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Using Social Media to Raise Capital?  Bad idea (even it is to buy beer).

Using Social Media to Raise Capital? Bad idea (even it is to buy beer).

If you are raising capital for your startup business through some sort of securities offering (i.e.  selling stock, LLC units, notes, bonds…etc…to investors), hopefully you have sought the advice of a good lawyer.  And hopefully the first thing that lawyer did was grab your ear and explain to you the concept of “general solicitation.”  And hopefully then that lawyer explained to you that if you generally solicit potential investors, you run the risk of getting smacked silly by the SEC and state securities regulators – especially if those solicitations turn into actual sales of securities.

In general, the rule against general solicitation means that you cannot advertise, engage in a mass mailing, or issue a press release that discusses the existence of your offering / potential offering of securities. A conservative interpretation of the SEC’s view is that all potential investors should be people with whom a company, its directors, officers, or full-time employees have a pre-existing business relationship.  If you want to generally solicit, you need to register your securities with the SEC, which means big bucks in legal and underwriting fees (e.g. and IPO).

Now you can officially add social media to the list of no-no’s (which should have been quite obvious anyways).

Yesterday the SEC announced a settlement with two advertising executives who launched a Twitter and Facebook campaign to buy the Pabst Brewing Company, makers of the questionably classic beer Pabst Blue Ribbon.  They also created a website that is no longer around – BuyaBeerCompany.com (yes!).  Their stated goal was to raise $300 million to buy Pabst.  So they started taking pledges, and apparently received around $15 million in pledges within a few weeks – and the full $200 million from 5 million pledgers within 5 months (wow!).  Of course this attracted media attention, which alerted the SEC to the campaign, and of course the SEC got all hot and bothered.  This was clearly a general solicitation, and the SEC was having none of it.   In the end, the two never received the $300 million in pledges, and never collected any money.  The SEC issued an order finding that these two knuckleheads violated federal securities law. As a result, they must cease and desist from committing or causing any violations and from committing or causing any future violations federal securities law – which the knuckleheads consented to without admitting any wrongdoing.

This was more about setting an example than actually dishing out punishment (they got slapped on the wrist). The clear message is that if you start tweeting to the masses that you are raising money, be prepared to get an SEC boot planted in your rear.  Luckily for these guys they never actually collected any money, and more importantly, never lost any money they may have collected – because then this would have been about punishment – and the penalties can be quite severe.

I am not always a huge fan of our securities regulatory scheme – sometimes it makes it very difficult and expensive for a startup with little capital to raise the capital it needs to get off the ground or expand.  And this is coming from someone who makes a decent living advising business owners who are raising capital.  Still, there is a reason these laws and regulations are in place (scam artists lurking EVERYWHERE).  So if you are raising capital, be careful, and get some good advice.  And stay off the twitter. And the facebook.  And don’t launch a website called “PleaseInvestInMyCompany.com” (I already own that domain name anyways).

 

Posted in Private Placement (PPM), Raising Capital, Raising Venture CapitalComments Off on Using Social Media to Raise Capital? Bad idea (even it is to buy beer).

Check Me Out On The Latest 8ify.com Podcast

Check Me Out On The Latest 8ify.com Podcast

I am a huge fan of 8ify.com and its fearless technology ninja leader @BrandonCorbin.  Earlier this week I had the pleasure to spend an hour talking with Brandon on episode 20 of his great @8ify podcast series.  I think it turned out pretty good, and we talk about what’s going on around Indy, about designing sewers (not kidding), and other wine/bourbon induced topics.

You can listen to the podcast here, or you even better, subscribe to the whole podcast series on iTunes.  You may note that the logo to the right has a really neato caricature of none other than Brandon Corbin himself.  This is way cooler than the stuffy picture of me wearing a tie that continues to circulate the Internet and is shown on the podcast page.

If you have any interest in recording a podcast, or if want to know more about why you SHOULD be recording a podcast for your business, you need to check out Brandon’s podcast production studio Digital Good Studio!  Tell him IndianaStartup.com sent you, and maybe he’ll give me a cookie.

Posted in Indiana Startup News, Startup AdviceComments Off on Check Me Out On The Latest 8ify.com Podcast

The LEAST you should do to protect your startup’s IP

The LEAST you should do to protect your startup’s IP

Early startups don’t always have the funds to seek qualified legal representation. However, a company’s valuable intellectual property (copyright, trademark, patent) assets are at risk from day one.  Below are several important steps your startup can take to identify, define and protect its intellectual property before you ever phone a lawyer.

Copyright – a set of rights granted to the author or creator of an original work, including the right to copy, distribute and adapt the work.

To protect your copyrights, the LEAST your startup should do:

  • Include a copyright notice – © – on all significant original works, including software, manuals and advertisements
  • Use copyright ownership/assignment agreements with employees and contractors
  • Educate staff on the importance of your startup’s copyrights and other intellectual property

Trademark – a word, phrase, symbol or design that identifies and distinguishes the source of the goods of one party from those of others.

To protect your trademark rights, the LEAST your startup should do:

  • Perform a clearance search before adopting any trademark – check trademark database, major search engines and domain names
  • Use the trademark notice – TM
  • Claim your domain names and social media accounts

Patent – the right to exclude others from making, using, offering for sale or selling an invention

To protect your patent rights, the LEAST your startup should do:

  • Require all employees and consultants to enter into invention assignment, nondisclosure and noncompete agreements
  • Require invention disclosure forms and have all technical/inventive personnel keep dated notebooks/logs of invention
  • Conduct periodic review of possible inventions

As you might imagine, there’s still plenty to do to truly protect your startup’s intellectual property. Protecting your confidential trade secrets will be discussed in another post. However, doing the above will put your startup in a better position when you first sit down with an IP attorney. Don’t underestimate the importance of establishing good IP practices at an early stage.

Posted in Startup AdviceComments Off on The LEAST you should do to protect your startup’s IP

A Primer on Indiana LLCs

A Primer on Indiana LLCs

An Indiana LLC offers all of the advantages that most people would point to when assessing whether to form an Indiana LLC as opposed to operating a business as a sole proprietorship.  Those would include:

  • Limited liability and protecting personal assets.
  • Creates credibility with business customers and clients.
  • The risk of audit can be reduced in some cases.
  • It becomes easier to deduct certain valid expenses.

An Indiana LLC offers all of the advantages that most people would point to when assessing whether to form an Indiana LLC as opposed to a corporation.  Those would include:

  • An Indiana LLC provides a great deal of flexibility and organizational freedom.
  • An Indiana LLC can be member managed, manager managed, can have any number or type of officers.
  • An Indiana LLC has less requirements, restrictions and formalities under Indiana law.
  • An Indiana LLC can allocate profits, losses, and distrubutions among members in whatever manner the members agree to – not so for a corporation and its shareholders.
  • An Indiana LLC has far fewer restrictions than an S corp and can have as many members as it needs.
  • An Indiana LLC can enjoy pass though taxation.  Any business profit or loss is passed through to the members, so that they pay the taxes individually on their personal income tax returns.  Paying tax at the business level is avoided for an LLC.

Finally, forming an Indiana LLC does have a few advantages over forming an LLC in a different state:

  • Forming an Indiana LLC is fast!  The process of filing articles of organization with the Indiana Secretary of State can be done electronically – and in most cases – your Indiana LLC can be up and running within 24 hours.  Some states require documents to be mailed to the state, while other require that certain notifications be published in the newspaper – all of which can take weeks!
  • Forming an Indiana LLC is can be a private and confidential process.  Most other states require that the name and address of members, managers and/or officers of the LLC be filed as a matter of public record.  Indiana only requires that the name and address of the registered agent of an Indiana LLC be filed (which can be anyone located in the state of Indiana – typically an attorney or registered agent service provider).
  • Forming an Indiana LLC only requires a $87.00 filing fee with the state (which is included in in all of our LLC formation packages).  Some other states charge double, triple, and even quadruple that amount.

Posted in Limited Liability Companies (LLC)Comments Off on A Primer on Indiana LLCs

Private Placements – A Brief Overview of Raising Capital with a PPM

Private Placements – A Brief Overview of Raising Capital with a PPM

If you are looking to raise capital for your business, a private offering of securities might be one way for you to consider. Selling securities, whether it be to friends and family or angel investors, is an excellent means of raising capital if you are prepared and do it the navigate the maze of state and federal laws and regulations involved.  The following is intended to provide a basic understanding of raising capital via the private placement process. You should retain the services of a private placement attorney to advise you through the entire private placement process.

The SEC created Regulation D, which creates certain rules for private offerings. By following these rules, an issuer (i.e. a company selling stock, LLC units, partnership interest, notes, or other forms of a security to raise capital) generally may raise capital without a public offering.

Generally, a private offering may have no more than 35 investors. On the federal level, though, certain high-net-worth investors defined as “accredited investors” may be excluded when calculating the number of investors. There must also be NO general solicitation of investors by the issuer – no advertising. Just this weekend I came across someone soliciting the “private” sale of securities on Twitter – definitely not a good idea if you are trying to comply with the registration exemptions under Regulation D.

The federal securities laws for both public and private offerings are based on the premise that investors in securities are best protected by the disclosure of all relevant information regarding the securities and the issuer. The underlying guideline in this respect is Rule 10b-5, which requires the issuer to disclose to investors anything material that a reasonable investor would want to know prior to making a decision to invest. This is why PPMs are stocked to the brim full of material facts, disclaimers, and lots and lots of risk factors. Failure to properly include these and other items may subject the issuer to serious liability, including being forced to buy back the securities from the investor, as well as damages. If you want to avoid liability, overdisclose, do not hide anything, and do not mislead (among other things of course).

Keep in mind that there are also state “blue sky” laws to comply with – and they will need to be complied with in every state that a security is offered and/or sold.

There are lots and lots of land-mines to avoid when raising money in a private offering – so make sure to consult a private placement attorney / securities law attorney before you raise capital for your business. Also, I may be a lawyer, but the above is not legal advice!

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Raising Venture Capital – How Much Should You Give Up?

Raising Venture Capital – How Much Should You Give Up?

From the title of this post, you are probably assuming it refers to the chunk of your company you will be giving up in exchange for an infusion of capital.  You would be right – mostly.  In addition to giving up equity, start-up founders also give up some measure of control when they raise venture capital.  Therefore, the first part of this post will deal with equity; the second part will deal with control / governance.  Keep in mind that what i say below is not necessarily applicable to seed capital or early angel rounds – which I will discuss in a later blog post.

How Much Equity Should You Give Up?

Easy money 24

Don't expect a free lunch.

Unfortunately, the answer is not something you will typically have control over.  Generally, an investor will give a value to the business based on the net present value of future cash flows, then setting its desired ownership percentage based on its target internal rate of return.  A big component to this determination will be the level of risk associated with the investment.  So if you want to give up less, you’ll need a good valuation…and you’ll need to minimize risk.

How Much Control Should You Give Up?

Unfortunately, this is someting you will also not have much control over.  A venture capiltalist will want board seats.  They probably will not require control of the board, but they will likely require supermajority voting provisions on certain issues such as spending capital, raising capital, and selling the business.  The venture capital board members will also likely require directors fee and reimburesement for travel expenses.   Make sure that the number of seats the investor is entitled to adjusts based on percentage ownership; so as that percentage goes down, so do the number of board seats they are entitled to.  Also keep in mind that venture capitalists typically bring very valuable wisdom and exprience to the table – so having them on your board is not necessarily a bad thing.

Posted in Raising Venture CapitalComments Off on Raising Venture Capital – How Much Should You Give Up?

Business Planning – Your Strategy

Business Planning – Your Strategy

Too often business plans concentrate on just the numbers, with little explanation on how a business will arrive at a destination .   Just like a road trip, mapping your trip is an important part of the process.

When it’s time for a road trip, how do you plan your route? Do you tend to stick to all the major highways, do you try to save time with a little-known shortcut, or do you end up lost and confused on an unmarked back road?

The business strategy section defines the general direction your business will travel. Typically, strategy is broken into four elements: product, place, price, and promotion, often referred to as “The Four Ps.” Product description and strategy are covered earlier in the plan, so this section should focus on the other three elements. Remember, each decision should contribute to the business’ ability to meet the needs of the target customer.

In the business strategy phase, you will outline a general direction. In the next section, operations, you will expand on this information and address specific steps you will take to achieve your goals.

Place (Location) – Was location important to customers? Have you chosen a business location? Will you need more than one location? What factors are important in your choice of location?

Price – What pricing methods are you using and why? Is the price set by competitors? Is your goal to be highest, lowest, or in the middle, and why?

Promotion- What is your Unique Selling Proposition and how will you promote your product? What types of advertising and marketing will you use? Marketing Expenditures are a significant portion of your total budget, be sure to include a preliminary budget in planning.

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Operations:  Adding Fuel to Your Ideas to Get Your Business Moving

Operations: Adding Fuel to Your Ideas to Get Your Business Moving

Running a business is like one long road trip and your business plan is your road map.  Staying with the “map” metaphor, the strategy section outlines where you are going and the operations section describes the type of fuel you will put in your engine.  Here you begin the process of  dividing the tasks and responsibilities so no important details are forgotten, and resources are allocated appropriately.

Sales and Sales Management – The plan should include discussion on who will conduct sales and how will they be trained and compensated.

Manufacturing/Supply – Think of manufacturing in broad terms. What is your process for creating and delivering your product or service?

Staffing Issues – Summarize the current key job descriptions and outline a plan for business continuation.

Controls – Recordkeeping and documentation are important parts of your business. Lenders look to your records to be sure there is adequate control over finances. More important, these records will help you as a business owner determine whether you are on track to achieve success. Important records include:

  • Accounting System and Auditors
  • Records for Monitoring Sales Activity
  • Other Marketing Records

Posted in Raising Capital, Starting a BusinessComments Off on Operations: Adding Fuel to Your Ideas to Get Your Business Moving

Market Reasearch, An Important Part of Your Plan

Market Reasearch, An Important Part of Your Plan

When you prepare to vacation in a new city, state, or country, do you set out uninformed about your destination — or do you read a few guidebooks, surf the Internet for advice, or perhaps visit a travel agent? You likely do at least a little bit of homework first so that you know what to expect.

Customers

Everyone is NOT your customer. The more well-defined your customer, the more confidence the reader has that you actually know your market. What is the geographic scope of your market? Is this a hard or soft boundary? Describe demographics of target customers. Why will a customer buy your product? Who are the innovators – the ones who will be first to buy – among target customers?

Product Features and Sensitivities

From the customer’s perspective, describe the three most important features of your product.

Which of the following elements will be most influential in your customer’s buying decision?  Which are irrelevant?

Customer Sensitivities

  • Price, Quality
  • Your Reputation and Customer Service
  • Product Appearance and Size
  • Packaging, Ease of Handling, and Transportability
  • Variety
  • Operating Characteristics
  • Location, Facilities, and Hours of Operation
  • Credit Terms
  • Advertising and Promotion
  • Seasonal Cycles

Competitors

Even new, completely innovative products have competition. Long before your product comes into the market, customers have found ways to solve their problems. Understanding who your real competitors are is critical to your business success. As you analyze your competitors, it can be helpful to think about the three levels of competition.

Level 1 – These companies solve the customer’s problem with products or services that are very similar to yours.

Level 2 – These companies offer an alternative solution to your customer’s problem.

Level 3 – These companies do not solve the same problem, but compete for your customer’s limited resources.

Find this interesting? Sign-up for the Business Plan in 10 Weeks newsletter or purchase “Business Map: A Practical Guide to Business Planning” by Lorraine Ball.

 

Posted in Raising Capital, Starting a BusinessComments Off on Market Reasearch, An Important Part of Your Plan

Starting a Business – Forming a Corporation

Starting a Business – Forming a Corporation

A corporation is an entity created under statute that is separate and distinct from its owners. In other words, a corporation can be created only by following the requirements of the relevant statute (in Indiana, it is the Indiana Business Corporation Law) and will not automatically be created (as can be the case with some partnerships). Once formed, the corporation is recognized as being independent from you, the owner/shareholder. The corporation is managed by directors and officers; sometimes, the directors and officers are also the shareholders. From a liability standpoint, the corporation affords you complete protection; creditors must rely on the assets of the corporation and you are notpersonally liable for anything beyond your investment and financial commitment to the corporation.

That said, lenders frequently require shareholders of smaller corporations to personally guarantee the debt of the corporation. Corporations are the most complex entities, both in terms of creation and operation. In addition to filing articles of incorporation, corporations need to adopt by-laws, elect directors and officers, and in many states, have regular meetings. There may also be annual reporting requirements with the Secretary of State in addition to annual fees.

The shares of a corporation are freely transferable and unlike a partnership or limited liability company, the transferee of yourshares will succeed to all of your rights in those shares. In other words, the person to whom you transfer your shares will be just as much an owner of the corporation as you were. This ease of transferability can have significant impact later on as you begin to implement exit strategies (that is, you are ready to retire from
the enterprise).

From a tax perspective, corporations can also be more complex than their partnership and limited liability company counterparts. Usually, a corporation is a separate taxable entity. It pays tax on its income and later, when it distributes accumulated income to the shareholders, the shareholders will pay a second layer of income tax on those dividends. This “double taxation” is a significant drawback for most corporations. There is a special type of corporation (commonly referred to as an “S” corporation) that generally is not subject to double taxation. An “S” corporation allocates income and losses on a pro-rata basis to its shareholders, although the use of losses by a shareholder is limited to that shareholder’s basis in the corporation. You must strictly adhere to rigid equirements imposed on “S” corporations, and shareholders sometimes are surprised by how easy it is to terminate an existing “S” election inadvertently.

Occasionally, a business owner might intentionally choose the double taxation of a regular corporation to take advantage of certain corporate tax benefits. For instance, while partners in a partnership cannot be employees of that partnership, shareholders in a corporation can be employees; as a result, these shareholders can participate in certain fringe benefits extended to “employees” under the federal tax law, such as flexible spending accounts. Other examples include (i) the ability of a corporation to participate in tax-advantaged reorganizations unavailable to partnerships and limited liability companies and (ii) the potential for up to $50,000 ($100,000 on a Married Filing Joint Return) of losses from the sale, exchange, or worthlessness of certain small business corporation stock to qualify for ordinary loss treatment (as opposed to capital loss treatment).

As you can see from this post and my prior business entity selection and formation posts, a good deal of thought and care must go into your decision of what type of legal form your new business should take. Quite often, the advantages of one form will be offset by disadvantages not present in another. As mentioned, within similar types of legal forms, nuances exist that make the decision all the more difficult. By identifying the right combination of advantages and disadvantages and with the assistance of competent advisors, the right choice of entity selection can help ensure your business success.

Check back soon for a post regarding limited liability companies.

Posted in CorporationsComments Off on Starting a Business – Forming a Corporation

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