Yearly Archives: 2010

Favorable Tax Treatment Extended for Founders and Investors Receiving Stock in Certain …

Good News!!! Favorable Tax Treatment Extended for Founders and Investors Receiving Stock in Certain “Qualified Small Businesses”

Just in time for the holidays, Congress recently extended certain favorable tax benefits under the Small Business Jobs Act of 2010 with respect to individual tax payers that receive stock in certain “qualified small businesses” through the end of 2011 (including individuals that receive stock through partnerships, although special rules, including basis allocation provisions, apply). Before the extension, the window of opportunity only applied to new issuances occurring between September 27, 2010 and December 31, 2010.

Under the legislation, all of gain up to the greater of (x) ten times (10x) the tax payer’s basis in the stock and (y) $10 million is excluded for federal income tax purposes (including AMT). Generally to be eligible for the favorable treatment, the stock must be (i) acquired from the issuer during the extended window, (ii) held for at least 5 years, and (iii) issued by a “qualified small business,” which is generally a “C” corporation with $50 million or less of gross assets, excluding certain types of businesses, such as banking, farming, natural resources, consulting, engineering and leasing businesses.The prospect of a 0% federal tax rate should be quite an incentive for the formation and funding of early stage companies for the New Year!

This post on Tax was authored by Robert Bishop.

Founders Flash

This week’s stories provide tips for how you can make 2011 a great year for your startup. All are worth a read.

2 Keys to Playing Big in 2011 – Michael Alter, Inc.

Make no little plans; big ideas are what push people and companies into action.

How to Survive the Dreaded Due Diligence Process – Martin Zwilling, Startup Professionals Musings

Proactive preparation for due diligence requires a plan and involvement of your entire team.

The Crowdfunding Revolution – Kevin Lawton, VentureBeat

Crowdfunding has the potential to be a powerhouse for capital formation.

How to Gather Free Marketing Intel – Julie Rains, Open Forum

Tapping no-cost sources of market intelligence can help you with product design, market positioning and more.

This post was authored by Founders Workbench.

Frothy Start-Up Bubble Forming?

The New York Times’ Dealbook blog recently explored the possibility of a funding bubble forming in the start-up community: “The chief evidence, according to industry experts and analysts, is the way venture capitalists and established companies are clamoring to give money to young companies, including those with only a shred of an idea. They are piling into me-too start-ups that imitate popular Web companies that already received financing.”

Whether it’s the “herd mentality” or the movement towards smaller investments made possible by the “constantly falling cost of computing power,” the idea of investors chasing hot young companies to the point of creating “froth” is a welcome theme in light of the doom and gloom of recent few years, but hopefully, it is not also an indication that another bubble is forming.

This post on Venture Capital and Company Financings was auhored by Founders Workbench.

Founders Flash

This week’s stories provide good news on VC investment plans for 2011, excellent planning tips and reading recommendations. All are worth a look.

VCs say they’ll invest, hire and sell more in 2011 – Riley McDermind, VentureBeat

Good news: Venture capitalists say they will invest more in 2011, according to a new industry study.

Six Tips to Maximizing Your Advisory Board Value – Martin Zwilling, Startup Professionals Musings

Advisory boards can help when you don’t know what you don’t know, or to create what you don’t have.

When It’s the Time for Plan B – Sarah Needleman, Wall Street Journal

Startups don’t always proceed as provided. Some ideas on when and how to shift gears.

Holiday Reading: 5 of This Year’s Best Books for Startups – Audrey Watters, Read Write Start

Have some downtime over the holidays? These books offer great stories for startups.

This post was authored by Founders Workbench.

The Global Race to Attract Promising Start-Ups

The global race to attract top entrepreneurial talent is on. While Silicon Valley, the greater Boston area, NYC’s Silicon Alley and other hubs of innovation in the United States continue to play the predominant role on the world stage of start-up incubation, other countries are looking to join the competition through government-led initiatives.

For example, Chile is doing something innovative with its Start-Up Chile program. The program, which is organized by the Chilean government and recently completed its pilot phase, is targeted at attracting entrepreneurs from the United States and elsewhere to relocate to Chile for one year by offering them $40K in grant money (no strings attached), a one-year work visa, and a vast array of local networking opportunities and introductions to high-level contacts.

The idea is to position Chile as a low-cost, offshore development platform for start-ups by offering access to talented engineers at 33 to 50% of the price of Silicon Valley counterparts, an Internet savvy local population, and an economically and politically stable gateway to a fast-growing region. The pilot has been so successful that Chile plans to expand the program to several hundred or more entrepreneurs in 2011.

Russia is also garnering a lot of attention with its Skolkovo project, which is intended to create a high-tech center loosely modeled on Silicon Valley in a Moscow suburb. Earlier this year, a large U.S. private equity fund agreed to invest $250 million in Skolkovo and multiple high-level delegations of U.S. venture capitalists and other leaders have recently visited the project.

While the feasibility of Russia, Chile or any other country replicating Silicon Valley is not yet proven (one critic’s view and advice), it is almost certain that the globalization trend in start-up formation and funding will continue. At Goodwin Procter, we have witnessed an increasing volume of cross-border start-up activity in the past 12-18 months as U.S. venture investors expand their investment horizons beyond Israel, China and India, and non-U.S. start-ups launch operations and hire talent in the United States. It should be interesting to watch this trend continue and see what role government-led programs to promote centers of innovation and entrepreneurship can play.

This post on Start-up Issues was authored by Daniel Green.

Goodwin Partners withVLAB on Networking Sessions

With the holiday season upon us, there are networking opportunities abound, and savvy entrepreneurs should take full advantage of these opportunities. One forum for high-impact networking in the San Francisco Bay Area is VLAB, the Bay Area chapter of the MIT Enterprise Forum, a nonprofit organization dedicated to promoting the growth and success of high tech entrepreneurial ventures by connecting ideas, technology and people.

VLAB organizes content-rich panel presentations on cutting-edge topics that regularly pack more than 350 people into a large auditorium at the Stanford Graduate School of Business. Panelists are top-tier and have included CEOs and senior level executives from companies such as Yahoo, TiVo, JBoss and Meru Networks. VLAB also distinguishes itself with its large and passionate audience (estimated in excess of 10,000 by one internal source). Recent events have focused on the business of the brain, biofuels and the real-time web, to name just a few topics.

VLAB events aren’t about small talk and hors d’œuvres. The VLAB organizers work hard to deliver what they call “actionable discovery” in their content by giving participants something tangible upon which to build a new working relationship, a line of research or even an entire business.

Over the coming year, Goodwin Procter will be working with VLAB on a series of post-event networking sessions to be held at venues in Silicon Valley. Please stay tuned for further details and check the VLAB website frequently for updates on upcoming events.

This post on Networking was authored by Founders Workbench.

Founders Flash

This week’s stories provide insights for entrepreneurs on how to focus themselves and their companies on what it takes to be a success. All are worth a read.

5 harsh realities of being an entrepreneur – Jason Baptiste, VentureBeat

Being an entrepreneur is not all glamour. Take a look at the realities of running a startup.

How To Determine A Startup Funding Strategy – Frank Gruber, Tech Cocktail

A review of funding scenarios for startups – covering bootstrapping, angels and venture capital.

5 Ways to Achieve Follow Through – Marla Tabaka, Inc.

Are you finding things are slipping through the cracks? Here are five ways to stay on track.

How to Build a Referral Engine – John Jantsch, Open Forum

Quality referrals can be critical for new and repeat business. A look at how to build a referral engine.

This post was authored by Founders Workbench.

Allocating Escrows and Earn-Outs

From time to time on the blog, we’re going to focus on terms or negotiated points that often arise in negotiating early stage financing documents. One such term is a mandatory allocation of escrow provision in the context of a sale event that is often addressed in charters in venture financings. Under the typical venture-backed company charter, the preferred investors have a liquidation preference that comes off the top before proceeds are distributed to the holders of common. The question that is often unanswered in charters is how any contingent payments in connection with a sale event, such as earn-outs and escrows, are allocated among the stockholders.

Many charters are silent on the allocation, which requires the Board of Directors and stockholders to approve the allocation at the time of the liquidity event. It’s noteworthy that the NVCA flags such an allocation as a possible basis for litigation against the Board should an aggrieved party prove unhappy with the allocation. As a solution, the NVCA proposes a provision requiring that the merger consideration in the sale transaction be allocated at closing as if there is no escrow or earn-out thereby effectively shifting the contingency risk of the earn-out or escrow away from the preferred and to the common. Another (and more founder-favorable) solution is to allocate the full escrow and/or earn-out among all the holders (pro rata between the preferred investors and the holders of common) as though all of the consideration was being paid at closing. Just one of many points worth keeping an eye on in early-stage financings since those documents drive the outcome on many issues, such as this one.

This post on Company Financings was authored by Ryan Sansom.

MoneyTree Report for Q3 2010: VC Investment Declines but First-Time Financings Remain Steady

Venture capitalists invested $4.8 billion in 780 deals in the third quarter of 2010, according to the recently published MoneyTree Report from PricewaterhouseCoopers (PWC) and the National Venture Capital Association (NVCA), based on data from Thomson Reuters.

Quarterly investment activity decreased 31% in terms of dollars, and 19% in the number of deals, compared to the second quarter of 2010 during which $6.9 billion was invested in connection with 962 deals.

PWC and the NVCA attributed the decrease in dollars invested to the absence of large rounds in the clean tech sector, and noted that venture investors continue to invest more into first-time deals than follow-on rounds.

Of the 780 deals funded in the third quarter, 271 (35%) were early stage financings. Of the $4.8 billion invested, almost $1.3 billion (26%) was invested in early stage deals.

Michael Greeley, general partner of Flybridge Capital Partners, says the report is good news for start-ups. Greeley, quoted in Xconomy, observed that “the amount of first-time financings is a great barometer for the health of the industry. That really is probably the most risky investment that venture capitalists are asked to make. To see that over a quarter of those dollars went into those types of companies, I think was quite, quite encouraging. We also shouldn’t lose sight of the fact that July and August are historically pretty slow months.”

Other highlights of the MoneyTree Report:

The software industry was the top recipient of venture dollars with $1 billion going into 190 rounds. Those numbers equal a 13% drop in dollars and a 21% drop in deals compared to the second quarter.

The biotech industry raised $944 million in 108 deals, a 32% drop in dollars and a 29% drop in deals compared to the second quarter. Medical devices and equipment companies raised $573 million in 82 deals, a 27% drop in dollars and an 18% drop in deals compared to the second quarter.

The clean tech sector raised $625 million in 58 deals, down from $1.5 billion in 78 deals in the second quarter.

Internet-specific companies raised $661 million in 154 deals in the third quarter, a 25% drop in dollars and a 28% drop in deals compared to the second quarter.

This post was authored by Jonathan Shapira.

Founders Flash

This week’s stories provide insights on how to grow your business, work more productively, leverage social media to your advantage and hire great talent. All are worth a read.

How To Scale Your Business From Zero To Multi-Millions In Revenue – Alyson Shontell, Business Insider

Growing from startup to millions takes smarts, hard work, risk taking and some luck. Bruce Pellegrino did it and shares tips on how you can too.

The 8 Habits of Highly Productive People – Celestine Chua, Personal Excellence

True productivity is the ability to create a lot of high-impact work quickly. Here are eight work practices to help you become more highly productive.

Three Ways to Connect with Online Influencers – Entrepreneur

Finding the right social media connections can boost your startup’s marketing. This post looks at three ways to engage with online networkers.

5 things to ask yourself when hiring – Will Herman, VentureBeat

Looking for the next great person you want to add to your startup? Five questions to ask yourself before hiring.

This post was authored by Founders Workbench.