Every startup is unique and different with individual circumstances and needs and there are avoidable mistakes that all startups should consider that can lead to legal complications. Complications which can jeopardize the long-term success of a business and future rounds of financing.
People like to give advice and share their opinion, but wise men seek counsel from someone who has been there and done that! AIN’s goal is to use our years of experience and all we’ve learned to help you.
Here are the 5 quagmires to avoid at all costs!
FAILURE TO DOCUMENT A FOUNDER AGREEMENT AT THE BEGINNING.
This oversight can lead to the so-called “skeletons in the closet”. Early co-founders sometimes drop out of the picture due to disagreements and you might forget about them, but they don’t forget about the verbal agreements you two made. Later when your venture is closing on financing or even going public, that forgotten early partner surfaces demanding shares, warrants or even money.
This problem can be avoided by incorporating immediately and issuing shares to the founders, which are recorded in the minutes of the corporation. Everything you discuss should be documented. There’s a great tool we use titled “Elements To The Perfect Agreement”. This text helps to identify and document expectations between partners. We also recommend and use Laughlin & Associates for all our “Corporate Compliance” . They help make sure Corporate records include minutes and proper documentation that meet legal requirements for everything done on behalf of the corporation.
INCORPORATE & ISSUE FOUNDERS SHARES IMMEDIATELY.
Many startups delay incorporation until the first formal round of financing, which is too late. At this point your entity may already have several million in valuation, so the IRS can tax your shares as income at that value immediately. This is called “phantom income” and is to be avoided at all costs. If you don’t, you might have to pay taxes on stock that has no liquidity and or real cash value.
The solution again is to incorporate early, when founders’ shares clearly have trivial value. Also, file an “83(b) election” with the IRS within 30 days of the agreement. Then you will only have pay tax on the increased value of your shares when they are sold.
DISCLOSING PATENTABLE INVENTIONS BEFORE THE PATENT APPLICATION IS FILED.
Entrepreneurs often put off the hassle and the cost of filing a patent until their first funding. Sometimes they share their invention with the public, the might even launch and start selling their product before filing a patent application. Eventually, they realize that not filing a patent has them looking like a novice, which investors will likely shy away from.
There is no excuse for not filing at least a provisional patent early. This will hold your place in the patent line for a year. The costs and time for this provisional filing are generally less than a full patent would be. Trade secrets need to be documented, and reasonable steps taken to keep them secret. Business plans and other documents should always be labeled as confidential.
MAKING SURE YOU ARE LEGALLY COMPLIANT BEFORE ACCEPTING MONEY FROM INVESTORS.
Laws can be very complicated. Many times, federal laws don’t necessarily line up with state laws, which make it difficult for the novice entrepreneur to understand what applies to them. With the new crowdfunding laws, things are changing dramatically state by state and on a federal level. Bottom line, make sure to get legal counsel when raising capital to ensure you comply with both state and federal laws.
Overall, the biggest legal mistake that a startup can make is to assume that legal problems can be resolved later. Finding a lawyer early is easy, we use and recommend James E. Burk at the law firm of Burk & Reedy. In reality, it will cost you much less to get it right the first time, when the stakes are still low, compared to the heartache and cost of correcting something later.
ALLOCATE FULL TIME TO RAISING YOUR CAPITAL AND DON’T STOP UNTIL THE JOB IS DONE!
We see hundreds of deals every month. Way too many entrepreneurs start the process of raising capital, get a portion in the door, then start to focus on the business without finishing the financing round. They end up in a situation of never having enough money to actually implement the business plan as outlined and then end up raising money for months and even years. I am guilty of this myself, which is why I don’t want you to do down that road.
I think it is great advice to get your plan for funding together and go at it full bore nonstop until the money you need is raised. Don’t let off of the throttle one bit after you get the first few checks in the door. Work at it full time until completely funded before you executing your plan.
The new latest edition of Angel Investors News came in today! If you are a subscribed member keep a look out in the mail to receive yours soon!
Harvey Mackay (my mentor & friend) , Kendall Almerico (one of the Top jobs funding attorneys in the country) are featured in this issue along with the featured article on StarSHop! PLUS MUCH MORE!
Check it out and get yours today at >> http://ainnewsletter.com/
WHAT IS ANGEL INVESTORS NETWORK?
Angel Investors Network (AIN) was created by a group of successful entrepreneurs, investment bankers, angel investors, marketing and management experts, lawyers and accountants who have built companies in a diverse set of industries.
AIN offers investors an opportunity to participate in the buying and selling of businesses, making equity investments, and providing debt financing to businesses with the opportunity of managing risk and creating wealth.
AIN also works with investors, marketing strategists, management experts and financial gurus who combine their skills and experience to work with our target entrepreneurs and make them highly successful business owners.
We are more than just Angel Investors. We are a community of experts that invest our time, expertise, and money in exchange for equity with the objective to perpetuate free enterprise, capitalism and support the entrepreneur spirit while creating wealth, happiness and fulfillment for all those involved.
If you’re interested in getting your start-up into an accelerator or incubator there’s no shortage of options, assuming you live in a metropolis. But these terms sometimes get thrown around interchangeably. Do you know the difference between the two?
I did some research and here is how Paul Bricault, cofounder of Amplify, a Los Angeles-based accelerator, defined them:
“An accelerator takes single-digit chunks of equity in externally developed ideas in return for small amounts of capital and mentorship. They’re generally truncated into a three to four month program, at the end of which the start-ups graduate”.
“An incubator, on the other hand, brings in an external management team to manage an idea that was developed internally. Those ideas can gestate for much longer periods of time and the incubator takes a much larger amount of equity [compared to accelerators]”.
TechStars would be an example of an accelerator, but good luck getting in! Even though thousands of companies apply every year, TechStars only selects 10 for each of its programs.
One highly successful incubator is Pasadena, California-based Idealab, which was started in 1996 by Bill Gross in. Bricault says Idealab itself usually comes up with lots of good ideas for new businesses then recruits outside people to bring them to fruition. Incubators like Idealab take a bigger cut of the company than an accelerator does— from 20 percent to possible more, Bricault says.
Want to get your idea incubated? Idealab doesn’t accept business plan submissions they only consider ideas referred by people with whom they already have a business relationship. Bricault says that’s not the case with all incubators.
Fortunately, now there are so many of these companies to choose from. Capital efficiencies in the market have brought down the cost of creating a start-up, Bricault says, thus fueling a boom in new accelerators and incubators.
“What would have taken $5 million to get off the ground with product developed and customers and traction several years ago now can take a few hundred thousand dollars,” he says.
If you want your company get into an accelerator, here are a few interesting ones tailored for unique niches:
Women Innovate Mobile is a new accelerator in New York for mobile technology start-ups that have a female founder or co-founder. Companies accepted into its three-month program receive $18,000 in funding, free office space, product development and design support, mobile-marketing promotions, and mentoring. In exchange, WIM takes a 6 percent equity stake in the companies it helps get off the ground.
San Francisco is the latest city to partner with Code for America (CfA) to launch an accelerator for Web developers who create apps that that help make the city government run better. In the last two years Code for America has helped hundreds of developers in dozens of cities and received $1.5 million in funding from Google. CfA in San Francisco will start taking applications in the spring.
The NewMe accelerator is a 12-week program for businesses led by underrepresented minorities, specifically African Americans, Latinos, and women. This one is intense—if your start-up is selected you’ll hole up with seven others in a house in Mountain View, Calif.
I hope that helps clarify the differences, and gives you some insights. Seeking one of the two options maybe your ticket to paradise.
On March 25th, 2015 history was made. The entire team at Angel Investors Network had the opportunity to attend a pre-launch party in West Hollywood, California for StarShop, a phone-based app that will sell branded products (more later). It was electrifying! We were with celebrities, Hollywood execs, investors and the recently assembled management team of StarShop, including their new spokesperson Paula Abdul.
My business partner Ed Bracken and I have been involved with StarShop since the summer of 2014, the day Sprint, a fortune 100 company, signed on. We were having breakfast with Kevin Harrington – one of the original Sharks – in San Diego where we were both speaking at the same event. Kevin was eager to share his vision for StarShop. He announced the signed agreement with Sprint. Needless to say, I was super happy for Kevin and very excited about his vision for StarShop. I knew right then that StarShop was a going to be a big deal.
Kevin is a visionary with a been-there, done-that track record – something investors love. Sprint agreed to come on board with StarShop and market the new mobile App to their 55 million customers. It’s apparent that Kevin has a tiger by the tail!
At this point Kevin had already been involved with Angel Investors Network (AIN) and this newsletter, as a shareholder and investor. I asked Kevin to let our team introduce StarShop to our network of investors so that we could be a part of helping market StarShop. After some discussion, Kevin agreed to give us an exclusive opportunity to buy in for a short period of time, to help benefit Angel Investors Network. Normally, when deals like this come along, it’s big Venture Capital firms and/or investment banks that scoop them up and only people in their good ol’ boys networks get a chance to invest.
Thanks to our relationship with Kevin, he graciously gave us the opportunity to share this opportunity with our good ol’ boys network.
So what IS StarShop and why are we so excited?
StarShop is the newest app for smartphones. It is being designed as the first 100% mobile optimized ‘Mobile Shopping Network’. It’s like Home Shopping Network for mobile devices. The super cool twist about it is that it’s celebrity and entertainment video-driven – think of Entertainment Tonight meets Home Shopping Network only 100% optimized for mobile devices! A celebrity-driven social engagement mobile shopping marketplace, the first one of its kind.
StarShop’s celebrities and their app stores will be used to sell branded products targeted primarily to an under age 50 audience. Celebrities are filmed in 30-120 second “selling videos” where they pitch, demonstrate, use and describe the various products being sold. It’s a simple model, utilizing celebrities to sell merchandise from millions of phones on a daily basis.
Because of Kevin’s extensive background in the industry, the team has gone to great lengths eliminating the expensive overhead driven model of QVC and HSN. They’ve created a lean, streamlined business model that is poised to make history in the mobile e-commerce space. This business model includes NO inventory, warehousing, multimillion dollar video production studios, expensive airtime or media buys. This model seems to have eliminated all the major costs of a proven TV based market. All that, combined with the muscle of Sprint and celebrity-driven branding, Kevin has assembled a world-class management team with an amazing strategic advisory board and some incredible joint venture partners. They are already planning to launch in 5 different countries and predict a global market within the next 36 months. This is a very aggressive plan that seems obtainable when considering the worldwide reach of Sprint and its parent company, Softbank.
Truly, this is the American dream in action. One of those rare deals with more risk reducers than we can count, and the probability for a huge financial upside.
Consider this one fact, when was the last time you saw a fortune 100 company involved in a startup? Do you think for a minute they would play at the level they are in StarShop to make just a few hundred million dollars? My guess is that Sprint is betting StarShop will become a 10 figure business. Anything less won’t move their financial needle. Stay tuned for the rest of this story…