Employment Confidentiality Provision Unenforceable

"Many schools [and companies] have provisions in their employee handbooks or employment contracts that make clear that an employee's salary and other compensation elements are to be kept confidential...A little known provision of federal law makes such confidentiality statements unlawful."

Read more in this Fisher & Phillips article found via the newsletter of Employment Law Information Network.


Inc. Magazine Seeks Your Feedback

Inc. magazine is asking for your feedback and vote on your favorite of four startups recently profiled by the Magazine. You can join entrepreneurs--Tim Gill of Quark, Paul Orfalea of Kinko's (NYSE:FDX), Roxanne Quimby of Burt's Bees, and Gordon Segal of Crate and Barrel--to provide the founders (and the rest of us) with your feedback. The four companies:

- A product design start-up (their first hit is a rolling runaway alarm clock) started by Gauri Nanda, our cover subject, a woman from Detroit who just completed her master’s at MIT

- TechShop, a geek’s paradise in Silicon Valley, where you can go to learn how to use welding equipment or a lathe or whatever crazy machinery you want

- Zsweet, a new sugar substitute (forget Splenda) that’s sold through Whole Foods

- A new software company in Oregon called GreenPrint, that cuts down on printer waste

You can find the links to the main feature’s page, as well as individual links to each fresh new founder, below.

How to Launch a Cool, Profitable, Worth-All-The-Risk, Kick-Ass Start-Up (And Live To Brag About It)

Case Study #1: The Reluctant Entrepreneur
Case Study #2: The Inventor's Best Friend
Case Study #3: The Taste Maker
Case Study #4: The Enlightened M.B.A.


Tips to Encourage Others

Dave Cheong offers the following 8 simple things you can do to encourage others:

Show genuine interest...Let them know you care. Express genuine interest by asking questions. Get them talking...

Acknowledge what’s important to them...affirmation and validation is like nitro for their confidence and self-esteem.

Say “Well done”. ...These magical Words of Encouragement at the right time can make all the difference between “keep going” and “give up”.

Say “Thank you”. Common courtesy. Good manners... A simple thank you lets others know what they have done is worthwhile and meaningful to you.

Reciprocate the favor...Think of this as a pendulum. They do something nice for you. You do something nice for them. They do something nice for you. You do something nice for them. And so on…

Respond with something unexpected...

Ask for advice or confide in them...

Offer to lend a hand...If that person sees that you are willing to commit your own time and energy in their interests, they will be more committed to seeing it through and less likely to give up...


The VC Method of Startup Valuation

"How should one value a startup? It’s obviously a difficult question because the company typically has no revenues, few assets (apart from people and some IP), and cannot be traded in a market with enough participants (and enough information) to accurately determine a price."

This post from Ryan Junee describes is one of the most widely used (often called the ‘VC method’) using a simple scenario of a company that takes only one round of venture financing, and then show how this method can be expanded to handle multi-stage financing, stating:

"The first thing we need to calculate is a ‘terminal value’ for the company. That is, a value at some point (say 5 years) in the future. This point may be an expected liquidity event (IPO or acquisition), or failing that should be a point where the company is at least earning a profit...

Lets make this clearer with an example. Our company, Infelidoo, is expected to earn a $3M profit in year 5. Comparable companies in Infelidoo’s industry are trading at PE ratios of around 15. This means Infelidoo’s expected terminal value is $3M x 15 = $45M...

The Venture Capitalist’s Required ROI
Lets say our VC is ready to invest in Infelidoo and needs to value the company. The company needs $2M to get started - and in this simplified example will need no more cash over the next 5 years to reach its goal. Given the risk of this project, the VC decides she needs a 50% annual rate of return on her investment (more on determining the rate of return later).

This means in year 5 the VC’s investment must be worth (1 + 0.50)5 x $2M = $15.2M. [That’s just (1 + IRR)years x Investment] So, in year 5 the VC expects the company to be worth $45M. Her share of the company must be worth $15.2M. Thus her ownership stake in the company must be 15.2/45 = 34%.

Note: by taking a 34% stake in the company now, in exchange for $2M, the VC is valuing the company at $6M.

The Discount Rate
Above we used a discount rate (rate of return) of 50%, which may have seemed somewhat arbitrary. The discount rate reflects the level of risk in the company (the higher the chance of failure, the higher the discount rate should be)...Figuring out the exact discount rate to use is more art than science. Some approximate guidelines for discount rates based on the stage of the company are:

Seed stage: 80%+
Startup: 50-70%
First-Stage: 40-60%
Second-Stage: 30-50%
Bridge/Mezzanine: 20-35%
Public Expectations: 15-25%...

Forms for Solos

Carol Elefant at MyShingle.com, announced the launch of her new feature, SOLOFORMANIA - "a cornucopia of forms for the busy solo - ranging from FREE sample practice guides, fee agreements and retainer letters, to court forms for all 50 states (some free, some fee) to general form files on the Internet."

Sorry Gotta Go

The Web site SorryGottaGo.com offers a collection of audio clips to help people get off the phone with telemarketers. Hilarious. Thanks to Jim Calloway's Law Practice Tips Blog for the link to the site, which you will find on his blog.

This gives me an idea for how to deal with a perennial question I receive, "Can you spell your last name?" Of course I can. With a click on my computer linking to a recording of the spelling, you will also be able to.


Venture Capital Alternatives

"If you’re struggling to find success in your quest for venture capital, maybe you’re looking in the wrong place. Venture capital is not for everybody... there are plenty of other options available when it comes to finding capital. From angels to credit cards, here are 25 alternatives to consider when it comes to funding your business.

1. Angels
2. Private Placement
3. Initial Public Offering
4. Bootstrap Financing
5. Fund From Operations
6. Licensing
7. Launch Customers
8. Vendor Financing
9. Sweat Equity
10. Self Funding
11. SBA Loans
12. SBIR and STTR Programs
13. State Funding
14. Home Equity Loans
15. Community Banks
16. Microloans
17. Finance Debt
18. Silent Partner
19. Friends
20. Family
21. Form A Strategic Alliance
22. Sell Some Assets
23. Business Lines of Credit
24. Personal Credit Cards
25. Business Credit Cards..."

Read more in this article from Business Fund.com.


So You Want to Share the Pie?

"Many private business owners sell (or grant options to sell) minority ownership interests in their business to employees, investors, family members, friends and others. The majority owner selling these minority interests may be motivated by many reasons, such as: the desire to obtain new capital, incentivize, reward or put "golden handcuffs" on employees, strive for family harmony, obtain estate planning goals and reap the emotional feeling of power or largesse.

"The majority owner’s goals, while certainly well intended and understandable, often focus only on these positive aspects, but seldom factor in the countervailing concerns" that are addressed in this article [from Business Law Today]."

The article notes that, "The sensitivity of majority owners to common pitfalls in their relations with their minority partners, together with their taking reasonable precautions prior to and after offering ownership positions to minority owners, can minimize litigation, improve harmonious inter-owner relations and improve the business’ prospects for success."

The article provides the following list of factors to consider when taking on minority investors:

Overall fundamental fairness/exercise of fiduciary duty. A vigilant or persistent minority owner will be entitled to scrutinize carefully every action or inaction by the majority owners. These rights exist, within reasonable limits, whether the minority owner sincerely questions the majority’s conduct or is trying to use its position to frustrate or hinder the majority.

In general, minority owners may assert that the majority breached its fiduciary duty or engaged in bad faith and unfair dealing and other contractual breaches based on various fact patterns. To support those legal conclusions, minority owners will seek to weave a tapestry of facts showing that the majority regularly or systematically, or at least occasionally, favored itself over the best interests of the business or the minority...

Affiliate agreements. Minority owners seeking to challenge a majority owner’s conduct may be entitled to carefully scrutinize all contracts, agreements and other arrangements between the business and suppliers, customers, consultants and other businesses owned or operated by the majority. The fairness of the price, comparative quality of performance and openness of the bidding for the affiliated company’s goods and services are often subject to criticism...

Salaries, bonuses. Similar to issues raised under affiliate agreements, compensation arrangements with key employees, particularly those employees who are majority owners or related to majority owners, will be subject to scrutiny on the same basis...

Distributions of excess cash vs. reinvestment. The different priorities of majority and minority owners are magnified in the area of a privately held business...Majority owners want the untrammeled flexibility to reinvest the free cash in the business, buy additional businesses (whether or not in the same line of business as the existing business) or make distributions to owners...while the minority...often looks to the business as a source of cash...

Sale of business and structure. The minority owner may challenge all aspects, substantive and procedural, of the ultimate sale of the business. Besides the obvious substantive areas for challenge such as the timing (either too soon or too late) and the price and payment terms, minority owners may examine other aspects of the transaction that allegedly favor the majority. Substantive areas often challenged for their alleged mischief include:

• allocations of the sale price to noncompete and consulting and similar arrangements in favor of the majority (thereby reducing the net consideration available to the minority),

• other post-closing arrangements between the buyer and the majority (such as leases or purchase-and-supply contracts) and

• the overall tax structure and financing of the transaction...

Business focus, priorities. A minority owner, whether wanting to make mischief or fervently convinced of its position, will scrutinize and criticize the business priorities and focuses of the majority. Frequent areas of dispute involve new business opportunities, geographic areas of sale, distribution practices, treatment of disappointing product lines, joint ventures or outsourcing and hiring or retaining key personnel...

Dissenters’ rights on sale. While dissenters’ rights are a creature of and will vary with state law, they typically provide grounds for challenges to the fairness of the price of the sale or merger transaction. Absent a showing of fraud or other egregious abuses, dissenter rights statutes will not allow a minority owner to block a transaction, but rather, to seek a higher price for its shares...

Information rights....Two major implications flow from such disclosure of information. First, to the extent that "knowledge is power," a minority owner may be better equipped to ask questions, challenge entity action and cause unwanted delays and confrontation. Second, dissemination of information increases the risk that it will be disclosed to competitors or those who could otherwise use the information to the entity’s detriment...

Participation rights. Minority owners frequently try to expand their rights to participate in the affairs of the business in a manner disproportionate to their minority position. They may seek rights to approve fundamental transactions through super-majority thresholds for any number of matters. These may include the right to approve a sale, major acquisitions, budgets, capital spending, borrowing, compensations, hiring and firing of key personnel and a litany of other areas...

Future opportunity rights. A majority owner may desire to expand the business — or buy a competing or complementary line — by forming a new entity in which the minority does not participate, and thereby exclude the minority from benefiting from this new opportunity. This raises issues such as affiliated entanglements discussed above, the loyalty of the majority to the existing business, breach of fiduciary duty and usurping corporate opportunity...

Co-sale rights. Minority owners...will attempt to assure the right to sell their interests in the business at the same time, and on the same terms, as the majority...These "tag-along" rights...may impinge on the majority’s flexibility if:

• it desires to reap a premium for itself, at the expense of the minority, for possessing control of the business,

• it desires to sell, or the buyers desire to buy, only a portion of its interests and, therefore, the minority’s tag-along rights will reduce the majority’s sale proceeds accordingly or

• certain procedural requirements in the tag-along process are not followed and render the sale susceptible to challenge.

Conversely, if a buyer desires to purchase all ownership interests in a business, the minority’s refusal may result in a blocked sale or reduced price...

Redemption rights....Obligations to repurchase the minority’s interests could affect the business’ free cash flow and divert resources from investment in more productive activities, or distributions to shareholders, to recapitalization...

Keep Your Corporate Veil from Piercing

This Wikipedia entry explains:

"The corporate law concept of piercing (lifting) the corporate veil describes a legal decision where a shareholder of a corporation is held personally liable for the debts or liabilities of the corporation despite the general principle that those persons are immune from suits in contract or tort that otherwise would hold only the corporation liable. This doctrine is also known as 'disregarding the corporate entity'."

This article, Determining Your Company's Legal Structure, contains a good overview of the options for the legal structure of your business and the following tips for avoiding "veil piercing" claims:

Be sure that you always conduct business through and in the name of your entity rather than in your own name (unless you are a sole proprietor). Failure to follow the rules for the entity allows creditors to try to deny you liability protection because you did not really conduct business as an entity.

Always have the entity adopt resolutions to authorize action, even if there is only a "ratification" after the fact.

Use the proper form of entity signature by always signing documents in representative capacity as an agent of your entity: "XYZ LLC, by John Q. Smith, Managing Member."

Use proper signs, advertisements and business cards showing an entity rather than an individual (e.g., "John Smith, President, ABC, Inc." rather than "John Smith, Owner/Proprietor").

Use proper fictitious name filings.

Avoid commingling your business and personal funds in the same bank account.

Pay business and personal bills from separate accounts.

Maintain separate personal and business bank accounts.

Prepare notes and other documentation of all loans between the business and its owners.

Your entity must have a minimum capitalization reasonably adequate for the business to be conducted. Insurance counts.

Don't sign contracts or make commitments for the business until you have filed the correct papers to organize it, since you will be personally liable. The liability shield of the corporation or LLC does not exist until the entity exists through a filing in the state capital.
Found via this Kauffman eVenturing post.


Getting Paid for Your Export Sales

Laurel Delaney links to a chapter from her book, Start and Run a Profitable Exporting Business, entitled, "Methods of Payment: Terms, Conditions, and Alternative Financing Sources for Export Sales," [pdf file] explaining how to ensure payment for export sales and the various complicated methods for doing so.

See this post from China Law Blog for active links


Random Color Splashed Around

"And then I saw this, the random color splashed all around. No one had painted it and still it was so beautiful. I guess the beauty of randomness."

-Soumya Soumata speaking about this photo taken yesterday at the Three Rivers Arts Festival and part of the Pittsburgh Pool on Flickr.

The photo also demonstrates something about living: Open to possibilities - You find what you look for - Look for beauty and you find it - Be ready.


Thinking About Thinking

"There is nothing more practical than sound thinking. No matter what your circumstance or goals, no matter where you are, or what problems you face, you are better off if your thinking is skilled. As a manager, leader, employee, citizen, lover, friend, parent — in every realm and situation of your life — good thinking pays off. Poor thinking, in turn, inevitably causes problems, wastes time and energy, engenders frustration and pain....

Consider the following key ideas, which, when applied, result in a mind practicing skilled thinking - sticking to the point (thinking with relevance), questioning deeply, and striving to be more reasonable...

1. Clarify Your Thinking

Be on the look-out for vague, fuzzy, formless, blurred thinking. Try to figure out the real meaning of what people are saying...Explain your understanding of an issue to someone else to help clarify it in your own mind. Practice summarizing in your own words what others say. Then ask them if you understood them correctly... When you cannot do this to their satisfaction, you don’t really understand what they said. When they cannot summarize what you have said to your satisfaction, they don’t really understand what you said. Try it. See what happens.

Strategies for Clarifying Your Thinking

-State one point at a time
-Elaborate on what you mean
-Give examples that connect your thoughts to life experiences
-Use analogies and metaphors to help people connect your ideas to a variety of things they already understand...

2. Stick to the Point...

When thinking is relevant, it is focused on the main task at hand. It selects what is germane, pertinent, and related. It is on the alert for everything that connects to the issue. It sets aside what is immaterial, inappropriate, extraneous, and beside the point...

Ask These Questions to Make Sure
Thinking is Focused on What is Relevant

-Am I focused on the main problem or task?
-How is this connected? How is that?
-Does my information directly relate to the problem or task?
-Where do I need to focus my attention?
-Are we being diverted to unrelated matters?
-Am I failing to consider relevant viewpoints?
-How is your point relevant to the issue we are addressing?
-What facts are actually going to help us answer the question? What considerations should be set aside?
-Does this truly bear on the question? How does it connect?

3. Question Questions

Examine the extent to which you are a questioner, or simply one who accepts the definitions of situations given by others...Good thinkers routinely ask questions in order to understand and effectively deal with the world around them. They question the status quo. They know that things are often different from the way they are presented. Their questions penetrate images, masks, fronts, and propaganda. Their questions make real problems explicit and discipline their thinking through those problems. If you become a student of questions, you can learn to ask powerful questions that lead to a deeper and more fulfilling life. Your questions become more basic, essential, and deep...

4. Be Reasonable...

Notice when you are unwilling to listen to the views of others, when you simply see yourself as right and others as wrong. Ask yourself at those moments whether their views might have any merit... One of the hallmarks of a critical thinker is the disposition to change one’s mind when given good reason to change. Good thinkers want to change their thinking when they discover better thinking. They can be moved by reason. Yet, comparatively few people are reasonable. Few are willing to change their minds once set. Few are willing to suspend their beliefs to fully hear the views of those with which they disagree. How would you rate yourself?..."

Read much more in this excellent article from CriticalThinking.org from which the foregoing was quoted.


Three Rivers Arts Festival Music Lineup

The Three Rivers Arts Festival opens today and kicks off summer in Pittsburgh by filling downtown streets and plazas in the city with art and performance. Here is the evening concert lineup at the Stanwix Triangle Stage

The following evening concerts start at 7:30pm Monday-Saturday, 6:00pm on Sundays, except where noted. All shows are free and open to the public.

Fri, June 1
Robert Randolph & the Family Band
Sat, June 2
Martin Sextonwith special guest
Jon Check at 6pm
Sun, June 3
Mon, June 4
Black Moth Super Rainbow at 8:30pm
Race the Ghost at 7:30pm
Jack Wilson and Dums at 6:30pm
Tues, June 5
Grace Potter and the Nocturnals
Weds, June 6
Thurs, June 7
Roomful of Blues
Fri, June 8
Cowboy Junkiessponsored by Point Park University
Sat, June 9
Koko Taylorwith special guest
Willi Tri Blues Band at 6pm sponsored by Point Park University
Sun, June 10
Los Lonely Boyssponsored by Point Park University
Mon, June 11
Stephen Pellegrino
Tues, June 12
Ike Reilly Assassination at 8pmwith special guest
Earl Greyhound at 7pm
Weds, June 13
The Avett Brothers
Thurs, June 14
Joe Bonamassa
Fri, June 15
Jackie Greene
Sat, June 16
Rickie Lee Joneswith special guest
Lohio at 6pm
Sun, June 17
Spyro Gyrawith special guest
Rodney McCoy at 5pm sponsored by Mellon Financial Corporation