McStartup

I was just cleaning up a few old questions out of my McStartup inbox.  I reply to a lot more questions via direct email than I post on the site here, mostly because I get a lot of repeat questions.  I was laughing at myself in doing so because creating content which never goes online is a really lousy search engine strategy -- but it takes less time.  

I was talking to my friend and neighbor Jim Cockrum, a well known internet marketeter, about "SEO" stuff and we both are in complete agreement that an "SEO" strategy is really a "produce good content people want to read" strategy -- any "optimization" designed to trick the search engines is just one Google tweak away from being banished to the bottom of the pile.

This site is no exception.  I do zero SEO optimation, yet there are a few keyword searches for which McStartup will come up at or near the top of the list.  Maybe it's luck, but I'm assuming it's because I'm producing real content that isn't some kind of Google trickery, and the search algorithms are getting sophisticated enough so that the real content gets promoted past the spam content. 

While thinking about this, I did a quick search for "raising capital" to see what came up.  I was very surprised to see the top result was an article from a company which "takes small companies public" as a means of raising capital (supposedly).  This is surprising to me.  While going public is a means of raising capital, it's far from the easiest or most common way to get funding.  Certainly, most young businesses are in no position to even try to go public, no matter what this company might claim.

As such, I find it hard to believe that this particular article, the number one search result on Google, is so popular that Google must make it #1?  Very odd.  The danger here, in my opinion, is that in searching the phrase "raising capital" and then in seeing "let us take you public" as the theme of the number one result, it leads the uninitiated entrepreneur to think IPO is a real funding option for a small business.  I can envision a rat-hole of time and expense which gets the fledgling business nowhere. 

Most businesses need angel financing, venture capital, or bank financing to get started.  The art of raising capital is what my little book is all about. No where in it will you find a reference to making an IPO pitch to investment bankers.  Certainly this is a way to raise capital, but it's not the path a new business should go down.  

So strange to me that a link about tiny IPOs comes up ahead of things like venture capital.  There are thousands of articles about raising venture capital on the internet.  Likewise for angel funding, or bank financing.  How does this IPO method (dare I say, "scheme") come up first?  

Perhaps the search algorithms still have a long way to go.  Nevertheless, I believe good content is king. 

On the chance that you've come upon McStartup looking for info on raising capital, I'd suggest you take my book, The 8 Slide Investor Pitch for a test-drive.  And even if you don't, then please put the concept of this small time IPOs out of your head.  I've never seen one "work" and I hate to see people led that direction. 

Jeff

Brad wrote:

My company, just finished its first round of funding. Along with cash and expert leadership we have a board to set up. We have set up provisions for a 5 person board with 4 of the seats filled. 2 for my partner and I; and 2 for our 2 investors. We have 6 months to find the 5th or they get to find the 5th.

Congrats on the funding, that's a big milestone in any company.  It sounds like you've thought this through pretty well, and having an independent board member to "balance" the interest of the investors and the founders is always a good idea.

There are a few ways to go about this.  You'll want someone who has some board experience, and ideally experience working with investors.  Perhaps they've been an independent board member before, but I wouldn't make that a big requirement.  It would be fine if they only had experience in being in your shoes, or for that matter, in the investors shoes.  

The big thing is this person needs to have credibility with both you and the investors, because they are a sort of middleman who can translate (hopefully) between your needs and the investors needs.  

Beyond that, you'll want someone who, above all else is quite simply going to have a positive impact on the company.  Perhaps your team has certain skills but you have other holes.  A board member is one way to fill some of those gaps.  Perhaps you have a great team but you need guidance and coaching yourself -- a board member can also function as a bit of an executive coach for example.  Maybe you expect to raise money from different sources down the road, in which case a board member who has done that is a natural fit.  

There's no right answer, but you'll want someone who brings insights and experience to the table to fill gaps, enhance your own team, or both -- and someone who can bridge the divide between founders and investors.  

I hope this helps - I realize this advice sounds a bit generic, but those are the things you need to think through.  

Jeff

Wesley Wrote:

My business partner and I started a Nevada llc in 2008 that did 3D graphic work. We own it 50/50, I'm the President that does vusiness development and sales and my partner the operations and design.  since inception I have invested $25,000 cash and my partner no cash but sweat equity.  

The company has turned into a successful local brand ( hat company ) and we have brought on 3 people ( product manager, director of design, Accountant VP of Finance)that all deserve a vested interest in the company. Should we start a new S Corp or C Corp and grant stock to the 3 team members and make this new company a subsidiary of the LLC parent company? Should I get 51% of the company since I've been the sole investor? I guess I need help with company structure and ownership. Thanks so much for your time!

If I'm understanding your correctly, the original LLC has morphed into this new business, and the original LLC had no investors or equity holders other than you and your partner.  I'm also under the assumption here that both you and your original partner are active in this "reborn" company.

Given all of those assumptions - I would not set this up as a subsidiary of the original company.  You certainly could do that, but it will result in more complication at tax time and for the accounting, none of which seems necessary here.  I'd look to either morph the original LLC into the new company, which could be an LLC, or which you may want to change into a C-Corp, or, just create a brand new, unrelated LLC or C-Corp and shutdown the original.  Mixing the two doesn't make sense to me in this case. 

If you are looking to hand out stock to the other employees, and you are thinking that you will soon raise capital, then I would instinctively lean toward a C-Corp over an LLC.  However this would not have to be the case.  Talk to a good accountant about your current situation and plans and then decide where to go.  Your staff accountant may or may not have a lot of experience with different business structures or, more importantly, with passive investors (and a lack of such experience does not make them a bad accountant).  You should talk to someone with both.  

As for 51% -- that's not a question I can answer for you.  This is a conversation, sometimes an uncomfortable one, which you must absolutely have with your partner.  There is seldom any real "magic" in 51% -- an investor will be more than happy to tell you what to do even if you own 99%.  But, you do need to be on the same page as your partner with regards to the equity in the company (and perhaps you already are), as well as where the company is headed, what the goals are in terms of bringing in new investors, how you might eventually exit the business, and what happens if one of you leaves (or gets kicked out) somewhere between here and there.  

If you have that conversation, and you guys have questions I can help with, come on back to the site and let me know.  But, you need to try and work those things out first.

Jeff

William wrote:

I think I might have started the wrong type of corporate structure.  I read your video game piece and it said S-corp.  Is that what I should have done?  I opened an LLC and am building a web application (service based).  I am looking at friends and family for financing,but have had difficulty coming up with something to offer them.  Was thinking about offering equity, but on the level it seems that you can't offer shares or equity on LLC?  Is that right?  What can I do to get back on the right track?

Rodger wrote:

I'm planning on starting a new business with my friend, and was wondering how I can protect my idea. Other than a non-disclosure agreement, is there another way to prevent someone else from using the idea (especially when it's an internet startup idea and does not involve a physical product or invention)? We are looking for funding from angel investors.

I get this type of question a lot, especially when I’m making my regular rounds of speaking at college campuses which often involves a few stops in engineering centric class rooms.  This “how do I protect my IP” or “how do I protect my idea” question is near the top of people’s minds, and if you are of the technical type, it seems to be question number one.

In short:  stop worrying about this.  For nearly every type of business, especially for the type of idea you are talking about, an internet startup, 99.9% of the work is everything that has to happen after the idea is already out there. 

Most investors will not sign an NDA.  Some angel investors will, but very few venture capitalists would.  The idea that someone would hear your idea, drop everything they are doing, have all the motivation you have, create a vision, and start building a company, ONLY because they got the idea from you, is fairly absurd.

Could it happen?  Sure.  Are the odds high?  Not at all.  Don’t slow yourself down worrying about this.

With contractors, other technical types, potential employees, etc, go ahead and get your NDA signed.  You can ask potential investors to sign one but this is probably a waste of time and might look amateurish. 

Now if you do have some patentable intellectual property, you’ll want to take some steps now.  You can file a provisional patent application (available online from Legalzoom), and start actual patent filings.  The provisional patent can be done inexpensively (relatively speaking) but a full patent application is going to cost real money.  In your case, it doesn’t sound like this is an issue, so I won’t go into more detail here.

If anything, what you need to do is work on building your story and polishing your pitch. 

I strongly recommend you read my book, The 8 Slide Investor Pitch before you go out and start pitching angel investors. 

From the nature of your question, I can sense that you are going to go into those meetings and spend a great deal of time talking about the wonders of your product idea.  This is normal, and this is why you are concerned about “giving it away”.   

In The 8 Slide Investor Pitch, I explain that you should spend no more than 4-6 minutes of a 20 minute presentation talking about your product or service.  You will be well served to spend some time with this book and to build your  pitch the right way.  Your idea will not sell itself.

Good luck.  I hope you will heed this advice – I’ve seen far too many entrepreneurs get so hung up on protecting the uniqueness of their idea that they were afraid to tell anyone about it.  Don’t be like Golem from Lord of the Rings.  Your idea is not “your precious.”  You need to get out there and raise capital, and you should not let something like this restrain that effort.