The High-touch Legal Services® Blog • For Startup Companies

In an article published today (Venture Capital to Suppress Its Appetite for Risk in 2013), the Wall Street Journal reports that venture capitalists have dramatically lowered their appetite for risk, reducing the power of Internet entrepreneurs who are seeking funding.

The article notes that:

• In light of disappointing stock-market performance of Facebook, Zynga and Groupon, VCs are investing less in consumer Internet companies.
• During the past year, valuations have gone down significantly.
• On a quarter-over-quarter basis, the number of deals, the amount invested and the percentage of “up” rounds all have declined.

Read more…

In an article yesterday (Where the Action Is), the Wall Street Journal discussed seven centers of innovation across the U.S. – other than well-known locations, such as Silicon Valley and Boston – where entrepreneurs, investors and government are working together to develop specific industries.

Those industries and their locations are:

• Outdoor Sports Gear – Ogden, Utah
• Cybersecurity – San Antonio, Texas
• Information Technology  – Kansas City, Kansas / Missouri
• Life Sciences – Indianapolis, Indiana
• Health Care – Nashville, Tennessee
• Beer Brewing – Asheville, North Carolina
• Nanotechnology – Albany, New York

Dana H. Shultz, Attorney at Law  +1 510 547-0545  dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.

I frequently talk to individuals who are about to start new businesses. Sometimes, our conversation reveals that the nascent entrepreneur is:

• Age 30-something,
• Married, and
• Parent of a young child, or has a first child on the way.

When I learn this, I immediately ask, “Have you done any estate planning?” The answer invariably is “No.”

Read more…

In an article yesterday (“Peer-to-Peer Loans Grow”), the Wall Street Journal discussed increasing use of peer-to-peer lending sites such as Prosper and Lending Club by small-business owners.

The reason such use is increasing: During and since the financial crisis, small businesses have had a difficult time obtaining bank loans, and the loans that they can obtain often have unfavorable terms.

How peer-to-peer lending works: The borrower pays the site a fee. The site analyzes the borrower’s creditworthiness, sets an interest rate accordingly, and posts the loan. Investors anonymously invest small amounts – less than $1,000 – in loans that interest them. As each loan payment is made, each investor receives his or her portion. Because the site has low overhead, borrowers pay a lower interest rate that they would to a bank; in turn, investors receive a higher return than they would from many other investments.

The sites are regulated by the Securities and Exchange Commission. As a result, they issue prospectuses that highlight the risks of using the sites. For example, the Prosper Prospectus includes more than 20 pages of risks related to borrower default, Prosper’s ability to service the notes, and the like.

Perhaps most important, in the event of a  default, the lenders cannot go after the borrower directly. As a result, lenders should be prepared to lose the entire amount of their investments. However, with default rates of less than three percent, peer-to-peer lending can make sense for investors who spread their money in small chunks among many loans – and it makes a huge amount of sense for borrowers who cannot obtain money elsewhere.

Dana H. Shultz, Attorney at Law  +1 510 547-0545  dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.

A few days ago, a first-time entrepreneur contacted me, asking that I advise him on such issues as employees vs. independent contractors, equity compensation, and the like.  As we exchanged e-mails, however, I could see that there were fundamental business issues to which he had not given sufficient consideration.

I wrote that, in my opinion, the he didn’t need a lawyer – he needed a management consultant or business advisor to help him solidify his business model and prepare a business plan. I recommended that he start with the U.S. Small Business Administration. He was thrilled – he called the SBA and made an appointment to visit them the next day.

Bottom line: A lawyer can help you get your business off the ground – but, first, you should have a reasonable idea of where that business is going and how it expects to get there.

Dana H. Shultz, Attorney at Law  +1 510 547-0545  dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.

The evening of May 18, the Silicon Valley Association of Startup Entrepreneurs (SVASE) will present, as part of its East Bay Series, “Pitching: How to Go the Distance and Chalk Up a Win”.

Here is the description from the SVASE website (emphasis added):

Pitching isn’t just about the Giants winning the World Series – it’s also about entrepreneurs presenting their companies to potential investors. In this session, two real-life entrepreneurs will pitch their companies to a panel of investors, who will explain what the entrepreneur – and you – can do to better direct your presentations to investors’ highly-subjective strike zones.

The panel of investors includes:

• Nicolas El Baze, Partech International
• Jay Jamison, Blue Run Ventures
• John Matthesen, Serial Entrepreneur / Angel Investor / Venture Partner

The program will take place at the beautiful Crow Canyon Country Club and will include a tasty buffet dinner.

Dana H. Shultz, Attorney at Law  +1 510 547-0545  dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.

In an article published today (“Web Start-Ups Get Upper Hand Over Investors”), the Wall Street Journal reported (emphasis added) that “As venture capitalists scramble to get a piece of Silicon Valley’s new Web boom, entrepreneurs … are finding they have the upper hand.”

Here are some of the points the article makes about the latest Web boom:

• As VCs search for the next Facebook or Twitter, some entrepreneurs are positioned to have a greater say about how much they raise and deal terms.
• Bidding among VCs is driving up the price of many deals.
• Angel investors are driving up the prices of the tiniest early-stage companies.
• Some entrepreneurs are taking advantage of the situation by seeking the best advisors rather than the greatest amount of money.

Dana H. Shultz, Attorney at Law  +1 510 547-0545  dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.

A successful exit by acquisition is one of the great thrills of entrepreneurship. That exit does not come easily, however. This post discusses, by category, the most important documents and information that you will need to provide during the acquirer’s due diligence process.

Corporate Documentation

• Articles of incorporation and bylaws, as amended
• Minutes of board and shareholder meetings and actions
• Share transfer ledger, including name and address of each shareholder
• Agreements pertaining to shares and shareholders’ rights (buy-sell, voting rights, etc.)
• List of holders of option or warrants and all applicable agreements

Read more…

At 6 pm on Wednesday, September 15, the Silicon Valley Association of Startup Entrepreneurs‘ East Bay Series will present “Picking the Right VC” at the beautiful Crow Canyon Country Club in Danville (tasty buffet dinner included).

Panel members:

• Kent Godfrey, Pond Venture Partners
• Tim Wilson, Partner, Partech International
• Sean Jacobsohn, Harvard Angels

Dana H. Shultz, Attorney at Law  +1 510 547-0545  dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.

Recently I have received questions from entrepreneurs who are starting a second line of business. They want to know whether the new business should be under the same legal entity – perhaps with a separate fictitious business name (DBA) – or under a separate corporation/LLC.

This is not really a legal issue: Either approach can work just fine. The differences between the two approaches are business-oriented.

The advantage of using the existing entity is minimal additional paperwork or cost.

The advantage of creating a new entity is that it isolates the businesses from one another. If one of the businesses fails or has serious legal or financial problems, the other business will not be affected.

Only the entrepreneur can decide whether the ability to isolate the businesses is worth the cost of a second entity. I suspect that, for many entrepreneurs, the answer would be “yes”.

Related post: Should I form an LLC or a corporation?

Photo credit: Emil Bacik via stock.xchng

Dana H. Shultz, Attorney at Law  +1 510 547-0545  dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.