Monthly Archives: June 2012

JOBS Act: What’s the Catch?

The recently enacted JOBS Act is being heralded as an unprecedented way to let companies raise money from ordinary folks (i.e. unaccredited investors). For technology companies who often rely on friends and family to provide the seed capital for their ventures – this legislation, which enables entrepreneurs to “crowd-fund” – appears to be just what the doctor ordered. The basic framework of the law permits companies to raise up to $1 million from unaccredited investors in any 12-month period so long as they comply with certain SEC requirements.

A deeper dive into the SEC requirements, however, shows that this newfound fundraising tool does not come without strings. Companies must submit to the SEC (among other things) the material terms of the financing, potential risks of investment and their business plan. Additionally, there are annual reporting obligations on the Company.

These requirements have been put in place as evidence that the SEC is still focused on protecting the non-institutional investor. However, well-intentioned companies may be understandably frightened with the prospect of having to supply such detailed information to a governmental entity. Often, start-up companies in need of early capital will pivot from their initial business model as the result of trial and error or changing market conditions.  Further, the company-specific risks of investment may not be fully understood by the founders — let alone the investors at the time of the initial funding.  In view of all of these additional regulatory requirements, founders may wonder if an investor with buyer’s remorse might seek a remedy via the SEC by pointing to the Company’s filing requirements in the event things go south.

As with most things, time will tell how useful the new JOBS Act will be in attracting capital from non-institutional investors. In the meantime, before the money starts to flow, companies should still ask the classic question – “what’s the catch?”

For more information on navigating the JOBS Act, please visit Goodwin Procter’s JOBS Act resource center.

This post on Capitalization Issues and Start-up Issues was authored by Alon Rotem.

 

 

 

Submit Questions for Ram Shriram’s Fireside Chat at NY Venture Summit

This Thursday, June 28, Goodwin Procter partner Steve Davis will moderate a fireside chat with famed investor Ram Shriram at the 2012 New York Venture Summit.

Steve would like to invite our readers to submit questions for Ram. The fireside chat will be recorded and shared on our blog following the event.

To submit a question, please e-mail or tweet us.

The 2012 New York Venture Summit will feature a distinguished line up of more than 50 VCs on interactive panels, presentations from more than 60 Top Innovators seeking funding, and high-level networking opportunities.

To register for the Summit, please click here.

This post on Venture Capital was authored by Founders Workbench.

 

Founders Flash

This week’s articles discuss the importance of separating personal and business finances, provide creative ways to fund a business, consider why selling your company won’t buy you happiness, and discuss the traits that investors look for in entrepreneurs.

A Common Personal Finance Mistake New ‘Treps Make – Catherine Clifford, Entrepreneur

One of the biggest mistakes new entrepreneurs make is not keeping their personal and business finances separate.

5 Creative Ways to Raise Money (Without Giving up Equity) – Carlos Solorio, Under30CEO

The founder of a custom menswear company that raised $60,000 over 3 months without giving up a single share lists the best ways to fund your business without giving up equity.

Selling Your Company Won’t Make You Happy – Jessica Stillman, Inc.

A veteran of two acquisitions offers a reality check for fellow founders, reminding them they shouldn’t be in the start-up game just for the payout.

Startup Investor Whitney Johnson Helps You Answer The Question “Are You A True Entrepreneur?” – Kathy Caprino, Forbes

A leading investor discusses the top seven traits found in successful entrepreneurs.

This post was authored by Founders Workbench.

 

The Power of Design Patents

Design patents are a useful tool for protecting the ornamental, non-functional design of an article of manufacture, ranging from physical goods, such as handbags and park benches, to purely electronic creations, such as graphical user interfaces (GUIs) and icons. In a design patent, the drawings submitted with the application define the scope of protection and, therefore, it is important to ensure the drawings filed with the application cover the design in the manner intended.

Design patents are most useful in protecting against exact copies. In some cases, however, protection can extend to cover designs that differ slightly from the claimed design. For example, if an ordinary observer familiar with other earlier designs in the same field is easily deceived into thinking the different design is the same as the patented design, the different design may be deemed infringing.

While the protection afforded by design patents is somewhat limited, the cost of obtaining design patent protection is typically significantly less than the cost of fully prosecuting a utility patent.  The filing fees are lower and the time required to prepare, file, and prosecute a design application to issuance is usually much less. Often, the entire process takes less than a year, as compared to several years or more in most utility cases. Additionally, there are no maintenance fees once the patent issues in the United States, so the design patent will remain in force without further costs or action required. Lastly, the term of a design patent is 14 years from the date of grant, not the usual 20 years from the date of filing for utility patents.

Design patents are a useful and economical tool to consider when developing a strategy regarding the protection of intellectual property, especially when cost and time are prime considerations or in conjunction with utility patents to provide additional protection.

This post on Patents was authored by Mike Hammer.

 

Founders Flash

This week’s articles discuss why those with entrepreneurial experience make better VCs, consider why management teams should never let the founder leave a company, provide advice on creating and selling a long-term company vision, and profile the tech start-up scene in Estonia.

The Data Is In: Entrepreneurs Make Better VCs – J.J. Colao, Forbes

Former founders make more effective venture capitalists than those without entrepreneurial experience.

Don’t Let the Founder Walk – Jeff Dyer, Hal Gregersen, and Clayton M. Christensen, Upstart Business Journal

When the founder leaves a business, key innovation skills walk away from the top management team.

How to Sell Your Startup’s Long-Term Vision – Nadia Goodman, Entrepreneur

Elements to take into account when presenting the long-term vision of your company to employees or investors.

The Many Reasons Estonia Is a Tech Start-Up Nation – Ben Rooney, Wall Street Journal

Estonia is the 132nd-smallest country in the world by land mass, yet it produces more start-ups per head of population than any other country in Europe.

This post was authored by Founders Workbench.

 

Duly and Validly Issued, Fully Paid and Nonassessable: Importance of Statutory Formalities for …

From the outset of a new company’s existence, the founders should be aware of all statutory requirements for issuing stock and should follow all required formalities when doing so.  Without the proper authorizations, stock issued may be deemed void and could have an adverse effect on the company’s control and governance.

The Delaware courts generally will not recognize stock that has not been properly approved and issued pursuant to the applicable statutory or corporate formalities. The case law in Delaware suggests that  while some defects in stock issuances can be cured by later board ratifications, the circumstances are unclear as to when this is acceptable and, more often than not, the Delaware courts find that the defect is incurable and the stock issuance is void.

The holders of a company’s stock appoint the board and have voting authority over certain corporate actions. Accordingly, defective stock issuances may result in invalidation of company actions that were improperly approved by holders of void stock or approved by directors that were appointed by holders of void stock, and can create uncertainty as to the proper owners of the company and create challenges in completing a future sale or initial public offering of the company.

To avoid these potential pitfalls, it’s crucial to understand the requirements for issuing stock under the law of the state in which the company is incorporated. For Delaware corporations, the critical requirements are set forth in the Delaware General Corporation Law (the “DGCL”), and are summarized as follows:

  • The company’s certificate of incorporation must state the number of authorized shares the company is allowed to issue and the company may not issue more than the number of shares authorized (Section 151 of the DGCL).
  • Any increase in the number of authorized stock requires an amendment to the certificate of incorporation, which must be approved by the Board of Directors and the stockholders of the Company, and properly filed with the Secretary of State of Delaware (Section 242 of the DGCL).
  • The Board of Directors of a company must approve and authorize all grants of stock (Section 141 of the DGCL).
  • The stock must be fully paid by the holder, in an amount set by the Board of Directors and not less than the par value of the stock (Sections 152 and 153 of the DGCL).  This means each stockholder must pay an amount equal to at least the par value of the stock for the stock to be validly issued.

This preceding is not intended to be an exhaustive list of all steps a company must take to ensure that its stock has been properly issued; rather, the DGCL sections referenced above provide the basic, fundamental statutory requirements that companies operating under Delaware law must follow. Companies should consult their legal counsel before issuing stock.

For a more in-depth analysis of relevant case law in Delaware, C. Stephen Bigler and Seth Barrett Tillman’s article provides additional insight into the pitfalls companies should avoid when issuing new shares of stock.

This post on Capitalization Issues and Start-up Legal Issues was authored by Nina Chen.

Founders Flash

This week’s articles discuss how entrepreneurial thinking may solve world problems, profile social news start-up Reddit, consider whether all VCs make money on IPOs, and highlight an interview with VC Guy Kawasaki.

Why Entrepreneurs Will Save The World – Paul B. Brown, Forbes

An entrepreneurial mindset is a wonderful tool to use to try to solve what seem to be unsolvable problems—everything from the health care crisis to social ills.

How Alexis Ohanian Built a Front Page of the Internet – Christine Lagorio, Inc.

Reddit was one of the first start-ups out of the Y Combinator program to be acquired, making founder Alexis Ohanian a 23-year-old multimillionaire. Here’s how he did it.

Myth Busted – All Venture Caps Make Money – Debra Borchardt, The Street

According to a new study, venture-cap returns haven’t significantly outperformed the market since the late 1990s.

Guy Kawasaki: No ‘Secret Sauce’ for Tech Success – Jason Fell, Entrepreneur

Kawasaki discusses what’s helped him succeed in the tech business and how others can find their own success.

This post was authored by Founders Workbench.

Start-up Stories: An Interview with Judy Robinett, Super-Connector

Name and Current Occupation: Judy Robinett, investor, start-up coach, entrepreneur, super-connector

What is your start-up story?

I have a bit of an unusual start-up story.  I was working as an executive at a hospital in Idaho.  I had been working closely with practitioners and academics, including Malcolm Baldrige, to create a set of healthcare standards that would lead to quality improvements in the healthcare chain.  And then a colleague approached me and asked me to look at a restaurant that we thought could be a good franchising opportunity. Not surprisingly, a restaurant was a difficult first start-up, but I learned a tremendous amount about bootstrapping. Imagine getting a $1.6M SBA loan, then as the business hit an unusually slow winter, running out of cash. I was terrified and went to a bankruptcy attorney before making the decision to figure it out.  It put steel up my spine and I understood clearly what ‘cash is king’ is all about.  After turning the business around and selling it, I now advise entrepreneurs to cut their revenue projections in half and plan accordingly.  Always have a Plan B.

What is the secret of your success?

I have learned to subscribe to the J. Robert Oppenheimer quote: “We know too much for one man to know much.”  One of the most important lessons I have learned is that I don’t know everything and never will, regardless of how hard I work or study.  I surround myself with people who are smart, trustworthy and have good instincts – advisors who have a good head, a good heart and a good gut are invaluable.  My attorney in my first startup-up once advised that I could have my ego or the money and suggested he play a larger role in negotiating a deal.    On another deal, a trusted board member shared her gut feeling that a potential investor with deep pockets appeared to be untrustworthy and even dangerous. Make sure you surround yourself with advisors who are truth tellers—people who have your back and your future.

As my career has progressed, I have become more and more a trouble-shooter for ventures that were struggling because their management teams couldn’t or wouldn’t see their own shortcomings. Because they lacked this knowledge, they were unable to leverage their existing resources or find additional resources that could get them to the next stage of development.

For some people, that inability to recognize internal inadequacies is an ego issue – are you willing to give up being “king” of your own venture to be successful? A willingness to recognize areas of weakness ­– within yourself, your management team, your advisors ­– is critical to growing a business and achieving any level of success. Opinions are cheap.  Get advice from those who have done it successfully.

What is a “Super-Connector”, and how did you come to be one?

A super-connector is exactly what it sounds like – a person who is able to connect many individuals from many parts of the innovation ecosystem. My contacts span from coast to coast (and internationally too) but more importantly from A to Z in experience. The quality of the chosen connection is more important than the quantity of the available connections. I not only make person-to-person connections, but I also make person-to-group connections and group-to-group connections. One of the keys to success is to be part of a group (or groups) that will provide access to what your business needs – usually capital, strategy, and team members but also support.

I became a superconnector by accident.  People kept introducing me as the best networker they had ever met and asking if they could follow me around to see how I did this.  For years I thought I was shy so I didn’t pay much attention to it until I was introduced to a gentleman who had grown a company to $1.7B in sales.  I was introduced as someone with a platinum rolodex. I could finally see that connecting with people was a valuable asset that I could enhance.  And I did.  Nothing happens without people.  People write the checks for funding, people share the ideas for opportunities and people buy your business.

What advice would you give to a new entrepreneur?

Three pieces of advice:

    1. Invest in resources to get it right the first time. Investors are not going to want to work with you if your company has “hair on the deal” – i.e. that you have made mistakes prior to funding that are going to be expensive (or impossible) to clean up. If an investor is choosing between a “hairy” deal and a clean deal, they are going to choose the clean deal. This means hiring attorneys, CPAs, and other service providers when you first start—paying them in cash or stock options­– and maintaining records, staying organized, and protecting your important assets (IP, proprietary information, etc).  This will not only help you avoid missteps early on in your start-up, it will also enable potential investors to breeze through their diligence process. The easier it is to do diligence, the more likely it is for them to fund you.

 

    1. Have a clear exit strategy. Investors bet on companies where they see the potential for business success that fit with their model. While some super angels, angel groups, micro-VC’s or VC’s are agnostic to industry (technology, life science or stage) and stages of startup financing (seed, angel, round A), many are not. Many investors were burned in the most recent downturn because they had invested in great (or not-so-great) companies whose exit strategies were not as robust as they had thought. Think hard about not only the investor’s exit strategy, but your own.

 

    1. Go where the money is. I recently heard the statistic that 80% of investment money for technology start-ups is coming from Silicon Valley, and that 60% of angels only invest in their geographic region. If you want to be successful, you have to go where the money is. In other words, understand the funding ecosystem.   In 2011 there were 790 VC firms highly concentrated in Silicon Valley–$80B in CA, $30B in Boston, and $17B in NY. Very few startups are funded by VC’s.  The National Venture Capital Association (NVCA) estimates $18B+ is invested by angels annually.  It is also estimated that angels fund 30 to 40 times more startups than VC’s.  There are 630,000 accredited investors in the United States.  Informal investors – relatives, friends, neighbors and strangers – are estimated to loan or invest $100B+.

 

 

 

What resources (blogs, books, etc.) are you reading right now?

 

 

Two excellent books that are just out are “The Ultralight Startup: Launching a Business Without Clout or Capital by Jason L. Baptiste and “Venture Capitalists at Work: How VC’s Identify and Build Billion-Dollar Successes,” by Tarange Shad and Sheetal Shah.I read a lot of blogs, particularly Brad Feld at Foundry Group (http://www.feld.com/wp/), Jonathan Fields, author of Uncertainty: Turning Fear and Doubt into Fuel for Brilliance (Portfolio, September 2011) (www.jonathanfields.com), and Steve Blank, professor of management and entrepreneurship at UC-Berkeley and author, with Bob Dorf, of The Startup Owners Manual (K&S Ranch 2012)(www.steveblank.com).

This post on Start-up Stories was authored by Caitlin Vaughn.