BizzBangBuzz by deal attorney & business lawyer, Anthony Cerminaro

8/08/2005

Venture Capital Basics

This summary from vnpartners.com provides a good overview of the venture capital financing process, answering questions such as:

What is "venture capital"?
What is "seed money"?
What is "start-up capital"?
What are later stage financings?
Why would these later stages be necessary?
Is there a way to avoid later-stage financings?
What is an "IPO"?
Aren't founders' shares and private placement stock subject to restrictions on transfer? If so, how then do the founders and investors cash out?
Who invests in start-ups?
Aren't there securities laws concerning investor solicitations?
Don't you have to register your offering with the SEC?
How much money is available for investment in venture capital situations?
What type of return do venture investors require?
What types of returns are possible?
What else do investors expect?
How important is the offering circular or private placement memorandum?
What are the most important elements of the offering circular?

Happy BizzBangBuzz Birthday

I blog, therefore I am.

At least that is how it has seemed for the past year. Yes, this blog is celebrating its birthday. And in the spirit of the "new normal," you get the presents. In the next few days, I will be posting collections of my posts on various topics for your enjoyment and use. The first two may be accessed by following the links below.

Open Source Software Posts

Franchise and Franchising Posts

The Smart Money is on Smart Money

"Many times startups seeking capital from professional or institutional investors focus almost exclusively on the financial aspects of the pending transaction. This is misguided to a degree as the primary benefit professionals bring to the negotiating table is not their dollars but rather their sense, experience, contacts and their existing relationships.

Entrepreneurs who have prior experience with raising money have learned this lesson. Successful entrepreneurs almost inevitably get more than a cash infusion, they get a partner with additional non-financial resources dedicated to seeing them succeed....

If you are seeking early investment, seek out and find those financiers that can bring more to your start-up venture than cash. It will pay dividends far in excess to effort required to convince seasoned pros that your venture is worthy of their consideration."

Read more in Drakeview post: Simple enough.

Franchise and Franchising Posts from BizzBangBuzz

The franchising business model

Legal Aspects of Franchising

FTC Guide to Buying a Franchise

Franchise Purchase Red Flags

Negotiating a Franchise Agreement

Franchises Offer Startup Advantages

Questions to Ask Before Buying a Franchise

Franchisees Lose Part of Their Independence

Franchise Business Idea Theft Rare

Should I Franchise My Business?

Open Source Software Posts from BizzBangBuzz

The Cult of the Non-Disclosure Agreement

"To all those entrepreneurs with innovative, unique business ideas who want to capitalize on them before someone else does, I have one piece of advice: Get over it...

Do the math. If you had an idea, odds are that a sizable fraction of the people with the required expertise and who worry about similar problems have had the same idea at some point. For the vast majority, it will just be a passing thought, but a few will take the time to do their homework, and maybe even put together a business plan...

Good venture capitalists understand this, and many will refuse to sign an NDA before looking at a business plan. Few entrepreneurs understand it, and many get wrapped up in "protecting their idea" so someone else doesn't steal it.

Why the cult of the NDA?

In our culture, we've elevated the creative new idea to be the core factor in determining whether a startup succeeds or fails. Unfortunately, nothing could be further from the truth, but there's a chain of logic which leads inextricably to the NDA:

1) A unique new product or idea is essential to a startup's success.
2) The first company to capitalize on a new product or idea has a unique and sustainable advantage.
3) I have a unique idea for a new product or service.
4) If others find out about my unique idea, they could bring it to market first, and steal the advantage from me.
5) Therefore, by disclosing my idea only under the strictest confidentiality, I preserve an advantage for myself.

Each of these five points is wrong in most cases...

What should be confidential?...

Information which is appropriately confidential includes:

* Trade secrets, unique methods and algorithms, and processes.
* Customer lists and prospect lists.
* Data generated on behalf of a client.
* Information which a third party has asked be kept confidential..."

Read more in this provocative post from frozennorth.org.

Mmm..Mmm...Good Taglines

Smart Answers columnist Karen E. Klein recently spoke with Eric Swartz about the survey results and how small companies can craft taglines every bit as effective as those of the big guys. Edited excerpts of their conversation are available here, including this highlight:

"Q: How would an entrepreneur go about developing a tagline?
A: We first recommend that you sit down and ask yourself some core questions about your company: Who are you? What are your values? Your vision? Your corporate culture? What nouns and adjectives would you use to convey your brand's promise and its solution? What words might your customers use to describe your company? Are there any misconceptions about your company that need to be cleared up?

Also, you'll want to analyze what your competitors are doing. For instance, there may be about five positions that toothpaste companies can stake out: tastes good, fights cavities, whitens teeth, freshens breath, etc. When Tom's of Maine entered the market very late, they had to pitch something different -- the environmental benefits of their brand. Otherwise, they would have just encroached on what their competitors were doing and diluted their entry into the marketplace.

Q: So you determine what makes your company different and valuable, and then list words that convey those concepts?
A: Yes, and then what I do for clients is develop a brief that summarizes all that information and use it as a platform for developing 75 or 100 potential taglines that the clients scrutinize and evaluate and eventually narrow down to the one they want."

Business Legal and Tax Issues

Legal Aspects of Buying or Selling a Business

Common Small Business Legal Mistakes

The Value of Preventive Legal Audits

Website Legal Pitfalls

Key Legal Issues in Collaborations and Licensing

Primer on Advisory Boards

Legal Issues in the Global Information Society

Open Source Software Comes with Legal Risks

Start Up Business Structure Choices

University Technology Transfer Overview

Document Important Agreements in Writing

Private Placement Legal Issues

How To Conduct a Background Check

Compliance Policies Key to Corporate Crime Prevention

OSCE Database Of Defamation Laws

Protect Your Business with "Non-Agreements"

CA Law Increases Risks for Private Placements

What to Include in an LLC Operating Agreement

No-No Interview Questions

Changes to Bankruptcy Act Affecting Businesses

If You Don't Document It, It Never Happened

How Limited Liability Companies (LLCs) are Taxed

Sub-S vs LLC: Self-Employment Tax Issues

Why Incorporate in Delaware?

Small Businesses Need "Premaritial Agreements"

Small-Business Retirement Plans

Ten Tips Regarding Comparative Advertising

Businesses May Have Legal Obligation to Combat Phishing

Legal Reasons to Retain E-mail, Web Pages and Other Records

Legal Issues to Consider Before You Say "You're Fired"

Shred This: Identity Theft Law Affects Small Business

Delaware Court Holds Directors With Specialized Expertise to a Higher Standard

What can you say when you raise private money?

Five Key Privacy Challenges for Employers

Open Source Indemnification and Warranty Risks Require Review

The Americans with Disabilities Act: A Primer for Small Business

Non-Compete Covenants Enforceable in Franchise Agreements

Why is Shareholder Liability Limited?

Sole Proprietorship Basics

Avoiding Sarbanes-Oxley Pitfalls

SOX and the Private Company

Recap of The Sarbanes-Oxley Act

Ten Employment Mistakes Plaintiffs Lawyers Hope You Make

Global Outsourcing Legal Issues

Detailed Guide to Preparing a Business Plan

Follow this link from AddisChamber.com to access a very detailed guide to develop a business plan covering marketing, production, organization and finances. In Word format, its ready to go.

Copyright & Fair Use Explained

"Fair use is a copyright principle based on the belief that the public is entitled to freely use portions of copyrighted materials forpurposes of commentary and criticism. For example, if you wish to criticize a novelist, you should have the freedom to quote a portion of the novelist's work without asking permission. Absent this freedom, copyright owners could stifle any negative comments about their work.

Unfortunately, if the copyright owner disagrees with your fair use interpretation, the dispute will have to be resolved by courts or arbitration. If it's not a fair use, then you are infringing upon the rights of the copyright owner and may be liable for damages.

The only guidance is provided by a set of fair use factors outlined in the copyright law. These factors are weighed in each case to determine whether a use qualifies as a fair use. For example, one important factor is whether your use will deprive the copyright owner of income. Unfortunately, weighing the fair use factors is often quite subjective. For this reason, the fair use road map is often tricky to navigate."

This summarty from Stanford University Libraries explains the various rules behind the fair use principle. Found via this surf11.com post.

Making Source Code Escrows Work

"Hundreds of companies pay thousands of dollars to set up source code escrows to protect their business critical software applications, so that if their licensor goes out of business, they can still get access to the source code and can continue to maintain the software. Unfortunately, though, in many cases these escrows are like having an insurance policy from a hopelessly insolvent insurer: In the one situation when you need it, it may provide no protection. But, as described in a recent article [from Farella Braun + Martel], with a few careful additions, source code escrows can be tweaked so that they do work in the real world."

From this IP Blawg post.

What's in a Name?

This Nolo.com webpage provides answers to commonly asked questions about choosing and registering a successful business name, including:

What's the best type of name for my business?
What issues should I keep in mind when picking a name for my business?
How do I find out if the business name I want is available?
What is a trademark?
What is the 'legal name' of my business?
What is a fictitious business name?
Do I have to register my business name?

Via this I/P Updates post.

Common Intellectual Property Rights Mistakes

This post by Dennis Fernandez identifies the ten most common IP mistakes he encounters in conducting venture capital investment due diligence as follows:

1. TOO LATE TO START FILING US AND INTERNATIONAL PATENT APPLICATIONS
2. TOO NARROW LEGAL SCOPE OF CLAIMING PATENTABLE INVENTIONS.
3. INTERNALLY MISMANAGED PATENT INFRINGEMENT; "WILFULNESS" EXPOSURE.
4. RELYING SOLELY ON COPYRIGHTS FOR SOFTWARE PROTECTION.
5. INADVERTANTLY TAINTING I.P.R. WITH 3RD-PARTY CO-OWNERSHIP RIGHTS.
6. IGNORING THE IMPACT OF NEW "FESTO" U.S. SUPREME COURT RULING RE: PATENT AMENDMENTS.
7. UNDERESTIMATING THE IMPORTANCE OF TRADE SECRETS AND CONFIDENTIALITY.
8. OVERLOOKING LEGITIMATE OPPORTUNITY TO SET-UP OFFSHORE LICENSING TAX SHELTERS.
9. RESPONDING SLOWLY TO U.S.P.T.O. OFFICE ACTIONS.
10 OVER/UNDER-SPENDING ON LEGAL FEES TO PROSECUTE PATENT APPLICATIONS.