August 25th, 2010
George Grellas has been practicing business law in Cupertino since 1984. He made some very insightful observations about formation issues at our February 16th Bootstrappers Breakfast we reported in “George Grellas on Why Startups May Benefit From Incorporating Earlier Than Small Businesses.”
George has worked with thousands of entrepreneurs in helping them with their strategic planning, entity formation, IP protection, funding, acquisitions, and the whole range of their startup legal needs involving both deals and disputes. He is a clear and insightful as a writer as well and in addition to authoring the Startup Law 101 Series of tutorials for founders and entrepreneurs he also writes very well thought out essays on the Hacker News site.
In a recent post he addressed a point about considering investment options based on the bona fide needs of your business. When folks at a breakfast ask “how do I raise investment” one of the common answers is do you have a business that merits investment, and what type of investment. What follows is a great essay by George Grellas on this point that he originally posted on Hacker News at http://news.ycombinator.com/item?id=1613249. It is posted here with his permission, and hyperlinks have been added to provide references for some of his points.
Successful startups can come in many shapes and sizes, though some highly respected people like
Steve Blank take the view that what you are building cannot legitimately be called a startup unless it shoots for the moon and seeks to massively scale. I think that Mr. Blank’s view reflects VC thinking, and it is a legitimate point of view from that perspective. All small-scale businesses, in that view, are and will always remain “small businesses” unless they aim for massive growth and for a transformative commercial outcome, in which case they are true startups.
High risk. High reward. High failure rate.
But, in this view, you are not doing a true startup unless that is the view in mind. Of course, any such startup will necessarily require large infusions of capital in order to aim that high, and this assumes it will be VC-funded.
I strongly disagree with this VC-only view of startups (that is, with its being the only legitimate form of startup), and the founders I have worked with for years have tended to reject it as a working approach to their startups. These sorts of founders have always valued the independence of keeping control of their ventures and of seeking to build it to the optimum level for their needs and then either selling it or keeping it as a longer-term business that is solidly profitable.
Even in the days when it took far more capital than it does today to launch the prototypical Silicon Valley startup, it is amazing how many such independent startups managed to thrive and flourish in the nooks and crannies of the startup world. The founders behind such companies had all the exceptional qualities that solid entrepreneurs need in order to conceive winning ideas and to execute them well.
In today’s environment, such independent startups are thriving and flourishing all the more as the capital needs for launching a startup have sharply declined. The independence of the entrepreneur, and the corresponding power of control over one’s own company, is stronger than ever. This is solidly confirmed today in Silicon Valley and elsewhere as early-stage startups are proliferating while VC-backed ventures have been comparatively stagnant. In this sense, it is perhaps a new era for startups. Those that want to build their company independently, or even those who ultimately plan to seek significant outside funding but wish to defer such funding until they can build solid value and minimize dilution, are in the ascendancy and this trend is possibly a permanent one.
All that said, the founders who fit in this “independent” category have never, in my experience, seen investors as the enemy. There is an antipathy to VCs who propose shark-like terms but never to quality VCs who can legitimately take the company to the next level. Maybe they don’t want to take the risks associated with such a course, but the founders see it as one legitimate option to consider – to consider and reject for many of them, perhaps, but to consider nonetheless. They are not harmed by the presence of such VCs but rather helped in that their choices are broadened for situations where such a path might become attractive to them.
Whatever may be said of VCs, though, there has never been any general antipathy to angels as a potential investment source. Angel investors have always come in all varieties. Many are successful entrepreneurs in their own right and they not only can invest money into a promising venture but also other talent and expertise that can help guide the venture. I have seen such situations firsthand, over and over again, where such contributions have proven invaluable to the startups involved and much appreciated by the founders. It is precisely by this means that founders often can raise the comparatively modest amounts of capital that would be too much for the founders themselves to risk but that are essential to building the venture to the point where it can become commercially feasible. Such companies have nowhere to go without such capital, and the angels are there to supply it on terms that are often reasonable and very much in the interests of not only the angels but of the founders also. To categorically write off this sort of investment as coming from some congenitally hostile source that must be resisted at all costs by founders is a mistake. Some ventures, of course, will want strictly to self-fund. But not all do. Indeed, from my experience with having worked with countless founders, I would say that most do not want to limit themselves strictly to self-funding because they themselves see that pure self-funding will not enable them to realize their goals for their venture.
I am not saying that all angel investments are good or that all angel investors are benign. It is a shark’s world out there and, whenever entrepreneurs are taking investment money, they need to watch their backs. But to dismiss angels as a category is to dismiss the idea that founders should have a broad range of choices before them in seeking to build their companies, and such a categorical dismissal is a serious mistake for most ventures. It is like saying that, because there are risks in a certain direction, I as an entrepreneur will never walk that path even while my competitors keep that option open for themselves and perhaps use it to outrun my venture through needed capital infusions that can often take a company to a better level.
My advice to founders: don’t be gullible in allowing yourselves to be cowed into taking in investment money for no good purpose other than to brag about being a legitimate startup; but don’t become so narrow-minded about investment options that you box yourselves into a strictly self-funded venture in cases where that may not be in your startup’s best interests.
In other words, forget categorical rules in this area. Consider angels and their investments in light of the bona fide needs of your venture and, if they can meet those needs, then by all means avail yourselves of the value they offer (and, yes, do it on the best terms you can and watch out for the vultures). If they don’t meet your needs, and you see more value in building a long-term profitable company without looking to be acquired, then by all means avoid investments that will only complicate your company and your life.
But by all means keep a balanced view of this or you will only arbitrarily limit your own legitimate options for building a successful venture.
August 22nd, 2010
We meet at 7:30am at most of our locations. The theory is that it allows bootstrappers to get on with their work day and the entrepreneurially curious to keep their day job as they consider launching a startup.
It was interesting to read “Fraternity of the Wired Works in the Wee Hours” about entrepreneurial nightowls in New York (“New York Nightowls is a late night co-working club for professionals”) who meet in co-working facilities from late evening to early morning:
“The goal is to come, get inspired, meet new people and get work done,” said Amber Lambke, a creative consultant. “It’s six hours of uninterrupted, productive time where you’re surrounded by other creative people doing awesome things.”
If the Bootstrapper Breakfasts® get started too late, consider one of the nightowl meetups:
August 16th, 2010
Lyn William of MySoiree, a frequent attendee of the San Francisco Bootstrapper Breakfast is speaking on a panel tomorrow night at Parisoma on “How to Survive Without Funding”
Overview of issues the panel will address:
Many companies today don’t get funded. Considering that, how does a small startup survive tough competition, company growth, and unpredictable markets with virtually zero capital? It definitely happens and to help everyone learn how, we’ve compiled a panel of founders who’ve been there and investors who have seen it happen. We’ll be discussing whether its possible to get by without funding, how to balance the budget if you try, and what problems you are likely to encounter. We’ll also be getting into what tools to use, how to stay lean, stories of what hasn’t worked, and other fundamentals of the self-funded process.
Coordinates:
- Tuesday, August 17, 2010 at 6:30 PM
- Parisoma 1436 Howard St. San Francisco, CA 94103
Register here tickets are $25 in advance, $35 at the door.
July 26th, 2010
Disha Bheda is our coordinator for the San Francisco breakfast, she has pulled together a checklist of questions for entrepreneurs to think about as a part of planning to formalize their business structure.
First let’s look at why form a corporate business structure? Incorporation is the forming of a new legal entity that is effectively recognized as a person under the law. A couple benefit of having a new legal entity are:
- protect personal assets
- provide container for intellectual property your team is creating
- enables you to do business with larger firms
- formalizes agreements between business associates and certain stakeholders
- you want to compensate third parties/employees by stock initially when cash flow is scarce
- raising funds is easier
When (how long can you put it off)
- When you are not the sole founder
- once your core team is formed
- when there are many stakeholders-intention of hiring people
- the idea/product begins to sell or launching a service
A bootstrapper’s start-up can be either sole proprietorship, a Corporation, Sub-S, or a Limited Liability Company (LLC). What kind of corporate business structure makes sense for you? Definitely include your accountant in these discussions, it is important to understand the current tax implications of one structure over another. Tax treatment is often the biggest reason for one over another.
- While deciding a business structure, you should keep in mind:
- The tax implications for each structure.
- The kind of liability provisions offered by each structure.
- How much regulatory paperwork you want to file.
- Both a S-Corporation and LLC eliminate the double taxation incurred by owners of corporations and sole proprietor.
- The main differentiating factor though, is the employment tax paid on earnings, which is significantly more in the case of LLC.
- A LLC does have less recordkeeping rules so you may have to tradeoff that off against the tax liabilities.
How
- Either do it yourself or hire a lawyer.
- Good lawyers are typically from small law forms with a handful of employees.
- They tend understand the mindset of start-ups better.
- Business name check to ascertain if the business name is available with the state of incorporation
- File papers for formation of the business entity – Certificate of Incorporation – which is filed with the secretary of state
- Create the initial bylaws – procedures affecting the governance of the business entity-the structure of capital such as common stock, preferred stock, etc-whether the corporation is forever or renewable
- Put in place appropriate Non Disclosure Agreements
- IP assignment
- Software License Agreement
July 20th, 2010
I received an E-Mail this week from an early stage entrepreneur
I am committed to getting my start up idea off the ground.
However, I am still in the planning/gathering information phase. I do not have the business entity yet, but currently working on creating a network and building a team. What stage of entrepreneurs are you looking for to join bootstrappers? What information can entrepreneurs expect to take away from this event?
If you are seriously considering starting a technology business and want to learn more about bootstrapping you are welcome to attend and meet other entrepreneurs. We have a number of folks attend who are considering starting a business, active first time entrepreneurs, and serial entrepreneurs. Here are some related blog posts.
July 14th, 2010
You’ve started your business, now what?
– How well do you understand the market you are in?
Mark Florant, will discuss a number of key issues you should be thinking about:
- Understanding the size of your market: current key players/competitors, and customers.
- Selling into your market: decision makers—who are they, targeting different exec. levels/areas within a company and why.
- Factoring in changes in the marketplace
Mark Florant currently is working with three early stage start-ups; Aquabella Organics, Wspider and 360iCoach helping them with sales, market development, marketing strategies.
Mark’s passion and expertise is taking a product with no revenue and establishing a market, along with building strong relationships that enhance the process. His has experience working with large organizations, IBM, Cisco, Hitachi and Intel (having held positions as Sr. Account manager at Cisco as well as US Sales Dev Mgr for the Optical Platform Division of Intel. He has also been at successful start-up organizations such as LightLogic, where he was VP of Worldwide Sales. Mark earned a Bachelor of Arts degree from Stanford University in Psychology.
July 9th, 2010
Disha Bheda, our coordinator for the San Francisco breakfasts, has written a nice summary of a conversation we had in San Fransisco last month about managing global teams:
So as to make more effective use of resources, lower costs and utilize time better, today’s businesses are seeing a very distributed workforce. As people across various continents work on the same project, managing global teams poses various challenges.
Not being able to meet or know your colleagues is a serious cause of concern. Managers interact with their team mostly over email. What is forgotten is that there is a person reading and responding to the email. Effective communication is key. Management should take as many opportunities as possible and go out of the way to communicate through the phone and through video conferencing.
The challenge posing constant communication is the different time zones. When it’s time for the manager to work, it might be the end of day for his team. Care should be taken such that meetings are scheduled to accommodate everyone. This is difficult and one team member or two might be inconvenienced. The times of meetings can be changed periodically so that not only one part of the team is inconvenienced.
People have found having a five minute meeting everyday where the tasks to be accomplished over the next 24 hours are discussed, nothing more, nothing less to be great. Having chatroom where people sign in when they come to work and sign out when they’re done has proven effective for some. Having a local manager as a point of contact with the team in a particular geography is another solution. As the naysayers say, “Communicate and things happen less often”.
There is the challenge of building trust with colleagues. When interacting with them online, the manager faces a constant dilemma whether to believe if the colleague really needs a day off. There also comes into the picture cultural differences. Being aware of differences and events happening locally goes a long way. Building trust with colleagues and giving them the benefit of doubt can help set the dynamics of the team on the right footnote.
We also published a a
poll on Managing global teams last month.