Monday, January 6, 2014

Summary of Blog Post Topics on Startup Voice

To find a post of interest, use the search box at the top left-hand corner of the screen, review the list of "labels" on the right, or simply browse the posts listed below by topic.

I have tried to provide on my blog answers to most frequently asked questions relating to company formation and obtaining investment. If there are other general interest topics that you would like to see covered, please make a note of it in the comments section and maybe sometime soon you will see an answer posted on this blog!

General


Company Formation & Corporate Maintenance


Fundraising Process


Investment Terms


Investors' Perspective


Information Rights of Shareholders in a California Corporation

Generally, all shareholders of a corporation registered in California are entitled to obtain from the corporation, upon request, certain corporate information. The type of information and the requirements that a shareholder must meet to get access to it it depend on the size of the corporation and the size of the shareholder’s equity interest in the corporation. In certain instances, it is required that the shareholder state a “purpose reasonably related to such interest.”

When Is “Reasonably Related Purpose” Not Required

  • Generally, all shareholders irrespective of the size of their equity ownership in a corporation are entitled to receive an annual report (CA Corporations Code Section 1501), except that a corporation with fewer than 100 shareholders may expressly waive this requirement in its bylaws. In such a case, the shareholders are entitled to receive a financial report similar to what an annual report should entail.
  • All shareholders irrespective of their of the size of their equity ownership are entitled to receive a copy of the corporation’s bylaws (CA Corporations Code Section 213).
  • All shareholders irrespective of of the size of their equity ownership are entitled to receive the results of vote at a regular, special or annual meeting (CA Corporations Code Sections 1509-1511).
  • Shareholders owning individually or in the aggregate at least 5% of corporate shares are entitled to obtain and copy shareholders register and records (CA Corporation Code Section 1600) and quarterly financial information (CA Corporations Code Section 1501(c)-(d)).

When Is a “Reasonably Related Purpose” Required? Other than the situations delineated above, all other shareholders are required to state in writing a reasonable relationship between their interest in the corporation and the purpose of their inspection of books and records. In fact, if such relationship purpose of inspection of records and books is stated, then such shareholders are entitled to inspect (CA Corporations Code Sections 1600 and 1601):

  • Shareholder lists and Records
  • Minutes of Books and Records
  • Accounting Books

What is a “Reasonably Related Purpose”? The courts are unfortunately not clear on the answer and the legislation is not clear as to the time frame during which the written demand should be made on the corporation. Hence, the corporation is afforded some time to intelligently evaluate the “reasonable purpose” and ascertain the next course of action. If the corporation decides to withhold the information to a shareholder owning less than 5% of shares in the corporation, then the next venue will probably be courts.

What is an Annual Report? An Annual Report encompasses the following (CA Corporations Code Section 1501(a)):

  • Income Statement; and
  • Statement of Cash Flows for the Applicable Fiscal Year

Other Important Rules

  • The statutory right of shareholders to inspect and copy corporate books cannot be limited by articles of incorporation or bylaws. (CA Corporations Code 1600(d)).
  • The copies of corporate books, under this section, could be made by person, attorney or agent. (CA Corporations Code 1600(d)).
  • The shareholder’s right is to inspect records at the corporation’s office and to make copies and extracts of the records. The corporation has no obligation so send such records to the shareholder.

Happy company making!

Inna


White Summers  Inna Efimchik, a Partner at White Summers Caffee & James LLP, specializes in assisting emerging technology companies in Silicon Valley and beyond, providing incorporation, financing, and licensing services as well as general corporate counseling.
LEGAL DISCLAIMER

Copyright Notice. The copyright for all original content in this post and any linked files is owned by Inna Efimchik. All rights are reserved.

No Attorney-Client Relationship. This post has been prepared by Inna Efimchik of White Summers for general informational purposes only. The information provided herein does not constitute advertising, a solicitation or legal advice. Neither the availability, transmission, receipt nor use of any information included herein is intended to create, or constitutes formation of, an attorney-client relationship or any other special relationship or privilege. You should not rely upon this post for any purpose without seeking legal advice from licensed attorneys in the relevant state(s).

Compliance with Laws. You agree to use the information provided herein in compliance with all applicable laws, including applicable securities laws, and you agree to indemnify and hold Inna Efimchik and White Summers Caffee & James LLP harmless from and against any and all claims, damages, losses or obligations arising from your failure to comply.

Disclaimer of Liability. ALL INFORMATION IS PROVIDED AS-IS WITH NO REPRESENTATIONS OR WARRANTIES, EITHER EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE AND NONINFRINGEMENT. YOU ASSUME COMPLETE RESPONSIBILITY AND RISK FOR USE OF THE INFORMATION IN THIS POST.

Inna Efimchik expressly disclaims all liability, loss or risk incurred as a direct or indirect consequence of the use of any information provided herein. By using any information in this post, you waive any rights or claims you may have against Inna Efimchik and White Summers Caffee & James LLP in connection therewith.




Monday, September 30, 2013

What Can Startups Disclose, Before Filing a Patent Application

The current wisdom on attracting investment for a startup states that the way to get the attention of frazzled investors is to present them with a short video that draws them in. From the perspective of getting emotional buy-in from investors and willingness to spend 5-10 minutes reading a startup’s executive summary or browsing its investor deck, a promo video is the way to go.

But if a startup has not yet filed at least a provisional patent application, what can be the ramifications of such a video? I have asked Mark Beloborodov, an experienced U.S. patent attorney, to explain the risks of early disclosure.

America Invests Act. According to the expanded definition of “prior art” pursuant to the Leahy–Smith America Invents Act (AIA) that went into effect on March 16, 2013, public use, sales, publications, and other disclosures available to the public anywhere in the world as of the filing date bar patentability. Public disclosure of the invention by the inventor (or someone else who “obtained” the disclosed subject matter from the inventor) within one year prior to filing (inventor's "publication-conditioned grace period") constitutes an exception. This exception is a concession to opponents of the AIA’s “first-to-file” regime that already exists in the European Union and the rest of the world, and a carryover from pre-AIA patent law, which has traditionally given startups comfort to discuss their invention publicly before filing a U.S. patent application, in connection, for instance, with fundraising efforts.

Product for Sale. One potential problem that a promo video featuring the product may pose is that it may not fall within the “publication by inventor” exception, but may instead be considered an offer of sale of the product featured. Any novel and non-obvious features, functionalities and attributes implemented in the product that, prior to the video’s release, constituted patentable inventions, may suddenly fall into the public domain and thereby substantially reduce the value of the business. Publication. But suppose that the promo video (or an article) does not reach the level of the offer for sale and qualifies for the publication-conditioned grace period. Does that mean that it is safe in those circumstances to disclose inventions, for which a patent application has not been filed?

It’s not so simple, says Mark. While the disclosed inventions themselves may still be protected, what if a public discussion is spurred by the disclosure that builds on the information made public by the inventors? Anything that is generated in that public discussion above and beyond what the inventors disclosed falls into the public domain. If the initial publication disclosed only part of the invention, and then other elements of the invention surfaced in subsequent public disclosures, even such other elements previously known to the inventors, patent protection for those elements may not be sought later. So any disclosure prior to at least a provisional patent application is fraught with risk even in the US, not to mention loss of patent protection for the invention as a whole in other countries.

The Band-Aid Solution. So what’s one to do? In the perfect world, a startup’s patent application would be prepared by a patent attorney in advance of starting to pitch investors and certainly well in advance of publicly distributing promotional materials. Such application, even if a provisional one, would be drafted after careful consideration of the invention and would contain a detailed and enabling disclosure of how it is made and operates, which fully supports patent claims to be included later in the full-blown application.

But we don’t live in the perfect world. To preserve intellectual property rights in the product or solution that will be the subject of an upcoming promotional video, Mark recommends making at least a minimalist provisional patent application filing before the video becomes public. Even if the filing consists of little more than the video script, overview of key components of the invention, and annotated screen shots illustrating them, risky as it is, it’s better than nothing. After the founder strings together the materials that will go into the promo video, it is advisable to have a patent attorney do a quick review. This might translate in total into a $1,000-$1,500 cost, including the filing fee, but, if it may preserve intellectual property rights that might otherwise be lost forever, seems like a good compromise.

Happy company making!

Inna


White Summers  Inna Efimchik, a Partner at White Summers Caffee & James LLP, specializes in assisting emerging technology companies in Silicon Valley and beyond, providing incorporation, financing, and licensing services as well as general corporate counseling.
LEGAL DISCLAIMER

Copyright Notice. The copyright for all original content in this post and any linked files is owned by Inna Efimchik. All rights are reserved.

No Attorney-Client Relationship. This post has been prepared by Inna Efimchik of White Summers for general informational purposes only. The information provided herein does not constitute advertising, a solicitation or legal advice. Neither the availability, transmission, receipt nor use of any information included herein is intended to create, or constitutes formation of, an attorney-client relationship or any other special relationship or privilege. You should not rely upon this post for any purpose without seeking legal advice from licensed attorneys in the relevant state(s).

Compliance with Laws. You agree to use the information provided herein in compliance with all applicable laws, including applicable securities laws, and you agree to indemnify and hold Inna Efimchik and White Summers Caffee & James LLP harmless from and against any and all claims, damages, losses or obligations arising from your failure to comply.

Disclaimer of Liability. ALL INFORMATION IS PROVIDED AS-IS WITH NO REPRESENTATIONS OR WARRANTIES, EITHER EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE AND NONINFRINGEMENT. YOU ASSUME COMPLETE RESPONSIBILITY AND RISK FOR USE OF THE INFORMATION IN THIS POST.

Inna Efimchik expressly disclaims all liability, loss or risk incurred as a direct or indirect consequence of the use of any information provided herein. By using any information in this post, you waive any rights or claims you may have against Inna Efimchik and White Summers Caffee & James LLP in connection therewith.




Monday, September 9, 2013

Preparing for a Silicon Valley Fundraising Trip

[This post is an excerpt from my presentation entitled Silicon Valley Fundraising Trip: Tips for the Non-U.S. Based Startup Founder.]

If you are traveling to the Silicon Valley to raise capital for your startup from abroad, you can save yourself a lot of time and make the trip more efficient by preparing thoroughly and doing your homework before the trip. Here are some things that should not be overlooked:

Research. Before your trip, sign up for startup networks, groups and mailing lists, to receive announcements about upcoming events. (This is covered in more detail in the full version of my presentation.) You should know which venture capital firms and super-angels are investing in your space. You should research and consider which strategic investors you should target, if any. Based on your research, prepare a list of 10 to 20 people that you’d like to meet while you are here. This list is aspirational, so if you do not get the opportunity to meet all of them, you have not failed.

LinkedIn. Create a LinkedIn profile, if you don’t already have one. If you have one, check to see if it's time to review and update it. This is your business resume. Most professionals rely on it!

Don’t be lazy – take the time to write-up prior projects and experience, your education, and anything else relevant to what you are doing and to who you are now. This is your chance to tell people what you want them to know about you!

Note that LinkedIn is also a great place to do your own “diligence” about the people you’ll meet while networking, through introductions, or otherwise.

Video Presentation. If you have the resources, create a short video teaser and post it on YouTube or Vimeo for easy sharing with new contacts. A few excellent examples are below. Notice how effective it is if the teaser can demo your product or service. A picture is worth a thousand words. And a video is worth at least a thousand pictures, charts and graphs.

  • MapsWithMe Teaser
  • Posse Teaser
  • Readymag Teaser
  • Robin Teaser

    Videos work well to get you a foot in the door (not seal the deal for you). Before an investor takes the time to read your executive summary, in fact, before he even makes the decision about whether it's worth his time to do so, it is helpful if you can get him excited (or at least curious) about your product or service. The way to do it is by offering information in an easy and fun format - video - that appeals to the viewer's emotions, not just his intellect.

    Executive Summary / Presentation. VCs don't read business plans. They just don't have enough hours in the day to screen companies based on their business plans, and, frankly, with business at an early stage, a business plan reads more like astrological predictions than fact.

    Still, if you are talking to an investor at a networking event, or have been introduced to an investor by email, he will want to see something in writing about your company. You will be expected to send an executive summary (a one-pager that introduces the investor to your company and piques his interest) or, more frequently these days, an investor slide deck (8-10 PowerPoint slides that serve the same purpose but are easier on the eyes).

    Instead of trying to work with your team back home when you are already here, faced with a time difference and time pressure, prepare this before you come. You may have to adjust it based on the feedback you receive from investors, but if you have a solid draft, it will make your life easier.

    A really well-made executive summary or deck can set apart your startup from the rest and give you a fighting chance at a more involved look from the investor.

    You can work with designers and advisors to help solidify your message in your materials. But do not hire someone to write them for you. You have to own your materials, and by that I don't mean the legal sense of ownership, but in the sense that you stand behind each word in that document and, if prompted, can expand in verbal or written format on any of the points made in it!

    U.S. Phone Number. With your Google account, you can get a free Google Voice number and set up call-forwarding from that number to your temporary U.S. number.

    Google Voice also offers voicemail functionality. Make it easy on your callers - record a greeting with your name and the name of your company, so that they know they reached the right number.

    Business Cards. Your business card should be in English and should contain (1) your company name (and if you have not registered the company, the name that you think you will use), (2) your name and title, (3) your corporate domain email address, (4) the address of your physical office (if any), and (5) your U.S. phone number.

    Note that you don’t have to spell your name on the card the way it is spelled in your passport. Feel free to spell it in a way that will make it easy for English speakers to read. This will save you time and annoyance, unless, of course, you like correcting people and having off-topic conversations about foreign names, the English language, pronunciation, etc.

    Credit Cards. The most common and convenient payment method for most things that you’ll need to buy on your trip will be a credit card. Every online purchase will require it and some merchants (like car rental places) will take your credit card number as a security deposit, even if you pay cash.

    When getting ready for your trip, make sure there is money in the account tied to the card that you are taking with you. To really play it safe, take several credit cards tied to accounts at different banks. It is best to call ahead, and let your bank know that you will be in the United States. Sometimes banks will suspect identity theft and block your card, if there is unexpected activity on your card in a foreign jurisdiction. Nothing quite makes travel so uncomfortable, as having your credit cards lock up, when you are relying on them as a primary payment method!

    Driver's License. While you are visiting California, you are permitted to drive with your valid foreign license. Make sure to take it with you, as you are packing for your trip, and that it does not expire during your trip (rendering it no longer valid).

    Happy company making!

    Inna


    White Summers  Inna Efimchik, a Partner at White Summers Caffee & James LLP, specializes in assisting emerging technology companies in Silicon Valley and beyond, providing incorporation, financing, and licensing services as well as general corporate counseling.
    LEGAL DISCLAIMER

    Copyright Notice. The copyright for all original content in this post and any linked files is owned by Inna Efimchik. All rights are reserved.

    No Attorney-Client Relationship. This post has been prepared by Inna Efimchik of White Summers for general informational purposes only. The information provided herein does not constitute advertising, a solicitation or legal advice. Neither the availability, transmission, receipt nor use of any information included herein is intended to create, or constitutes formation of, an attorney-client relationship or any other special relationship or privilege. You should not rely upon this post for any purpose without seeking legal advice from licensed attorneys in the relevant state(s).

    Compliance with Laws. You agree to use the information provided herein in compliance with all applicable laws, including applicable securities laws, and you agree to indemnify and hold Inna Efimchik and White Summers Caffee & James LLP harmless from and against any and all claims, damages, losses or obligations arising from your failure to comply.

    Disclaimer of Liability. ALL INFORMATION IS PROVIDED AS-IS WITH NO REPRESENTATIONS OR WARRANTIES, EITHER EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE AND NONINFRINGEMENT. YOU ASSUME COMPLETE RESPONSIBILITY AND RISK FOR USE OF THE INFORMATION IN THIS POST.

    Inna Efimchik expressly disclaims all liability, loss or risk incurred as a direct or indirect consequence of the use of any information provided herein. By using any information in this post, you waive any rights or claims you may have against Inna Efimchik and White Summers Caffee & James LLP in connection therewith.




  • Wednesday, September 4, 2013

    10 Basic Principles of Effective Networking

    [This post is an excerpt from my presentation entitled Silicon Valley Fundraising Trip: Tips for the Non-U.S. Based Startup Founder.]

    Networking events are a lot of work. But if you are building up your network, networking at startup events can be a great way to get exposure to a lot of people fast.

    Because networking is hard work, if you are going to do it, you might as well make the most of it. My suggestions are based solely on my own personal experience and reflect either what has worked for me or my observations of the behavior of others. There may be other effective networking tactics, so if you are feeling anxious about this, read a few more articles (or books) for a deeper dive.

    1. Set the Right Goals. Make sure you set the right goals and expectations for yourself when you go out to network. Chances are that you will not meet and win over an investor at a networking event (unless the event is a pitch competition than you win, and frequently not even then).

    What you should really be hoping to do is to ingratiate yourself with three to five well-connected individuals, who will make introductions for you to people in their network. Note that the people that you get introduced to may not be your investors either.

    The goal of networking is to grow your network because you never know where your investors, customers, or even future employees may come from. Approach networking with an open mind, and good things will come!

    2. Dress to Impress. When you go to events, you want to be memorable, stand out in the crowd. That way, when someone you spoke to for a few minutes wants to introduce you to someone else at the event, he can find you again in the crowd. As with anything, you have to be careful not to overdo this, because if you are too outlandish in your wardrobe, you might be memorable, but it won’t score you any points. The trick is to stand out in a positive way.

    At the very least, if you have a T-shirt with your company’s logo, wear that. It may not be very original, but it will be a good conversation starter, and people with a visual memory are more likely to remember the name of your company if it’s written across your chest.

    3. Don’t Forget Your Business Cards. Business cards are cheap, so stock up and bring enough. Sure, if you run out, you can add the person you are speaking with on LinkedIn during the conversation or take his card and write your name on the back of it. But coming unprepared does not characterize you well, and if there is at least a small chance someone will keep your pretty business card around and will remember about you some time in the future when it could be advantageous to you, you can be sure they'll toss your info scribbled on the back of their card. LinkedIn is pretty good, but unless you have a stellar memory for names, it can be hard to find the contact that you need among your 500+ contact list. So, personally, I prefer cards.

    But don't mistake the exercise of handing out cards for networking. If you hand out your cards like they are on fire, but don't cement it with at least 3-5 minutes of solid conversation with the folks you gave the card to, you may as well have thrown them in the trash.

    4. Forget Your Comfort Zone. Networking is not comfortable. It would be easy if relevant contacts would line up to meet with us in an orderly fashion when we show up at an event. In fact, that’s not what happens at all. You are lucky if you are approached by another networker looking to strike up conversation. More frequently, you find yourself in a room surrounded by small groups deeply immersed in their own private conversations. Those small groups look intimidating.

    But if you stay within your comfort zone and hover in the corner, waiting to be approached, which might be your natural inclination, you will be wasting precious time. So try to make eye-contact with someone in a group, to see if they’ll welcome you to join them, or just shamelessly insert yourself into a group and when there is a pause in conversation, extend your hand and introduce yourself. At a networking event, no one will think worse of you for doing so. Sometimes, the topic of discussion will be so narrow that after a few uncomfortable minutes you will decide to leave to look for another place to park, but the more polite networkers will attempt to integrate the newcomer into their conversation.

    5. Stay Positive. If you want to leave a positive impression, you have to radiate positive energy. If you complain about your suppliers and customers, or put down your partners, employees or investors, it leaves a bad taste with the person you are speaking to. So focus on the positives. Be that person that everyone will enjoy talking to!

    6. Keep Conversation Light. If you want to make more than a single connection at an event, you will need to move fairly quickly from one conversation to the next. Keep in mind that no matter how passionately you feel about public policy or politics, a tech networking event is not the place to get entangled in a heated debate, whether about the conflict in the Middle East, the shortcomings of the Obama administration, a woman's right to abortion, the right to bear arms, or U.S. world domination. In general stay away from religion and politics, unless it is to say that you are hoping that the Startup Visa initiative passes, which is a pretty safe bet. Finally, remember to smile! There is nothing as disarming as a genuine smile, so it is going to be your best networking weapon!

    7. Listen First. When you engage in a one-on-one conversation with someone at a networking event, even if you are burning to proselytize anyone who will listen to the cause of your amazing company, recognize that everyone there has a story.

    If you practice active listening – paying close attention to what the other person is saying, reading their body language, asking follow up questions, sharing information that they may consider valuable, and looking for ways you could help – you will find people more interested in your story, and willing to help, whether with advice, introductions, or empathy.

    8. Don’t Be a Salesman. Think about how you feel when you are approached by a salesman. What’s your first reaction? I know mine is, “No, thank you!” The last thing you want to do at a networking event is to be perceived as a salesman. Instead, you want to be seen initially as someone who is easy and interesting to talk to and eventually, as a good long-term contact.

    9. Follow Up. You have to follow up, if you don’t want all that networking to have been in vain.

    If you promised to send your executive summary, do so within a few hours of the meeting, if you can, and within 24 hours at most. If the person you talked to promised to send you something, follow up with them after the meeting and remind them. They have busy lives, so take the initiative!

    When you are networking, you are building up your social capital, so don’t just be dependable when it can stand to benefit you. If you promised a networking contact to send the name of an app that slipped your mind during the conversation or to make an intro to a good web designer, do it.

    The greatest value of networking is in the long-term connections that you form. For this reason, strong follow up is essential. Invite contacts that you make at a networking event that you would like to make a more permanent part of your network to meet with you for coffee sometime that week. Almost no one will turn down a coffee offer, unless (a) it’s a VC, or (b) you are perceived as a salesman.

    10. Have Patience! Have patience with the process and try to enjoy it! Networking does not produce immediate rewards, but it does pay off in the long-run!

    Happy company making!

    Inna


    White Summers  Inna Efimchik, a Partner at White Summers Caffee & James LLP, specializes in assisting emerging technology companies in Silicon Valley and beyond, providing incorporation, financing, and licensing services as well as general corporate counseling.
    LEGAL DISCLAIMER

    Copyright Notice. The copyright for all original content in this post and any linked files is owned by Inna Efimchik. All rights are reserved.

    No Attorney-Client Relationship. This post has been prepared by Inna Efimchik of White Summers for general informational purposes only. The information provided herein does not constitute advertising, a solicitation or legal advice. Neither the availability, transmission, receipt nor use of any information included herein is intended to create, or constitutes formation of, an attorney-client relationship or any other special relationship or privilege. You should not rely upon this post for any purpose without seeking legal advice from licensed attorneys in the relevant state(s).

    Compliance with Laws. You agree to use the information provided herein in compliance with all applicable laws, including applicable securities laws, and you agree to indemnify and hold Inna Efimchik and White Summers Caffee & James LLP harmless from and against any and all claims, damages, losses or obligations arising from your failure to comply.

    Disclaimer of Liability. ALL INFORMATION IS PROVIDED AS-IS WITH NO REPRESENTATIONS OR WARRANTIES, EITHER EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE AND NONINFRINGEMENT. YOU ASSUME COMPLETE RESPONSIBILITY AND RISK FOR USE OF THE INFORMATION IN THIS POST.

    Inna Efimchik expressly disclaims all liability, loss or risk incurred as a direct or indirect consequence of the use of any information provided herein. By using any information in this post, you waive any rights or claims you may have against Inna Efimchik and White Summers Caffee & James LLP in connection therewith.




    Monday, September 2, 2013

    The Right Time to Fundraise in the Silicon Valley

    [This post is an excerpt from my presentation entitled Silicon Valley Fundraising Trip: Tips for the Non-U.S. Based Startup Founder.]

    The Silicon Valley is a fantastic place to visit almost any time of year. We have great weather here year-round, many tourist attractions within a stone’s throw of one another, and fantastic sights for the nature enthusiast.

    But if your goal is to travel to the Silicon Valley with the goal of raising venture capital for your foreign-based startup, to avoid disappointment, set the right expectations, and make the most out of your trip, consider whether your startup is primed and ready for this step.

    Ripe for US Fundraising. The best time for a foreign startup to come to the Silicon Valley to raise venture capital is when it can make the following statements truthfully:

    • We raised a small seed round of capital with a local venture capital firm and angels
    • We have publicly launched our product in our country
    • Our product has gained significant traction in our domestic market
    • We are ready to launch our product on the US market
    • We are opening an office in the US that will be handling US operations and marketing
    • Our management team has already relocated to the US (or is relocating to the US within 3-6 months)
    • Our CEO reads, writes and speaks fluent English and is able to present our company to US investors, strategic partners, and clients in a clear, competent and confident manner.

    Almost There. If a startup meets some (maybe 4-5) but not all of the criteria above, it does not mean that the founders should not come to the Silicon Valley to fundraise. But it does increase the likelihood that this is going to be the first of several trips. A startup at that stage may still be able to successfully raise capital from Silicon Valley VCs, but it may easily take 6 to 12 months or longer and multiple trips to get to a term sheet.

    Raising money in the Silicon Valley is difficult, even for companies that fit all of the criteria above. So a company that does not, has a greater hurdle to overcome. Still, I believe the preliminary trip, if approached correctly, with due preparation, forethought, and the right expectations, can be instrumental in laying the groundwork for a future financing by giving the founder an opportunity to establish contacts, by growing the founder’s professional network in the Silicon Valley, and by clarifying areas of improvement in the startup’s fundraising position.

    More Work to Do at Home. A startup that either has not launched a product, or has launched a product but it has not seen significant adoption domestically, and that has not received support from its local investors, has more work to do at home before venturing out to fundraise internationally. That is not to say that such startups should not attend international conferences or take business development trips, whether to the Silicon Valley or elsewhere. I just think it will be more productive to realize that it may be too early to be fundraising abroad in earnest, so the trip, if taken, should have other purposes and expectations attached to it in the founders’ minds.

    The Chief Executive Officer. To state the obvious, the right CEO makes the difference between a startup that gets venture capital funding and one that does not. As we said above, to be successful at raising capital in the United States, the foreign CEO has to have fluent written and conversational English, though he or she may speak with an accent and many do. The CEO must also have the personal and business skills that make him or her a good person to represent the startup in investor meetings.

    But what if the CEO does not have good English? Unfortunately, neither engaging translators to assist in pitch meetings, nor hiring U.S. promoters or U.S. investor relations specialists to help with fundraising, actually works.

    Ultimately, the investors have to believe that the core team has what it takes to succeed, and if the investors have a language barrier with the CEO, they will simply not have sufficient basis to form that belief. The solution is one that is true for all companies, local or foreign – if the CEO is not the man (or woman) for the job, find a CEO who is!

    In startups, one of the founders is the CEO by necessity. Sometimes it is the right fit. And at other times it is not. Sometimes it is the right fit for the country, where the startup is based, but not for the U.S. Any company that hopes to be successful must recognize wherein lie its team’s weaknesses and fill them with new hires. If the current CEO will not be able to fundraise successfully in the U.S., the startup should entertain the idea of recruiting a U.S.-based CEO or another CEO in their country with solid “western” experience. In that situation, the current CEO can take another title, whether it is President, Chief Technology Officer, Chief Financial Officer, or whatever else best fits his or her strengths. Unfortunately, relinquishing the helm can be a major pain point for founders. I am sure some of my readers are wincing as they read this advice.

    The Bottom Line. If the founders of a startup believe they absolutely must raise capital in the United States, and if, after honestly assessing the strengths and weaknesses of the current team, they realize that they do not have the right candidate among them for the job, then they have to reconcile themselves to the difficult reality that such candidate must be found elsewhere. The same, incidentally, goes for filling any other holes that stand in the way of a startup’s success in raising capital in the United States – these holes must be (a) identified, (b) evaluated, and (c) resolved, preferably prior to the founders investing very heavily into their U.S. fundraising efforts.

    However, it may also be the case that, despite some initial flirtation with the idea of coming to the United States to raise capital, the founders will ultimately decide that their chances of raising funds domestically, or in Europe, or in Asia will be better than in the United States and will come at a lower cost (emotional, financial, temporal).

    There may be a lot of investment capital aggregated in the Silicon Valley, but there are oh so many contenders from all over the world all vying for it!

    Disclaimer. Regardless of how well-positioned your startup may be to raise capital, be prepared for the process, almost invariably, to be more frustrating, more disruptive to your business processes, and to take longer, than you expect. There is no guarantee that the process, even when it is well-executed, will result in raising VC capital in the Silicon Valley.

    Happy company making!

    Inna


    White Summers  Inna Efimchik, a Partner at White Summers Caffee & James LLP, specializes in assisting emerging technology companies in Silicon Valley and beyond, providing incorporation, financing, and licensing services as well as general corporate counseling.
    LEGAL DISCLAIMER

    Copyright Notice. The copyright for all original content in this post and any linked files is owned by Inna Efimchik. All rights are reserved.

    No Attorney-Client Relationship. This post has been prepared by Inna Efimchik of White Summers for general informational purposes only. The information provided herein does not constitute advertising, a solicitation or legal advice. Neither the availability, transmission, receipt nor use of any information included herein is intended to create, or constitutes formation of, an attorney-client relationship or any other special relationship or privilege. You should not rely upon this post for any purpose without seeking legal advice from licensed attorneys in the relevant state(s).

    Compliance with Laws. You agree to use the information provided herein in compliance with all applicable laws, including applicable securities laws, and you agree to indemnify and hold Inna Efimchik and White Summers Caffee & James LLP harmless from and against any and all claims, damages, losses or obligations arising from your failure to comply.

    Disclaimer of Liability. ALL INFORMATION IS PROVIDED AS-IS WITH NO REPRESENTATIONS OR WARRANTIES, EITHER EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE AND NONINFRINGEMENT. YOU ASSUME COMPLETE RESPONSIBILITY AND RISK FOR USE OF THE INFORMATION IN THIS POST.

    Inna Efimchik expressly disclaims all liability, loss or risk incurred as a direct or indirect consequence of the use of any information provided herein. By using any information in this post, you waive any rights or claims you may have against Inna Efimchik and White Summers Caffee & James LLP in connection therewith.




    Saturday, August 24, 2013

    Should Founders’ Shares be Subject to Vesting

    In the startup world, contributors are frequently incentivized with shares of stock in the venture to align their interests with those of the startup. These shares sometimes represent a significant percent of the company’s total capitalization, especially in the early days, when there are few contributors and the contribution of each contributor is therefore that much more significant.

    Who Should Have Vesting. Every contributor’s shares in a venture should be subject to vesting. I use the term “contributor” here because these concepts apply not just to the founders, or the early employees, or the consultants, but to anyone in a startup who is incentivized by a grant of shares, or the right to purchase shares (known as a stock option).

    Vesting Definition. Vesting is the process, whereby shares or stock options granted to a contributor are, in effect, earned over a period of time, such that they may be repurchased or cancelled, as applicable, in whole or in part, from the contributor if his involvement with the venture does not continue for the entirety of the vesting term.

    Vesting Term. Vesting should be imposed over a term, typically calculated in months, that is the shorter of (a) the period over which the contributor is expected to meaningfully contribute to the venture, or (b) 48 months.

    No Cliff on Founder Shares. There is usually no cliff on founders’ shares—their shares vest monthly from the beginning and frequently they get “credited” in their vesting for the number of months that they worked on the project prior to getting their shares. For example, if a founder worked on his startup for a year before he was issued shares, it is not uncommon for his shares to be 1/4th vested up front, and the remaining shares to vest monthly over 36 months.

    Cliff on Shares by Other Contributors. By contrast, non-founder contributors typically have what is known as a “cliff” on their vesting—a block of time up-front, during which they are tested to make sure they are a good fit. At the end of the cliff, which is usually a year for full-time hires and may be shorter for other contributors, a portion of the contributor’s total share grant, usually proportionate to the ratio of the cliff period to the entire vesting period, vests at once. However, if the contributor’s services to the company are terminated before the cliff runs out, none of the shares vest.

    Vesting Acceleration. Sometimes the vesting of founders’ shares or the shares of other top contributors, accelerates in full or in part upon the happening of certain events. Most typically, vesting accelerates, if at all, either on a single trigger (which can be termination of the contributor or acquisition of the company), or on a double-trigger (termination of the contributor in connection with an acquisition of the company). Vesting acceleration is a heavily negotiated term whether with investors, new hires, or an acquirer of the company.

    Why Do We Need Vesting. There are several good reasons why it is a very good idea to impose vesting on the founders’ shares.

    First of all, investors insist that the founders’ and other contributors’ shares be subject to vesting. So if the founders do not subject their own shares to vesting in the beginning, when they engage with investors, imposing vesting on founder shares will almost invariably be one of the conditions to the investment. Founders who impose vesting on their own shares may get better terms than those that investors will require of them. But as long as those terms are reasonable, investors will typically not require founders to amend their vesting terms.

    But even if investors are not in the picture, as long as there is more than one founder, imposing vesting on all founders protects the company and its viability. Let’s consider an example to see why vesting can make or break a company. All names, characters and specifics are completely made up, but situations like this in an assortment of variations come up all the time.

      GameFriends is a startup developing a new social gaming application. Jim does the coding and Rhonda does the graphics. Jim and Rhonda have known one another since college and came up with the idea over coffee one day. They started working on GameFriends a few months ago and agreed that everything would be split fifty-fifty between them. They have not incorporated the business yet, waiting to complete a game first.

      At a gaming conference, Jim and Rhonda meet Pete. Pete has an MBA from Stanford and did a summer internship at a venture fund. Pete is a gamer and after spending several long weekends talking to Pete about their vision, they decide that they would benefit from Pete’s business expertise in getting GameFriends off the ground. Pete agrees to join the company for a 20% stake, but insists that they need to incorporate the venture and formally issue shares. Everyone agrees. The founders incorporate the venture with 10,000,000 authorized shares of Common Stock, of which Jim and Rhonda hold 4,000,000 each and Pete holds another 2,000,000.

      Jim and Rhonda trust each other, so they decide they don’t need vesting on their own shares. Since Pete is new, they decide to have his shares vest monthly over one year.

      In the meantime, Rhonda’s sister, who is working on a children’s book, asks Rhonda to help with illustrations. Rhonda can’t say ‘no’ to her sister, she’s always really liked doing children’s books illustrations, and her sister promised to pay her! She decides she can help her sister, while continuing her role with GameFriends.

      Unfortunately, she isn’t able to do both well. She takes longer to respond to Jim’s emails and lets his calls go to voicemail because she feels bad about not having her deliverables ready when she promised.

      After a couple of months, Jim and Rhonda have a heated discussion, where Jim accuses Rhonda of not being dedicated to the project and Rhonda defends herself and finds fault with Jim’s own coding efficiency, which she thinks is to blame for their first game not being ready yet. Rhonda is upset and decides to leave the project. She has 40% of the company at this time. In order to finish the project, Jim needs to bring on another graphical artist. At a high school reunion, Jim runs into a good friend of his, Kevin, who would be perfect to replace Rhonda. Jim wants to bring him on and offers him 4,000,000 shares in the company, the same number of shares that Rhonda received. Kevin is interested, until he realizes that a large percent of the company belongs to a former co-founder, who is no longer involved.

      Here is what the capitalization looks like: Jim and Rhonda each have 4,000,000 shares, Pete has 2,000,000 shares and Jim would like to offer Kevin 4,000,000. If Kevin accepts, he will have approximately 28.5% of the company, but so will Rhonda, who invested only a few months of her life into the project.

      Kevin turns down the offer. When Pete realizes that there is not anyone to replace Rhonda, he leaves as well. At this point, 6 months have passed since he joined the company. Because his shares are subject to vesting over 12 months, half of his shares have vested. The company repurchases the remaining shares.

      Jim is now the only one left, trying to salvage the business. Rhonda and Pete together hold 5,000,000 shares and Jim holds the remaining 4,000,000, or roughly 44.5%. It is very difficult for Jim to bring on either a new graphic artist or a new business person because such a large percent of the company is owned by people, who are not contributing to the business. Jim closes the company and accepts a job at Zynga.

    GameFriends could have avoided this untimely demise, if Jim and Rhonda had not made critical mistakes at the formation stage. Had Jim and Rhonda’s shares had vesting on them, then, when Rhonda left, GameFriends could have repurchased most of her shares, which could have gone to Kevin instead. Pete’s shares were subject to vesting, but the vesting period was too short, which is why he ended up with over 10% of the company when he left 6 months later.

    When shares are granted to contributors, the expectation is that they will continue to contribute for some significant period of time. If they don’t, their shares have to be made available to other contributors, who will be brought in to take their place. Otherwise, those who stay with the company suffer dilution, when additional shares have to be issued to attract replacement contributors, and the recruiting process itself becomes very difficult.

    For this reason, to improve a venture’s chances for success, it is the industry practice for the founders’ shares to be subject to vesting.

    Happy company making!

    Inna


    White Summers  Inna Efimchik, a Partner at White Summers Caffee & James LLP, specializes in assisting emerging technology companies in Silicon Valley and beyond, providing incorporation, financing, and licensing services as well as general corporate counseling.
    LEGAL DISCLAIMER

    Copyright Notice. The copyright for all original content in this post and any linked files is owned by Inna Efimchik. All rights are reserved.

    No Attorney-Client Relationship. This post has been prepared by Inna Efimchik of White Summers for general informational purposes only. The information provided herein does not constitute advertising, a solicitation or legal advice. Neither the availability, transmission, receipt nor use of any information included herein is intended to create, or constitutes formation of, an attorney-client relationship or any other special relationship or privilege. You should not rely upon this post for any purpose without seeking legal advice from licensed attorneys in the relevant state(s).

    Compliance with Laws. You agree to use the information provided herein in compliance with all applicable laws, including applicable securities laws, and you agree to indemnify and hold Inna Efimchik and White Summers Caffee & James LLP harmless from and against any and all claims, damages, losses or obligations arising from your failure to comply.

    Disclaimer of Liability. ALL INFORMATION IS PROVIDED AS-IS WITH NO REPRESENTATIONS OR WARRANTIES, EITHER EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE AND NONINFRINGEMENT. YOU ASSUME COMPLETE RESPONSIBILITY AND RISK FOR USE OF THE INFORMATION IN THIS POST.

    Inna Efimchik expressly disclaims all liability, loss or risk incurred as a direct or indirect consequence of the use of any information provided herein. By using any information in this post, you waive any rights or claims you may have against Inna Efimchik and White Summers Caffee & James LLP in connection therewith.