ITS ALL ABOUT BUSINESS

Plan Your Business
Get Ready
Write a Business Plan
Start Your Business
Find a Mentor
Finance Start-Up
Buy a Business
Buy a Franchise
Name Your Business
Choose a Structure
Protect Your Ideas
Get Licenses and Permits
Pick a Location
Lease Equipment
Manage Your Business
Lead
Make Decisions
Manage Employees
Market and Price
Market and Sell
Understand Fair Practice
Pay Taxes
Get Insurance
Handle Legal Concerns
Forecast
Advocate and Stay Informed
Use Technology
Finance Growth
Getting Out
Plan Your Exit
Sell Your Business
Transfer Ownership
Liquidate Assets
File Bankruptcy
Close Officially


BUSINESS PLAN'S MISTAKES :-

1. Failing to incorporate early enough.One problem that arises here is the so-called "forgotten founder": a partner involved in starting the venture subsequently drops out. When the venture gets financing or is ready to go public, this partner returns, perhaps with an inflated view of what his or her contribution was, demanding equity. This problem can be eliminated by incorporatingearly and issuing shares to the founders, subject to vesting. As partial consideration for their shares, each founder should be required to assign to the new corporation all inventions and works related to the company's proposed business.Incorporating early - before significant value has been created and well in advance of any financing event that establishes an implicit value for the shares—also helps prevent potential tax problems for "cheap stock." Incorporating too late, and issuing inexpensive stock to thefounders at the same time that much more expensive stock is being sold to investors, can create tax problems when the IRS argues that the difference in stock price is actually income to the entrepreneur.

2. Issuing founder shares without vesting.Simply put, vesting protects the members of the founding team who take the venture forward. If people remain on the team and are productive, their shares will vest. If they leave earlier, that stock can be retrieved and given to whoever is brought in to replace them.

3. Hiring a lawyer not experienced in dealing with entrepreneurs and venture capitalists.Many venture capitalists say that they often rate the judgment of entrepreneurs by their choice of legal counsel. Lawyers who have no experience working with entrepreneurs and venture capitalists will most likely focus on the wrong things while failing to recognize some of the more subtle potential traps. It's better to hire someone who has played the game, who knows what's standard and what isn't, and who will get the deal negotiated and closed promptly.

4. Failing to make a timely Section 83 (b) election.If the advice in #9 is followed, then shares will be issued, subject to vesting, to the founders as well as new employees. If stock is acquired and it's subject to what the IRS calls a substantial risk of forfeiture, then the IRS doesn't view the purchase as being closed until that risk goes away. When the stock vests, that risk evaporates, so the IRS considers the deal closed. The IRS then calculates the difference between the price paid at the outset and the fair market value at that later date, then taxes this difference as ordinary income. An 83 (b) election allows the tax computation to be made basedon the value at the time the shares are issued, which is often pennies per share.
5. Negotiating venture capital financing based solely on the valuation.
A no-name firm offering the highest valuation is often not the best source of equity. Valuation is not the only thing one should consider when selecting a venture capitalist or when negotiating the deal. There are many other ways for venture capitalists to get compensated if they end up paying a high price for shares. These include requiring participating preferred with a high cumulative dividend, redemption rights exercisable after only several years, and ratchet anti-dilution protection with no cap.One must ask, what's the reputation of this firm? Do they have ahistory of standing by the entrepreneur if the entrepreneur stumbles? Do they have good contacts in the industry? In trying to build alliances, do they know the big players? A no-name firm offering the highest valuation is often not the best source of equity.

6. Waiting to consider international intellectual property protection.Patents are granted on a country-by-country basis (with a single application available for the European Union). In the United States, if an invention is sold or made public, there's a year's grace period to file a patent application. Everywhere else, if the invention is sold or publicized prior to filing the patent application, the invention is unpatentable in that country. For example, if the invention is publicly disclosed to a Japanese national visiting a tradeshow in the United States, then under Japanese patent law, if no patent application has been filed, that disclosure makes the invention unpatentable in Japan. The same is true with trademarks. A tremendous amount of money might be spent in developing a brand in the United States, yet when the product is shipped overseas it could violate trademarks of companies dealing in similar goods outside the UnitedStates. One must make intelligent choices of where they think their markets are, and how much money to spend at an early stage in order to insure that the brand is available in those markets.

7. Disclosing inventions without a nondisclosure agreement, or before the patent application is filed.If patent protection hasn't been obtained, or in cases where a patent is not available, the only protection is to maintain something as a trade secret. To do so, one must show that they've taken reasonable steps to keep it secret from competitors.Is it wise to get potential venture capitalists to sign a nondisclosure agreement? In the best of all worlds, yes, but most won't. Before disclosing to anyone, one must learn who has a reputation for integrity in the industry. In dealing with most people, it's wise to require them to sign nondisclosure agreements. It needn't be elaborate, but it should say that they acknowledge they may be exposed to trade secrets, and they agree not to use or disclose them without permission. Business plans should expressly state on the cover page that they are confidential and proprietary. That's not as strong as a nondisclosure agreement, but laws in some states suggest that if a person knows they have been exposed to a trade secret, they can't use it or disclose it without permission from the owner.

8. Starting a business while employed by a potential competitor, or hiring employees without first checking their agreements with the current employer and their knowledge of trade secrets.The law is clear that if someone is currently working for a company, particularly if her or she is a key employee, they cannot operate a competing business. Even just incorporating may spark a lawsuit from the current employer. Would-be entrepreneurs should first go to their current employer and either resign or tell them what they're doing and ask them if they'd be interested in investing. Amazingly, that's often a very smooth way of ending that relationship. Under no circumstances should they misrepresent the nature of the new business.Even after leaving the current employer, one still cannot use or disclose the company's trade secrets. Under the so-called inevitable disclosure doctrine, if someone has been exposed to trade secrets at their job and leaves to work for someone else, and if their responsibilities in the new job are sufficiently similar, some courts will conclude that it's inevitable that they will use the information that they had from the earlier position. They could face an injunction prohibiting them from working for the new employer until a number of months go by and whatever trade secrets they had are stale.It also helps to know whether potential recruits are subject tocovenants not to compete. States vary in terms of how enforceable they are, but one shouldn't assume they are not. One should also check to see what assignments of inventions might have been signed. Personnel files should be reviewed, and recruits should check theirs, to be certain that a covenant not to compete or an assignment of inventionswasn't tucked into a signed non-disclosure agreement.

9. Promising more in the business plan than can be delivered and failing to comply with state and federal securities laws.If someone promises to do something and knows that they can't perform that promise, that's considered fraud. In a business plan, one must make an honest appraisal of what's doable and set forth their assumptions, so the person putting up money can judge whether they are realistic. Can entrepreneurs be sued by their funders for fraud? Yes.Trying to squeeze out a little extra valuation by fudging the numbers erodes credibility, makes investors less trusting, and ultimately impairs the ability to get subsequent rounds of financing.Finally, anyone selling stock or other securities must comply with both the federal and state securities laws by either registering the securities (rare for a start-up) or meeting all the requirements for an applicable exemption. Ignorance of the law is no excuse. As one judge put it in a decision upholding criminal convictions for violating the securities laws: "No one with half a brain can offer 'an opportunity to invest in our company' without knowing that there is aregulatory jungle out there."

10. Thinking any legal problems can be solved later.There's a tendency to think, "Once I get my funding, once I'm up and running, then I've got time to hire the lawyers; right now, I'm running as fast as I can to get my business plan done and raising money." This is shortsighted logic. Many of the points made here are problems that can't just be patched up later. Does that mean that one should devote all of their time, effort, and money to the legal issues? No. That's a good reason to hire a competent lawyer. Excellentlegal talent can be retained for relatively little money up front at the early stages. It will cost much less to get it right at thebeginning than to try to sort it all out later and correct it.

HOW TO APPROACH VENTURE CAPITAL?

The VC connects wealthy investors to nerds. There are fewalternatives. You can self-fund by consulting and by setting aside money for your venture. That doesn't work. You could go to friends and family, but that risks friendships. You could find "angel" investors, but that only delays going to VCs.The VC community is a closed one. It caters to a restricted audience. In fact, you don't get to meet a VC unless you have a personal introduction. Don't send them your business plan unless the VC has personally requested it.VCs don't sign nondisclosure agreements. That affords them protection if they like your ideas, but they want tofund someone else to do them. At least two of my friends have had their ideas stolen and funded separately. One case was blatant theft--sections of the original business plan were crudely copied and taped into the VC-sponsored plan. My friend sued and won a moral victory and a little money. The start-up based on the stolen idea went public and made lots of money for that start-up's VCs. Most entrepreneurs don't have the time, the means, or the proof to sue. In the second case, venture firm D sent its expert several times foradditional "due diligence" regarding the possible investment. My friend got funding elsewhere, but D funded its expert with the same ideas.VCs are sheep. The electronics industry is driven by fads, just as the fashion and toy industries are. The industry is periodically swept by programming language fads: Forth, C++, Java, and so on. It's swept by design fads such as RISC, VLIW, and network processors. It's even swept bytechnical business fads such as the dot-coms. No area is immune. If one big-name VC firm funds reconfigurable electronic blanket weavers, the others follow. VCs either all fund something or none of them will. If you ride the crest of a fad, you've a good chance of getting funded. If you have an idea that's too new and too different, you will struggle for funding.VCs aren't technical. Mostly, they aren't engineers--even the ones with engineering degrees. An engineering degree is a starting point. If you design and build things, you can become an engineer; if you work on your career, youcan become an executive or a venture capitalist. VCs in Silicon Valley are as technically sophisticated as VCs come. As you get geographically farther from technical-industry concentration, investors become more finance-oriented and less technically-oriented. Like all people, they dismiss what they don't understand, your novel ideas, and they focus on what they know, usually irrelevant marketing terms or growth predictions.Experts aren't very good. The VC will send at least one "expert" to evaluate your ideas. Don't expect the expert to understand what you are doing. Suppose your ideaimplements a cell phone. The VC will send an expert who may know all there is to know about how cell phones have been built for the last 10 years. As long as your idea doesn't take you far from traditional implementations, the expert will understand it. If you step too far from tradition--say, with a novel approach using programmable logic devices instead of digital signal processors--the expert will not understand or appreciate your approach. One company I worked with had an innovative idea for a firewall: build it with programmable logic and it works at wire speed. Wire speedmeant no buffering, no data storage, and therefore no need for amicroprocessor or for an IP (Internet Protocol) address. Simple installation, simple management, but so different that experts - even those from programmable logic companies - didn't understand it. To them, proposing a firewall without a microprocessor and an IP address was like proposing a car without an engine. No funding. Back to workat a big company. Worse for them; worse for us. The industry loses.Progress is delayed.VCs don't take risks. VCs have a reputation as the gun-slinging risk-takers of the electronics frontier. They're not. VCs collect money from rich people to build their investment funds. Answering to their investors contributes to a sheep mentality. It must be a good idea if a top-tier fund invested in a similar business. VCs like to invest in pedigrees, not in ideas. They are looking for a team or an idea that has made money. Just as Hollywood would rather make a sequel than produce an original movie, VCs look for a formula that has brought success. They're not building long-lasting businesses; they're looking to make many times the original investment after a few years. When VCs build a venture fund, they charge the fund's investors a management fee and a "carry." The carry, which is typically 20 to 30 percent, is the percent of the investors' profit that goes directly to the VC. The VC, who gets a healthy chunk of any venture-fund profits,may have no money in the fund. Even a small venture fund will be invested across a dozen or so companies, spreading risk. Also, the VC, as a board member, will collect stock options from each start-up the fund invests in. The rich investors take some risk, though their risk is spread acrossthe fund's investments. The real risk-takers are the entrepreneurial engineers who invest time and brain power in a single start-up.Venture funds are big. Too big. If your idea needs a lot of money, say $100 million, then you have a better chance of getting money than an idea that promises the same rate of return for $1 million. The VCs running a $1 billion funddon't have the time to manage one thousand $1 million investments. It won't even be possible to manage two hundred $5 million investments. It's better to have fewer, bigger investments. In such an environment, if you need only $5 million, your idea will struggle for funding.VCs collude. VCs collect in "bake-offs" that are the VC's version of price fixing. They discuss among themselves funding and "pricing" for candidate start-ups. Pricing sets the number of shares and the value of a share, and is typically expressed in a "term sheet" from the VC to the start-up. VCs optimize locally. It wouldn't do for several of them tofund, say, six companies in an industry wedge. Limiting the options totwo or three limits competition and makes the success of the few more likely. The downside: limiting competition stifles innovation and slows progress. As in nature, competitive environments foster healthier organisms. Innovation is the beneficial gene mutation to the current technology's DNA.VCs don't say no. If the VC is interested, you can expect a call and, eventually, a check. If the VC is not interested, you won't get an answer. Saying "no" encourages you to look elsewhere--that's not good for the VC, who prefers to have you hanging around rather than going elsewhere forfunding. Fads change; the herd turns; your proposal may look better next year. In addition, the VC may want more due diligence from you - to add your ideas to a different start-up's plan. If VCs think you have few alternatives, they will string you along: "I love the deal, but it'll take time to bring the other partners along.""We need more time to get expert opinions.""We're definitely going to fund you, but we're closing a $500 million fund, and that's taking all our time.""I'll call you Monday."Once your alternatives are gone, they negotiate their terms.VCs have pets. The VC's version of a pet is the "executive in residence." Many venture firms keep a cache of start-up executives on staff at $10,000 to $20,000 per month (a princely sum to an engineer, but just enough to keep people in these circles out of the soup kitchens). Start-up executives, loitering for an opportunity, may collect these fees frommore than one venture firm, since the position entails no more than casual advising. These executives have "experience" in start-ups. When you show your start-up to the VCs, they will grill you about the "experience" of your executive team. It won't be good enough, but not to worry, the VC supplies the necessary talent. You get a CEO. The CEOreplaces your friends with cronies. The VCs' pets are like Hollywood's superstars. Just like Julia Roberts and Tom Cruise, the superstar CEOs command big bucks and bigpercentages (of equity)--driving up the cost of the start-up--but are "worth it" because they give investors and VCs a sense of security.Your idea, your work, their company. The VC's CEO gets 10 percent of the company. VC-placed board membersget 1 percent each. Your entire technical team gets as much as 15 percent. Venture firms get the rest. Subsequent funding rounds lower ("dilute") the amount owned by the technical team. Venture firms control the board seats. The VC on your board sits on 11 other boards. Board members visit once a month or once a quarter, listen to the start-up's executives, make demands, offer suggestions, and collectpersonal stock options greater than all of the company's engineers hold, with the possible exceptions of the chief technology officer and the vice president of engineering. The VC's executives control the company. You and the rest of the engineers do the work. VCs take advantage...to maximize the return for the venture fund's investors. Engineers are getting short-changed.Values at variance. The VCs know money and they don't care about the technology; the entrepreneurs know technology and they need money. Money knowledgeapplies across all the start-ups; the technical knowledge is unique to each. The VCs don't care about any single technology because they spread their investments across the opportunities. Knowing money isn't the same as knowing value. A year ago, VCs were lining up to give money to Internet dog-food companies; this year, they wouldn't back aninventor with a working Star Trek transporter. It's financial; it's not technical or personal. To the VC, the engineer and the ideas are commodities. The venture firm squeezes thetechnical team because it can. VCs believe that they are exercising their responsibility to maximize return for themselves and for the fund's investors.