Nesheim Online

WORD OF THE DAY: READ

I received an email from a techie with some good business questions about a startup. His team has built a couple of products beneficial to companies who are excited about them. The questions in the email was in essence, "What do we do with our products? Can we make a business out of what we have? What do venture capitalists want to see? What should we do next?"

This is a common situation in the world of startups. Technologists see a problem to be solved, build one and sell it, and then another one and get excited because the first two customers give rave reviews of the product. The first flames have begun, now what?

Here is my response: 

Your good start tells me that it is time to test the water: I recommend you and your team draft a quality business plan and in doing so, it will tell you (1) what the VCs want to see, (2) how large a task it will be to make a business out of your first products, and (3) what you are missing to get the money.

I wrote my second book The Power of Unfair Advantage for people in your shoes. Parts I and II will help you a great deal.  Unfair Avantage is what VCs and top business people are looking for in startups.

I wish you the best.

There are a lot of good things you can read out there besides my works. They are about what investors want to see in a startup. Reading is private, can be done when convenient to your schedule, and generates a lot of basic advice, quickly. And you have a reference to come back to.

If your business has started without a bplan, you will find few investors willing to take time to help you address the key issues that you must address before they will give you money. At least a draft of a presentation of a complete business plan is strongly advised. Reading them (I have a bplan for free on my web site) will give you a more realistic view of what you have to do to get your money.

BOTTOM LINE: If you wonder what to do to make a business out of a prototype after a couple of successful sales, consider reading about what you must do to prepare a quality business plan. As you do, you will quickly answer a lot of your questions about what to do next. That realism is the door to open that will help you be wise with your decisions. I wish you the best.

WHEN TO INCORPORATE/REGISTER YOUR COMPANY? Later than you think is best

Today I got an email from Deepak, asking about how to register (British for "incorporate") a company, what would be the cost and when should he issue non-disclosure agreements and so on.

My basic answer is "Wait until the last minute before you spend the time and money to incorporate."

Here are some reasons:

• You can do a bplan without being incorporated. The bplan may tell you that your idea is weak and should be abandoned.
  
  
• You should not be using NDAs before you are on solid ground with your idea and are ready to incorporate. Keep as much as possible secret until you are ready to go get the money.
  
  
• You can incorporate after you get your money. You do not need to be incorporating to start raising it.
  
  
• If you decide to start work on a small scale before getting serious, do a prototype or experiment a bit, then you are likely to find you still do not need to incorporate. You can still deduct business expenses on your tax return in many countries, including the U.S. without being incorporated.

How much does it cost to incorporate? Ask a couple of different lawyers. That meeting will be at no charge. A good lawyer can save you a lot of money and headaches.

BOTTOM LINE: Wait before running out and incorporating. It is often too early and frequently not needed at that time. Find a couple of lawyers to work with, now and in the future. That will save you time and money and trouble.

START WITH AN EXPERIENCED LAWYER: Pick wisely to save agony and money

Today I will meet with A.C.'s lawyer to set up the incorporation details and begin construction of the stock option program. Then we'll prepare a negotiating plan for the upcoming term sheet. This is part of the birthing of a new enterprise. At such moments a great lawyer is as valuable as a doctor who helps deliver the baby. I learned the hard way in the past that you get what you pay for with lawyers. The amazing thing I found was that the cash for the best is less than others less able. The mistakes and errors are what are the most expensive cost of picking a poor lawyer.

Your lawyer must be experienced with venture capital closings. That is the process of getting to a term sheet and then to cash in the bank. Until it is in the bank, you have not closed on your financing. A lot can go wrong along the way. Yesterday I was told by a VC that Limelight had been raising a lot of money in a fresh round of financing. Several VCs had joined Goldman Sachs the Wall Street firm to do the deal. One day before the closing, Limelight got sued by Akamai. The VCs dropped out. Goldman decided to do the deal. It could have just stopped and the deal would have been dead. Lawyers know how to help you with bad news and good. They are able and willing to go the extra mile with you. Pick them wisely.

There are also a lot of tricks in pricing a deal. A great lawyer knows what to do and what not to do. He will keep you legal and ahead of the power curve, on the best side of the deal. And he will keep the deal rolling to conclusion.

There are also intellectual property issues and patents and trademarks and a lot more to work on with a lawyer. Many startups are incorporating overseas because businesses are immediately global. You need a skilled lawyer to do that.

BOTTOM LINE: Pick your legal counsel wisely. Search for a person familiar with VCs and their special ways. Look for wisdom and street smarts. Such a lawyer will be a real counselor, a business adviser and become your friend. Take you time and make a good choice. It's worth the effort.

PICK A GREAT LAWYER: They are especially good at keeping your competitive advantage unfair

A great lawyer just called me, Mario Rosati of Wilson Sonsini Goodrich & Rosati. He is a rubber-meets-the-road counselor to startup CEOs and a veteran of countless venture capital deals. He helps green CEOs stay out of trouble and also gives practical advice about business decisions. That is the kind of legal beagle you want on your side.

Another terrific example is Mike Phillips of Morrison & Foerster the firm that is spread out over the world. Mike has been both a legal counsel for a world famous startup that went IPO as well as practicing lawyer advising startups that became giants. He is very quick about people's character, abilities and limitations. And he is very experienced with doing deals across borders for venture capital and legal contracts.

Those are examples of legal advisors that can keep your company focused on building its unfair competitive advantage, instead of wasting time and money fighting legal battles.

BOTTOM LINE: Pick your legal advisor from the best. With lawyers, you need excellence. Below excellent is very expensive.

LAWYERS ARE ALWAYS EXPENSIVE: Manage their work or pay a lot more

"The bill is about double what I thought we'd see!" exclaimed the CEO. "Now I have to work with a board of directors that is not going to be happy (I told them all was well and legal costs were going to come close to my estimate for this project). And I have a great attorney at a first class law firm that has to eat a lot of the billing. It's going to be embarrasing for both of us. What should I do about that?" As I listened to the lament, I reflected that I had heard this all too often in the past. It always comes out the same: the legal bills end up much higher than what seems "reasonable" and yet the work done is vital to keeping a startup out of trouble. A great lawyer is worth his or her weight in gold. But sometimes there is a lot more weight than we can bear.

My response to the CEO was simple: "This is normal and both you and your lawyer are going to have to accept some significant pain in this case." The early estimates of the project (an acquisition) were far below the actual hours spent. Furthermore, along the way, the CEO did not put pressure on the senior partner to work harder to get the average billing hour down (by using more junior lawyers wherever reasonable). These projects can be managed. It is up to CEOs to learn how to keep the billing from breaking the bank.

BOTTOM LINE: Proactively manage large legal projects. Don't let them manage you. Cost control for legal bills can be accomplished. Put in the time and effort. It is worth it.