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To attract talent, investors, partners and good feedback, I need to share my vision, but there is always a risk that someone will steal my idea.  How open should I be prior to launch?

ANSWER:

This is a problem countless founders face.  They have a great idea, but they need to share it with lots of people, some of them potential competitors, in order to get it off the ground.  I’ve been in the situation many times myself, and here’s my question to you.  What’s the biggest risk you actually face?  Is the chance of someone stealing your idea a major risk?   From what I’ve seen, the biggest risk most founders face is running out of money, time and motivation before their product even launches.

In most cases, the chance of someone you talk to stealing your idea is very small.   The fact is that most people are so wrapped up in what they’re doing at the moment that they can’t move quickly enough to capitalize on even the best new idea.  You’re lucky to get them to join your team or invest in you if they really believe in your idea.

Of course, this isn’t always the case, but it’s a matter of weighing the risks involved.  Startups are fraught with risk.  It’s just the nature of the beast.   The fact is that the majority of founders tend to give up on an idea before anyone has time to steal it.  And if you really want to worry about something, there probably is someone in Stockholm right now with exactly the same idea and that’s your real competitor — you just don’t know about that person yet.

Instead of worrying about someone copying your idea, which will happen inevitably (if it’s any good), you should focus on building your business as quickly as possible.  That’s  your best defense.  Without a business it doesn’t matter if someone pilfers your idea because you won’t be around to compete with them.  Also, execution is the hardest part.  The idea is only 10% of what it takes to make your company succeed.  The other 90% is how you execute.  So again, if you factor in all the risks, someone stealing your idea is probably less than 1% of the total risk your startup faces.

As a precaution, you can ask potential employees, investors and strategic partners to sign an NDA.  Many investors will refuse to sign NDAs, but you can ask politely if you’re really worried.   I hope this helps!

I’m launching a startup where I plan to get venture funding.   Where can I find Delaware corporate formation documents?  I’m looking for angel & VC funding, so I want something that would be acceptable to both.

ANSWER:

Below is a link to the formation documents for a Delaware Corporation provided by Orrick.  You need to check with your counsel to make sure these work with your company.

Go see Corporate Formation Docs

Incorporation Questionnaire

This form should be filled out completely. Ask your Orrick contact about any questions you may have, but try not to leave any blanks. There are a number of choices to be made as a threshold matter, such as choice of entity (corporation, LLC, partnership, etc.) and choice of jurisdiction (Delaware, California, etc.). These are questions you should discuss with an attorney.

Certificate of Incorporation

This document sets forth the Company’s initial authorized capitalization, among other things. This Certificate of Incorporation is appropriate for a typical start-up company – at the time of an initial public offering a number of changes should be considered.

Bylaws

The Bylaws provide the procedural mechanics required by Delaware law, including establishing the number of authorized directors. These Bylaws are appropriate for a typical start-up company – at the time of an initial public offering a number of changes should be considered.

Action by Written Consent of Incorporator

This document appoints the initial Board of Directors and adopts the Bylaws of the Company.

Initial Organizational Resolutions of the Board of Directors

This document completes the organization of the Company by appointing the Officers and authorizing the issuance of shares to the Stockholders, among other things.

SS-4 and Filing Instructions to Obtain an EIN

The IRS Web site allows you to obtain an employer identification number once the Company is incorporated.

NOTE: Keep in mind that the answer to this question will vary from case to case.   It’s best to seek advice from your own legal counsel in an issue this complex.  Before making any business decisions based on information on this site, it is your responsibility to check with your counsel or professionals familiar with your situation.

Founders Tip: Consider using a filing service such as Incorporate.com where they file all the documents with the state, get your record book, and more.

I am the registered owner of a defunct company that has a judgment against it.  In the Commonwealth of Virginia, can I close that company with the active judgment?

Ethan Stone

Answer by Ethan Stone, Stone Business Law

First, a quick but important clarification: I’m not your lawyer and this answer doesn’t establish a lawyer-client relationship. I’m giving a generic answer to a generic question to educate the users of this site. The information below is general in nature and should not be understood as a substitute for personal legal advice.

I’m also not a Virginia lawyer and I haven’t looked at Virginia’s corporations laws. The following answer reflects the typical arrangement under most states’ corporate laws.

The answer is that you can dissolve the company if you want, but to avoid personal liability for that judgment, you’ll have to put aside assets to cover it (usually in trust) before you distribute anything to the shareholders. Reading between the lines, I’m guessing that there may not be enough assets to cover the judgment. In that case, you can dissolve the company and put all of the assets aside to pay the judgment (and any other remaining liabilities of the company).

If the company clearly does not have enough assets to pay the judgment and there are few or no other creditors, you might consider talking to the judgment creditor to see if you can formally settle the claim by turning over the company’s remaining assets. If the creditor(s) are willing to do that in advance of dissolution, it will make dissolution easier. Since there are legal doctrines that can allow a corporate creditor to impose personal liability on shareholders, formally settling the judgment will also provide you with a bit more peace of mind.

You might also take a look at an earlier answer I posted to a similar question here:http://www.foundersspace.com/company-formation/can-i-simply-abandon-a-california-corp/.

Ethan Stone

by Ethan Stone, Stone Business Law

First, a quick but important clarification: I’m not your lawyer and this answer doesn’t establish a lawyer-client relationship. I’m giving a generic answer to a generic question to educate the users of this site. The information below is general in nature and should not be understood as a substitute for personal legal advice.

The answer to this question depends on state law.  In California, and many other states, the answer is no.

California Law requires an “itemized statement” including the following:

• gross wages earned
• total hours worked by the employee (except for salaried “exempt” employees)
• the number of piece-rate units earned (for workers paid on a piece-rate basis)
• all deductions
• net wages earned
• the dates of the pay period
• the employee’s name and the last four digits of her/his social security number or employee ID  number
• the employer’s name and address
• an itemization of the applicable hourly rates in effect during the pay period and the corresponding number of hours worked at each hourly rate by the employee

Given the numerous state and federal rules and regulations pertaining to paying employees, withholding taxes etc., most employers prefer to use a payroll service, such as ADP, Ceridian, Insperity and Paychex (there are many others and I’m not endorsing any of them), to deal with their payroll and generate the paystubs.

I’ve heard of startups going public with penny stocks. Is this a good way to raise money? What is the downside? Should I spend my time looking into this?

ANSWER:

Ethan Stone

by Ethan Stone, Stone Business Law

First, a quick but important clarification: I’m not your lawyer and this answer doesn’t establish a lawyer-client relationship. I’m giving a generic answer to a generic question to educate the users of this site. The information below is general in nature and should not be understood as a substitute for personal legal advice.

The quick answer is “no.” I’ll elaborate, but it’s worth emphasizing first that the world of “penny stocks” is, generally speaking, disreputable. There are exceptions. I don’t mean to disparage any company with a low stock price. But the reputation is well known and, by and large, well deserved. So an entrepreneur going this route should bear in mind that informed people will assume the enterprise is shady. I’ll try to explain below some of the reasons that this tends to be true.

So why don’t reputable companies raise capital this way?

It’s Very Difficult, Time-Consuming and Expensive

When people say that a company is “public,” they usually mean that it has registered some class of securities with the SEC under the Securities Act of 1933 and assumed reporting obligations under the Securities Exchange Act of 1934. Registration is the only way a company can sell securities to the public at large and allow their unrestricted resale on a secondary market. To register securities, the company must prepare a “registration statement” (an elaborate set of disclosures). As a practical matter, a registration statement does not become “effective” until the SEC is satisfied that the company has addressed any concerns it raises on review. After the company registers its securities, it must generally make periodic disclosure filings with the SEC, such as quarterly and annual reports. All of this is subject to intricate written and unwritten rules. Compliance requires significant effort and expertise. So registering securities publicly means devoting a lot of time and money to compliance and disclosure, both before the offering and on an ongoing basis. For small amounts of capital, this time and expense is almost never justified . . . for people who take compliance responsibilities seriously. Shady operators and their advisers are often less troubled by the niceties of legal compliance.

It Only Helps if the Company Is Selling to Unsophisticated Investors.

There are a number of exemptions to the general requirement to register securities. The most versatile and commonly used exemption is under Rule 506 of the SEC’s Regulation D which, generally speaking, allows a company to offer and sell securities to “accredited investors” with a minimum of regulatory burden. “Accredited investors” are, summarizing again, institutional investors and individuals meeting certain income or asset thresholds. There are other exemptions for offering that do not meet the criteria or Rule 506, but they are more restrictive. None of the exemptions allows a broad-based offering to the public.

So the advantage of registering is that it allows the company to offer and sell its securities to a broad swathe of unsophisticated investors. Honest entrepreneurs looking for capital to build a company aren’t normally interested in this prospect. They do not want a constantly shifting shareholder base of people who presumptively had no idea what they were doing and very little understanding of the business when they invested. If things don’t go perfectly, these investors will not support the company; they will sue for fraud or, worse yet, try to get the SEC to do so. Even if things go well, dealing with them will take time and money an entrepreneur can’t spare. Again, shady promoters are much less concerned about this problem.

Bear in mind that good angel and VC investors are not only much less trouble than unsophisticated investors (bad ones can be a serious burden), they also add value by giving the company the benefit of their reputation, experience and contacts.

What About Liquidity?

In theory, registered securities are much more “liquid” than unregistered securities, since they can be legally bought and sold on the secondary market with almost no restrictions. Securities purchased under an exemption from registration are generally subject to significant resale restrictions. The practical reality is more complicated.

Registering securities does not, in itself, create a liquid market for them. For that, the company must list the securities on an exchange or other securities trading platform, get securities analyst coverage, and get the securities distributed fairly broadly. Without those additional steps, there won’t be the constant dealer quotations and buyer and seller interest that allow securities to be traded quickly and easily at a price that reflects the collective judgment of an efficient market (for whatever that’s worth). By contrast, there are now fairly good mechanisms, such as Sharespost (http://www.sharespost.com/), to buy and sell unregistered securities in which there is significant interest.

Sophisticated investors know this, so they won’t attach much value to the fact that a company is offering registered securities if there’s no prospect of a liquid market. That leaves unsophisticated people who will be disappointed and angry when they discover what they’ve purchased. Once again, the prospect of duping unsophisticated investors isn’t troubling to shady operators.

What About Public “Shells”?

All of the above applies to both new companies issuing securities for the first time and companies that merge with so-called “shell” companies that are public but dormant. If a company is going public anyway, merging with a shell can sometimes save some time and money, but it doesn’t change the overall regulatory burden.

So I’m sorry to say it, but selling penny stocks isn’t a secret source of quick and easy funding for startups. That said, there are often good alternatives to angel and VC funding. I have discussed some of them here: http://www.foundersspace.com/open/?mingleforumaction=viewtopic&t=43.0.

My understanding of convertible debt is that it is designed to convert upon the next round of funding. The valuation is determined by next round of investors. So what happens to any convertible debt financing if my startup gets acquired before another round of funding takes place?

ANSWER:

Ethan Stone

by Ethan Stone, Stone Business Law

First, a quick but important clarification: I’m not your lawyer and this answer doesn’t establish an lawyer-client relationship. I’m giving a generic answer to a generic question to educate the users of this site.

Now to the question: The answer depends entirely on the terms of the convertible debt. That said, I’ll make some general observations.

Let’s start with the obvious: Convertible debt is debt. So eventually (usually 6-12 months) the debt will come due with interest. So if the note doesn’t specifically address a sale of the company, the investor will, generally speaking, be paid its principal and interest out of the proceeds of the sale. The precise timing and mechanics of paying the lender vary, depending on a number of factors.

Because the angel investors who invest through convertible debt generally aren’t looking to be paid back with interest, but rather are looking for an equity stake in the business, the convertible note will often give them more. One common provision is to give the investor some multiple of the principal (usually in addition to interest), say 2X or 3X. Another common provision is to allow the investor to collect on the basis of some share of the equity. Since angel convertible debt is typically not “priced” (i.e. the investor’s exact equity stake isn’t determined at the time of the investment), these provisions need to address how that share will be determined (often, there’s a price that applies specifically to sales). Often, the investor will be able to choose between these two ways of getting paid (i.e. the investor can take whichever is best under the circumstances). Many other variations are possible.

The bottom line is that the specific terms of the specific note will determine. Those are (or, at least, should be) a key point of negotiation when the investor invests.

Incidentally, if the sale is for less than the amount due on the debt, it will render the company insolvent. That is similar to a short sale of a house and, generally speaking, the investors will take all the proceeds of the sale, leaving nothing for the stockholders. That said, insolvency and bankruptcy can be very complicated. So anyone looking at a sale like this should consult qualified insolvency counsel (that’s not me) before doing anything.

ADDITIONAL ANSWER:

Charles Swan

by Charles Swan at The Virtual CFO

Convertable Debt is debt than be converted into another instrument, generally common stock. The terms of conversion are determined by the agreement, or indenture. It is sometimes used to obtain a lower interest rate on the funds borrowed.

Conversions can be mandatory or demanded by either party, depending upon the terms.

You will need experience advisors to enter into any such transaction.

If you think that building a brand today is any less important than it was prior to social media, SEO, or word of mouth marketing, you might be mistaken.  The game has changed, and the tools are different, but the need to create a unique, powerful brand has never been more important.  Good branding is about breaking through and getting on people’s radar.  And, let’s face it, it has never been more difficult to make that happen as people are inundated with virtually unlimited product choice and marketing noise.

Companies need to go beyond the marketing principles of the past where brands were built on solid, but frequently uninspired foundations.  Giving a brand JUICE takes this a big step further.  Brands with JUICE are the ones that are provocative and relevant enough to generate meaningful customer interest and marketplace traction.

Here are a few key questions to help you understand whether or not your brand has JUICE.

1.  Are your customers spreading the word like “CULT FOLLOWERS”?

Here’s a new thought for you.  Don’t think about building your BRAND, think about building your CULT (hope this doesn’t sound evil or farfetched or conjure up images of the misguided cults of the 70’s and 80’s).  Because interestingly, most of the strategies and disciplines that go into building a great religion also go into building a great brand.  The beauty of building a brand cult is that, as your “followers” become loyal disciples, they spread your philosophy and recruit other members (with limited investment in marketing).  The most effective way to measure your brand cult’s strength is to understand how likely your customers are to recommend your product (or service) to a friend.

Who’s doing it right?

No one has built a more important brand religion than Apple.  Former CEO Steve Jobs (Apple’s high priest) preached an ideology that directly challenged the faith of even the most devoted PC worshiper.  Apple started as a cult dedicated to the needs of creative types, but with the introduction of the IPOD they grew into a mainstream global religion.  If you don’t think Apple is a cult, next time you visit an Apple store tell me if you don’t feel “cooler” and closer to the Company and Brand after your experience.

2.  Is your brand idea incredibly SIMPLE?

Albert Einstein once said “everything should be made as simple as possible, but not simpler.” While Einstein probably had his sights set on higher pursuits than branding, his statement rings true when you think about the great product, marketing and branding ideas of this or any other century.  It’s incredibly telling that most successful brands and companies, which are frequently supported by highly complex products and technologies, offer customers some of the simplest, most intuitive user experiences.

Who’s doing it right?

It has been well documented, but worth repeating, that Google showed tremendous discipline by only featuring a single search box at a time when virtually every other successful internet brand was cramming every possible piece of information onto their homepage.  Every time Google performs a search, their algorithm distills infinite possibilities into a simple, intuitive solution.  Google has also distilled their corporate values into a few simple principles.  At the heart of their organization is one of their most defining values that has guided them from the beginning; the notion that they would “do no evil.”  For Google, “doing good” was synonymous with serving the consumer and not misdirecting or distracting them with irrelevant ads.  At a time when other companies were struggling to find the right balance between short-term revenue and long-term customer experience, Google’s position was clear…serve the consumer and everything else would fall into place.

3.  Do you have your STORY straight?

Behind every business, there’s a great story.  Your story needs to be interesting, easy to tell and true. It’s infinitely more effective for a product (or company) to tell a story than to simply provide a list of features and benefits.  We remember stories, but features and benefits fade away into the noise of everyday life.

Who’s doing it right?

When it comes to storytelling, few have done it better than Virgin.  Virgin is essentially the story of David versus Goliath.  It’s a story about Richard Branson (Virgin’s charismatic leader) playing the underdog role by fighting for the needs the underserved British airline passenger. When British Airways zigged, Branson zagged.  Virgin built an emotional connection with customers by championing their cause and providing a tangible combination of quality, innovation, value and fun.  Virgin was the first to offer business class seats for first class prices, on-board massages, and seatback entertainment.  They also taught cabin crews that friendliness was a priority.  The Virgin Brand has now been leveraged across 300 individual companies.

4.  Are you exceeding CUSTOMER expectations?

Simply meeting customer expectations is a thing of the past. Today, great brands aren’t just trying to satisfy their customers, they are trying to surprise and delight them. Great companies recognize that customers are their most important stakeholders and the lifeblood of their organizations.  Many companies “talk the talk” when it comes to being customer-centric, but very few actually “walk the walk.”

Who’s doing it right?

Whole Foods has taken customer service to an entirely new level.  Whole Foods takes great care of their employees (known as “team members”), and in turn, they expect “team members” to take exceptional care of their customers.  Team members take initiative and go out of their way to help customers through exceptional customer service. If you ask a “team member” if the Fuji Apples are tasty, they don’t just say “yes, there nice today”, they pull out a paring knife and let you sample one.  Ever had that happen in Safeway?

5.  Are you an INNOVATOR?

The words  “innovate or die” have never been more relevant than they are today.  Companies and Brands are in a constant struggle to maintain relevance.  In many categories, the internet has lowered the cost of entry and given infinite numbers of new companies the opportunity to compete. Companies that didn’t exist 5 or 10 years ago are now flourishing.  Companies like mySpace and Friendster have gone from Internet juggernauts to Internet has-beens in less than a decade.  While it may sound trite, great brands/companies go beyond simple customer satisfaction with continuous improvement and innovation.

Who’s doing it right?

Starbucks has done a fabulous of using social media not just by connecting with customers, but also by LISTENING to customers and using their ideas to create on-going stream of innovative new products.  To date, Starbucks has implemented over 150 consumer-generated ideas from the “MyStarbucksIdea” customer blog.  Lots of companies claim to be customer focused, but Starbucks goes beyond the rhetoric in a way that other companies might want to emulate.

How does your brand measure up against these key criteria?

Does your brand have JUICE?

I’ll bet most people can only remember a handful of taglines, at most, despite millions of dollars of marketing exposure in many cases. In my view, taglines are a legacy of the television-advertising era. “Just Do It” is probably the most memorable tagline in history and it is only relevant because Nike spent hundreds of millions on TV ads that gave it meaning.

When it comes to successful startups, I can think of very few that have had lasting taglines. Go to the homepages of Google, Amazon, Ebay and Facebook and let me know how many taglines you see.

Don’t get me wrong, taglines are fine and if your team comes up with an interesting one, go ahead and flaunt it proudly. But my view is taglines should play a very, very minor role for most new companies. I suggest new companies spend more time building a strong brand strategy and then translating it into all critical brand touch points. You’ll know if you have an effective strategy because it will naturally inform virtually everything you do.

If you run a new company or startup, let us know if we can help you define your brand strategy.