Zane Safrit

Review: The Tech Entrepreneur's Survival Guide

Wow! That’s what I thought as I flipped through the pages of The Tech Entrepreneur’s Survival Guide: How to Bootstrap Your Startup, Lead Through Tough Times, And Cash In for Success.

Some books on startups, like their founders, are heavy on rah-rah and emotion and light on details. Nothing wrong with that. There’s a huge audience and a number of successful startups. I worked for two, becoming the details-oriented CEO for one.

Some books on startups, like their founders, are big on case-studies and stories.

And others are extensions of productivity treatises in the style of How to Get Things Done. That’s cool. An entrepreneur’s life is nothing if it’s not about getting things done, right?

But no book, I’ve read recently, had combined all these areas and more into a single, efficient and well-written Survival Guide. And on top of that the author, Bernd Schoner PhD and CoFounder of ThingMagic shows the entrepreneur how to Cash In, too.

Rare, ridiculously rare, is the entrepreneur whose expertise encompasses all of these parts and facets. That’s the downfall of so many, one of these. But with Bernd’s book an entrepreneur can raise the stakes and the percentages that they will avoid these common potholes along their journey.

He organized the book into Parts and chapters, starting from The Entrepreneurial Dream - Part 1, Bootstrapping: Venture Creation Out of Thin Air through Startup Assets and What to Pack in Your Bag through Cofounders (Key!) to Equity Funding: A Double-Edge Sword in Part II to finally Part III: Exit Strategy. As that’s the standard journey for an entrepreneur, it’s easy to find the section you need or want to read.

As I always do when I read a business book, I scan the table of contents. If they’re simple and clear, pointing me from the book’s start to its conclusion, then it makes it easy for me to jump to the first page and start reading. Bernd’s organization does just that.

Schoner’s writing is crisp and clear. It has to be in order to cover these areas in one book. That’s a good thing for entrepreneurs whose time is of the greatest essence.

Schoner includes his experience as cofounder of ThinkMagic in such a way that adds credibility not arrogance to his narrative. I found reading those parts helped lower skepticism and enhanced the pleasure of reading his book.

But what I really liked about his book, and why I’ll keep it close at-hand, is the depth and breadth of the details he offers in each section. There’s excellent advice on everything from  Copyright, Trade Secrets and Know-How to System Admin and Graphic Design and Inventory Management. There’s detailed discussion of government funding programs such SBIR, Small Business Innovation Research, and the STTR, Small Business Technology Transfer. There’s detailed discussion of employee perks from disability insurance to commuter and train tickets and food. I want to list them all, but I don’t want to bore you and I hate reviews that merely describe the contents of a book.

 I just want to impress upon you that you should read this book if:

•  an entrepreneur or if you’re considering taking that step;

• if you’re an angel investor or you’re considering being an angel investor, you will better  understand the entrepreneur’s journey and discover more resources to help you and your investment reach the best ROI;

•  an accountant, a legal professional advising small businesses and startups, you will better understand the challenges your clients may face and the solutions available to them.

• working at a startup, well you know,  to better understand the challenges you and your founders face and be a valued employee by offering some of these solutions to your founders;

• working at a Fortune 500 whose policies and routines are written in stone and you're thinking you might like a go at that new startup;

• a fan of well-organized, well-written books.

There's not much else to say after that, is there?

 

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Highlights from My Conversation with Todd Sattersten, author of Fixed-to-Flexible

Todd Sattersten joined the show last week. We wanted to talk about his new, and great book: Fixed to Flexible: Four Simple Lessons About Cost, Price, Margin and The OptionsAvailable to The 21st Century Business.

You can listen to our conversation here.

I’m a firm believer in that if you admire and respect folks, well, you should tell them. Right to their face or voice in this case. Todd’s one of those rare individuals who...packs a heart with smarts. Intellectually, Todd could hold his own with almost anybody. And those who may not, there may be a few...he’s smart enough to listen until he can.

And for those he clearly surpasses, he’s kind enough and articulate enough to make them feel they are his equal, sharing their unique solutions and views of the world. Those two, the big heart, the sharp mind, get applied creating friends and partners and fans wherever he goes because he helps them reach their goals. And quietly allows them all the rewards.

Any business, any size, can benefit from reading Todd's new book. And it’s free as a download.

Let’s talk about your new book. Fixed to Flexible: Four Simple Lessons About Cost, Price, Margin and The Options Available to The 21st Century Business.

Congrats. When did it go live?

It went up on Groundhog Day – my most favorite day of the year.

Our friend, Erika Andersen, has a phrase I love. The phrase is reasonable aspiration or hoped-for goal. What was your ‘reasonable aspiration’ or ‘hoped-for goal’ in writing this book?

There has been so much conversation around price in the last couple of years. I thought I could connect a different set of pieces together that people may have not thought of or seen before. I wanted people to think differently about what pricing means and what options people have available to them. Understanding that you have more options creates more power as you go to do things.

How will you know when you have reached it? What will change about your life?

I know I have reached it already because of the feedback. I have received more feedback on this project in just two weeks than all the feedback on the 100 Best Business Books of All Time.

Note: Todd co-wrote with Jack Covert of 800CEORead. Also, a great book.

There is clearly something that is ringing true with people regarding cost, margins, price and decisions.

How has it changed your life?

The way it has changed my life is that it make me realize that I need to do more projects.

You compiled a lot of research and case studies for this book. Where were you most surprised? Was it some data or a case-study?

I think the thing I found most interesting was a case study on a company called EverNote. They are a web-based service: I like to call it digital memory. You can upload anything and store it. I think it pulls together a whole set of ideas of the next business models that will evolve. It is a free service – about 2.2 million people utilize it for FREE. It is fully supported by 40,000 that pay $5.00 a month for the premium service. His model actually works and I love seeing that.

Note: Todd's interview with EverNote's CEO

Note: I use Evernote. It’s surprisingly cool, simple and very useful. And I've just touched some of its uses.

Who is your audience? More specifically, describe thereader you had in your mind as you wrote this book.

I was speaking to the sort of person that is like you and I, Zane: independent- creatives that are doing a variety of projects for people, whether they are assisting with customer service or graphic designers, copy writers or people with project ideas they want to commercialize. Pricing is the single most important decision people have to make and I didn’t really see a good resource to help with this. People need to know how to charge, what their products are worth, and different options. I think it ended up appealing to a wider audience but it was focused towards people who are trying to launch a project and how they should go about doing that.

Why do they need this book? What pain of theirs are you solving?

1. The unique connection of stuff. It connects the dots. It pulls together material that probably is spread over ten books and 50 websites.

2. It solves the pain of what am I going to do? They are not sure of their options. I try to convince people that there is a wider array of options available to them in terms of how they are going to market.

What are the 4 simple lessons about cost, price, margin and the options...?

If you are in business you concentrate on these things:

1. Costs - Costs are always going down. You have to manage with that. For the last 20 years the costs of hard drives have gone down 5% per quarter.

2. Price - Price is a signal. One concept I talk about is anchoring and you can sway someone’s perception about cost or product by anchoring them with a number beforehand. For example retail price tags: here is the old price- here is OUR new price.

3. Margins - Margin is when you connect price and cost together. It is the most important measure in business. It is like your weight. How many calories are you taking in versus how many you are burning tells you where your weight is at. You have control over price and costs.

4. Options - You Have Options. There are more ways than you realize how to go to market. Price discrimination is a way to create different price points for the consumer.

Time is another point. I am trying to connect all the commercial aspects of business together: sales, customer service, purchasing and pull these into one bundle and say you have many options and flexibility in terms of how you go to market.

28:57

Which lesson did we, collectively, fail as a country in the run up to this recession?

The one thing that strikes me is that money was cheap. When Greenspan set the discount rate to zero, it was here pricing got way out of whack by the fact that cheap money was available. As we are trying to get back to some semblance of order now, but I don’t think we will get past some of the problems we have been experiencing for the last 20 years.

Does our economic recovery wait while we learn this lesson? Or does one of the other 4 lessons turn us around?

It is interesting watching the status quo and the players in creating the situation we have got ourselves into.

We have a ton more options available to us.

Let us believe that we are smarter than we were. We need to understand that emotion is a powerful driver in decision-making and we need to have some speed bumps – breaking mechanisms in our free market system and they need to be balanced to stop the things that have happened over the past couple of years.

Do the 4 lessons apply equally to small businesses and large?

Yes they do. The power of the e-book is that I believe small businesses have a greater ability to apply these lessons than big business. Big business runs a little differently and small businesses are more flexible and creative in going to market. In the digital realm you have even more options, especially in book publishing. You can choose your price. I think small business has the ability to be more creative, but you have to get over the fear of pricing and product offering.

Let's say you're founder of a startup. Which lesson would keep you awake at night wondering if anybody gets it at your startup?

It continues to be price because there is no perfect answer to price. On the cost side, you can price shop the cost of the needed product. You can pay what you want to pay. When you get into the pricing aspect, there are many things that don’t have a set price – like a home or a car. There is plenty of leeway.

I am a big fan of cash-flow. That's the number I always talk about. Cash makes you king. Keep the cash flowing in and you are the king. And with banks no longer lending to small businesses, it's even more important. You reference a quote from Bo Burlingham of Inc magazine that says gross margin is the most important. Why is gross margin so important?

It tells you how hard you have to work. It tells you how many sales you need. As a business owner, at the end of the day you need to know that you make enough money to thrive. If you don’t understand the margin, you can very easily get yourself under water. Companies go out of business because they run out of money. The margin is what you get to take home at the end of the day. Margin tells you time. You need to be bringing in more money than you are spending.

44:47

In your book, great book again, you talk about an experiment by behavioral economist Dan Ariely usingWalt Whitman’s Leaves of Grass. What was that experiment?

Dan has done a lot of interesting experiments on how we perceive value. He wanted to see how his students would perceive value. He told them that he was going to have a poetry reading and it would cost $2.00 to attend. He sent out an email and only 3% would attend. This was not very promising. He made a second offer – which was free attendance. The percentage jumped to 35%.

He approached a second set of students and told them that he would pay them $2.00 to attend. 59% said they were interested. He then made a different offer, saying that the event would be free. The attendance rate dropped to 8%.

The response rates depended on the initial offer. The point is that you have a much more significant ability of how people value your product than you realize. You can construct value around what you do.

As I read it, I kept thinking about the efforts of the Big Three recently to offer more and more incentives to buy. Yes, they increased sales. But did they create repeat customers? Would making their products free have helped? What would have happened if they let the buyer determine the price of the car?

You have to understand that if it is a pay what you want, you may not recover your costs to provide the product or service. You might need a “lower limit.” I think it is tough for someone who offers a physical product to use this methodology.

What books are you reading?

Most books that are coming out are around the idea of action and work. It started with Dan Pink’s Drive: The Surprising Truth About What Motivates Us. It was a simplified model of how we should think about motivation.

Seth Godin’s book: Linchpin: Are You Indispensable? One of the ideas is how when we used to go to work, someone always told us what to do. Now we have to create our own maps. Defeat the “lizard brain.”

2 days ago I talked with Chip Heath, co-author of “Switch: How to Change Things When Change is Really Hard” which is about change.

(Listen to Todd's interview with Chip Heath.)

Rework by the guys from 37 Signals. It is about work and how we do stuff.

Thanks, Todd.

My testimonial for Todd's book. This is a short book. But I found the content and ideas and yes formulas made it a powerful book. A book I wish I'd read...a few years ago. All of it was so good, compact, crisp, I first grumbled what a headache. Disclaimer: I'm an art major. But as I read it again and again I saw the beauty of it. It opens the door to seeing your business in a brand new light, a light that can allow you to create new products, new services, new markets, with compelling gross margins and cash-flows to make and keep you king.

Small Business Lending Disconnect

An article in CFOZone highlights the disconnect between small business lenders and their former customers. The disconnect was highlighted in recent survey by the Federal Reserve of Senior Loan Officers.

Here's the banker's perspective:

In its January 2010 Senior Loan Officer Opinion Survey on Bank Lending Practices released Monday, the Federal Reserve determined that the 78 respondents generally ceased tightening standards on many loan types in the fourth quarter, but have yet to unwind the considerable tightening that has occurred over the past two years. You can read the full results here.

Here's the small business perspective...now, two years later.

Additionally, the Fed survey suggests firms don't necessarily even want more loans. Only two banks reported moderately stronger demand for loans from small firms, while 18 reported weaker demand. In all likelihood, healthy firms are unwilling to take on the burden of additional debt in such uncertain times.

Don't necessarily even want more loans? How about don't even want to bang their head against a brick wall, a wall they, the small business customers and their employees, built for the bank.

Small businesses report they no longer are interested in loans from commercial banks. Why should they be interested? If they survived this recession, then they did it on their ability to extract concessions from employees to vendors, from customers to partners...and not from the help of their former partners in growth: commercial lender.Those small businesses that survived have little interest in being customers of those who chose to abandon them while they struggled to survive.

Banks celebrate their means of survival by citing their survival without needing federal assistance...while not discussing how they cutoff the source of jobs in their communities.That source is their small business customers.

And now we have a jobless recovery. That means at some point...those consumer loans will no longer be a source of revenue for the banks, either.

I have a feeling that some banks and even small businesses may play fiddles while their communities burn metaphorically.

That might be how these two reconnect in the future.

$30 billion...hey, it's a start

Today, President Obama will announce the latest initiative in his series of plans to spur growth, bolster hiring and free up credit for small businesses: a new $30 billion "small-business lending fund" created from TARP money.

The fund would be available to community banks with assets of $10 billion or less for small-business lending...USAToday

Hey...it's a start.

The logic for this is that small community banks with under $10 billion in assets are:

.. the small, local banks that work most closely with our small businesses — that provide them their first loan, and watch them grow through good times and bad.

The questions that are not clear include:

• Why so late?

• When will these funds be made available?

• When will they create jobs?

• Why have the community banks, many who remain healthy through this economy, chosen to stop working closely with their community of small businesses?

• Why have the larger banks not participated in these loans despite their ads to the contrary.

• Why does it fall on the federal government to facilitate commercial lending NOW when many banks see their balance sheet reflect healthy asset-liability ratios?

• Exactly how do these banks expect our economy to recover, jobs to be created, customers of their lending products to be created...unless they participate with their role of lending?

• Again, why does the fed need to ...push capitalists to behave like capitalists if the fed is led by a WH labeled as socialist?

Whatever the answers are, this $30 billion in funds for small business lending is a step in the right direction. Steps in the right direction, against obstacles and resistance, is the sign of a leader.

Where’s small business with this recovery?

There’s some good news out there for small business in this recovery.

Fewer Small Business Loans in Arrears - Reuters

Delinquencies among small and medium-sized U.S. business borrowers fell in October for a third straight month, according to PayNet Inc, which provides risk-management tools to the commercial lending industry.

Arrears. I had to think about that word for a minute. Arrears...oh, yes. It means: 1 : the state of being behind in the discharge of obligations.

Everyone else might write that title as:

• Fewer Small Businesses Miss Their Loan Repayments.

Or, let's put it in the positive:

• More Small Businesses Stay Current with Their Loan Repayment Schedule.

I like that last, positive, version the best. I like the previous version some. And the arrears title brings up the rear.

The fewer here, in arrears, the better.

We Think the Economy is Worse than It Is - NY Times.

When recessions begin, people generally think current conditions are good. After recent recessions, the current-conditions index continued to decline for a number of months after the recession ended, and the economy began to improve..

By contrast, expectations about the future have a good record of beginning to rise before the recession is over, as has happened this year. The proportion of Americans who expect there to be fewer jobs in six months has fallen from 47 percent in February to 23.1 percent now. Similarly, just 15.1 percent now think business conditions will worsen, compared with 40.7 percent in February.

Awright, so the proverbial We is conflicted about our economy’s prospects. Who isn’t these days?

Generally, speaking I tend to bristle a bit at experts who say We the consumer or the We the People don’t know what we’re talking about. We do, actually. That’s been confirmed repeatedly again and again over the history of our country. And, if I wasn't a parochial American, I'd say it has been confirmed again and again around the world, throughout history.

Look closer at these two sentiments. There is no contradiction. We see the economy getting better. We see the economy getting better without possibly generating the boost in jobs that usually accompanies, generates, results from any economic recovery.

What that means is that we face the higher risk of a double-dip recession. Why? You can’t grow an economy on the back of unemployed workers.

Even in a Recession, Some Small Businesses Grow - NY Times.

According to a recent survey of 300 small-business clients conducted by SurePayroll, a payroll service based in Chicago, about 30 percent of respondents said their sales increased over the last year.

How have they done it? Turns out, in a bad economy, successful small businesses tend to be successful in their own ways.

There’s the secret sauce of small business success. It becomes less secret in a recession. Success...comes in our own ways.

Our own way...that’s the ultimate niche marketing. Your own way is a way no one can duplicate. If no one can duplicate then no one(s) can commoditize.

A recession is illustrated by the demise of commoditized industries and unsustainable business models. Think Big Trucks and the Big Three automakers for the first. Think of the recent global financial crisis for the latter.

A sustainable recovery would emphasize the growth and sustainability of small businesses doing it their own way.

SBA Runs Out of Stimulus Funds for Small Business Loans - Reuters

This is a good-news bad-news story.

Good news is there were stimulus funds for that part of the economy that will drive us out of this recession and keep us out. (Sustainable recovery sustained with job creating small businesses.)

Good news is that many small businesses were able to take advantage of this program, albeit...maybe not as soon as they would prefer.

Bad news is that the 2 loan programs that received Recovery Act funds, 7(a) and 504 Loan Programs, were exhausted after only $375 million in loans were made. This is tip money compared to the amount of TARP/Bailout money alloted to bonuses of key executives at some of the financial institutions those key executives played some role in creating the need for those funds.

Frankly, I think this $375 million will generate more new jobs. Over 60% of new jobs created in hits country between 1993 and 2008 were created by companies with fewer than 500 employees.

Good news is that it appears additional funds will be made available to sustain this very popular lending program that reduces fees for small business and risk for lending institutions.

SUMMATION

How does small business survive and in some cases thrive in a recession? Clearly, their success is not accomplished with TARP or Recovery Act funds. What is it that small business does so well despite the lack of lobbyists and PR firms to push their interests before Congress?

There's the key to success, sustainable success, for our economy.

Can you tell the difference?

Can you tell the difference between trickle-down, voodoo, economics and stimulus plan funding?

Trickle-down economics is synonymous perhaps with Reagonomics. But the gist is that if you provide enough tax credits to businesses and the wealthiest well then the benefits of their wealth will trickle-down to the rest of us.

The funding for those tax credits comes out of our pockets as tax payers in two ways. Initially they come out of our pockets in the form of lower tax revenues which are either financed through slashing government programs like education, infrastructure investment, EPA and FDA enforcement (those guys who inspect our food, water and air supply), healthcare, etc. Notice the demographic who would be most effected by cuts in these programs. Yes. Correct. The people who await the trickle-down....

Then they would come out of our pocket in the form of higher interest rates. The higher interest rates result from the higher borrowing costs that come as the our federal government needs to borrow more in order to finance itself, ourself, until the wealthy deign to trickle-down on us some of our wealth we have given them in the form of tax breaks and slashed social programs.

Every time I discuss trickle-down economics I have this picture of a medieval castle surrounded by paupers and their cottages. An anonymous hand periodically throws a few gold coins from a darkened window in the castle. They land, scattered, around the little plots of land farmed on a subsistence basis by the paupers. Sometimes they land on their heads. And each time the pauper rises up from their labor and says 'thank you lord and lady'. And the anonymous hand rotates back and forth like the hand of Queen Elizabeth.

Clearly, if voodoo economics as Bush the Elder called them or trickle-down economics worked our deficits would not have grown as they did during the Reagan years, nor would an ever increasing gap in wages and income exist now based on the rapid rise of the very richest, the decline in wages of the very poorest and minimal wage growth for those in the middle.

Stimulus funding takes our tax dollars and gives them to the banks and financial institutions whose management expertise led them to incentivize risky lending and whose vision forbade them from seeing the other shoe drop. Maybe, that's because they were hopping to another job before their bonuses were taken away. I don't know.

But the methodology is the same as trickle-down economics. Give our tax dollars to the wealthiest, in this case financial institutions, and hope they trickle-down some of that in the form of loans to small businesses who will then peform their role and create jobs.

So far, the altruism of today's bankers is no different than the altruism of yesterday's gilded wealthy of the Reagan years. In fact, they may be even greedier. They're hoarding our tax dollars while our federal deficit rises. Banks continue to refuse to lend to small businesses. Banks have announced new fees and penalties for credit card users in advance of changes to the laws. Now, their fees and penalties now are beyond what had been known as usurious. But, that's ok. We accepted them. And now they want to raise them.

And the impact on the economy is about the same. Wealth is increasingly concentrated in the hands of fewer people. Wall Street and the markets are reaching new highs at the same time unemployment is reaching new highs. Clearly, our tax dollars have yet to rain down on us. Or, the anonymous hand has yet to throw a few gold coins to the paupers.

Maybe, that's why no one looks up these days. I'm not sure.

And in defense of the stimulus funding, it's had less than one year. Whereas reagonomics had a decade or two, if you count 2001 to 2008.

But, at this point, I can't tell the difference. Can you?

Creating Jobs: Does Universal Healthcare Trump Tax Rates?

When you think about creating jobs what do you think about? What’s the one lever you can manipulate to create jobs? And let their creation drive us out of this recession?

• Taxes?
• Stimulus Dollars?
• Infrastructure Investments?
• Education?
• Universal Healthcare?

It’s taxes, right? Everyone will say taxes. Lower taxes on small business and you will create jobs.

And, it makes sense. More money left in the business owner's pocket = more money to create jobs.

Maybe. I wrote earlier this year that a cursory glance of state tax rates and their unemployment rates does not show a causal relationship between the former and the latter. States with the lowest tax rates are not always, in fact, rarely, the states with the lowest unemployment rates. Is there a recipe for creating jobs?

I asked if the difference-maker was innovation or infrastructure? The connections between these two were weaker. Anecdotal, at best. More like faith-based, really.

What if it was affordable or universal healthcare? What if the number of entrepreneurs, startups and small businesses were driven by the availability of affordable or even universal healthcare. Hold on to the rants for just a minute. Rant if you will. But wait.

A recent study sponsored by The Center for Economic and Policy Research showed the percentage of citizens in major industrial nations classified as self-employed. Greece was first with 35.9%. We, the US, were...last with 7%.

John Schmitt and Nathan Lane, Center for Economic and Policy Research.

Shocked? I was. I see us as the country of risk-taking entrepreneurs. We’re not. We’re near last in fact.

I looked at national tax rates, both statutory and effective. 


Statutory tax rates are not the rates we pay. Just ask those who held bank accounts with UBS. (Ask their ex-spouses, also.) Statutory rates are the rates in the statutes before our accountant finds the exemptions. Effective tax rates are the rates we pay. They are the statutory rates, net of exemptions.

And the OECD reports we have the lowest effective corporate tax rates in the world. By odd coincidence we have the highest statutory corporate tax rates.

To their defense, the OECD did report the connection between tax rates and economic activity.

Again, the disconnect is shown between tax rates and the rates of self-employment, entrepreneurship and small business. We have the lowest effective corporate tax rates. We have the lowest rate of self-employment, also. This is important. Why? Self-employment, entrepreneurship and small business...they are the primary drivers for job creation in any economy. They are the only job-creating drivers during a recession.

We're in a recession. They, you, become even more important. We, collectively, need to know what lever to push to generate more jobs.

Back to the quandary:

Why can countries with higher effective tax rates have higher percentages of small business and entrepreneurs and self-employed?

We can see the impact of this demographic on our rates of recovery from this recession. Look at the different rates of recovery from the global recession. Our rate of recovery remains...last. Asia has the fastest recovery rate. It’s led by China and India. Germany and France (France?) lead Europe out of its recession. EU suffered only a .1% drop in their GDP this past quarter. We suffered a 1% drop in our GDP.

I went back to that study from Center for Economic and Policy Research. Here’s their conclusion:

One plausible explanation for the consistently higher shares of self-employment and small-business employment in the rest of the world’s rich economies is that all have some form of universal access to health care. The high cost to self-employed workers and small businesses of the private, employer-based health-care system in place in the United States may act as a significant deterrent to small start-up companies,12 an experience not shared by entrepreneurs in countries with universal access to health care.

Those countries with the highest rates of entrepreneurs, self-employed and small business are the same countries with:

• higher effective corporate tax rates than we pay here in the US
• access to affordable, universal,  healthcare for its residents.

I have no data that refutes that conclusion. Do you? Ideology and faith-based reasoning is not data. Show the data that refutes this conclusion.

Or rant. But as you rant with word like socialism, government control, government rationing of healthcare, etc, remember the so-called socialist countries have higher rates of self-employment, entrepreneurship and small business are rising from this recession faster. And offer universal healthcare to their citizens.

Now, resume ranting, if you wish.

* Graph from Economix Blog.

10 Legal Tips for Your Startups

Wow. This is a great list. It's comprehensive. It's well-written. It's written by an expert. 10 Essential Legal Tips for Startups at Formation, by George Grellas, a business and corporate lawyer specializing in early-stage tech startups with offices in Silicon Valley. 

Here's some highlighted excerpts from the post and my perspectives:

1. Set up your legal structure early and use cheap stock to avoid tax problems.

No small venture wants to invest too heavily in legal infrastructure at an early stage. If you are a solo founder working out of the garage, save your dollars and focus on development.

Bam! Right there, the author shows he understands the startup's reality. And he offers a realistic solution. Realistic here means: cash-flow sensitive.

2. Normally, go with a corporation instead of an LLC.

There are special cases where an LLC makes sense for a startup but these are comparatively few in number (e.g., where special tax allocations make sense, where a profits-only interest is important, where tax pass-through adds value). Work with a lawyer to see if special case applies. If not, go with a corporation.

Ok.

3. Be cautious about Delaware.

Delaware offers few, if any advantages, for an early-stage startup. The many praises sung for Delaware by business lawyers are justified for large, public companies. For startups, Delaware offers mostly administrative inconvenience.

Wow. Ok. I'd never heard this clarification before. But administrative inconvenience for a startup means death. Startups cannot afford administrative staff. Any administrative inconveniences then are handled by the founder or 1 of the other members of the already-short staff. Not good.

4. Use restricted stock for founders in most cases.

If a founder gets stock without strings on it, and then walks away from the company, that founder will get a windfall equity grant.

Makes sense. But when does a founder lose their role as primary decision-maker at the time stock is issued? This advice reads like "shutting the door after the cows are out". But, I'm sure I'm missing a key detail or two.

Regardless, the advice applies equally to all those who follow the founder into the startup. And founders and their minions often paint a picture of the future with pastels and soft hues of trust and conquering the world and people living saintly values of altruism.

6. Get technology assignments from everyone who helped develop IP.

Founders sometimes think they can keep IP in their own hands and license it to the startup. This does not work. At least the company will not normally be fundable in such cases. Exceptions to this are rare.

Ok. End of discussion. Anything that restricts funding options is not healthy for the startup.

8. Consider provisional patent filings.

Many startups have IP whose value will largely be lost or compromised once it is disclosed to the others. In such cases, see a good patent lawyer to determine a patent strategy for protecting such IP. If appropriate, file provisional patents. Do this before making key disclosures to investors, etc.

About the Author

George Grellas is a Silicon Valley business and corporate lawyer specializing in early-stage tech startups. He founded and heads a firm of startup business lawyers

I've never met Mr. Grellas. But,; in the event I found a tech startup I'll want to visit with him. You should, too, in that event. He has set up a firm of; startup business lawyers who have helped a lot of startups since 1984 in Silicon Valley. (Since 1984. That means he's survived the booms, the busts, the netscapes, and everything else in Silicon Valley over the past 25 years. )

Link to article from LegalRiver on Twitter.

I'd bet on the organic farmer who listens to his customer

If Dante Hesse's hunch is on the money, the people he sells his organic milk to will also become the people who fund his growth. Reuters

He first invested his most precious resources. His time, his attention, his heart and his two ears. His purpose? Find their way to make their life better.

Customers told him what they wanted. They did this in...low-key, one-on-one conversations, with him.

And they told him how important their desires were by how much they were willing to pay.

As a result, they willingly pay a 100% premium for his whole, organic, milk. $4.00 a quart. That's double the national average.

Now, he looks to deepen that relationship. That one-on-one conversation has escalated into a serious attempt to raise $850,000 - in as little as $1,000 increments - directly from the dairy-loving consumers who buy his milk by the quart.

I'd bet on the organic farmer who listens to his customers, whose customers willingly pay a premium for his product. Who would you bet on?