BizzBangBuzz by deal attorney & business lawyer, Anthony Cerminaro: June 2005

6/30/2005

How Angels Evaluate Investment Opportunities

"Courtesy of Drakeview, [via this post from new dog old trick] here's a good summary of what one well known Southern California angel investor looks for in evaluating a prospective investment."

How to Start an eBay Business

"Step 1: Register your business...
Step 2: Find stuff to sell...
Step 3: Manage the auction process...
Step 4: Provide great customer service...
Step 5: Build a brand on eBay...

Legal and tax tips for eBay sellers

When you sell on eBay, you're subject to most all federal and state laws, taxes and rules that apply to retail businesses generally. Here are some tips to help you stay out of trouble on eBay:

1. Set yourself up as a legal business. Get federal and state tax ID numbers for your business, as well as any licenses and permits your state requires for you to sell your merchandise. If you're using a trade name, register it with your city, town or county clerk's office as your state law requires.

2. Register for your state's sales taxes. If the winning bidder is a resident of your state, you'll have to pay sales tax on the bid amount. Put the following statement on all eBay auction pages: "Residents of State X [your state] must add ___% sales tax to their winning bid."

3. Sell only legitimate merchandise...

4. Resist the temptation to "shill." If you (or a friend or relative) are ever tempted to bid against legitimate bidders in an attempt to drive up the price of your products (an illegal practice called "shilling"), think twice. Not only will eBay's fraud department shut you down permanently if they catch you, but many state attorneys general are bringing criminal charges against flagrant offenders, with eBay's cooperation."

Read more in this msn.com article found via this Small Business Brief post.

Business Recordkeeping Primer

"Recordkeeping is one of those things that most beginning entrepreneurs don't even think about. As the need for recordkeeping dawns -- usually as the result of harping by the entrepreneur's accountant, banker, attorney -- a recordkeeping system gradually evolves -- albeit reluctantly...

Good recordkeeping does require time and effort -- but it's also necessary. How much time and effort it requires depends on how you approach it. The fundamental axiom of Quality applies as much to recordkeeping as to every other business process -- it's always easier to do things right the first time.

If you let your recordkeeping evolve haphazardly -- "fixing" it only as "problems" result -- you will find that, over time, you will have put much more time and effort into the process than if you had simply done it "right" at the start."

This series of articles by Ed Zimmer provides some insight into what constitutes "right".

Robert's Rules of...Survival

1. Get and stay out of your comfort zone. I believe that not much happens of any significance when we're in our comfort zone. I hear people say, "But I'm concerned about security." My response to that is simple: "Security is for cadavers."

2. Never give up. Almost nothing works the first time it's attempted. Just because what you're doing does not seem to be working, doesn't mean it won't work. It just means that it might not work the way you're doing it. If it was easy, everyone would be doing it, and you wouldn't have an opportunity.

3. When you're ready to quit, you're closer than you think. There's an old Chinese saying that I just love, and I believe it is so true. It goes like this: "The temptation to quit will be greatest just before you are about to succeed."

4. With regard to whatever worries you, not only accept the worst thing that could happen, but make it a point to quantify what the worst thing could be. Very seldom will the worst consequence be anywhere near as bad as a cloud of "undefined consequences." My father would tell me early on, when I was struggling and losing my shirt trying to get Parsons Technology going, "Well, Robert, if it doesn't work, they can't eat you."

5. Focus on what you want to have happen. Remember that old saying, "As you think, so shall you be."

6. Take things a day at a time. No matter how difficult your situation is, you can get through it if you don't look too far into the future, and focus on the present moment. You can get through anything one day at a time.

7. Always be moving forward. Never stop investing. Never stop improving. Never stop doing something new. The moment you stop improving your organization, it starts to die. Make it your goal to be better each and every day, in some small way. Remember the Japanese concept of Kaizen. Small daily improvements eventually result in huge advantages.

8. Be quick to decide. Remember what the Union Civil War general, Tecumseh Sherman said: "A good plan violently executed today is far and away better than a perfect plan tomorrow."

9. Measure everything of significance. I swear this is true. Anything that is measured and watched, improves.

10. Anything that is not managed will deteriorate. If you want to uncover problems you don't know about, take a few moments and look closely at the areas you haven't examined for a while. I guarantee you problems will be there.

11. Pay attention to your competitors, but pay more attention to what you're doing. When you look at your competitors, remember that everything looks perfect at a distance. Even the planet Earth, if you get far enough into space, looks like a peaceful place.

12. Never let anybody push you around. In our society, with our laws and even playing field, you have just as much right to what you're doing as anyone else, provided that what you're doing is legal.

13. Never expect life to be fair. Life isn't fair. You make your own breaks. You'll be doing good if the only meaning fair has to you, is something that you pay when you get on a bus (i.e., fare).

14. Solve your own problems. You'll find that by coming up with your own solutions, you'll develop a competitive edge. Masura Ibuka, the co-founder of SONY, said it best: "You never succeed in technology, business, or anything by following the others." There's also an old Asian saying that I remind myself of frequently. It goes like this: "A wise man keeps his own counsel."

15. Don't take yourself too seriously. Lighten up. Often, at least half of what we accomplish is due to luck. None of us are in control as much as we like to think we are.

16. There's always a reason to smile. Find it. After all, you're really lucky just to be alive. Life is short. More and more, I agree with my little brother. He always reminds me: "We're not here for a long time; we're here for a good time."

The above is included with the permission of Bob Parsons, founder of GoDaddy, (http://www.bobparsons.com) and is Copyright 2005 by Bob Parsons. All rights reserved. The full text of the post is availableHhere.

Making Your Threats Credible

'This is the dilemma confronting negotiators who make threats: Your threat will be credible only if the other side believes it's in your best interest to follow through—yet you probably made the threat at a point when the other side doubted your resolve. After all, if it were obvious that you were ready to walk away, you wouldn't have had to threaten at all!

As this paradox highlights, the credibility of threats is always in question. What follows are six ways to make your threats more credible in negotiation.

1. Increase your costs of not following through on your threat...
2. Visibly restrict your options...
3. Visibly incur sunk costs...
4. Delegate authority to someone who will follow through on the threat...
5. Create and leverage a reputation for making credible threats...
6. Leverage the shadow of the future...

As many of the strategies suggest, sometimes the best way to make your threat credible is to act in a way that would normally be considered irrational. Restricting your options, sinking money into a potentially useless enterprise, and surrendering authority are the types of behaviors that smart negotiators usually try to avoid. It is critical to understand, however, that these tactics don't work because they make you seem irrational or unpredictable but because they fundamentally alter your strategic options and those of your counterpart.

Read more in this HBS Working Knowledge article.

US, Canada, Mexico Agree on Common E-Commerce Framework

The US, Canada and Mexico have agreed on a Framework of Common Principles for Electronic Commerce

"The framework includes a plan to establish a formal process for consultation on issues related to the protection of personal information and trans-border data flows."

Via this Information Policy post.

Do Patents Protect Small Companies?

"Patents are just negotiating chits in a Big Company Chess Game. You not only need the patents but you need lots and lots of money to play against the 'Big Boys'.

If you don’t have the financial resources to support years and years of patent litigation, then your patents have no teeth and therefore your negotiating chit has no credibility in the eyes of your potential licensees (potential licensee = future violators) of your patents...

A small company with a significant patent in an area deemed of strategic importance to the deep pocketed companies is always of interest but as the CEO of the “little guy” you can’t over-play the hand — unless you have deep pocketed backers — meaning industry players — NOT investors...

When a big company comes knocking, that is your opportunity — but also a warning sign of which you’ll only get one — if you rebuff them, you are headed for trouble..."

Read more in post from Christian Mayaud.

If Mere Mortals Can't Run It, Your Business is Not Scalable

"Only scalable businesses can achieve the high-growth characteristics required to command market multiples attractive to venture investors.

So what is a "scalable" business?...to be truly scalable, a business must satisfy two criteria...incremental costs must be decreasing — ideally approaching zero. This means that the cost of each incremental dollar in revenue must be going down...

Criteria #2 is the real key to understanding “scalability” — but, as with criteria #1, it is also a necessary, but insufficient, criteria. For a business to be scalable — the business must be able to grow — even if you throw mediocre resources at it (both in terms of people and money — i.e., it must be able to flourish with dumb people and dumb money)

The importance to entrepreneurs is this corollary:

If your business requires smart talented hard-driving management or sophisticated investors or customers to grow, it is, by definition, NOT SCALABLE!!!...While VCs always prefer a good management team, it is really a bonus.

If a company’s long-term requirements includes any “super-humans” or “super-heroes” (management, customers, employees, investors, whatever) —– IT IS NOT SCALABLE!

If mere mortals can’t run it — IT DOES NOT SCALE!"

Read more in this Sacred Cow Dung post.

Why Incorporate in Delaware?

"Companies and individuals deciding to establish an entity in the United States often will elect to set up a corporation...in a state such as Delaware that offers certain advantages over many other states. These advantages include:

Ease of establishment...

Flexibility for the owners...

Latitude for directors...

Clear and well developed corporate law...

Tax advantages...Delaware imposes no state corporate income tax on certain types of entity (qualifying holding companies and investment companies) unlike many other U.S. states. For other entities - incorporated but not doing business in Delaware-- the sole tax imposed is an annual franchise tax. In the case of companies with a small number of authorized shares the annual tax payable is minimal.

Delaware Intellectual Property Holding Companies...Because qualifying holding companies are not subject to any Delaware income tax, many businesses have taken advantage of this to achieve savings from other state income taxes. Typically, one or more operating companies will transfer their intellectual property (patents, trademarks trade names, copyrights, etc) to a Delaware IP holding company subsidiary. The subsidiary will then license the rights to the IP back to the operating group in exchange for an ongoing royalty payment. The operating company(s) will deduct the expense of these royalty payments against state income taxes owing.

A number of these arrangements have come under challenge in other states in recent years especially where the IP holding company is used solely to hold and license back the IP (and not for any other business purpose such as third party licensing, IP monitoring or IP enforcement). While not all state challenges have been successful, in a number of cases courts have negated the intended tax savings. (One type of state challenge has been to seek to subject the IP holding company’s income to tax in the state of the operating company; other states have sought to deny the benefit of the expense deduction against the state income tax.)...

These challenges have cast doubt on the use of arrangements designed purely to avoid income tax in other states..."

Read more in this article from the Australian Trade Commission.

Who Would Serve on Your Imaginary Board of Directors?

"1.Select three to five business movers and shakers, living or dead, whom you admire most.
2. Get photographs of your Board and pin them up to constantly remind you of the talent at your disposal.
3.Research your heroes. Read everything about your heroes that you can get your hands on.
4.Take notes on your favorite passages. Pay particular attention to the creative techniques they employed to solve problems.
5.When you have a challenge, consult the members of your board and imagine how they would solve it."

Read more in this intriguing post from Brand Autopsy.

How to Help People Understand You

"Do you come out of meetings or conversations with people and feel that you weren't heard? Do you get a lot of blank stares from people as you are talking with them, as if you are talking in some foreign tongue?...

What are some things you can do to help people to understand you?

Keep things simple - Don't go immediately to the details. Avoid being too technical unless the audience is right. Start with the broad strokes to see if people are following you...

Speak their language...focus on terminology that will peak their interests....

Use forms of communication other than just verbal...

Get constant feedback - Don't be afraid to ask people...what did they get from the conversation?...

Rally some supporters - If you are going to meet with a larger group, determine the key opinion leaders and speak to them individually before the meeting. You can "test" what you plan on talking about and see how they react."

Read more in this Random Thoughts from a CTO post.

5 Questions to Ask About Your Company's Privacy Policies

"Every company in the business of collecting, processing or using data should ask itself the following five questions in order to determine if it is at risk for increased liability or regulation.

1. Do we collect, process or use "personal data"?...Common examples of personal data include social security numbers, credit card numbers, drivers’ license numbers and health records...

2. How do we use personal data within the company?...

3. What laws are we subject to with respect to personal data?...

4. What third parties have access to our data?...

5. Who is responsible within the company for monitoring the personal data?...

Answering these five questions will go a long way towards helping you to implement a personal data privacy policy that can help reduce the risk of potential liability. It is also good business practice; as consumers, customers and employees will feel more comfortable working with you."

Read more in this McGuireWoods LLP article.

Ebay Launches Service To Encourage Small Sellers To Build Web Sites

"Eager to find new sources of income beyond its popular online auction format, eBay Inc. launched a new service Thursday that encourages small- and medium-sized sellers to build Web stores that operate independent of the e-commerce powerhouse.

EBay's new ProStores service will allow sellers to design their own fixed-price e-commerce site with a unique Web address. The service, which costs $6.95 (euro5.75) per month with fees ranging from .5 percent to 1.5 percent of transactions, will allow users to link their custom-built site to their eBay site and use PayPal, eBay's popular online transaction service."

Read more in this Technology Review article.

E-Mail Policies and Practices Should Be Reviewed

"E-mail policies intended to limit an employer's liability from one source may, in fact, open the employer up to liability from another. Although this creates a troubling situation for employers seeking to regulate the use of company provided e-mail, there are a few guidelines employers can follow when creating email policies that will help companies navigate these confusing waters.

As discussed [in this article from DLA Piper Rudnick Gray Cary via Mondaq}..., if an employer does institute a 'business use only' e-mail policy, it must be certain to enforce the policy strictly and in a nondiscriminatory fashion, otherwise, it may open itself up to unwanted solicitation and other undesirable activity.

Additionally, under the NLRA, an employer should be prepared to present substantial business justification for any limitations imposed on employee e-mail use, narrowly tailor any limitations, and draft its policy using clear and unambiguous language."

Service to Others is Real Love

One of the wonderful aspects of writing this blog is that I come across items worth sharing while searching for other material. Like these gems:

“Let everyone understand that real love of God does not consist in tear-shedding, nor in that sweetness and tenderness for which we usually long, just because they console us, but in serving God in justice, fortitude of soul and humility.”

—St. Teresa of Avila

"It is true that prayer is the means by which we experience the reality of God. But once God has become a living reality for us, we simply have to love our fellow men. We cannot do otherwise. Once we receive the new life of the Spirit, we begin to live in love. And living in love, we are moved quite naturally and joyfully to serve others. God is love and if we live in union with God, we have the strength and longing to love others. Service is a spiritual activity, the natural fruit of love. God, who is love, is ever serving and caring for Creation. Human beings are made to be like God and so they too should never tire of serving others."

-Sadhu Sundar Singh

Protecting Software End-Users Against Patent Infringement

"Get the Vendor to indemnify - Before entering into any contract with a technology vendor, make sure there is a well-defined indemnity clause included. Often times products have an implied UCC warranty that the purchased product does not infringe on anything. However, explicitly stating the terms of the warranty should help remove any potential ambiguities.

Consider Patent Infringement Insurance - A patent infringement insurance policy can include a range of coverage from just legal costs to full indemnification for damages. However, insurance can be pricey. A policy's cost can range from $7 to $12 per $1,000 of coverage, but it can be worth the extra expense, especially given the "chain of commerce" in which liability can shift from one company to the next. For instance, many large companies require that their suppliers have a defense policy in place prior to doing business.

Join a Working Group or Defense Group - plaintiffs love to target end-users that are perceived as being too weak to defend themselves. 99% of the time, these types of targets settle quickly (usually at a cost between $40-300k, depending on the circumstances) to avoid escalating legal costs. By teaming up with others, your ability to actually fight back becomes much greater."

Read more in this post from Peter Zura.

Process of Forming a Company

"John Nesheim, in his best-selling book High Tech Start Up: The Complete Handbook for Creating Successful New High Tech Companies, concludes from his research that there are 14 stages in taking a venture from idea to IPO, as follows:

Stage 1: Getting the Idea
Stage 2: Meeting Around the Kitchen Table
Stage 3: Getting the Founders' Commitments
Stage 4: Pullout from Employer
Stage 5: Creating the Business Plan
Stage 6: Filling the Management Team
Stage 7: Raising Seed Capital
Stage 8: Incorporating and Cash in the Bank
Stage 9: Finding a Home
Stage 10: Starting Up
Stage 11: Raising Secondary Rounds of Capital
Stage 12: Launching the First Product
Stage 13: Raising Working Capital
Stage 14: Initial Public Offering"

Chapter 3 of High Tech Start Up, reprinted post from startupventuretoolboxy, describes the main focus activity, time required, typical participants, help needed, major costs, main risks, output and ROI for each of these stages. Although written for a hi-tech company, this discussion is also generally applicable to most other new ventures.

No-No Interview Questions

"When conducting job interviews, it's important to ask the right questions to get the information you need to see if the person you're interviewing is a good fit for the job. But it's also important to know what not to ask - in other words, what the various employment laws say you can't ask or what might suggest to an outsider that you're considering an impermissible trait in evaluating candidates.

As a general rule of thumb, all of your questions should be directly related to the job in question and the job duties the applicant would be required to perform if hired. Of course, you need to steer clear of asking applicants about their age, race, color, sex, disability, religion, national origin, pregnancy, and other protected classifications.
While it would be impossible to create an exhaustive list of 'no-no' questions.."this list from HR Hero Line provides a good place to start.

Via this George's Employment Blawg post.

Know Your VC's Magic Numbers

"Different VCs are managing different sized funds – so the appetite for how much capital they would like to invest in a company over its lifetime varies accordingly...

In determining if a venture firm is a good fit for an entrepreneur (and vis versa), every first meeting should include a brief discussion about fund size, typical initial investment size, and the magic number of how much the VC would ideally like to deploy over the life of a company."

Read more in this Genuine VC post.

The Power of Free

"This post [from Fractals of Change] is about when it is a mistake to ask for money....

Three good reasons for giving things away are 1) to build a large network; 2) to establish a standard; 3) to establish a prospect base (which I�m not blogging about today). Once you have a large network or control a standard, you can use it to actually make money. You can also kid yourself into thinking you're building value when you give things away and people take them; the potential for deluding yourself and others when you succeed in 'selling' free goods is one of the reasons why free is a very high risk strategy."

"I paid for it; I own it" Maybe Not, Under Copyright Law

"Although the general rule is that the person who creates a work is the author [and owner] of that work, there is an exception to that principle: the copyright law defines a category of works called "works made for hire." If a work is "made for hire," the employer, and not the employee, is considered the author. The employer may be a firm, an organization, or an individual...

Whether or not a particular work is made for hire is determined by the relationship between the parties. This determination may be difficult, because the statutory definition of a work made for hire is complex and not always easily applied...To determine whether a work is made for hire, one must first ascertain whether the work was prepared by (1) an employee or (2) an independent contractor.

If a work is created by an employee..[within the scope of his or her employment]...generally the work would be considered a work made for hire...

If a work is created by an independent contractor (that is, someone who is not an employee under the general common law of agency), then the work...can be a work made for hire only if both of the following conditions are met: (1) it comes within one of the nine categories of works listed in part 2 of the definition and (2) there is a written agreement between the parties specifying that the work is a work made for hire."

Read more in this U.S. Copyright Office - Information Circular.

$150,000 Up for Grabs in "NANO Week" Event

"Organizers of the second annual International and North Coast Nanotechnology Business Idea Competitions today announced they are accepting submissions for the 2005 event, which will award winners $150,000 in prize money at the conclusion of NANO Week in October. The competition seeks to encourage the development of business ideas that will commercialize nanotechnology research being done around the world.

The International and North Coast Nanotechnology Business Idea Competitions is the culminating event of NANO Week, October 17-21, which this year will focus attention on the next generation of nanotechnology-based products and applications from the aerospace, automotive and consumer products industries."

Read more in this dBusinessNews article.

Best Practices for Trade Secret Protection

From the Guiding Rights Blog:

"A recent Illinois trade secret decision highlights the security measures companies should take to preserve proprietary rights in customer lists...

1. Limit computer access on a need-to-know basis.
2. Restrict access to physical copies.
3. Prevent employees from taking copies when they leave the company.
4. Require employees to sign confidentiality agreements.
5. Advise employees that lists are confidential.
6. Label the lists as confidential."

Road Trip

Growing up in Scranton PA as an avid New York Yankees fan, my grandfather, we grandkids and other family members and friends made regular road trips to Yankee stadium during the sweltering summer months. If you are going to travel three hours each way for a game, why not make it for a Sunday doubleheader and, of course, bat day or ball day. Be certain to show up for batting practice as well. We sure got our money's worth. Always ate at the Jerome Street cafeteria before and after the game. Left Scranton around 7:00 a.m. Arrived home way past bedtime. Those were the days.

We never saw the Pittsburgh Pirates play at Yankee Stadium though. My buddy and I are about to change that, with a road trip from the 'Burgh to the Bronx for Thursday night's game and then on to Beantown and Fenway Park for the Red Sox - Pirates game on Friday.

Now a Pirates fan, I still have warm feelings, unlike most Pirates fans, for the Yankees, but I have to say I will be rooting for the Buccos this week.

The Pirates and the Yankees have met in the World Series twice, with the Yankees sweeping in 1927 and the Pirates surprising the Bronx Bombers in 1960.

For a look at the sixty series from the point of view of a Pittsburgher turned Yankees fan, see this article from The Pinstripe Press on Baseball Almanac that states in part:

"On October 13, 1960, Bill Mazeroski became an instant hero when he became the first player ever to end the World Series with a home run. In one of the greatest games ever played, 'the Maz' hit a fastball off of Yankee pitcher Ralph Terry over Yogi Berra's head in left field, giving the Pirates a 10-9 victory and their first World Championship in 35 years. It still remains as one of the most shocking moments in sports history and many middle-aged Yankee fans are still trying to forget that day. 'As an 8-year-old Yankee fan in 1960, I literally wept when Bill Mazeroski's home run cleared the ivy-covered wall of Forbes Field.' Bob Costas said, '35 years later, I believe I have come to terms with it, and can see Bill Mazeroski for what he really was: one of baseball's all-time great second basemen.'

Not only was Mazeroski the greatest second baseman in Pirate history...he achieved instant fame offensively with one swing of the bat. He had already made his mark in the Series against the Yankees with a two-run homer in the opener, but no one could have predicted his game 7 winner."

Anyway, I am off to New York for a bit of history today.

Make Mine Shoebox

This video from Chris Harding offers a humorous inside look at the greeting card industry. Pay particular attention to Harding's take on creating a business that occurs after the bunny creates a greeting card and thinks he is in the greeting card business.

Via this The J-Walk Blog post.

Why Startups Should Consider Open Source Software

"Lower costs...Open source has been practically free or at least lower initial cost, and you don't have to pay addition money for major upgrades...

More frequent updates...

Larger developer base...

Better response...Open source seems to almost encourage feedback, and you can find or get the answers you need quickly...

More flexibility...Open source seems to thrive on providing lots of bells, whistles, and options...

Better extensibility - With commercial software, you are pretty much stuck with the functionality you get until the next major release...Open source, on the other hand, seems to provide extensibility out of the box. You can find plenty of plug-ins."

Read more in this Random Thoughts from a CTO post. "

How to Write an Executive Summary

"Most guides to writing an executive summary miss the key point: The job of the executive summary is to sell, not to describe.

The executive summary is often your initial face to a potential investor, so it is critically important that you create the right first impression. Contrary to the advice in articles on the topic, you do not need to explain the entire business plan in 250 words. You need to convey its essence, and its energy. You have about 30 seconds to grab an investor’s interest. You want to be clear and compelling.

Forget what everyone else has been telling you. Here are the key components that should be part of your executive summary:

1. The Grab: You should lead with the most compelling statement of why you have a really big idea...
2. The Problem: You need to make it clear that there is a big, important problem (current or emerging) that you are going to solve...
3. The Solution: What specifically are you offering to whom?...
4. The Opportunity: Spend a few more sentences providing the basic market segmentation, size, growth and dynamics...
5. Your Competitive Advantage: No matter what you might think, you have competition...
6. The Model: How specifically are you going to generate revenues, and from whom?...
7. The Team: Why is your team uniquely qualified to win?...
8. The Promise ($$)...You should show five years of revenues, expenses, losses/profits, cash and headcount...
9. The Ask: This is the amount of funding you are asking for now...

You should be able to do all this in six to eight paragraphs, possibly a few more if there is a particular point that needs emphasis. You should be able to make each point in just two or three simple, clear, specific sentences. This means your executive summary should be about two pages, maybe three."

Read more in this article from garage.com (pdf)>

Startup Board Dynamics

This post from Will Price contains a link to a Levensohn Venture Partners authored guide to start-up board dynamics, that in particular explains how boards influence the success or failure of technology companies. From the guide:

"Boards that provide the greatest value to their companies have the following qualities in their operation:

• Company-first governance
• Focus and narrow vision
• Customer-focused point of view
• Complementary mix of talents
• Decisiveness
• Mutual respect and regard
• Strong communication with the CEO...

There are many causes of failure in a new venture, but some of the preventable ones include the following pitfalls that belabor Venture Boards...

1. Complacency
2. Inability to confront difficult issues
3. Distraction and over-commitment
4. Misalignment of interests between Board Members and investors
5. Divisiveness on the Board
6. Paralysis over liability issues
7. Board Member role confusion
8. Leadership vacuum
9. Loss of trust in the CEO
10. Resolution to fail"

Compensation for Outside Directors

Brad feld offers this advice on compensating startup outside directors:

"-Allow any board member to buy into the last VC round.
-Option grant vesting annually over four years that is equivalent to what a director/VP (not SVP/COO) level employee would get. This is typically 0.5% - 1% depending on the stage of the company (so 0.125% to 0.25% per year).
-Full acceleration on change of control (single trigger) - FYI - this is the ONLY time I'll give single trigger (except in certain founder cases).
-90 day exercise period if you leave the board. Sometimes I'll extend this to a year, but I like this to be the same that employees get.
-No cash renumeration.
-Travel expenses covered."

The Well Utilized Business Lawyer

"So you want to be your own boss. Tired of someone else telling you what you have to do? Ready to break-free and do it YOUR way? Good for you! Congratulations! It's an awesome experience! Let me give you a couple of beginner's tips: Find a good lawyer and a good accountant.

'WHAT?!', I can hear you say, 'Those cost money!' OK, here's another tip, now that you're a business owner, learn the difference between spending money and investing it. No, I'm not talking about the stock market. I'm talking about the money you put towards good professional help, especially in the legal and accounting areas, is an investment, not just an expense.

OK, don't get all goofy on me, yes it's an expense when it comes to doing your taxes, and that good accountant you hired will tell you so. But more importantly, it's an investment in that those two people can save you a lot of money, headaches, and time in the future. Ever heard of somebody getting audited by the IRS? (For those outside the United States, the IRS is the federal tax authority in the USA.) How much time, headache, and money do you think an audit can cost you? Invest the money to get good help up-front and minimize the chance of that happening.

Why a lawyer? Well, hopefully you won't ever get sued over the work you do, but you very likely will be entering into contracts for that work. A good lawyer will look out for your best interests and advise you about the terms found in the contracts BEFORE you sign them."

Read more in Self-Employment 101from About AjarnMark.

Technology Startup Boot Camp

Doug Kersten writes:

"Every year the University of Maryland sponsors a Technology Startup Boot Camp and the best thing about it, other then the greatness of the idea, is that they put the powerpoints (in .pdf) and the video of the presentations online for everyone to access.

I have watched several of the videos and I can tell you that this is great information. I encourage anyone starting a technology startup to take a look at this fantastic resource."

Sample Business Plan Outline

A concise outline of a business plan may be found at this quickmba web page.

Document Important Agreements in Writing

"No matter how well you know your business associates, no matter how much you all trust one another, you have to get all important agreements in writing. The fact is, memories fade over time, people remember things differently, and people choose to remember things differently, so the only way to avoid misunderstandings is to memorialize any and all agreements in writing.

Doing so is smart business and no one should be surprised or offended if you insist that your agreement is reduced to a writing...Second, planning for the worst means that you will have the proper insurance...Finally, expecting the best but planning for the worst means that your business will have the proper legal structure. Running your business as a sole proprietorship or partnership puts your personal assets at risk should the business fall on hard times. But incorporating, or starting a Limited Liability Company (LLC), means that business debts do not put your personal assets at risk."

Read more in this USATODAY.com article found via this Business Opportunities Weblog post.

Best Alternative to a Negotiated Agreement (BATNA) Explained

"BATNA is a term coined by Roger Fisher and William Ury in their 1981 bestseller, Getting to Yes: Negotiating Without Giving In.

It stands for "best alternative to a negotiated agreement." BATNAs are critical to negotiation because you cannot make a wise decision about whether to accept a negotiated agreement unless you know what your alternatives are. Your BATNA "is the only standard which can protect you both from accepting terms that are too unfavorable and from rejecting terms it would be in your interest to accept."

In the simplest terms, if the proposed agreement is better than your BATNA, then you should accept it. If the agreement is not better than your BATNA, then you should reopen negotiations. If you cannot improve the agreement, then you should at least consider withdrawing from the negotiations and pursuing your alternative (though the costs of doing that must be considered as well)...

BATNAs are not always readily apparent. Fisher and Ury outline a simple process for determining your BATNA:

1. develop a list of actions you might conceivably take if no agreement is reached;
2. improve some of the more promising ideas and convert them into practical options; and
3. select, tentatively, the one option that seems best.[4]

BATNAs may be determined for any negotiation situation, whether it be a relatively simple task such as finding a job or a complex problem such as a heated environmental conflict or a protracted ethnic conflict."

Read more in this article from beyondintractability.com.

Truett Cathy’s Five–Step recipe for Business Success

"Armed with a keen business sense, a work ethic forged during the Depression, and a personal and business philosophy based on biblical principles, Truett Cathy took a tiny Atlanta diner, originally called the Dwarf Grill, and transformed it into Chick-fil-A, the nation’s second largest quick-service chicken restaurant chain with nearly $1.75 billion in sales in 2004 and currently more than 1,200 locations. His tremendous business success allowed Truett to pursue other passions – most notably his interest in the development of young people...

Following – in his own words – are five basic principles upon which Cathy successfully built the Chick-fil-A chain.

1. CLIMB WITH CARE AND CONFIDENCE

“Every day, a framed poster of a mountain climber given to me by my daughter Trudy reminds me to ‘climb with care and confidence.’ I wholeheartedly believe in this philosophy, which is why in all my years in the restaurant business, I have never tried to overextend. I’m satisfied stepping from one plateau to the next, making sure we’re doing everything right before moving on. That way of thinking has allowed us to grow steadily into a $1.5 billion-dollar business with more than 1,200 restaurants, while responding to the needs of people around us. I know the best way to grow our business is to climb with care and confidence.”

2. CREATE A “LOYALTY EFFECT”

“Our people are the cornerstone of all that we do at Chick-fil-A. As a chain, we believe that attracting great people helps create an unforgettable experience for our customers. It requires a lot of time and effort to make sure you have the right people working the right jobs, but we believe this is time well spent. The bottom line is that our people, from our restaurant Operators to the team members they hire, enjoy their work. Fewer than five percent of our franchise Operators leave the chain in any given year. The more we can foster the feeling that we are a group of people working together, depending on each other, the more likely we are to be loyal to each other."

3. NEVER LOSE A CUSTOMER

“Ever since I was a teenager delivering newspapers (for seven straight years), I have tried not to lose a single customer. I treated each one like the most important person in the world and delivered each paper as if I were delivering it to the front door of the Governor’s mansion. The key to succeeding with a paper route and the restaurant business, I would later learn, is to take care of the customer. Whether on the paper route or in my restaurants, I have found that the most effective way of promoting my business didn’t cost me anything but a little kindness to my customers.”

4. PUT PRINCIPLES AND PEOPLE AHEAD OF PROFITS

“I’d like to be remembered as one who kept my priorities in the right order. We live in a changing world, but we need to be reminded that the important things have not changed. I have always encouraged my restaurant Operators and team members to give back to the local community. We should be about more than just selling chicken, we should be a part of our customer’s lives and the communities in which we serve.”

5. CLOSED ON SUNDAY

“I was not so committed to financial success that I was willing to abandon my principles and priorities. One of the most visible examples of this is our decision to close on Sunday. Our decision to close on Sunday was our way of honoring God and of directing our attention to things that mattered more than our business.”

Read more at TruettCathy.com.

Assessing Entrepreneurial Opportunities

"A key skill that successful entrepreneurs learn is to more efficiently and quickly assess possible opportunities before they make extensive commitment of time and money. It allows them to weed out ideas that don't have a good chance or working. In effect, it gives the entrepreneur a chance to fail on paper.

I have entrepreneurs examine three basic questions to assess opportunities:

Is there a MARKET?...
Is there a MARGIN?...
Is this for ME?...

These three basic questions should become the first thing you do when you look at an idea for a new business. If the idea passes this test, it offers real potential as a true business opportunity and should be pursued further toward a possible launch. Using opportunity assessment will help increase your success rates with business start-ups. It will also help you deal with an idea and move on if it does not seem to offer a good chance of success."

Read more in this post from The Entrepreneurial Mind.

Down Round Financing Explained

"A Dow Round Financing is a venture capital financing subsequent to initial venture financings in which investors pay less for the shares issued than previous investors.

Down-round financing sounds complex, but it really isn't, although a company's decision to do a down-round can be... Down-rounds were once seen as the financing option of last resort, to be exercised only when a company was in such dire straits that the only other options might be shutting the business or selling off the assets. They are more common today, especially among the survivors of the tech-wreck of the 1990s... The most common side effect of a down-round is the dreaded dilution. (In fact, the dilution can be so severe that the new investors take effective control of the company - these types of down-rounds are called "washouts" or "cramdowns" because they obliterate the initial investors)... The original investors often try to protect themselves by inserting anti-dilution provisions into their share subscriptions. These have the effect of increasing the number of common shares the investors can receive upon converting the preferred shares they received when they first invested...The catch is that as a prerequisite to their participation, the down-round investors usually require the original investors to waive many, if not all, of their anti-dilution rights. These and other prerequisites, such as "pay-to-play" provisions (which require existing investors to participate in the down-round), put the down-round investors in the catbird's seat by making their shares more valuable relative to the other outstanding shares."

Read more in this PLI - Pocket MBA article.

Advertising and Marketing on the Internet: Rules of the Road

"The Internet is connecting advertisers and marketers to customers from Boston to Bali with text, interactive graphics, video and audio. If you're thinking about advertising on the Internet, remember that many of the same rules that apply to other forms of advertising apply to electronic marketing. These rules and guidelines protect businesses and consumers - and help maintain the credibility of the Internet as an advertising medium. The Federal Trade Commission (FTC) has prepared this guide to give you an overview of some of the laws it enforces" as well as this Dot Com Disclosures guide.

Search Fund 101

"A search fund is an investment vehicle in which investors cover the operating expenses of an entrepreneur’s efforts to locate and acquire a privately held company....The search entrepreneur writes an offering memo emphasizes the planned search process and acquisition criteria. The search funder circulates the memo to individuals who typically invest $20–25k each. A ces study found that the median first-time search funder raises $290,000 from 12 investors.

In return, the search fund investors receive both a carried interest in the eventually acquired company, as well as a pro-rata right of first refusal on subsequent acquisitions"

Read more in this article from Stanford CES

Creative Financing for Startups

"Software manufacturing, software programs to defeat spam, new business data technology and web services are all areas of opportunity for entrepreneurs, according to venture capitalists taking part in a panel on creative financing at a recent Wharton Entrepreneurship Conference.

And those entrepreneurs who cut costs, sign on angel investors and find other creative ways to finance their start-ups will be rewarded with more equity in their firms, assuming they become successful. "

Read more in this Knowledge@Wharton article.

Effective Business Plans

"Most good plans have the following characteristics:

-25 - 40 pages written in a professional manner with Executive Summary, Market Assessment, Company Description, Marketing and Sales Tactics, Product and Services, Operations, Management and Ownership, Finance and Use of Funds as the primary sections.
-Logical, cogent, easy to read and comprehend...
-genuine not canned, condensed or off the shelf..
-validated and not rely[ing] on unrealistic or unverified assumptions
-Should focus on addressable markets rather than on service or product
-Attentive to details, internally consistent and not shoddy, sloppy or casual
-Thorough awareness of competitors, regulations or trends that may impact operations, position defense or sales...
-Concentration on customer needs (what they want, not what they say they want) and their reasons to select the product or service;
-What the firm is significantly better at than anybody else - along what dimension of expertise will the company focus their best people;
-How is the firm positioned in the market and how well can barriers and defense be employed to protect that position; and
-Who cares? What makes the product or service offering unique, approachable, understandable, attractive, believable and why do particular customers select your product/service from alternatives.
-And good plans always reflect the passion of the founders. This element is crucial to effective business planning. If the founders are not excited and do not share their enthusiasm about the business, the plan will be devoid of the emotion that is necessary for conveying import."

Read more in this Drakeview post

5 Steps for Commercializing an Invention

"The light bulb above your head is glowing so bright that it's threatening to blind everyone around you. But what should you do with your great invention idea? Before you start blabbing about your invention to the wrong person or run to the first company that offers to buy it, you need to do one thing: Protect it."

Andy Gibbs, CEO of PatentCafe.com breaks down the process to five steps.

Step 1: Document It
Step 2: Research It
Step 3: Make a Prototype
Step 4: File a Patent
Step 5: Market Your Invention

Read more in this article from entrepreneur.com.

UK and Hong Kong legal news and business guides

"OUT-LAW.COM is part of Pinsent Masons, an international legal practice with a long-standing interest in new media, IT and the internet.

This site provides guides, articles and news stories relating to everything from the drawing up of on-line contracts and agreements to issues of taxation and defamation.

You will also find sample contracts, checklists and other documents, indispensable to your business planning and operation."

Although the site is based on UK and Hong Kong law, many of the concepts and information has broader application and is worthwhile reviewing.

Privacy Policy Generator

"Consumer notification of information policies is a basic element of a direct and interactive marketer's information practices. [The Direct Marketing Association] DMA believes that all marketers operating online sites should make available their information policies to consumers in a prominent place.

On this page, Webmasters and administrators can complete a questionnaire (basing their answers on their site information policies) and create a privacy policy statement to be posted on their own Web page. This tool has been developed to help marketers create policies that are consistent with The DMA's Privacy Principles for Online Marketing."

Complex Estate Planning Issues Face Small Business Owners

"Small business owners have many financial needs that may be different or more complex than those experienced by the average investor... Here are some of the considerations you should keep in mind as you develop your estate plan.

• Operational efficiencies...
• Cash flow...
• Ownership....
• Income for spouse...
• Dividing assets...
• Federal estate tax...
• State estate tax...

Read more in this "Coeur d'Alene Press article.

Looking to Buy a Small Business?

Here is a list of web sites listing small businesses for sale.

Biz Buy Sell
Biz For Sell
Busimarket
Business Broker Network
International Business Broker's Association
Merger Network

See this post from Small Business Trends for links and more.

The Essential Success Factors

"I read many books, blogs and other sites around business, leadership and management. Everybody says it a different way, but it seems that organizations really need these things to succeed:

Focus...
Execution...
Relevance...
Innovation...
Discipline...
Vision..."

Read more in this post from Random Thoughts from a CTO.

Cultivating An Equity Achievement Attitude

"The attitude of companies with programs for employee equity runs something like this: This is our company, and we will do whatever is necessary to help it succeed. It's that can-do attitude that makes equity stakes not only good for morale, but good for business, says the authors of Equity. In this excerpt, the three necessary elements to a successful equity model are explored...

One element is equity itself - stock ownership significant enough that it matters to employees' financial future. The second is a culture that helps people think and feel like the owners they are. The third, and often overlooked, element is a shared understanding of key business disciplines, and a common commitment to pursuing them..."

Read more in this HBS Working Knowledge article.

Marketing Mistakes to Avoid When Selecting a Business Name

Mistake #1: The Committee (Getting all your clients, employees and family members involved)...

Mistake #2: The Train Wreck (Taking two words and colliding them head on)...The problem with this approach is that it’s simply forced – and it sounds that way...

Mistake #3: Where's Waldo? (Names so plain they'll never stand out in a crowd)...

Mistake #4: The Atlas Approach (Using a map to name your company)...

Mistake #5: Cliché you say? (A good name is worth a thousand words)

Once past the literal, descriptive stage, the thought process usually turns to metaphors. These can be great if they are not overly used to the point of trite. Since many companies think of themselves as the top in their industry, the world is full of names like Summit, Apex, Pinnacle, Peak, etc. While there is nothing inherently wrong with these names, they are just overworked. Look for combinations of positive words and metaphors and you will be much better served. A good example is the Fortune 1000 data storage company Iron Mountain, which conveys strength and security without sounding commonplace.

Mistake #6: Hide the Meaning (Make it so obscure, the customer will never know!)...

Mistake #7: The Campbell’s Approach (Using alphabet soup to name your firm)...It’s not that coined or invented names cannot work, they often do. Take for example, Xerox or Kodak. But keep it mind, names like these have no intrinsic or linguistic meaning, so they rely heavily on advertising – and that gets expensive. Many of the companies that use this approach were either first in category, or had large marketing budgets. Verizon spent millions on their rebranding effort. So did Accenture. So check your pocketbook before you check into these type of names.

Mistake #8: Sit On It. (When in doubt, make no change at all)

Many business owners know they have a problem with their name and just hope it will somehow magically resolve itself...

Read more in Unit of 1 post.