Where Angels Fly: Finding angel investors and seed financing for your startup

Where Angels Fly: Finding angel investors and seed financing for your startup

Raising money is tough these days. But try asking for money from someone that just saw their portfolio value decline by twenty to forty percent in 2008. Now that is a tough assignment… and what is occurring more often these days as promising startups pitch to individual Angels or Angel associations. If you plan to reach out to private individuals and contacts, or formal Angel groups, this post has some helpful information – including where to look and how to target your efforts.

Inc., LLC, S-Corp., Del., Wash.: Do these choices matter?

Inc., LLC, S-Corp., Del., Wash.: Do these choices matter?

Whether you decide to consult with an advisor, an attorney or an accountant to determine the best form for your company or if you decide to forego the advice and go it alone, be sure you make a decision based on an understanding of how your choices affect the business and fit into your business strategy. Spending the time and money up front will help ensure that you make the right choices for your entity.

Fence-Riding: Startupping while employed elsewhere

Fence-Riding: Startupping while employed elsewhere

If you are employed elsewhere and have a side project or part-time startup, what should you watch for?

Fundraising in a down economy?  Try Uncle Sam.

Fundraising in a down economy? Try Uncle Sam.

You may find you qualify for a U.S. Government-backed microloan or may find that your product or team would be eligible for the Government Contracting programs. See what resources are available from a quick google search and you may wind up surprising yourself.

Startup vs. Small Business: What am I forming?

Startup vs. Small Business: What am I forming?

Does it matter if you say you are the forming a startup or a small business? Perhaps smarter minds would differ, but I happen to think it does matter. It may not be the difference between success or failure, but it matters.

Learn That Name: The Beginning

Learn That Name: The Beginning


I have to say, it has been an exciting past four days.

Learn That Name iPhone App

Learn That Name iPhone App

In the matter of four full days, I pitched an idea, met an awesome team, helped build an iPhone app, won an audience vote for the top startup, formed a business, waded into a controversy, got covered on slashdot and engadget, and readied the launch of our app on Apple’s AppStore.

Yeah, not half bad for four days…

I decided the experiences in the past weekend (and beyond) have been unique and surreal enough that I need to capture them somewhere.  So, where better than my blog.  In truth, I’ve got a bit of catching up to do to get my story current, so the next series of posts may lag reality a bit, but ’tis the realities of life.  So, without further ado.  The story of Learn That Name.

The Backstory of Startup Weekend Redmond (or the Pre-Beginning)

In case readers don’t know, I’m a lawyer.  I focus on technology companies — lots of startups and emerging companies, many of which are or will soon be funded by venture or angel capital.  So I love working with tech people.  But never done a day of programming in my life (except for some Dos applications when I was 10).  And still, I’m always game for a challenge and this story has proven that to be the case.

In January 2009, I had the pleasure of attending my first Startup Weekend held at Google’s Offices in Fremont.  I worked with a team on a project called “Tweet Reporters” during the weekend.  Fun time; decent idea; but probably too much for a weekend.  However, I was able to soak in the experience and meet a ton of people, which I considered a win.

Fast-forward to the summer of 2009.  A new team has taken over Startup Weekend and I’m introduced to them by a good friend Rebecca Lovell.  I meet Clint Nelsen and Marc Nager over beers at Fado’s and instantly am struck by their enthusiasm, creativity and vision.  Having previously participated in a Startup Weekend event, I can quickly see that they’ve identified the key strengths and the key challenges for the organization.  And while both Marc and Clint may not have been grizzled veterans, they asked all the right questions and seemed ready to dive into an exciting adventure.

Over the next few weeks, Clint, Marc and I continued to talk regularly.  I was excited about the possibilities ahead — and they were excited about their next event to be held up in Redmond in connection with BizSpark, a Microsoft program aimed at small businesses and startups.  I will admit, I was slightly skeptical that it was a good idea to partner so closely with any company, including Microsoft (the web address was bizspark.startupweekend.com which seemed to potentially be at conflict with Startup Weekend’s historically agnostic view about technologies and platforms), but Clint and Marc convinced me otherwise.  Seems that it was actually laid off Microsoft workers who proposed the idea and BizSpark agreed to help orchestrate and host the event.

As the event neared, I was pleasantly surprised to hear how quickly the event was selling out and at the types of people throwing their hats in the ring to attend.  And frankly, I was honestly looking forward to the event.

The Pitch — Day 1: Friday, August 28th

As the Friday evening kick-off of Startup Weekend Redmond arrived, my colleague Jason Barnwell and I were looking forward to the event and drove to Redmond together.  Jason is a developer turned attorney and I was an attorney turned… well, just an attorney.  But I do love working with startups and entrepreneurs, and connecting with people in the community, so I figured it would be great. Both Jason and I planned to attend the pitches on Friday, skip the actual “business building” part of the weekend and return on Sunday for the demos and presentations.  I had already scheduled an event on Saturday evening and was in a wedding for Sunday afternoon, so even if I wanted to stay, probably wasn’t going to happen since I was booked solid.

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Gottcha: What to watch for when reviewing a contract.


handshakeThere are a few provisions that may trip up a company that doesn’t read the language closely or fails to understand the impact of certain provisions.  Here are a few provisions to pay close attention to:

•    Ownership of Intellectual Property.  In the event you are looking to enter into a contract with a consultant, an employee, or any other third party, you should be certain to consider how any newly created Intellectual Property will be owned.  For many companies, they will want to be certain that they retain ownership rights to the intellectual property.  However, for more complex joint development projects, there may be cases where you will assign all or some portion rights to the intellectual property to another party.

•    Assignment Provisions.  Assignment provisions will require a company to get permission from the other company in the event that they wish to assign or transfer the contract to another party.  This is particularly important in the event a company is acquired or sold because it may require the company to obtain consents from all third-parties before the acquisition can be completed (which is sometimes difficult).

•    Exclusivity or “Most Favored” Language.  The Exclusivity provisions will require you to limit your actions in some way — perhaps that the other party is the only one who can distribute the product or has first rights to distribute.  The “Most Favored” provisions will require you to give the other party the best terms you give to any other customer — such as the lowest price, the best discounts, etc.  These may seem like harsh provisions (and in some cases they are), but it may be restrictions you can live with if they have limitations as to geography, industry, time, etc.

•    Attorneys Fees.  Be aware of any provision that requires either party to be responsible for attorney’s fees associated with negotiating or finalizing the agreement.

•    Use of Trademarks or Customer Names.  In the event you want to be able to publicize a customer list, be certain there are no restrictions on use.

•    Termination and Renewal Provisions.  Be aware of any provisions that allow the parties to terminate the contract early, particularly provisions that allow for termination in the event of even a minor breach without the opportunity to rectify the breach.  In addition, be aware of any provisions that allow for the automatic renewal of the contract.

•    Compliance with reporting provisions.  Some contracts will include language obligating the other party to provide certain ongoing reports or information to various parties such as federal or state agencies.

•    Obligations on Employees.  Contracts will sometimes require all employees that interact with the other party to be screened or drug tested.  Ensure that complying with these requirements will not breach any contracts you have with your employees.

•    Access to premises.  Be aware that contracts may permit the other party to enter your facilities.

•    Payment Terms.  Look for the terms of payments due as well as whether any payments due will be accelerated in the event that either party fails to perform certain activities.

Be sure to read every contract you sign — language that may seem harmless can come back to bite you.  And, if you have questions, ask someone such as your attorney, an advisor, a board member, etc.

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Taxes: How to minimize the pain of doing your business taxes this year

Taxes: How to minimize the pain of doing your business taxes this year


calculatorAh, taxes… few people (if anyone other than my wife, who going to be a PhD in accounting…) like to do their taxes.  It means you have to hunt around for old receipts, try and remember what some expenses were, and even pay in more money than was already withheld.  No doubt that it is a pain.  So why do a post about taxes during the summer months when tax day seems so far away?  Simple: Any efforts you make now to get organized can save you time (and probably money) down the road.

So, how can you minimize the pain?

A bit of filing and organization can go a LONG way to prevent some pain down the road.  (Think about it like flossing… will save some drilling in a future visit to the dentist).  And although it may seem fairly obvious, proper recordkeeping is one of the most important considerations for any startup company, especially in the early stages when you are do not have an established set of policies, an experienced accounting staff, or chief financial officer. Recordkeeping for tax purposes should be integrated into an entire document retention policy for the company. Most of the items discussed below will be key documents for accounting purposes — thanks to the help of my wife Allison for her tips.

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Board Members: What role do they play in your business?

Board Members: What role do they play in your business?


boardAn entrepreneur recently asked what he should look for in a potential director on his board.  That’s a pretty tough question as any entrepreneur can tell you.  As I started listing off all the potential traits that would be important - prior startup experience, industry contacts, mentorship, leadership, board experience, operational expertise, etc. - I realized I may be describing a person that could never exist…

So instead of looking at all the traits a board member should have, I thought it was valuable to the entrepreneur to describe the key roles a board plays.  By understanding what a Board of Directors is responsible for (and is involved with) in a company, hopefully you can identify the right mix of people to round out your board.  So if you board is full of people with lots of industry contacts, perhaps you need to look for someone with prior startup experience or perhaps someone with finance and accounting skills.

There are five key roles a board of directors’ play within the company, and particularly play with respect to a high technology startup company. Those roles are:

  • Legal Role
  • Representative Role
  • Strategic Role
  • Advisory Role
  • Service Role

The Legal Role played by the board of directors is determined by federal and state laws (primarily state laws governing the state of incorporation, but other laws may also be implicated), rules and procedures set forth in your corporate Articles or Certificate of Incorporation and corporate Bylaws, and additional rules and statutes from the Securities and Exchange Commission, Financial Industry Regulatory Authority or other entities that regulate certain stock exchanges.

The Representative Role relates to the relationship between the corporate shareholders and the board of directors. As discussed previously, the board of directors historically had been elected by the shareholders as representatives and acted out the will of the shareholders. And while that relationship does remain in some senses, particularly in that the shareholders continue to elect the board, the power has shifted in many cases to the hands of the directors. Even so, it is still important to recognize that the board does represent the interests of the shareholders and is responsible for providing oversight in the interest of all shareholders of the corporation. This relationship can be at issue in cases where a shareholder (oftentimes a holder of a sizeable stake of stock) believes the board is not acting in the best interests of the shareholders, but courts have tended to give substantial deference to the board.

The Strategic Role largely stems from the role the board plays in corporate decision-making. Due to the fact that a board will be responsible for approving decisions from potential acquisitions to option grants to new hires, the board will hold an important role with respect to certain strategic decisions. The challenge that some corporations is the balance between the board and management in these strategic decisions. However, there has been research that suggests there is a positive relationship between a board’s involvement in corporate strategy and the performance of the company.

The Advisory Role for a board of directors is most often seen in the earliest stages of corporate development. Early investors in the company, oftentimes who represent venture capital funds or other serial startup investors, will provide capital for the corporation, but may also view their role to guide and assist the company in its earliest stages. The experience many of these directors will have of working with numerous companies in a similar market, at a similar development stage, or facing common market conditions gives the board the ability to provide advice and insights to the company.

The Service Role of the board and its members come as a result of the fact that many small and early stage companies will not pay their board members until the company matures or will only pay a nominal fee for board service. Compensation will usually be in the form of stock options, reimbursement for travel expenses or stipend for meeting attendance. At least in some senses, the board and its members will be providing service to the company and its contributions will be aimed at adding long-run value to the entity.

When selecting anyone to join a board, remember the varied roles the board fills — and look to create a board with the right mix of personalities, skills and backgrounds to fill the roles.  Ultimately, a board can be a key extension of the management team and instrumental to the business’ success.

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VC Odds: What are my chances of raising money from VCs?

VC Odds: What are my chances of raising money from VCs?


handshakeFor many technology entrepreneurs, raising venture capital is an important part of their business strategy and may be a goal in and of itself.  As a result, I’m often asked: “What are my chances of being able to raise money from venture capitalists?”

Obviously, I’m not a venture capitalist (we lawyers, don’t pretend to know what exactly a venture capitalist is looking for and what they will require before making an investment).  However, you start to get a fairly decent sense of what a VC won’t fund.  I’ll save that list for another post and another time…

So my general answer to that question about whether or not an entrepreneur could raise VC funds is: it depends. It depends on the team you’ve assembled, the technology itself, the market for your technology, the right timing, and a little bit of luck. And while that may be the case, if you believe Sam Altman, the founder of Loopt, “If you’ve got a good idea, market, and team, raising money won’t be your problem.”

So, what are the odds then?

The truth is, the “it depends” answer isn’t very satisfying to most people. Entrepreneurs want to know their chances.  In a prior post, I wrote about the VC “Fit” Test.  That is one way to gauge if you may be a good fit or not (although, again, lots of subjectivity there).  The other way to gauge interest is to sit down with a few partners at funds and see the reaction (but that means you can get those meetings or are far enough along for them to be truly interested).

So, what about some more data into the chances of an unnamed startup?  Well, anecdotal evidence suggests that between two and three percent of businesses seeking venture capital financing will ever receive institutional funding. The majority of these cases are because venture funding is not the right type of funding for the business (not passing the VC “Fit” Test….). Sean Wise looked further and interviewed a number of venture capitalists to find out where their deal flow came from and the sources of deal flow that had the highest probability of closing. While these are not scientific numbers, these figures should offer some insights into the way VCs see the sources of their deals.

What are the odds of getting a meeting with a VC firm based on:

  • an unsolicited business plan submission? Approximately 1 out of 100.
  • a solicitation from an unknown agent? Approximately 1 out of 50.
  • direct contact from venture fairs, financing forums, and other industry events? Approximately 1 out of 15.
  • referral from professionals with fund relationships (accountants, lawyers, and market dealers)? Approximately 1 out of 3.
  • referral from current and future investors? Approximately 1 out of 2.
  • referral from executives of a portfolio company in the VC’s fund or other stakeholder in the VC’s funds? Nearly 1 out of 1.

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Startup Capital: Do you have enough to startup?

Startup Capital: Do you have enough to startup?


Raising FundsI recently had a terrific conversation with a soon-to-be entrepreneur.  He had pretty much everything set — a unique idea, the right set of skills, co-founders who would bring a nice mix of talent, enthusiasm, connections, etc.  If you asked me, this seemed like a pretty good start to a startup.

Then I asked the question — “So what are you guys doing for startup capital?”

A blank stare came back at me.  “Startup capital?  We don’t need any yet.  Well, I mean we’ll probably do an angel round or something… but we don’t need that for a while.”

Well… you may not think you need startup capital, but odds are nearly every business requires something to startup (more than just sweat equity of the founders).  The question isn’t whether you’ll need it (you will), but is how much (typical range is $15-75K) and where to find it (check the mirror).

What is “startup capital?

Some people call this seed money; others call it startup capital or initial capital; and still others use terms like founder capital. The short of it is, that this cash represents what you needed that can’t be paid for with your sweat and your time.  Real cash expenses.

Unfortunately, what this promising entrepreneur I’d been speaking with failed to recognize is that it takes money to start a business — really nearly any business, even the most lean, bootstrapped business takes some cash to get it going.  And that isn’t the type money you raise from angels or the like.  This is real startup capital to buy things like office supplies, business cards, software, laptops, test equipment, licenses, paying for a developer or designer, etc.

How much startup capital does a business need?

Obviously, that depends — and it depends on what period of time we are talking about.  If you plan to bootstrap the entire way through, you may be talking one amount or if you are just trying to get setup and have a seed investor or angel investor lined up, then it could just be a month’s worth of startup costs.

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Fully-Baked: The real cost of adding a new employee


partners

It’s not too early for some in the media to start speculating that the recession is already over thanks to a few good days in the stock market (thanks CNN).  So, next up, job opportunities for some of our best and brightest startups, right?  Not so fast, unfortunately (thanks Congressional Budget Office).  But those rays of hope may mean light at the end of the tunnel — companies will be looking to hire again (sometime) and others will start looking to bring on consultants.

For that reason, it may be time for companies to start considering the costs of adding a new employee and thinking about strategic hires sometime in the near future (perhaps there is a talented individual who was laid off from another company that might be a perfect fit).  What some new managers fail to recognize is that the cost of the employee are more than just their salary (and even more than salary and benefits).  Think laptops, rental space (if you need office space), lunches, taxes, training, travel, and everything else that goes into an employee.

There is no set number on the full cost of an employee and in fact it usually depends on the job itself and what types of “add ons” the company offers.  But estimates range from 1.5x to 3x of salary for the ‘fully-baked’ cost of an employee — the cost including things like benefits, taxes, equipment, training, rent, etc.  While bringing on an employee may only cost you $30,000 in salary, depending on the other costs, this could actually result in additional costs to the business of $90,000.

So how can you determine the true “fully-baked” cost of an employee?

The cost to add each new employee represents more than just the salary you’ve agreed to in the offer letter. You’ll be responsible for costs from taxes and benefits to rent and equipment.

The Department of Labor provides information on the costs an average employee costs to the employer (these don’t factor in things like equipment costs, rental costs, or other costs not directly tracked by the DOL). According to the DOL, an average employee costs $25.93 per hour when you factor in costs of salaries, benefits, and taxes. While these figures represent useful information, you should note that these numbers represent a broad range of employees across all industries in the U.S. economy.

Private Industry Employer Compensation Costs

U.S. Department of Labor’s Bureau of Labor Statistics (June 2007)

Employer Cost

Cost per Hour

% of Total Costs

Wages and Salaries

$18.32

70%

Paid Leave Benefits #

1.77

7%

Supplemental Pay

0.78

3%

Insurance Benefits

1.97

8%

Retirement and Savings

0.88

3%

Legally Required Benefits *

2.21

9%

Total

$25.93

100%

Employer Costs of an Employee

Employer Costs of an Employee

# Paid leave benefits includes vacations, holidays, sick leave, and other leave.

* Legally required benefits include Social Security, Medicare, unemployment insurance, and workers’ compensation.

So while the Department of Labor information represents aggregate data, the information can be quite helpful to gauge what it will really cost to hire another employee. If you’d like to estimate the real cost of adding a new employee, you may consider multiplying the employee’s base salary by a multiplier that would reflect their salary, benefits, rent, equipment, training, and other general expenses associated with another team member.

For instance, looking at the chart below, you could see that if you planned to add two programmers at salaries of $50,000 each and one manager at a salary of $100,000 for the following year, you could be looking at an increase of expenses of up to $540,000. When making your budget to add headcount, it is important to include costs associated with the employee in addition to their salaries. This is just a helpful “big picture” tool and each company will likely need to adjust its calculations to fit its own operations, however it is helpful in gaining a quick sense of the true costs associated with increasing headcount.

As you consider whether to bring on a consultant or hire a new employee, be sure to compare apples to apples — which usually means the full-baked employee costs versus the consultant’s rate.  There are oftentimes other “benefits” to hiring an employee over a consultant (perhaps a greater sense of loyalty).

There are rays of hope out there — some companies (hopefully yours) is looking to hire.  Plan ahead for the cost of an employee to be sure your hires don’t break the bank.

Employee Cost

Multiplier

Salary of $50K

Salary of $100K

Salary

1.0

$50,000

$100,000

Benefits

0.2 – 0.4

$10,000 – 20,000

$20,000 – 40,000

Rent, Equipment, Training, Etc.

0.5 – 1.3

$25,000 – 65,000

$50,000 – 130,000

Total

1.7 – 2.7

$85,000 – 135,000

$170,000 – 270,000

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Shhhh…. Why startups should care about trade secrets?

Shhhh…. Why startups should care about trade secrets?


Don't forget to protect your company's intellectual assets by keeping a secret.

Don't forget to protect your company's intellectual assets by keeping a secret.

Trade secrets are an underappreciated tool in protection of intellectual assets of high technology startups. And it is surprisingly easy – just keep it a secret. Of course, there is a bit more to it, but that’s the concept in a nutshell. For a new company without the financial resources to build a substantial patent portfolio, trade secrets may be an important tool for your company as it grows.

Why should every entrepreneur care about trade secrets? Because using trade secrets may allow you to hold off on filing a patent or limit your need to file so many patents.  Of course it won’t work in every situation, but I’ve seen too many new startups sent $20,000 to $30,000 out the door on a patent filing, when they may have been able to save those funds until a later point.  For most startups, it won’t be your only strategy, but should be part of your overall strategy (and it sounds good in a pitch when you inform investors that certain assets are protected as trade secrets).

The commonly understood definition of a trade secret is any information, including a formula, technique, pattern, physical device, program, idea, process, compilation of information or other information that 1) provides a business with a competitive advantage (that is generally unknown and not readily discoverable), and 2) where the individual or company takes reasonable steps to protect the secret and maintain these protections, absent improper acquisition or theft. A trade secret right permits the owner of the right to act against persons who breach an agreement or a confidential relationship, or who otherwise use improper means to misappropriate secret information. This allows you to retain the right to the secrets that give you a competitive advantage.
In most cases, the owner of the trade secret has expended some costs to develop or exploit this trade secret. The scope of what qualifies for a trade secret is quite broad, even including negative information (where your efforts show that something is not possible and shouldn’t be researched or exploited further). The key for most startup companies is the information provides you a distinct competitive advantage – and therefore you take steps to protect this information.

Examples of Trade Secrets

  • Customer Lists
  • Software Code
  • Supplier Lists
  • Blueprints
  • Maps
  • Design Drawings
  • Business Plans
  • Company Records (ex. Personnel, Financial, Sales)
  • Chemical compounds
  • Business processes
  • Survey results
  • Prototypes
  • Research results
  • Sales and marketing plans

Trade secret rights are, for the most part, governed by state law. California courts have generally considered the following factors in deciding whether information constitutes protectible trade secrets of a company: (1) whether the information has economic value due to its relative anonymity in the industry; (2) the company’s efforts to keep the information secret, both outside the company and within the company; (3) the time and money spent by the company in developing the information; (4) the relative commercial value of the information; and (5) the ease or difficulty with which the information could be independently obtained by outsiders. The nature of the “reasonable efforts” necessary to protect a trade secret varies depending on the nature of the trade secret. They include non-disclosure agreements with employees (and other companies to whom the trade secrets are disclosed), marking any lab books and other materials as confidential, and restricting access to trade secrets on a “need‑to‑know” basis. Trade secrets can range from computer programs to customer lists to the formula for Coca Cola.

Trade secret law protects owners from the wrongful appropriation of their trade secrets, but, unlike the patent law, not from independent development of the same information by other parties. Trade secrets are protected in most foreign countries, but the statutory protection is generally much weaker than in the United States. This weakness of the statutory scheme makes the use of contracts much more important in foreign countries.

Why Utilize Trade Secrets Laws and Rights?

· You are considering applying for a patent or have already applied for a patent, but have not yet received the patent

· You have a trade secret that can be kept confidential over an extended period of time without unusual effort (which can remain a trade secret longer than the information can be protected by a patent)

· You have information that can’t be patented

· You have a unique process, procedure, operating manner, etc. that differentiates the way you produce a product

· You have valuable information, but it is not the “crown jewel” of the company

In addition to protecting its own trade secrets, a company should be careful not to misappropriate the secrets of others. This is particularly important when a company hires a competitor’s employee.

Not Keeping Secrets

What could happen… Your management team has agreed that while you are considering obtaining other formal I.P. protections, you’ll keep your production process a secret. Is that enough?

What to expect… No. High tech companies’ most valuable assets may be their technical knowledge. To protect this knowledge and know-how, companies can rely on protections offered by trade secrets. In order to receive protection for your trade secrets (1) your confidential information must have restricted availability, (2) the information receives economic value because of the limitations on its availability, and (3) you must make “reasonable precautions” to keep the information secret and confidential.

It isn’t enough to decide to keep your technical process a secret – you also need to take “reasonable precautions” to keep the information a secret. While there isn’t any absolute understanding of what would be seen as “reasonable precautions,” high tech start-up companies should create and operate under a formal trade secret protection policy. Companies should follow proper protocol set forth in their policies and should provide these policies to each employee, independent contractor or consultant.

TIP: Just because information is “confidential” doesn’t mean it is a legally protected trade secret.

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