Startup Funding – Where To Get Money For Starting A New Business

By | Internet Lawyer | No Comments

startup funding get money new businessNewbie entrepreneurs with their first “million dollar idea” for starting a new business are often cash-strapped. This frequently makes third party startup funding a misplaced top priority.

Pretotyping Not Payola

As a practical matter, the first issue should be validating whether or not your idea is worth pursuing.

For the aspiring entrepreneur with a limited budget, your first investment should be buying and reading “Pretotype It: Make sure you are building The Right It before you build It right” by Alberto Savoia.

Even if you’re convinced everyone needs what you plan to build, save your time, money, and energy by testing that theory through applying the tactics described in Savoia’s book at little or no cost.

According to Texas Business Lawyer Mike Young, if there’s no market ready, willing, and able to pay for what you have in mind, it’s time to regroup before trying to fundraise for a startup no one wants.

After you’ve proven there’s a sufficiently profitable market by pretotyping, only then is it time to consider how you’ll fund the next steps for your startup.

Your Own Money

Before approaching friends, family, or third parties to raise capital, look at your own assets. If you’re not willing to risk part of your assets, why should anyone else?

That being said, think twice before looting a retirement plan (e.g. IRA or 401k) for your new venture. This is particularly true the older you get with limited time to make up any losses before retirement.

If you can’t afford the down side of a 100% loss of the funds, you shouldn’t be using them in your business.

Don’t go into debt to fund your company. Mortgaging your house or running up credit cards rarely results in business success because it creates a sense of desperation that leads to very bad business decisions when debt payments come due but money is tight.

Business Bank Loans For Startup Funding

Unless you have significant assets to use as collateral or a proven track record of building successful companies, banks are unlikely to give you the time of day for a business loan. In other words, banks are rarely interested in loaning money for startups unless you really don’t need their money in the first place.

Friends and Family Startup Funding

Want to ruin a good friendship or having family members never speak to you again?

Borrow money from them or sell them equity in your new venture.

If you insist on doing it, make sure the loan is done in writing (e.g. promissory note), collateral given if requested, etc. And honor the repayment terms of the debt.

Be careful when fundraising from acquaintances, such as co-workers or friends of friends.

Why?

Because there are federal and state securities laws that must be obeyed if you’re offering equity in exchange for startup capital. The regulatory compliance costs often exceed the amount you’re able to raise by this method…and these people are likely to sue you if your company goes bust and they lose their money.

Angel Investors and Venture Capitalists

Although some angel investors are adrenaline junkies who invest primarily for the rush of being involved with a startup, you should assume both angel investors and venture capitalists are solely interested in a high monetary return on investment (ROI) with the ability to cash out on their terms.

If you are one of the “lucky” few to get this type of funding, understand there are many strings attached.

One of the primary strings invariably is control. To protect their investment, they will throw you out of your own company if you fail to deliver to expectations. These investors don’t assume every investment will pay off. However, they show little tolerance for founders who drop the ball through laziness, incompetence, etc.

Know thyself.

If your primary reason for starting a new company is to work for yourself, giving up a large chunk of equity and expecting to run things as directed by your investors is a recipe for disaster. You can’t fight those who control the purse strings and expect to win, particularly when they’re in the business of making money from your efforts.

Self-Funding Business

Despite the hype given in the media, your new venture is unlikely to become the next Google, Uber, Amazon, etc.

After testing the concept through pretotyping, if you decide to proceed, seriously consider a model where the business’ incoming revenues fund its growth rather than incurring debt or giving up equity.

And if your startup does have the potential to be the next billion dollar unicorn, investors will be knocking at your door rather than you begging for help when starting a new business.

Crowd Funding

What if you need a serious injection of capital for the startup because of the nature of your new widget is technology that requires hundreds of thousands or even a couple million dollars just to get off the ground?

If pretotyping shows there’s a hot demand for your idea, consider using a crowd funding site like Kickstarter or Indiegogo to get the money you need. Just understand there are strings attached to this startup funding too. Whatever you promise to those who crowd fund your company, be prepared to deliver.

Software Development Agreement – Who Really Owns The Intellectual Property?

By | Copyrights, Intellectual Property, Licensing, Licensing Agreements, Open Source, Software, Software Agreements, Software Lawyer | No Comments

software development agreementWhether you’re a developer or a client, one of the most important things to cover in your software development agreement is who owns what intellectual property (IP) rights.

Surprisingly, most developers and their clients either don’t know or having conflicting views on the subject.

Imagine you’re a client that’s just obtained an advantage in the marketplace with new software. Then you discover your developer now works for one of your biggest competitors on a similar software project.

Or, let’s say you’re a software developer. At the end of a project, the client is happy with your work but makes an off-the-cuff remark about owning the new software lock, stock, and barrel. You wonder if the client understands that’s not the case.

According to Dallas Software Lawyer Mike Young, there are two competing interests at play. “The client wants ownership while preventing the developer from re-selling the software to others,” he said. “On the other hand, the developer wants to keep ownership because some code can be recycled and used on projects for other clients instead of having to reinvent the wheel from scratch.”

So, how do you balance these competing interests in a software development agreement?

One method is to use a combination of licensing with non-competition provisions.

How does this work?

The developer retains IP ownership, licenses the software to the client, and agrees to restrict the purposes for which the code can be recycled. Often, this means the developer is agreeing that for a period of time, the developer will not use the software to compete with the client or recycle the code and sell it to one of the client’s competitors.

What if the developer doesn’t own some of the code used in the software?

The general rule of thumb is you can’t convey what you don’t have.

When it comes to software development, there’s often is some code the developer does not own. For example, a developer’s license has been purchased from a third party, the developer is using open source licensed code (e.g. GNU General Public and Creative Commons licenses), or some of the code has been taken freely from the public domain.

In other words, there may be multiple tiers of intellectual property rights associated with a single piece of software. And if those are not clearly identified in the software development agreement, it’s a recipe for confusion, hard feelings, and litigation.

What if the developer is the company’s employee?

Even if employees are doing software development for an employer, it’s risky to assume the software is the employer’s intellectual property as a work made for hire for two primary reasons.

First, certain criteria must be satisfied before the software is considered a work made for hire.

Second, the employee(s) developing the software may have licensed some of the code, used open source code, or taken code from the public domain.

Employers can reduce these risks by taking preventative steps before development begins. These actions can include written employment agreements that cover works made for hire, implementing employment guidelines to ensure the work-for-hire criteria is satisfied, and establishing a clearly defined project scope of work to identify the coding resources for the project and related intellectual property rights.

IP Ownership Is Negotiable

Whether you’re an independent contractor, client, or an employee involved with a software development project, it’s important to understand the intellectual property rights are frequently negotiable, i.e. there’s no one-size-fits-all standard to apply across all projects.

Before negotiating, work with your software lawyer to identify what you must have, what would be nice to have, and what you can live without. This makes it easier to cut a deal where each party gets what they want from the project.

Evernote Privacy Policy Change: Much Ado About Nothing

By | Business Legal Alerts, Internet Lawyer, Privacy | No Comments

evernote privacy policy updateUpdateEvernote has rescinded its planned change to its privacy policy because of the backlash. Users must affirmatively opt in before the company’s employees will be reading the content of user notes as part of the machine learning process. This is somewhat silly because the same issue has been ignored for many years by Evernote users who also use “free” email services like Gmail and Yahoo mail.

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Original Article

Evernote is updating its privacy policy to reflect that some company employees may view your content as part of overseeing the machine learning process.

There’s an uproar because some users (e.g. technologically-impaired journalists) naively think their information is stored online secure from prying eyes.

Here’s What You Should Know About the Evernote Privacy Policy Change

First, the general rule of thumb is that anything stored online is not secure. Just ask the celebrities whose naked selfies were exposed in “The Fappening.”

Second, many of those complaining about Evernote’s policy change think nothing about using Google Gmail, Yahoo Mail, and other email services where machine learning is also supplemented by company employees viewing user content.

Third, Evernote is doing the right thing by disclosing how the machine learning process actually works with the assistance of real people. If the company hid this information, you’d undoubtedly see shakedown lawsuits because of the lack of transparency (Tip – if you’ve got a website or an app, you should have your Internet lawyer make sure your privacy policy is consistent with your actual practices).

If you don’t want your stuff seen by third parties, don’t put it online. If you want to access everyday tools that make your life easier (like Evernote and Gmail), then understand there’s a trade-off that includes a loss of privacy.

5 Things You Should Review For 2017 With Your Business Lawyer Now

By | Business Contracts, Business Lawyer, eCommerce and Technology, Federal Trade Commission, Internet Lawyer | No Comments

business lawyer reviewTo make sure your company is heading into the new year with minimal legal headaches, it’s time for an annual checkup with your business lawyer. If you hate lawsuits and government investigations, here are five things you should cover during your consultation.

1. Changes in Business Ownership.

It’s important to verify who owns equity in your company and decide if changes in ownership need to be made for tax or other purposes.

Frequently, a key player joins or leave a business but the legal paperwork gets overlooked to reflect changes in ownership. In addition, the marriage or divorce of an equity owner may result changes in ownership.

As time passes, it may also make sense to plan to transfer some or all of your equity to your children as they assume responsibilities at your company.

These are just a few scenarios. The important thing is to recognize that ownership frequently changes hands in a company and you want to do it correctly to ensure that the business is protected and taxes are minimized.

2. Entity Status.

If you’re operating your business as a sole proprietorship or a general partnership, it’s probably time to discuss with your business lawyer the advantages of converting your company into either a corporation or a limited liability company.

Your legal counsel can explain the pros and cons of each type of legal entity so that you can make an informed decision as to the best path for protecting yourself as the company grows during the coming year and beyond.

3. Existing Contracts.

Have your business lawyer review your existing contracts to ensure you’re protected and to spot potential legal dangers that can be prevented by taking action now rather than procrastinating.

Sometimes this may mean amending an existing agreement, replacing it with a new agreement that better reflects the deal between the parties, or simply taking certain steps (e.g. giving required advance written notice) to extend or terminate a contract.

4. New Agreements.

During your consultation with your business attorney, be sure to discuss new relationships with employees, independent contractors, suppliers, and joint venture partners.

It’s likely you’ll have a few of those relationships that you’ll need to paper over with legal agreements to ensure that you’re adequately protected in case things go wrong, to reduce the risk of misunderstandings with the other parties, and to avoid lawsuits in general.

5. Business Lawyer Review of Website Compliance.

Because the laws and regulations governing ecommerce are constantly changing, make sure your attorney reviews your website for compliance issues. According to Internet Business Lawyer Mike Young, it may just involve a simple update to your site’s privacy policy and other legal docs.

Occasionally, you may also need to tweak some of the language on your site to avoid getting in trouble with the U.S. Federal Trade Commission (FTC) or other government regulatory agency.

Note that this list of five issues is not all-inclusive. However, it does cover the most common legal problems that you’ll want to get fixed during an annual checkup with your business lawyer.

Sell A Business: How to Get Paid What You’re Owed

By | Business Lawyer, eCommerce Agreements, Internet Lawyer, Sell Internet Business | No Comments

sell a businessWhen you decide to sell a business (whether brick-and-mortar or an ecommerce company), sometimes it makes sense to structure the deal so there are payouts after closing.

Why Post-Closing Payments Occur When You Sell A Business

One of the most common reasons a seller will want to do this is to minimize the taxes paid on the income received from the sale of the company.

On the flip side, it’s common for buyers to want to make some of the payments on the back end. Some purchasers want the sellers to earn out, getting some of the compensation as post-closing obligations are fulfilled and/or certain milestones are met (for example, financial targets are met consistent with seller representations about the company’s profitability).

Other buyers are simply strapped for cash, i.e. they have monetary shortfall and plan to rely upon the company’s revenues to pay part of the purchase price over a period of time. In essence, this is seller financing that an unsophisticated seller might not even be aware is occurring.

Why Accepting Payments Later When You Sell A Business Can Be Risky

Although spreading out compensation over a period of time can have tax and other advantages for a seller, there’s a fundamental risk of nonpayment associated with such payment terms.

For example, there’s a restaurant group that sold one of its locations to an executive chef. As part of the deal, there was a consulting agreement where the seller was to be paid. Now the seller has sued, claiming the buyer has breached the agreement by not making payments due.

Regardless of whether the seller is owed the money, the fact is there is an expectation of payments post-sale and those payments are apparently not being made.

According to Internet Lawyer Mike Young, in many instances, the failure to receive payments post-closing makes the difference between a profitable deal and a de facto sale of a company for a loss.

How Can You Protect Yourself As The Seller From Risk Of Non-Payment?

In the offline world, it’s common to retain a security interest in the physical assets of company that’s sold. Upon default, the seller takes possession of the assets in question.

For ecommerce companies, sellers frequently protect themselves by having certain assets held in escrow that will not be released to the purchaser until payments have been made. This can include source code, domain name registrations, and other intellectual property.

A qualified business lawyer (particularly one with Internet law experience if the company does ecommerce) can help protect your legal rights when you’re selling or buying a company by structuring the deal correctly to minimize the risk of lawsuits later.