Blog

Raising capital, search results, and is Google leading you astray?

Jeff — Thu, 29 Mar 2012 15:33:05 +0000

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

How to select board members

Jeff — Fri, 16 Mar 2012 19:51:07 +0000

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

Startup Equity, Startup Stock Options, Founders Equity

Jeff — Fri, 16 Mar 2012 19:34:45 +0000

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

S-corp vs. LLC

Jeff — Fri, 16 Mar 2012 19:20:14 +0000

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?

First, take a deep breath. You are fine. All of these things are possible, and while I do make some recommendations on where it might be easier to start, you are not in some kind of situation where you can't get done what you want to get done.

If you are looking to raise capital from an investor, from a family member, from a bank, or from Martians, it is a good idea to first go and have a nice chat with a knowledgeable accountant who knows how to handle such forms of investment. Just get it all straightened out with them (and they may well tell you that the S-corp is just fine), and make sure you understand the tax implications for both you and your investors.

Then, after you have that sorted, take the investment. That's the easiest way to do it. All of these legal structures are a balance of tax structure, personal protection, and regulations. There's no universal "right" answer, and believe me you don't want to become an expert in all of this stuff.

Generally, if you aren't raising any money or getting all fancy with equity for employees, then an LLC is fine, and an S-Corp is fine too. When you want to raise money, talk to an accountant and decide if you need to switch or not. Talk to them about your long term plans too. Sometimes it's "easy" to make it work now for this investment, but in the long term you might be better of switching now and saving a bigger headache later.

Once you have investors, you should, as a matter of course, be willing to send them basic financial information on some kind of regular basis, even if it's just yearly. This is another great reason to start looking for an accountant who can help.

Jeff

How to protect your business idea when raising capital

Jeff — Tue, 21 Feb 2012 16:14:04 +0000

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.

The 8 Slide Investor Pitch - A Pirate's Guidebook

Jeff — Sun, 19 Feb 2012 04:22:47 +0000

Just released for 2012, I've put together this guide to help you turn your business into a compelling story investors will understand and be excited about. Here's an excerpt from the forward of this 87 page guidebook:

From the forward of The 8 Slide Investor Pitch:

I’ve read that fewer than 2% of companies who try and raise venture capital are successful. I suspect that the percent of companies who try to raise investment from other sources aren’t much better off.

Raising money is downright hard. Someone has earned their money, and now you want them to part with it and take a chance on you. Do you really expect them to take a look at a page of numbers, stare blankly at some market data, listen to a product they won’t fully understand, and then part with their hard earned money?

What makes you seem different from the seemingly infinite number of alternative investments available to them, from other private businesses, to public company stocks, to bonds, to savings accounts, to debt instruments, to gold bullion?

I know what the answer is: Your story.

If you hire a consultant, they'll likely charge you five figures to help you build your investor deck, and may charge a finders fee on top of that. But, I know that with this book, you'll be well on your way for a fraction of that price.

You'll spend hundreds of dollars, maybe thousands, on legal and accounting services as you get started. But what do you need more, a shell company, or a method by which to raise capital?

I've raised over $50 million dollars using the method I've outlined in this book. I've given group seminars to hundreds of people to teach them this method. I've provided individual coaching to dozens of entrepreneurs through this process.

Any of these methods would cost considerably more than this book. But now, I've packaged up the process in an easy to understand book that walks you through the process of building your investor pitch. What is that worth to you? Probably a whole lot more than I'm going to charge you for it.

But I run McStartup for fun, because I like helping folks start companies. I've written the book in the hopes of helping as many budding entrepreneurs as possible. All I'm asking for is a fair price for the work that it was writing this book, and a little motivation to get me to write more of them in the future.

The book is 88 pages, over 14,000 words, and it's yours for just $10 bucks.

Buy the book and get it instantly - $10

The 8 Slide Investor Pitch - Chapter 1 (Free Preview)

Jeff — Sun, 19 Feb 2012 04:11:00 +0000

The following is a free except from my new book titled, The 8 Slide Investor Pitch - A Pirate's Guidebook. This book walks you through the steps I use when building an investor presentation. My strategy is to turn what could easily be a boring, financals driven presnentation into a story that capture the imagination and the emotion of the potential investor. I hope you enjoy it.

-------------------------------------------------------

Slide 1: The Elevator Pitch

Who are you?
What do you do?
Why should I care?

-------------------------------------------------------

Why did I take this meeting again?

Slide One is really the elevator pitch slide. If you’ve come so far as to be reading this book, you probably already know what an “elevator pitch” is. But, just in case: An elevator pitch is the investment pitch that you would make to someone you have never met, in the time it takes to ride an elevator. Basically, it’s your story in 60 seconds or so.

Needless to say, 60 seconds is not a long time. You certainly can’t explain much (or any) nuance to your business or your business model in a that kind of time. Heck, you can probably barely get out your own name in a minute. Perhaps this explains why on a real elevator, people hardly ever start conversations.

On this slide, you are really trying to remind someone why that took the time to take this meeting in the first place. One thing to keep in mind is, just because someone has agreed to meet with you, it doesn’t mean that they’ve done a whole lot of research prior to them walking into the same room where you are.

In fact, you should expect that they haven’t done any. Generally investors, especially venture capitalists, won’t conduct a whole lot of research until you’ve captured enough attention to warrant it.

If they have done any research, it’s likely to fall into three buckets: They are aware of some general market trends, and they have some interest in that trend where you might fit;

Or, they have an existing company they’ve invested in, and their interest is really to get the scoop on you, just in case you are going to become a competitor to that company, or might otherwise have some interest research to share;

Or they’ve taken a look at similar companies to yours, and either passed on the investment or lost the investment to another investor.

In any case, you need to establish yourself, your credibility, and your business direction right out of the gate, and try and slap the investor into paying attention for the rest of the meeting, before you lose them to their Blackberry or iPhone checking email.

Quite simply: This slide is designed to give them the pitch that got you the meeting in the first place, again.

Don’t assume that just because you’ve already given this to them in some form that you should just skip over it or give a comment like “you know what we do, so we’ll get

into the meat of the presentation now.” If you do that, then you miss the chance to set the stage, and to lead the conversation your way, and instead, the stage will be set by whatever intuition the investor has about you and your pitch already, which might be wildly off base from where you want to take them.

When I say “set the stage” I mean “stage” in the literal, theatrical sense. You are on stage. The purpose of this meeting is to get the investor to spend the time to take a deeper look and to do the research that I wrote about earlier. Investors are not robots, they are not calculators, and they are not machines that scan mountains of data to find investments. They are people, and people respond to emotion, passion, and competence.

Moreover, any good investor knows the plan you are laying out here isn’t going to be how it all actually goes down. I have a funny quip that I use with my executive team from time to time: A plan is just a list of things that isn’t going to happen.

That doesn’t mean it isn’t important.

You can’t tell the future with perfection, but you can demonstrate the attention to detail which shows that you

understand how it could work. You must do this. But this alone is not enough.

Attention to detail in the absence of a story gets you nowhere.

While the “plan” may not be what’s going to happen, they “story,” or some version of it, is what you expect to happen. That’s your dream, that’s where you’re leading the company, and that’s where you want you investors to follow.

The “plan” on the other hand is a map you’ve drawn out that might take you there. A map with no destination is worthless. Investors are pretty darn good at reading these maps, but you must lead them to the destination. That’s what the story is all about. The plan is your best take on how to get to that destination, based on what you know today.

Put another way: The story is your destination and vision. The plan is where you demonstrate your knowledge of what is important and needed to get there. What will capture the imagination is the vision, not the plan.

So the bullets I’ve listed here are: Who are you? What do you do? Why should I care? It won’t take you long to get through this slide, but it might take you quite some time to actually prepare and rehearse what it is you want to say here. It may only be a couple of sentences. It might only take you 20 seconds to say it. But you’d better know what you are going to say, such that you get this presentation started on the right foot.

As the saying goes, you never get a second chance to make a first impression. Investors see enough pitches to cast a blanked judgement on how it’s going to go within about 20 seconds. You can look competent, prepared, and knowledgable, or you can look like an stumbling buffoon.

Obviously, you want to be the former.

Your pitch might go something like this:

“So let’s get started, and thanks for taking the time. I’m Joe Smith, founder of Technobabble. For the last 5 years, I’ve been an engineer in the networking industry, and I recognized across the industry, customers have been experiencing real pain because of the way the complex way networking protocols are managed. They are difficult to manage and downtime is common. We know how to fix this problem, and how to take that pain away, with a turn-key solution. That’s what we do at Technobabble, and that’s what I’m excited to tell you about.”

Let’s take a look at what this sort of introduction does in very short order:

Every story needs a hero. You are the hero. You will take the pain away.
You’ve established your superpower. In this case, five years in the industry, technical background. Superman got his power from the planet Krypton, you get your power from your knowledge about the inner-workings of the industry.
You established the victim whom you will save: networking customers.
You’ve established the victim’s situation: pain caused by manageability resulting in downtime.
You’ve established the villain: existing networking companies who do nothing to help their own customers.

And most importantly, you’ve created a story. A villain, a damsel in distress, and a hero with superpowers who will swoop in to save the day.

Let’s now contrast that with the way most entrepreneurs start their pitches:

“So let’s get started. I’m Joe Smith, founder of Technobabble. We’ve developed a networking technology called GHT that is built on the opensource I45-X standard. Analysts say the space we are in will grow at a compound annual growth rate of 24% over the next 5 years, creating a $500 million dollar market for our products. We’re looking for investment capital to help us launch this beta product into the market.”

And, out pop the Blackberries and iPhones.

It’s not that the investor has completely lost interest at this point, it’s that they know they just need to see if your technology fits into their perception of the market and the problem, because you’ve completely failed to establish it.

You’ve left it up to them to decide what the customer pain points are that drive the market opportunity.
You’ve left it up to them to decide what products or services will best serve the opportunity. You’ve left it up to them to decide what kind of hero is needed to put it all together.

And of course, you have no idea what they are thinking about any of this.

Thus, the rest of your presentation may or may or may not fit their perception of the world in which you operate. In short, rather than establish your own story, you are now auditioning for a part in theirs. You may or not be a fit, and they may or may not be right.

The odds are already against you and you’re 15 seconds into your presentation.

Don’t lose sight of the fact that the purpose of the presentation is to get someone interested. No one is going to write you a check before you leave the office an hour later. Tell your story, and try to get them interested in the next chapter. Slide one establishes the characters and the drama of your story.

Ready to read more?

Buy Today for $10

Business structure for a medical practice

Jeff — Thu, 18 Aug 2011 22:00:25 +0000

Naomi wrote:

I am starting a medical practice where I will be the sole owner and I will have several employees including other physicians. I am wondering if it would be better to be a c Corp with the intention of choosing s Corp status to avoid the double taxation on dividends or just do a LLC. Would the LLC mean a higher level of taxation?

For your situation, I would recommend finding good legal and accounting professionals to help you make this decision. You will likely be wanting to have these local folks on hand anyway, as you focus on being a doctor. There may very well be advantages one way or the other that apply specifically to medical professionals, so I'd ask some other doctors in your area for recommendations.

Both an S-Corp and an LLC should avoid double taxation, and for tax purposes are nearly identical. Generally I push people toward LLC's because they tend to be very easy to setup and maintain, but in your case again it's worth checking with someone who specializes in medical practices. There could very well be tax advantages to a C-corp as well, so it's worth exploring all your options.

If you do get a solid answer, please come back to the site and let me know. I'd love to have a good answer I can share with other medical professionals.

Jeff

How to I split equity with my partners?

Jeff — Sun, 14 Aug 2011 02:23:15 +0000

Susie wrote:

I came across your website and found it really interesting. Am working for a start up right now and wondered whether you might be able to help...

8 months ago my boyfriend came up with an idea for a start up. For the first three months I worked on it part time with him along with another guy who was also part time. In January we both became full time and my boyfriend brought on another woman who was initially part time, then quit her job to become full time in February. My boyfriend made her CEO and Co-founder, and himself Co-founder. The other guy and myself are not co-founders but have been working on this full time since January and put a lot into the project.

We are about to close funding and time has come to split up equity. At the moment my boyfriend and the CEO as co-founders are splitting Founders Stock 50/50 and the other guy and myself will hopefully get some proportion of their stock. I have no idea what, as a non-found, but on the original team, unpaid and full time since conception, should be pushing for % wise.

I believe the official term for this is "a royal mess". It's really imperative that you have an agreement on who is receiving what equity up-front, because it becomes awkward to have those conversations later.

There is no right answer to this question. It depends on how many hours people are putting in, if people are putting up cash, what their work is worth on the open marketing, who is doing what, etc, etc, etc.

The one thing I can tell you is this: However you split the equity, you need to set this up as either restricted stock or stock options. In this way, if someone leaves, or doesn't work out and you have to part ways, they won't walk off with a huge piece of the company.

Take a look at this past article for some more information -- and there are several more here on the site (look at past articles and search for "founders" or "equity"). How to Structure Equity for the Founders

Sorry I couldnt' be of more help, but at least you can start with that article.

Jeff

Delaware LLC vs. Some other state's LLC vs. C-corp?

Jeff — Sun, 14 Aug 2011 02:16:44 +0000

Marusia wrote:

My friend and I are starting a retail business and want to go with a NY LLC. When we are up and running, developed a great product and are ready to raise money and go big, we will convert into a DE C corp. The reason we want to go with a NY LLC are as follows...

You're all good here, I suspect. I don't know the details of one state's LLC vs. another, so you should consult a lawyer for the good legal advice on this. However in general, an LLC in your state is just fine. If you are going to have investors, the I would suggest switching to a c-corp down the road. Not necessary, but in my experience it's more flexible. Likewise if you get into employee stock options and the like.

Either way for a startup getting off the ground, I usually recommend LLC and the state you live in should be just fine.

Jeff