WSJ: Most Accelerators Are of Doubtful Value
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.
Why You Shouldn’t Use a Finder to Find Venture Capital
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
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.
If You Accept Venture Capital, You will Lose Control of Your Company
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.
WSJ: Lots of Money for Social Startups
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
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:
- Why (not) Incorporate in Delaware?
- Why are So Many Corporations Formed in Delaware?
- In which State should My Startup Incorporate?
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:
- Realistic Financing Options for Startup Companies
- VCs Pleased: Signs of Return to Normalcy
- Need Funding? WSJ Offers Tips to Gain Credibility
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.
Investor Due Diligence Should Go Both Ways
Due diligence is a routine part of an investor’s decision whether to invest in a company. The company also should conduct its own investor due diligence.
A couple of years ago, I worked with a company (“Client”) that provided e-mail security products. Previously, Client’s founder (“Founder”) had arranged for an equity investment by a company controlled by an individual in Southern California (“Investor”).
First Mistake: No Legal Counsel
One of Founder’s huge mistakes was not seeking legal counsel to review the terms of the investment. Two of those terms were disastrous for Founder. (more…)
Realistic Financing Options for Startup Companies
Sure, you dream of venture capital to turn your great idea into entrepreneurial success. But guess what: The vast majority of startups will never come close receiving venture funding.
There are alternatives, however. Here are approaches that my clients typically consider: (more…)
