus casting a dollar sign shadowThe typical transaction would involve the purchase of multiple practices and the establishment of a management company. The physicians would be paid a multiple of earnings and receive some rollover equity in the management company. Although many states have had a prohibition on the corporate practice of medicine for years, recent cases in multiple jurisdictions have made the structuring of these transactions more complex and subject to challenge.

In the recent case of Allstate Insurance Company vs. Northfield Medical Center, P.C., the New Jersey Supreme Court found that the control over the medical practice owned by a chiropractor violated the corporate practice of medicine doctrine, resulting in a verdict in favor of Allstate of almost $4 million. Previously, the District Court for the Eastern District of Louisiana, interpreting Pennsylvania law, found that the ability of the management company to participate in the profits of a dental practice, was akin to a partnership interest, one that would be precluded by the Pennsylvania corporate practice of medicine doctrine. Warren J. Appallon, D.M.D., P.C. vs. OCA, Inc., 592 F. Supp. 2d 906, and the similar case, OCA, Inc. v. Kellyn W. Hodges, D.M.D., M.S., 615 F. Supp. 2d 477.


Debra L. Gruenstein is a partner in the firm’s Health Law and Corporate departments, practicing in the Philadelphia and Denver offices.  This piece is slated to appear in an upcoming edition of the American Bar Association’s Business Law Today.

The Problem

As every founder knows, starting and scaling a company is an extremely difficult and multi-faceted undertaking. In addition to the primary goals of developing a viable product, finding (and in some cases building from scratch) a robust market, and raising the capital necessary to sustain their business and operations, founders and their core teams also grapple with the day-to-day management and operations of a growing enterprise, whether that be personnel issues, forecasting cash needs and burn rates or tackling the legal and regulatory hurdles that often go hand-in-hand with the creation of disruptive technologies. Unfortunately, given the size and complexity of the average founder’s workload, it is no surprise that emerging companies of all sizes occasionally neglect to heed the advice of their attorneys and ensure that any and all corporate actions taken by the company and its officers are properly authorized and, if necessary, approved by the company’s Board and stockholders.

The Exposure

Copyright: tang90246 / 123RF Stock Photo

Under the Delaware General Corporation Law (the “DGCL”) otherwise permissible corporate acts that do not satisfy the consent and other procedural requirements of the DGCL, the corporation’s organizational documents or any other agreement to which the corporation is a party, are deemed to be “defective corporate acts” and are generally held to be void and of no legal force and effect.[i] The pre-2014 historical body of Delaware case law held such corporate acts, taken without “scrupulous adherence to the statutory formalities” of the DGCL, to be acts undertaken “without the authority of law” and therefore necessarily void.[ii] Prior to the enactment of Sections 204 and 205 of the DGCL, the relevant line of Delaware case law held that corporate acts, transactions and equity issuances that were void or voidable as a result of the corporation’s failure to comply with the procedural requirements of the DGCL and the corporation’s governing documents could not be retroactively ratified or validated by either (i) unilateral acts of the Corporation intended to cure the procedural misstep or (ii) on equitable grounds in the context of litigation or a formal petition for relief to the Court of Chancery.[iii] In short, there was no legally recognized cure for such defective actions and the company was left forever exposed to future claims by disgruntled shareholders, which could ultimately jeopardize future financings, exits and ultimately the very existence of the company.

The Statutory Cure

Luckily, for those founders who make the potentially serious misstep of failing to obtain the required consents and approvals before taking a particular action (e.g. issuing options to employees or executing a convertible note or SAFE without the prior consent of the Board), in 2014 Delaware enacted Sections 204 and 205 of the DGCL, which served to clarify the state of the law in Delaware and fill a perceived gap in the DGCL by providing new mechanisms for a corporation to unilaterally ratify defective corporate acts or otherwise seek relief from the Court of Chancery.[iv]

While both Sections 204 and 205 were intended to remedy the same underlying issue and provide a clear process for ratifying or validating a defective corporate act, the mechanics set forth in the respective sections take disparate routes to arrive at the intended result:

  • Section 205 provides a pathway for ratification that runs through the courts, allowing a corporation, on an ex parte basis, to request that the court determine the validity of any corporate act.
  • Section 204, on the other hand, is considered a “self-help statute” in the sense that the procedural mechanic provided for in the statute allows a company to ratify the previously defective act unilaterally, without the time and expense involved with petitioning the court for validation of the corporate act in question.

In the case of early stage companies, the expenditure of the heavy costs and valuable time associated with seeking validation in the Court of Chancery render Section 205 a less than ideal tool for curing defective acts. This post therefore focuses on Section 204, which provides a far less onerous mechanic for ratifying defective corporate acts, allowing a corporation to cure past errors “without disproportionately disruptive consequences.”[v]

Section 204 in Practice

Section 204 provides Delaware corporations with a procedure to remedy otherwise void or voidable corporate acts, providing that “no defective corporate act or putative stock shall be void or voidable solely as a result of a failure of authorization if ratified as provided in [Section 204].”[vi] Pursuant to Section 204, a corporation’s Board may retroactively ratify defective corporate acts by adopting written resolutions setting forth:

  • the specific defective corporate act(s) to be ratified;
  • the date on which such act(s) occurred;
  • the underlying facts that render the act(s) in question defective (e.g., failure to obtain the authorization of the Board or inadequate number of authorized shares); and
  • that the Board has approved the ratification of the defective corporate act(s).

Additionally, if a vote of one or more classes of stockholders was initially required to authorize the defective act at the time such act was taken (e.g., the approval of a majority of the Series A preferred stockholders in the case of an act that falls within the purview of the Series A protective provisions), then ratifying resolutions of the relevant class of stockholders are also required in order to cure the prior defect in the corporate act.

In sum, founders and their Boards should, at minimum, undertake the below listed procedural steps* in order to ensure that otherwise defective corporate acts are cured and ratified in the manner prescribed by the DGCL.

  • A resolution by the Board setting forth (i) the defective corporate act to be ratified, (ii) the date of the defective act, (iii) if shares or other equity is involved, the number, class and date of the equity issuance, (iv) the reason for the defect, and (v) the approval and ratification by the Board of the defective corporate act.
  • Approval of the stockholders or a particular class of stockholders (in the form of a written consent) if such an approval was required at the time of the defective corporate act.
  • Proper notice of the ratification sent to all stockholders (including stock that may have been invalidly issued). The notice must include a copy of the ratifying resolution/consent and an explanation that any claim that the ratification in question is not effective must be brought before the Court of Chancery no later than 120 days from the effective date of the ratification.
  • In certain circumstances, the filing of a “Certificate of Validation” with the Delaware Department of State to cure the defective corporate act being ratified (e.g., if shares were issued without filing the necessary Certificate of Amendment to increase the authorized shares of a corporation).

*This list should not be considered all-inclusive. Each situation is unique and further actions may be required depending on the underlying facts and the cause of the defect in question.

Startups represented by seedling growthTakeaways

The potential adverse impact of an uncured defective corporate act cannot be understated. For an early stage company seeking to raise capital from venture investors or other outside parties (or eventually exit through an acquisition), the risks associated with such defective acts are particularly acute. As a practical example, a corporation’s failure to observe the proper procedures in the election of a director can result in the invalidation of such election. In the event of such a defective election, actions taken by, or with the approval of, the improperly elected Board may be void or voidable. This or other defective corporate acts may result in the corporation being in breach of representations and warranties in any number of contracts, including stock purchase agreements executed as part of a financing round or M&A transaction.

Generally speaking, relatively extensive due diligence is typically the first step in all venture financings and other major corporate transactions. As part of this process, counsel for the investor or acquiror will undoubtedly review all material actions of the company along with the corresponding Board and stockholder consents as a means of “tying out” the company’s cap table. Any defective corporate act that was not later ratified by the company in accordance with Section 204 or 205 will at best need to be ratified or validated in advance of the closing of the transaction, and at worst may result in either (i) a reduction in the company’s valuation due to the perceived risk that past actions are ultimately void or unenforceable, or (ii) in extreme situations, the abandonment or termination of the transaction.

In an ideal world, companies of all sizes would always observe the proper procedures in authorizing corporate acts and ensuring that all other necessary steps are taken to ensure the validity of such actions. Unfortunately, in the fast-paced and often frenzied world of a startup, certain “housekeeping” items occasionally fall by the wayside. Upon the discovery of a defective corporate act by a company or its counsel, it is vital that the proper ratification procedures be undertaken in order to ensure that any and all past actions that could potentially be rendered defective are rectified and ratified in accordance with Section 204 (or in some cases Section 205) of the DGCL.


[i] A “defective corporate act” includes any corporate act or transaction that was within the power granted to a corporation by the DGCL but was thereafter determined to have been void or voidable for failure to comply with the applicable provisions of the DGCL, the corporation’s governing documents, or any plan or agreement to which the corporation is a party. See 8 Del. C. § 204(h)(1); See also, e.g., Blades v. Wisehart, C.A. No. 5317-VCS, at 8 (Del. Ch. Nov. 17, 2010) (requiring “scrupulous adherence to statutory formalities when a board takes actions changing a corporation’s capital structure”); STAAR Surgical Co. v. Waggoner, 588 A.2d 1130, 1136 (Del. 1991) (“stock issued without authority of law is void and a nullity”).

[ii] See, e.g., Blades v. Wisehart, C.A. No. 5317-VCS, at 8 (Del. Ch. Nov. 17, 2010) (requiring “scrupulous adherence to statutory formalities when a board takes actions changing a corporation’s capital structure”); STAAR Surgical Co. v. Waggoner, 588 A.2d 1130, 1136 (Del. 1991) (“stock issued without authority of law is void and a nullity”).

[iii] Id.

[iv] See H.B. 127, 147th Gen. Assemb., Reg. Sess. (Del. 2013): “Section 204 is intended to overturn the holdings in case law . . . that corporate acts or transactions and stock found to be “void” due to a failure to comply with the applicable provisions of the General Corporation Law or the corporation’s organizational documents may not be ratified or otherwise validated on equitable grounds.”

[v] In re Numoda Corp. S’holders Litig., Consol. C.A. No. 9163-VCN, 2015 WL 402265, at 8 (Del. Ch. Jan. 30, 2015).

[vi] 8 Del. C. § 204(a).