I have addressed the type of entity you might form in a variety of articles over the years, but just put a new one up on LinkedIn that is a good summary. If you are thinking of forming an entity, this is a great place to start.
Should I Form an LLC or Corporation?
Also, watch my video course on the same subject to learn more.
Welcome from Setting Up Your Small Business as a Legal Entity by Dana Robinson
I wrote a piece many years ago that was an outline for the last lecture I gave to students in MY first teaching assignment. It was sort of my life advice for the students. It was delivered in far shorter fashion, but I kept the essay and intended to start sending it out at the end of each semester to each new class, but it wasn’t until earlier this year that I finished it. I published it to LinkedIn, and that’ll make it easier to distribute to my future law students. I encourage them to connect with me on LinkedIn, and this will be an article that I ask them to read as they forge their way through law school. Have a read if you are interested, or pass it along to young lawyers and law students.
You may have seen one of my courses on Lynda.com (now LinkedIn Learning). If you’ve made it through filing your own trademark, you might find yourself asking “what’s next?” I thought I’d push out an article that explains the whole trademark process so that people who can’t afford attorneys can get the resources to figure it out on their own. Check out the article here. I’ve also put a graphic that may help. You can see more about how the trademark process works here.
I was featured on the Gen Why Podcast last year. I’m stoked to have also seen Nicole Abboud blossom and launch from her practice to speaker and guru! Check out a fun interaction between us on this edition of her podcast. The podcast was intended for attorneys who are exploring how to find meaning, but is applicable to anyone who is asking the same questions: how to I find meaning in my career (which might be boring work in a sterile office).
I’ve been working on a lengthy article about networking for quite some time. I finally got around to finishing it up and published it to LinkedIn here.
Here’s the gist: networking shouldn’t be a thing. The best networking isn’t networking at all. It’s all net and no work.
Whether you are an introvert, extrovert or ambivert, networking can often seem like more work than it’s worth. It feels forced. It feels unnatural. The reality is, networking is not natural for most people because they view networking as a “thing.” Those who are truly great at networking have a secret: they aren’t networking.
In order to figure out how to net without work, you’ve got to stop believing that it’s something that it’s not. Stop fantasizing that you need to be an extrovert to be a natural networker. Stop thinking you need to read a book or learn a special skill to be good at networking. That just creates more pressure, which in turn, makes it even more work. In the end, this approach makes networking daunting, and will prevent you from ever actually doing the real thing.
What’s the real thing? Start with this question: what do you really want to do with your time and relationships? You probably want to create true, organic relationships with people. That’s what I want. And, when it comes to networking, you’ll fare better if you stick with what you really want! The real deal is human connection. If you want to be good at “networking” all you really need is empathy. Everything else grows from that.
I developed a matrix to explain the difference between good networking (or genuine networking), and bad networking. There are two axes:
Y: Who is networking about, you or the other person?
X: Is the means of connection direct or indirect?
The “Less Work – More Net” Matrix
Check out the article on LinkedIn and let me know what you think!
I’ve posted an article to LinkedIn about the shifting sands of trade secrets and human intellectual capital, here.
While I’m not taking a direct position in the matter, it does raise a very interesting problem that will continue to plague us.
Uber has been sued by Google subsidiary Waymo over allegations related to theft of trade secrets. The case stems from Uber’s acquisition of AI startup Otto.
Otto was founded by Anthony Levandowski after he left Waymo. Waymo believes that Levandowski took trade secrets when he left Waymo to form his own company, and thus when Uber purchased Otto, Uber ended up with Waymo’s trade secrets.
Uber paid $700 million for Otto. Ford invested $1 billion in Argo AI last year. These acquisitions appear to be largely due to the fact that there is a dearth of talent in the AI/self-driving-car industry and the costs of retaining talent.
What I find interesting is whether the value of these acquisitions is really about the underlying technology, or the human resources. Check out the article!
There’s basically two kinds of startups in the world today. Those started by a founder or founders that raised money from investors and those that are started by one or more founders that use their own money. I’ve worked with both. I’ve been on founding teams where both approaches are taken. My preference is to avoid using investors. If you are a first-time entrepreneur, I’d like to recommend that you try this path, before you try to hunt down investors.
Let me walk you through the typical funded startup process.
A company is conceived of by a person. Often, that person then gathers a small team of smart people to rally around the idea. In the world of Internet based businesses, it seems like most startups are launching a software application or a service provided through software on the Internet (“software as a service” or “SaaS”). The team puts together a plan for how to execute on the idea, and agrees on how they will each be compensated, including how much equity each will get for their involvement in the business. While they are planning, they might build prototypes, mock up websites, write story-boards, and create explainers and slides. They’ll write a business plan, file for some intellectual property protection, and then approach investors.
In the beginning, the team might take a bit of cash from friends and family. There might be a rich uncle who drops $50K as a loan or for equity, or for a loan that converts to equity. There might be 5 friends or family members who each put in $20K. This type of funding is often referred to as a “friends and family” round (round is a term used to describe the phases of investment). Some startups skip the friends and family round and go straight to a seed round that might include a couple of dozen people who invest a total of $500,000 or even $1 million in some jurisdictions (there are securities laws that restrict how much you can raise depending on your state). With this seed money, the team launches the company, or takes it through some phase of early growth. But, this is not the end of the investment cycle, it is only the beginning. In a fully funded startup, the company will use much of its cash to hire a team of experts, programmers, a CFO, and sometimes even a president who was not one of the founders. Each month the company will be using more cash than it makes from operations. This is called the “burn rate.” The founders or the CEO will generally go out to the professional investment community from there and seek additional investment. In many cases, the second round of investment will come from what we call angel investors. Angels are wealthy individuals who take some of their investment capital and put it into high risk startups. An angel or a group of angels might put $250-500,000 into a startup. They will also typically have a seat on the board of directors and they will get involved in the management of the company to some extent.
But, even with a good seed round, and a good angel round, most startups will have a burn rate that requires more capital. If the company is doing well, it might need to expand, and begin to invest in marketing, sales and customer acquisition. If you’ve read my store of how LegalZoom kicked my startup’s ass, you can imagine how much venture capital LegalZoom must have required in order to run its marketing campaign and overpay for ad clicks.
So, at this stage, a startup will have burned through its seed money and be burning its angel capital and will be actively courting venture capital. Venture capital (or “VC”) is a word we use for a company that invests in ventures professionally. Most venture capitalists aren’t people (although we refer to these types of bankers as venture capitalists, or affectionately as vulture capitalists). Venture capital firms are staffed by partners, and associates who are generally MBA’s or smart entrepreneurs themselves. They evaluate startups for whether the company fits their investment criteria. They typically specialize in particular types of investments, so that they have a cohesive portfolio of investments. They might invest $2 million or $5 million or in some cases $20 million, into a startup that has passed the seed and angel stages. VC investment is a big deal. When the VC invests they typically control the terms of the investment. In many cases, they’ll take a controlling interesting in the company. They might take 50%, or they might take 90%! But, company founders often take the VC money and accept massive dilution of their own stake in order to have access to the capital of the VC, as well as the expertise that the VC brings.
When a VC invests, everything changes. The CFO and CEO will be appointed by the VC. The VC controls the stock and therefore the company. The VC, thus, controls what the company does with the VC’s money. This can be good and bad. The VC may make financial decisions that are inconsistent with the original vision of the founders. This usually brings an upset of the founding team, and often people bail out at this point. In some cases, the entire original team bails out, and just has to hope that their original stock (now only 2 or 3% of the equity) pays out down the road if the VC is successful.
The advantage to VC funding is that those who do stick around get a salary. Founders are often pulling little or no salary when the company is funded by seed and angel money. So, when a VC comes in, the founders start getting paid like employees, often with benefits. But, the VC will still expect the founders to pour their life’s blood into the project.
Another advantage to VC funding is that the VC will typically will put the company into a bigger, better network. The VC may have other complimentary investments that bring strategic alliances between companies that helps a startup in many ways. The VC will also be ready to do follow on financing if the burn rate continues.
If you end up being VC funded, it’ll either be the biggest, best thing that’s ever happened to you, or it’ll ruin your life. If your company makes it through, then the VC will either take it public or merge it with another company, and you’ll get a big payout. In addition to your big payday, you’ll have new friends with money, and new opportunities to do it all over again. For many, it is the holy grail of the startup world.
But, there are many horror stories as well. First, step back and imagine the scenario where you were one of three founders. In the beginning, you owned 33%! You then diluted to 30% when you brought in friends and family, then with Angels, you ended up at 20%. When the VC comes in, you end up at 2%. If that company becomes a $500 million company or is sold to Facebook for $1 billion, then you still get paid really well, right? Your 2% might be worth $5 million or even $10 million. But, if it struggles along, then it could be that the VC needs to invest more and you dilute again. Or the company shuts down and the VC liquidates the company and the VC keeps whatever comes from the liquidation. There is not likely a happy-medium with VC’s. You’ll either win big, or get shafted.
VC’s bring in new people with new personalities that often upset the balance of the original team. It is not just common it is typical. Expect it.
VC’s are very hard to bring in. Thus, the battle to find VC money is difficult! This is probably the number one thing I try to impress on new entrepreneurs. You can spend full time for a year just trying to raise money. In that same year, if you had applied yourself to the business of the business, you might have launched! In the end, only a small percentage of the startups actually raise money. But, a lot of effort is required in order to try. Before you try, be sure that VC money is something you really need. Consider the bootstraper route.
Why do so many people want to take the VC route? I believe that part of it is the American “get rich quick” theme. People love stories of rags-to-riches. We dream of investing the big thing, or starting the next Facebook. We watch The Shark Tank on TV and envision Mark Cuban offering $500,000 to partner and take the next great idea to the world.
But, if you are really going to start a business as a means of gaining financial independence, then you have to shed the myths of making it big this way. The way to get out of modest American poverty is not to have a wealthy VC offer to invest in your business. The way out is a deliberate and disciplined effort that involves changes to your spending, your time, and your mind. It will require that you use your energy to buy or build a business. This is a far more sure way to achieve financial success than playing the lottery of fundraising. Launch your company on your boostraps if you can.
Creating a New Market is Rarely Successful
I had a client in my office describing his new business.
“Its an in-room music listening service for hotels,” he said.
“Ok, so its like pay per view but with music?” I replied.
(By the way, this was back in the early 2000’s before everyone had music in their pocket.)
“Yes!” he said, “this is like pay-per-view, but it can be a paid service, or it can be supported by ads and a hotel can offer it for free.”
“Okay, and do you have any experience in this industry?” I asked.
“Oh. No. But, this idea is huge. No one has ever done it before.”
I was trying to think of a way to be diplomatic.
“Well, here’s the thing,” I said to the client. “Most new entrepreneurs don’t succeed at creating an entirely new market from scratch. In fact, even if you had worked in music or in pay-per-view for years, you might have a hard time getting investors to back you because even seasoned investors are wary about doing something where there is no existing market. The cost to create a market is massive.”
He thought for a minute and replied, “well, there are no competitors. If I can just get this product into a couple of hotel chains, I will be killing it. No competitors! That’s golden, right?”
“No,” I said. “Its a common mistake for people to think that their idea is better because there are no competitors. You want competitors. It is proof of the business that others are already doing it. Doing it better, that’s golden. Doing it in a new vertical. Doing it in a new way. But, if no one is doing it, then it is typically evidence that either there is no market or that the barriers to entry are too high, even for those with the financial resources. If the big pay-per-view and in-room entertainment companies are not doing this, then it should tell you something about the market. Either there isn’t one or they see it as too costly to enter. Therefore, it is not a wise use of your time and money or your investors money to try to create a new market.”
He was crestfallen.
“Look,” I said. “You also have one major flaw in your idea. Your connections are almost entirely with executives at hotels in Las Vegas. Right?”
“Yes,” he said.
“Well, I have it from reliable sources that casinos do not want their patrons to stay in their rooms. They have limited television channels for a reason. The aren’t making money at gaming tables if their patrons are sitting in their rooms listening to music. Even if they get a few dollars from music revenue, they make a lot more when that patron is at a restaurant or at a slot machine.”
He left in disappointment. I felt bad for shooting him down. It is not always my role as an attorney to judge a business idea. But, he had some for more than just a single project. He wanted full counsel, and I gave it to him.
He had high hopes because his idea was so novel. Many Americans have the same misconception. They feel that having the “stroke of genius” is about thinking of an idea that has never been done. Even if the idea is patentable, this is no guarantee of success or value. There have been over 8 million patents issued since the inception of the US Patent Office. Of those only a small percent have lead to landslide success. Merely having a patent is not enough. The thing you patent still has to be in demand. People must need it or really want it.
I don’t think my client gave up merely because of my advice. I seem to recall that he sought investors (unsuccessfully), used a lot of his own cash, and made presentations to several hotels and even to the in-room entertainment companies. It never took off.
You are probably happy for him in one sense, right? Something else happened a few years later that may have ruined his entire business. By 2005, we all had iPods and hotels were changing their alarm clocks for iHome units that would hold an iPod and eventually an iPhone. Why pay for music on a television in your hotel room when you could just drop your device on a dock and press play? Nowadays, we have many music streaming services to choose from, and our mobile phones are loaded with our own music plus apps for iTunes, Pandora, Spotify, and maybe if you are a Jay Z fan, Tidal.
His business would have taken millions of dollars to launch, and faced numerous challenges, only to be brought down by changes in technology that were only a few years away.
What can we take-away from this? First, don’t try to create a new market. If you are super rich and backed by others who want to try to create a new market, then don’t listen to me. Go for it. You have the money to lose and if, against all odds, you create a new market, you’ll get even richer. But, for my tribe, we are regular people trying to dig our way out of modest American poverty, and gain financial independence. And, for us, trying to create a market would just be stupid.
The second lesson: whatever you choose to do must have an inexpensive MVP path that you can take, which diminishes your risks. Check out my article on bootstrapping to see a great example of how one of my ventures got clobbered by a big change in the competitive scene.
Filing a Trademark Online
While I prefer that my clients hire me to file trademarks, occasionally a small business simply cannot afford to pay legal fees but still desires to file a trademark. The USPTO (U.S. Patent and Trademark Office) uses an online filing system. The system is somewhat complicated, but does include step-by-step instructions.
The USPTO site is the best place to start, www.uspto.gov, but be sure to read instructions first. The biggest problem that people have is in describing their product or service in a way that fits the U.S. International Classification system. Want to apply for “clothing?” That will require that you state “apparel, namely shirts, t-shirts, socks, pants, shorts, tank tops, panties, etc.” You literally list every piece of clothing that you make (or intend to make) with the brand.
A second problem that self-filing applicants make is to state TOO MANY goods in their application. Here’s the catch: if you file for goods or services that you do not actually use, and you “allege” that you are in fact using the mark for all such goods or services, then you have committed a fraud on the trademark office. You can have your entire trademark cancelled down the road for this. There are two remedies for this common mistake. First, you can file your application as an “intent to use” application, state as many goods as you may use, but then redact all unused goods later when you are ready to “state use” of your trademark. Second, you can file based on “actual use” but only state the actual goods that you have actually used the brand to sell.
Filing online can save legal fees, and many clients have done just fine. Other clients end up spending as much on legal fees for an attorney to fix mistakes as if they had just used an attorney in the first place.
Like kind exchange, 1031, recapture of depreciation, losses, gains, etc.test