Read the case study “Starting a New Health Care Services Company” • Identify the legal structure and discuss issues involved in starting the business. • Based on the above discussion, what type of legal structure, or type of entity, would you recommend and what formation documents are necessary for that type of entity? • Are there additional initial legal contracts you would want in place as you start the business? If so, please identify the type of legal document and state why you deem it to be important.
Discussion Question
Read the case study “Starting a New Health Care Services Company”
• Identify the legal structure and discuss issues involved in starting the business.
• Based on the above discussion, what type of legal structure, or type of entity, would you recommend and what formation documents are necessary for that type of entity?
• Are there additional initial legal contracts you would want in place as you start the business? If so, please identify the type of legal document and state why you deem it to be important.
Starting a New Health Care Service Company
In the fall of September 2006, Peter, the chief technology officer for a health care technology company, resigned from his position. He then contacted Jennifer, who was a hospitals director of marketing, in charge of advertising and promotions. Both discussed an idea to start a company that offered health care providers claim processing services. Peter and Jennifer committed to start a new company called New Health Claim Processing. This name was important, for it would carry great weight in the industry. Peter and Jennifer had developed a unique business model to process claims at a very low cost while providing a high degree of customer service. The company would lease all the back-end hardware and write the software necessary to operate the business. The company would also provide all implementation, maintenance, and other ongoing support that would be required to use the service.
Peter and Jennifer invited Andy and Grace to join their effort. The four had met in Professor Jack Kaplans entrepreneurship course at Columbia Business School. They were all technologically savvy and had outstanding grades and extensive relevant work experiences. Their credentials would look good for raising capital. This core group of four refined Peter and Jennifers initial ideas and started drafting a business plan.
As part of the business plan, the group decided that they needed a CEO to attract the venture capital they believed they needed. Before the business plan was complete, they called their friend Michael with a proposition. They promised that they would make it worth his while if he would lead the company as the CEO. Two months later, the business plan was complete. The group of five was very excited as Michael took the lead in seeking funding for the venture. Michaels early contacts were successful. Within weeks of completing the business plan, he had scheduled an appointment to present the business plan to a venture capital firm.
During the presentation, the venture partners became interested in the companys vision and strategy and in the business processes for delivering customer service. However, as the due diligence questions got around to organization, Michael became quiet as the partners asked him about the type of company formed and the ownership of the business. A moment of silence occurred when one partner asked who owned the company. Michael had not yet settled how the ownership would be divided.
At the end of the all-day session, one of the venture partners told Michael in frank terms that he had handled the ownership questions poorly. He referred Michael to Cathy, a partner at a local law firm who was a close friend of his. Michael immediately made an appointment with her for the next day.
Cathy was an expert in organization and stock option incentives programs. She began by asking Michael for a retainer, which he paid out of his personal funds. Michael gave her a brief overview of the situation and arranged to bring all members for questioning.
Cathy soon uncovered the following:
• Jennifer had left her previous company three months ago but did not tell Michael that she was still on retainer. She had also signed a nondisclosure agreement on the day she left.
• Peter had taken from his previous job his client list and index of all his personal contacts. He also took a notebook and articles on health care products. Peter had received a letter from his previous company stating, “It has come to our attention that you may have in your possession confidential documents belonging to the company.”
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