by lilibalfour | | think
Whether or not it is wise to invest time and money to apply for a patent, trademark or copyright on your startup’s core intellectual property (IP) assets depends on the nature of the IP itself, your industry and its competitive dynamicsand the contribution IP is expected to make towards your startup’s ultimate success.
For instance, in certain industries (biotech or semiconductors), having a patent around the core IP can be crucial to even getting the first set of investors tothe table. In some other industries, such as consumer Internet or software, I believe patents are typically an afterthought and a nice-to-have luxury as insurance against future lawsuits.
In yet other industries such as fashion and creative arts, patents are rarely mentioned and instead trademarks and copyrights take center stage.
It is critical to have a realistic picture of the true costs of obtaining IP protection in terms of time, money, team distraction and public disclosure. Only an experienced IP attorney in your field can truly assess these costs.
To give a general picture, patents tend to be the most expensive and difficult form of IP protection to obtain, and can easily cost well over $10,000 and involve two to four years of back and forth with the US Patent Office. Trademark and copyright work can be registered a lot quicker and typically costs $1,000 or less.
It’s also important to consider the cost of patent trolls.
Every entrepreneur has read at least one horror story about patent infringement lawsuits brought on by non-practicing entities aka patent trolls. A recent survey estimated that in 2011 alone, companies spent $29 billion defending themselves against these suits.
So, if you are planning for success, you may need to create defensive patent strategies that would make it less likely for your startup to be entangled in expensive litigation with patent trolls.
To avoid the expensive costs, you can consult with competent patent counsel and devise a strategy that would both minimize the upfront cost to you and provide you with sufficient downstream protection as your company grows and raises its profile.
The good news is that the legal marketplace in the US is currently undergoing a renaissance and you have several options to consider:
Law Firms – Large, established firms will often have an IP department with highly trained and experienced practitioners. The typical fee deferment that some law firms offer promising startups may or may not apply to patent work because of the high demand patent practitioners face at law firms. But it is definitely worth talking to some firms to get a sense for style and points you need to consider as you evaluate your options.
Tip: Create a list of the top 20 law firms in your area and contact attorneys who specialize in patent work.
Online Legal Marketplaces – The recent trend of online legal marketplaces makes it easier for entrepreneurs to quickly find legal help. These online platforms typically enable you to tap into an experienced legal workforce that has a much lower overhead than law firms and can offer you better pricing and service, as practitioners on these platforms highly value their public client ratings. If you want the flexibility of working with a sole practitioner, and want to potentially save money on your hourly rate, search online.
Tip: It takes only a minute to post a request on a legal marketplace such as UpCounsel and receive free quotes from attorneys. A quick search for patent attorneys located in California or New York alone delivers dozens of highly skilled patent legal professionals.
Many entrepreneurs fear asking for legal advice because they don’t believe they can afford it. It is best to ask for help and determine a budget (deferred fees or hourly practitioners) that works for you, rather than to risk making costly legal mistakes.
by lilibalfour | | think
The Problem
I don’t believe that there is a gender bias, but rather a personality bias in the startup community. The startup world favors individuals who are focused on winning and are willing to go to any lengths to succeed. Unfortunately, women are typically raised in a manner that doesn’t develop these personality traits.
In my opinion, boys and girls receive entirely different messages about purpose and meaning in their formative years. Boys are typically raised to compete in aggressive activities; where winning is the main goal, and they play games where the smartest person is the winner.
Read what other mentors say on whether there’s gender bias in the startup world.
Most girls spend their formative years making sure they are well-liked and popular. Girls are socially conditioned to believe that their purpose and meaning in life is derived from their physical appearance and popularity. Most young girls spend very little time playing aggressive sports or intellectually challenging games. Naturally, they grow up to be women who don’t care about being the winner or being the smartest kid in the room.
The Solution
We need to create a world where females feel comfortable exploring competitive, and historically male-dominated fields. It is critical that young girls view intelligence and hard work as feminine, not masculine, personality traits.
The foundation for change has begun. Debbie Sterling, a Stanford educated engineer, created GoldieBlox to show young girls that they can enjoy engineering, and still enjoy their feminine side. Kimberly Bryant, a seasoned engineer and project manager, created Black Girls Code to introduce young girls to the fun side of tech. These are only a few ways that women are actively engaged in the solution, and not the problem.
by lilibalfour | | think
At Boxworks 2013, Box CFO Dylan Smith led a lively discussion with a panel of Silicon Valley investors, from newcomers The Social Capital Partnership to blue chip General Atlantic.
The Future of Venture Capital
With so many VCs entering the full-service arena, the question was poised: Is VC now a platform offering a multitude of services to entrepreneurs?
The panel chimed in that the role of a VC is to impart knowledge, instill confidence in the market, and dole out capital. If VCs can assist in PR, marketing, and recruiting its additive, but it is definitely not their core expertise. Entrepreneurs should be manage their expectations.
Growth Strategy
As the IPO market is beginning to firm up, many entrepreneurs wonder if an IPO is the right path for their company. Former Verisign CFO and seasoned board member (Omniture, acquired by Adobe; MySQL, acquired by Sun, Box, Survey Monkey, Criteo, Everyday Health, Linden Labs, Fusion-io and Proofpoint) Dana Evan pointed out that it took Verisign $5 million in capital to get to their IPO. Today, more capital would be needed before a company could reach IPO status. Let’s not forget it took over $300 million before Facebook was ready to make its public debut. Dana also points out that an IPO is not the end game some entrepreneurs believe it to be. She cautions that once a company goes public, they lose flexibility. To some degree, Wall Street Analysts become big brother. Companies are not able to execute on creative ideas that may interfere with profitability as Wall Street Analysts are closely watching EPS and ready to stamp a ‘sell’ recommendation on any company that doesn’t perform to expectations. If you are thinking that an IPO is the only exit strategy, you may want to cast a wider net.
It’s true that the cost of building a company has never been lower, however the cost to exit has never been higher. Entrepreneurs need to be mindful of the Series A crunch, which evolved when the market was flooded with seed capital without a corresponding increase in Series A capital. If it is increasingly difficult to secure a Series A round, you may not make it to a Series B or C. Hence, your long winded exit strategy may be cut short.
Now more than ever, entrepreneurs need to focus on a broad exit strategy. If an IPO is not feasible, they should be open to a merger or acquisition. And they should understand this strategy early.
Go Big or Stay Home
The panel underscored the need for companies to think big and go global. “Silicon Valley is limited and companies need a global market to scale,” noted Brett Rochkind of General Atlantic. As Rory O’Driscoll of Scale Ventures pointed out, “Playing safe is the riskiest part of building a tech company.” Entrepreneurs need to think big to get people motivated. Dana Evan points out that the culture at Box in the early days is one of the things that got her to join on as a board member. When teams are working on big ideas there is a distinct excitement in the air that others can feel. It’s contagious.
If you are building a company today, be sure to shoot for the moon, but be flexible in your exit. It’s critical to look at your competitive landscape, macro capital markets, and internal goals to determine the optimal exit strategy for your company.
Do you agree or disagree? Leave a comment below and let me know.
by lilibalfour | | think
1) They don’t create a capitalization table (commonly referred to as a cap table).
A cap table provides clarity around ownership. It will assist entrepreneurs in understanding the effects of issuing too much equity too soon. Too often, I see entrepreneurs freely giving away equity as compensation without realizing the extent of dilution they are causing.
It is normal to provide 1 percent to 2 percent of your company’s equity to an advisor who is willing to vest over a set time period of 6 to 12 months in exchange. The rationale behind vesting the shares is that you want to make sure this individual is performing activities that will enhance your company’s growth. As an advisor, I take equity in companies and specify that it will vest on a monthly basis as long as the contract is active, which is typically four to six months.
The problem I see often is when entrepreneurs dole out 5 percent or more to each person who provides ancillary services. If you give an accountant 5 percent of your company’s equity in exchange for an audit, you are diluting the company in exchange for a service that does not enhance your company’s growth.
Tip: Create a cap table and barter or pay cash for services that do not provide ongoing value to your company.
2) They don’t integrate their option pool with their hiring plan.
An option pool sets aside equity for future hires. Once the cap table is in place, the entrepreneur can start to develop their option pool. Of course, all smart entrepreneurs know to develop a financial model that details their hiring needs on a monthly basis for the next 24 months. This, in turn, provides guidance for the option pool.
The entrepreneur will look to the hiring needs of the company for the next 24 months. If they are raising outside capital, they will structure their option pool around the next funding event. In other words, they will create an option pool that will last up until their next funding round. Each subsequent round will have an adjusted option pool.
Here’s an example:
Six months ago, I seeded my company through a crowd funding campaign. Today, I want to raise $3 million, which will take me through to the next financing round, which I anticipate will occur in 18 months. Therefore, I create an option pool that covers all applicable hires within the 18-month time frame.
I use the following schedule for guidance:
C Level (CEO/CTO/CMO) 2% to 10%
Vice President 1% to 2%
Director .5% to 1%
Executive .5% to 1%
Your option plan will vary depending on the characteristics of your company. If you have a non-tech company that is highly focused on selling a non-tech product or service to your target audience, your CMO may warrant a higher percentage of options than your CTO. In other words, ask yourself how critical each role is and award the role accordingly. The more critical the hire, the higher the percentage of the option pool.
Tip: Create an option pool based on your company’s hiring and fundraising needs.
3) They don’t get legal guidance when negotiating the equity in their term sheet.
One common point of contention is an investor who inserts the option pool into the pre-money valuation. This may seem like a minor issue, but it dilutes the valuation of the company.
Here’s an example:
A company has a pre money valuation of $15,000,000.
An investor agrees to invest $5,000,000, which creates a post money valuation of $20,000,000 (pre money valuation + investment = post money valuation). However, the investor stipulates that 10 percent of the fully diluted shares will be set aside for the option pool. This 10 percent option pool represents $2,000,000 (10 percent x $20,000,000). Your valuation has gone from $15,000,000 to $13,000,000, as the $2,000,000 worth of stock has been set aside for future hires.
This can be remedied by asking for an increase in valuation. Most investors are amenable to the increase in valuation as they know that the option pool is a sensitive issue.
Tip: Always seek legal advice when negotiating a term sheet. Understand how each term in your term sheet affects your company.
In summary, entrepreneurs should pay close attention to the equity in their company. It is a finite source and should be distributed with the utmost care. Your option pool will be critical in attracting top talent, so you will want those working with you incentivized accordingly. Last, but not least, an ounce of prevention is worth a pound of cure. Always seek legal advice before signing off on any investment.
Still have questions about equity? Join me on August 16, 2013 at 11:00 am PST for a free, online Spreecast. You can RSVP and ask questions here — http://www.spreecast.com/events/finance-for-startups-5–2
If you can’t view it live, save the link and watch the replay at your leisure.
by lilibalfour | | think
When you first set out to execute your brilliant idea, you may feel that you have all of the answers. You are able to make decisions quickly and move at lightning speed. However, you will learn that you will go further by collaborating with and building an A-Team.
The first step in building your A-Team is determining the skill sets that you will need. If you are building a technology-based company, it is ideal that you have two co-founders: a technical co-founder and a co-founder who understands sales, marketing, PR and branding. In this scenario, you have two co-founders who are equally responsible for executing the idea. Of course, no two people have all of the answers.
The next step to building your A-Team is determining where you can fill in any deficiencies. It is critical that you first brainstorm all of the key functions within your newly formed company, and then determine the best route to patch up deficiencies. Be brutally honest. This is a great time for you and your co-founder to do some soul searching.
Now that you understand your company’s deficiencies, you can do one of three things: bring in a third co-founder, recruit staff or develop an advisory board.
Co-Founder – When you recruit a co-founder, make sure he or she has a critical role. You’ll know you have too many co-founders when you break out your organizational chart and certain co-founders have few critical tasks.
The mistake I see most often in the early stages is recruiting a chief operating officer too soon. This might seem like a good idea at first, but a small company does not have various layers of operations. In fact, it is best that the two (or three) co-founders oversee operations at the early stages. They will want to observe, and adjust, the infrastructure as needed.
Staff – When you recruit staff as a startup, remember that each new hire will be a huge percentage of your company and will have a strong affect on your company’s culture. Recruit people you have worked with in the past or people that come strongly recommended to you. At the early stages of your company, a bad hire can be disastrous.
The mistake I see most often in startups is the inability to let go of a bad hire. If a hire is not adding to the company, they are subtracting from the company. Do not be afraid to let them go.
Advisory Board – When you bring on advisory board members, make sure they are filling a real need. Don’t add vanity names.
If these people are not truly involved with the growth of your company, you lose credibility.
In summary, your A-Team will consist of key players who are assigned critical tasks. As you recruit staff and advisory board members, make sure each new person enhances your company’s culture and growth.
