The High-touch Legal Services® Blog…for Startups!

© 2009-2017 Dana H. Shultz, Attorney at Law

WSJ: Most Accelerators Are of Doubtful Value

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Accelerators offer entrepreneurs seed funding and one-to-one mentoring in exchange for an equity stake, making a profit when some of their startups receive institutional (VC) funding. However, according to a Wall Street Journal article published yesterday (Start-Ups Crowd ‘Accelerators’), most accelerators – especially those outside Silicon Valley, Boston and New York – are of doubtful value.

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Why You Shouldn’t Use a Finder to Find Venture Capital

Picture of a compass (for determining direction based on magnetic North)

I recently spoke with three startup entrepreneurs who had just retained a finder to locate venture capital in exchange for an equity stake in the form of warrants (the right to purchase shares at a specified price by a specified date). They got very nervous when, after reading their agreement with the finder, I told them the business and legal reasons why retaining the finder was a bad idea: (more…)

MarketWatch: Europe’s Start-ups still Drawn to the Valley

Logo for MarketWatch, which published an article about Europe's start-ups

An article, “For Europe?s start-ups, Silicon Valley still calls”, was published yesterday by MarketWatch, part of The Wall Street Journal Digital Network. It discusses why the tech entrepreneurs behind Europe’s start-ups continue to flock to the San Francisco Bay Area.

The article’s theme:

Divided by geography, language, regulation and, in some cases, just old-fashioned cultural prejudice, the region has struggled to shed fully its image as a place where men and women with ideas are born, but where they do not necessarily stay, prosper or secure funding.

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If You Accept Venture Capital, You will Lose Control of Your Company

Picture of two teams in a tug of war

After several years of hard work, a client has gained so much traction that venture capitalists – on their own initiative – are asking to make an investment. When the first term sheet arrived, however, the founder / CEO was disappointed – the valuation was fine, but his ability to make significant decisions would be curtailed. I pointed out: If you accept venture capital, you will lose control of your company.

The loss of control does not result from a change in voting power: The VC will own a minority of the corporation’s shares and will control a minority of the seats on the board of directors.

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WSJ: Lots of Money for Social Startups

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In an article published yesterday (“Money Rushes Into Social Start-Ups”), the Wall Street Journal reported that VCs are investing in companies that are taking social networking from computers to mobile phones. The rationale, according to the article (emphasis added):

Behind the spurt of new services is also the idea that the phone, carried by people at all times, can reinvent the notion of a social network by sharing more real-time information about where people are, what they’re seeing and even who they’re around.

Other points made in the article: (more…)

WSJ: Web Start-Ups Get Upper Hand Over Investors

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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.

Do VCs care where my company is incorporated?

Several weeks ago, a first-time entrepreneur called. He had read that venture capitalists prefer investing in Delaware corporations, and he sought my input on the subject.

I replied that, in my experience, incorporation either here in California or in Delaware is fine. Then I started wondering why what the entrepreneur read differed from what I had experienced.

I did some research and conducted an informal survey of a few VCs. Here are my tentative conclusions:

  • California-based VCs are comfortable investing in corporations that are formed in either CA or DE (thus my experience, because the vast majority of the VCs whom I know are here in the Bay Area).
  • VCs outside California have a preference for investing in Delaware-based corporations, though that preference can be weak or strong, depending on the VC. Even with a strong preference, however, a Delaware-preferring VC will invest in a corporation in another state if it is the right deal

Related posts:

This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact an attorney directly.

WSJ: Startups Will Keep Struggling in 2010

In an article published yesterday (Start-Ups Will Keep Struggling in 2010), the Wall Street Journal reported that startup funding will remain tough to find in 2010.

The major problems:

  • Most entrepreneurs use personal savings or contributions from friends and family, but personal wealth – often tied to the value of homes or stock portfolios – has not bounced back from the economic downturn.
  • For both conventional bank loans and those insured by the Small Business Administration, entrepreneurs most show (a) that they have invested a significant amount of their own money and (b) solid cash-flow projections.
  • During the first half of 2009, the total value of angel investments fell 30% compared to 2008; 2010 is expected to continue at the 2009 level.
  • While venture capitalists are continuing to invest, they typically have been protecting later-stage companies already in their portfolios rather than funding startups.

The minor bits of good news:

  • While angels are investing less per deal, the total number of deals increased during the first half of 2009 over 2008.
  • Stimulus-related measures may increase SBA loans from 1% of all small-business lending to between 5% and 10%.

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Related posts:

This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact an attorney directly.

WSJ: VCs to Resume Funding Startups in 2010

In an article published today (After Dry Year, Start-Ups Are Poised to Get Cash), the Wall Street Journal reported that venture capitalists will resume funding startups in 2010.

The major reasons for this development:

  • During much of 2009, VCs were hoarding cash to protect their existing companies. With the economy and the stock market stabilizing, VCs are returning to investment mode.
  • Whereas initial public offerings were almost nonexistent this year, investment bankers see IPOs returning in 2010.

Some additional points made in the article:

  • During 2009, the vast majority of the (modest) VC investment that did occur was in information technology or health care.
  • For 2010, VCs are looking for opportunities in social networking, mobile technology, health-care technology, and clean technology.

Related posts:

This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact an attorney directly.

You Can Have a Successful Business Even if You Don’t Have a Patent

I recently met a software developer who wants to start a business. He immediately started talking to me about obtaining a patent. Condensed a bit, our conversation went roughly as follows:

  • Dana: Without giving away information that would jeopardize your ability to obtain a patent, what would the software do?
  • Developer: It is enterprise customer relationship management (CRM) software.
  • Dana: What is novel and non-obvious about it?
  • Developer: It will be based on a unique algorithm.
  • Dana: You cannot patent an algorithm.
  • Developer: I can get a patent on software that implements an algorithm.
  • Dana: Perhaps. But there are other means, such as trade secrets, that might adequately protect the software [cut off in mid-sentence]….
  • Developer: VCs want to invest in companies that have patents.

Leaving aside the singular focus on VC funding – something that few entrepreneurs obtain (see Realistic Financing Options for Startup Companies) – the would-be entrepreneur was similarly myopic in focusing on a patent as the only type of intellectual property that matters.

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