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

By | Business Lawyer, 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.

Are You Smug Enough to Run a Public Benefit Corporation?

By | Internet Lawyer | No Comments
public benefit corporation

Should your Internet company become a public benefit corporation?

There’s a lot of buzz generated by Kickstarter’s decision to reincorporate in Delaware as a public benefit corporation. In the tech community and the media, it’s being heralded as the equivalent of Mother Teresa’s founding of the Missionaries of Charity.

Before you know it, those Silicon Valley orphans will have their bellies full of wholesome Kickstarter organic non-GMO vegan meals…or something like that.

A Public Benefit Corporation is a Socialist Entity

Whether your Internet business is a privately held corporation or a limited liability company (LLC), those who run the entity have a fiduciary duty to the business’ equity owners (e.g. corporate shareholders, LLC members, etc.).

If you’re a capitalist, you’ll understand that this means focusing on building the company’s value and profits for its owners.

In contrast, being a public benefits corporation lets those who run the company avoid liability for using revenues to pursue other goals. For example, Kickstarter’s new charter empowers the crowdfunding venture to spend money on the arts, “invest in green infrastructure” regardless of the cost, and to fight “systemic inequality” on behalf of anyone the company’s management feels is oppressed.

Reading the charter, it provides enough wiggle room for Kickstarter’s management to lobby Congress to ban fossil fuels or to pay for Bruce Jenner’s “sex change” operation to become Caitlyn Jenner in support of transgender equality.

Is a Public Benefit Corporation Right for You?

Let’s cut to the chase.

Converting your Internet company to a public benefit corporation probably makes sense if:

  • You’re a pretentious jerk who likes to pretend you’re better than other people because you’re “socially responsible” or “environmentally conscious.”
  • You plan to mismanage your company’s assets to support pet causes that have nothing to do making a profit for the business’ owners.
  • You majored in Peace Studies instead of Business in college.

What if you want to support charitable causes with your Internet business?

Perhaps you should consider following the path of Apple’s Steve Jobs. During his life, he focused on building up Apple into a very profitable company rather than turning it into some type of socialist experiment at the expense of shareholders.

However, as a successful entrepreneur, Jobs gave away a fortune to various charities during his lifetime from his own assets. He didn’t cripple Apple’s growth by looting it for a “public benefit.”

Was Becoming a Public Benefit Corporation the Right Move for Kickstarter?

Who knows?

But it certainly isn’t the right move for 99.99% of Internet business owners to make with their ventures…if building a profitable company is your primary goal.

Talk with your Internet lawyer and accountant if you’re interested in pursuing the idea. However, chances are they’re going to tell you to pass on the public benefit corporation fad.

Texas Attorney General Ken Paxton Indicted for Alleged Tech Securities Fraud

By | Internet Lawyer | No Comments
texas attorney general ken paxton indicted

Attorney General Paxton was indicted for alleged securities law violations

When a client starts talking about raising funds for an Internet startup by selling equity, it’s time for a reality check because of federal and state securities laws.

Quite simply, you can’t run around selling stock in your company without dotting a lot of legal i’s and crossing regulatory t’s. And you can’t pay commissions to your buddies for bringing investors to you.

Securities law is so complex that even most lawyers avoid it like the plague.
Which makes it all the more interesting that Texas Attorney General Ken Paxton has just been indicted by a grand jury on charges related to his alleged solicitation of investors for tech company Servergy, Inc. The three felony indictments accuse him of securities fraud and failing to register with the State of Texas to sell securities.

I don’t know if Attorney General Paxton violated the law. Some call the charges a political witch hunt. Others say he crossed the line.

Regardless of what did or did not happen, the important thing to learn from Paxton’s predicament is that you have to be extremely careful when raising funds for your tech startup. If you’re selling equity, get a securities lawyer on board to advise you before you even solicit investors.

For many entrepreneurs, the safer (and cheaper) course of action would be to do crowdfunding through sites like Kickstarter and IndieGoGo.

Disclosure: I dealt with Paxton’s office on an unrelated matter last year when he was a State Senator, and I voted for him when he ran for Texas Attorney General.

Internet Law News: Kickstarter Crowdfunding Campaign Nailed by FTC

By | Internet Lawyer | No Comments
kickstarter crowdfunding

FTC cracks down on dishonest Kickstarter crowdfunding campaign

The U.S. Federal Trade Commission just cracked down on alleged deceptive trade practices in a Kickstarter crowdfunding campaign.

According to the FTC, funds were raised for a project to produce a board game. However, the fundraiser never delivered the rewards he promised to his financial backers and he didn’t offer refunds either. Instead, he spent the money on personal expenses and other items unrelated to the board game.

It’s important to note that there was no allegation of wrongdoing by Kickstarter. The FTC went after the fundraiser.

Under the settlement reached with the FTC, the fundraiser “is prohibited from making misrepresentations about any crowdfunding campaign and from failing to honor stated refund policies. He is also barred from disclosing or otherwise benefiting from customers’ personal information, and failing to dispose of such information properly. The order imposes a $111,793.71 judgment that will be suspended due to [his] inability to pay. The full amount will become due immediately if he is found to have misrepresented his financial condition.”

Lesson to learn? If you’re going to crowdfund to raise money, be sure to honor your commitments. Taking the money and spending it on yourself is a bad idea from both a legal and ethical standpoint.

Related reading: Crowdfunding Project Creator Settles FTC Charges of Deception

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