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.

We all know 2008 was a tough year for individuals that might be looking to invest in startups. So be aware that adding a risky startup to their portfolio may be hard to stomach for some individual investors. But smart investors know that now offers the opportunity to ‘buy low’ into many very promising startups that are in dire need of important money. Finding the right investor can be a win-win situation for you.

A bit about Angels…

Angel investors represent a crucial piece of the startup infrastructure. According to the Center for Venture Research at the University of New Hampshire and the MIT Entrepreneurship Center, more money is invested annually by angels (approximately $23 billion annually) than venture capital firms (approximately $21.9 billion annually). And so it goes without saying that looking to Angels for startup capital will continue to be crucial, even as money remains tight from other funding sources.

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You’ve made your 2009 resolutions, and somewhere between “Be nicer to my in-laws” and “Floss once a week” is your goal of starting a new company.

Here’s to those 2009 resolutions… so what’s next to start that new company of yours?  Well, you need to start… a… new… company.  Okay, so what do you do?  Do you need to file something with someone?  Do you need to hire a board of directors? What should you tackle next?  Fortunately (and unfortunately), you can find lots of advice from lots of people on what to do and not to do.  Some will say definitely do an LLC.  Others tell you to form in Delaware.  Still others say that don’t bother forming a company yet.

So what is it?  If you want to form a new company, what should you do? Well, those “experts” above are probably all correct in some way or for some businesses.  In some cases, you don’t need to form a company for your side-project, but in others it is much better to form a C-Corp over an LLC.  Sometimes a S-Corp is the way to go, while other times it won’t cut the mustard for a new company.  Why you ask?  Well… it depends.  But, because it depends, you should get advice tailored to your business strategy.

Following the masses

Perhaps you’ve heard the statistics that more than half of all US publicly traded companies and more than 60% of the Fortune 500 are incorporated in Delaware. You might have also heard that many VCs prefer to fund Delaware corporations. Maybe someone once told you that “going public” is the easiest as a Delaware corporation. And, to heap on more evidence in favor of Delaware, you may have heard that Delaware has the most “business-friendly laws in the country.”

So, since it seems like most everyone is a Delaware corporation and you would like to raise VC money and go public, then I guess all that evidence just means I should form a Delaware C-corporation too, right?

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Without fail, when I mention that I’m a startup technology lawyer at an event with startup-folks, someone nearly always approaches me and asks, “So I work at [Insert Company Name here], but I’ve got this project or idea I’ve been working on. I’d really like to leave at some point and do that full-time, but I need my job at [Insert Company Name here] to pay the bills for now.  How can I do both?“

It is a great question and one that people really should be thinking about.  Many very successful companies were spun from side-projects or part-time development work in a basement or garage.  One of my favorite stories is about the founder of del.i.cious, that I write about in my book:

Joshua Schachter started his collaborative bookmarking website del.icio.us in 2003 as a personal project simply to allow him (and a few friends…) to tag and share web pages. Schachter had collected links to thousands of web pages he like and didn’t find any thing that could help him organize and share those likes with others. So, he developed del.icio.us in his spare time and started tagging websites to share with others.

But Schachter didn’t even consider himself to be an entrepreneur or a business owner. In fact, Schachter’s full time job as a Morgan Stanley employee. However, the power of the web made del.icio.us a huge hit and by 2005, Schachter felt it was best to incorporate the company as del.icio.us, Inc. Shortly thereafter, Schachter sold the business for an unnamed amount. All this from a little hobby…

At a time like this with funding options somewhat tight, many entrepreneurs are looking for a way to continue to build their product or idea, but keep the regular cash flow of their current job.  Sure, this comes with risks of less time to dedicate to your startup project or idea, but it also allows you to have your cake and eat it too, so to speak…

How to have your cake and eat it too…

So, to the question at hand, if you are employed elsewhere and have a side project or part-time startup, what should you watch for?

First thing to remember is that each situation is unique — each company will have different policies and procedures in place.  So be sure to be cautious.  Carelessness can get you into trouble (and can sometimes get you fired from your employer) if you are using company resources for your startup such as photocopying hundreds of color business plans, doing tests in the company lab or using your company laptop for development work.  So know your company, understand its rules and contracts, and avoid being reckless.

Here is a good set of questions and considerations to think about with respect to your current employer and your startup:

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I’m sure I’m not saying anything surprising when I say that private money is hard to come by right now.  Angels have likely seen their net worth plummet from a declining stock market and decreasing real estate market.  VC money remains tough and not the approach for many startups anyways.  And, of course, you’d be bootstrapping if you could, but you can’t, so that is why you are looking, right?  So where should you look at a time like this?  Well, spend a few minutes digging around to see if you could qualify for any of the various government programs.

There are countless programs out there and going through them all would take forever, but I’ve listed a few valuable links to check out at the end of this post.  But think about SBIR, SBA, NSF, or countless other government acronyms that may offer you an opportunity to find money that isn’t available elsewhere.

One caveat — these programs may not be a good fit if the money needed overnight to keep the lights on or pay employees on Friday.  These applications can be lengthy, require lots of time and phone calls, and be worse than preparing your college applications.  But, remember this — the government continues to aid small businesses and if you are already battening down the hatches riding out the economic storm, now might be the time for some applications and waiting anyways.

A bit of background on a few government programs.

Federal and state governments offer grant, loan and technical assistance programs designed to promote emerging businesses. Competition for these forms of public sector funding is fierce, and the application process is oftentimes quite arduous. Additionally, the funds usually come with burdensome restrictions on what you can do with the money. Nevertheless, some startups effectively use government funds to advance their business development, so these funding sources shouldn’t be completely dismissed.

One quick point to make: the SBA does not make grants to small businesses directly — they are the arm of the federal government that aids small businesses.  SBA grants go to others who actually help deploy that money.  The SBA does provide backing for loans to small businesses — but those are sometimes difficult for some technology businesses.

Many federal agencies participate in the government’s Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) programs. The SBIR and STTR are funding programs designed to stimulate technological innovation and fulfill the research needs of the federal government. Businesses are required to meet several criteria to be eligible for grants under either program, including U.S. ownership, for-profit status, and restrictions on number of employees. The SBIR and STTR programs differ in two major ways. First, under the SBIR program, the principal investigator listed on the SBIR application must be employed by the small business at the time of the grant and for the duration of the project. Under the STTR program, there is no such employment requirement. Second, unlike the SBIR, the STTR program requires the small business to be engaged in a collaborative relationship with a non-profit research institution located in the U.S. Read the full story

Startup vs. Small Business: What type of business are you forming?

“I’m the CEO of a new startup.”

As a conversation starter, this tends to be a pretty good statement to get someone’s interest peaked.  For some reason, being in the startup business tends to be pretty sexy, as far as business-building goes (wow, never thought I’d use the words startup and sexy in the same sentence, but there you have it).

On the other hand, forming a small business seems to have less of a ring to it.  I’m not sure why, but perhaps it has to do with what I saw on television — the general store owned by Mr. So-and-So or the Repair Shop down the street or insert your own random thought on a small business.

But the truth of the matter is, why does the phrase “startup” conjur up something different than a “small business?”  A startup tends to be a small business, by its very definition.  But oddly enough, they don’t have the same cache.

To Startup or Small Business… that is the question.

So what’s the difference?  In their book Engineering Your Startup, James Swanson and Michael Baird separate the businesses into two categories: (i) Income Substitution Businesses and (ii) Wealth Building Businesses. Generally, a small business will fall in the category of income substitution, while wealth building entities are more likely to be startups.

According to Swanson and Baird,

“people who simply do not want to work for someone else can easily startup a small income-substitution business such as a one-man computer repair service shop.”

This would qualify as an Income Substitution Business.  On the other hand, if you wanted to build a business that would be a national franchise or desired to create software allowing for repairs to be made remotely, then this model would be a wealth building business.

The terms “startup” and “small business” are sometimes used interchangeably, but in practice there is a difference between the two.  According to the Career Action Center,

“a start-up is a small company, most often with a high-tech focus, that is in the early stages of development, creating a product or service, or having a product or service needing manufacturing and/or marketing.  They are looking to grow through possible venture capital funding, initial public offerings (IPOs) or acquisition by larger companies.”

On the other hand, a small business tends to have a more narrow focus and is not limited to high-tech applications.  A small business may not have growth goals similar to a startup and may have no plans to grow larger than its small business size.

Does it matter?

That’s probably the better question here… 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.

Here’s why?  The use of the right description of your business and your goals sets the tone for your interactions with outsiders.  It is like knowing the secret handshake or the proper lingo.  Having the handshake and lingo will get you in the door (but don’t plan on staying long if that’s all you’ve got).  Why do most startups incorporate in Delaware?  Sure, there are the practical reasons (cutting edge law, most lawyers know it, ease of filing), but I think one of the other main reasons is it signals to outsiders such as investors, potential employees, executives, partners, etc. that you know what you are doing.

Same goes with the difference between calling your business a small business and a startup.  In all honesty, if you intend to build a business that, in all reality, will employ less than 20 people, most likely your concerns will be different than a technology company intending to build its product or service into the market leader for a market or sub-market.  One isn’t necessarily better (in fact, forming a small business probably is less risky and someone who has run the numbers may tell you that the odds of a successful outcome are higher), but you should probably know what you are planning to do and signal that to outsiders.  This prevents you from hiring the wrong types of folks (i.e. a programmer looking for a long term payout from some booming options) or spending time rubbing elbows with investor-types that aren’t in your wheelhouse.

In addition, small businesses tend to have different financing needs (which can be a good thing) and usually will have a more narrow market, either geographically or in scope.  Below are some of the basic differences between the two types of businesses:

Conclusion: Know thyself.

I’ve seen a number of people who have a business plan for a startup that would be much better off as a small business.  That isn’t to say that I bat 1000% on good ideas… but there are ideas that fit the ‘startup’ mold and those that just probably don’t.  For example, a consulting organization (even one that will consult on high tech issues or use high tech people) probably isn’t a startup in the traditional sense of the word.  The consulting business can prove very successful, create tons of cash flow and may even spin of an interesting technology for a startup.  But, few VCs will fund a pure consulting company.  So spending all the time, energy and resources making a VC-ready business plan for a small business isn’t a good use of time.

So, the long and the short of it is to figure out what type of business you should form based on your experience and idea, not the type of business that is sexier, hipper or sounds better at those elbow-rubbing parties.  A well-run small business may pay off multiple times over from a hot new biotech startup or innovative software startup.  And that’s just the way it goes.

Truth is, each of us probably wants to get into the restaurant on Hollywood Boulevard where all the celebs are hanging out, let’s call it Club Startup.  Yup, Club Startup is the sexy, hot hangout.  Tip the bouncer, give him the handshake and maybe you’ll get in.  Or maybe not.  But don’t go sittin’ in line if you really don’t want to go there.  People like me may be better off not waiting in that line if I’m not going to get in anyways.  Me, maybe I’ll just have Miller Lite…