Tag Archives: startup company

Is Your Startup’s Name Available in Delaware?

Delaware has a pretty sweet Name Availability Search Tool via their Division of Corporations. If your desired entity name isn’t available to reserve, then that name isn’t available for a new corporate entity filing in Delaware. If your startup name is available, you can reserve the name online for $75.

Finding out whether you can reserve your desired corporate name in Delaware isn’t as exciting as landing a 5-letter domain with a domain registrar, but at least you don’t have to pay to search like other states.

Don’t Create an “Issuance Pool”

“We want to have 30% of the startup company at exit.”

-Anonymous Startup Founders

Occasionally, founders will plan out their startup’s lifespan to the point of pre-determining their final equity figure after all hires and investments have been made. Usually, a set of founders want to end up with a final equity percentage in the 25% – 51% range. I call this number founders (mentally) reserve for future issuance the “Issuance Pool.”

While an Option Pool is a key tool for a startup in order reaching the next level, creating an Issuance Pool is of no tangible benefit.

First, the Issuance Pool creates the potential hazard that founders will operate and make equity issuance decisions, whether for a developer or angel investment, as though the Issuance Pool is pre-authorized like an Option Pool. A common mistake made by founders is acting as though they own the 25% to 51% they plan on owning instead of the 100% they actually own as a group after incorporation and before any other equity issuances. Thus, there is the tendency for founders at future issuances to think “This 10% issuance leaves us with 39% left for our (planned) future issuances.”

Your startup could over-issue equity to consultants, advisors, employees, and investors simply because you believe there’s a large amount of equity left in your Issuance Pool. Alternatively, your startup could turn off new hires and investors if you attempt to under-issue equity because your Issuance Pool is running low.

Second, the Issuance Pool should not be used as a barometer of success. Is your startup any more successful because it only issued 75% of your Issuance Pool? Maybe. But the goal should be that all equity issuances work to increase the value of the startup and generate great returns– not that your equity percentage is greater than what you planned months, if not years, ago.

While the Issuance Pool doesn’t show up on your startup’s cap table, it can still be harmful to your startup. There’s nothing wrong with planning, but an Issuance Pool should be discarded quickly after incorporation.

Venture Capital Geography & Performance

I’ve always been skeptical of the “you have to be in the Valley” to be a successful startup. Well here’s some potential ammo for those of you being pressured into moving, whether from Dallas to Boston, or Rancho Cucamonga to the Valley:

Non-local investments made by venture capital firms based in the Valley, Boston, and New York outperform their local investments.

This is according to a working paper titled “Buy Local? The Geography of Successful and Unsuccessful Venture Capital Expansion” just published by Henry Chen, Paul Gompers, Anna Kovener, and Josh Lerner.

The authors conjecture that local underperformance is due to venture capital firms having higher hurdle rates for non-local investments. But I’m pretty sure most of you entrepreneurs are thinking it has something to do with less visits from the VC.

Overall, the working paper attempts to demonstrate how geography affects performance of venture capital firms. It’s a somewhat long, but very interesting read.

PEHUB posted the entire working paper on Scribd here.

Startup “Odds of Success” Calculator

StartupNation released an “Odds of Success Calculator” so that entrepreneurs can “see if your business is prepared for success.” The calculator derives your odds of success based upon your answers to the following 8 questions:

(1) About how much debt and equity capital has been provided to your business?

(2) How long do you think it would take to obtain additional funding for your business?

(3) How often do you evaluate your cash flow status/plan?

(4) What’s your degree of business planning?

(5) What’s the approximate annual growth rate of your market?

(6) How many years of management experience do you or your team have?

(7) How many years of industry experience do you or your team have?

(8) Over what timeframe do you want to know your chances of success?

The Venture Capital Dispatch blog at the Wall Street Journal did a mock trial using Twitter’s information and got a 46% “odds of success” over the next 5 years.

Of course, the calculator is a pretty good way to generate web traffic and get registrations in the same way that Younoodle did so with their “Startup Predictor” which gave a projected valuation for your startup.

So far, the offers for this blog have not reached Younoodle’s prediction of $2,340,000.

Don’t Oversmart Your Startup’s Business Plan

A couple of weeks ago, I retweeted a Brad Feld post titled “Startup Cost Projections for First-Time Entrepreneurs.” The passage that interested me the most was:

The biggest mistake first time entrepreneurs make is that they fall prey to the idea that they need to put together a five year P&L forecast and cash flow projection. I can guarantee – with 100% certainty – that this model will be wrong. As an investor, I don’t really care about this; rather I want to see how you are thinking about getting to “the next stage” of your business. You get to define the next stage, what it’ll cost you to get there, and what things will look like when you get there.

I think this is critical advice every entrepreneur needs to follow. And the post reminded me of some of the things potential clients send me.

About once a month, a startup founder will send me a “5-year business plan” with a cap table that anticipates 4+ rounds of funding. Typically, the future cap table will estimate what each founder’s future ownership will be down to the 1/100th of a percent.

I suspect that the majority of these 5-year business plans come from entrepreneurs with corporate/consulting/finance backgrounds. These new entrepreneurs are quite skilled at producing such documents and are eager to use these skills at their startup. While such skills are an asset, their importance is minimal in the early stages of a startup.

As an attorney, I really don’t need to see multiple excel worksheets of projections. And an entrepreneur, regardless of their background, does not need to be creating a projected cap table with four rounds of funding. If you do this, you are spending time working on something that will be incorrect.

As Brad mentions in his article, work on the implementation of your idea. How is your startup going to reach the next stage? How are you going to sell, etc.?

Don’t oversmart your business startup’s plan. Figure out the answers to these shorter-term questions and the long-term numbers and cap tables will work themselves out.

More VC Gloom But With Colorful Charts

TechCrunch just posted some charts regarding the utter lack of venture-backed exits in 2008.

In summary, 2008 saw 6 venture-backed IPOs (down 93% ) and 260 merger & acquisition deals (down 27%). And as you might expect, the prospects aren’t that great for 2009.

So what does this mean for your new startup company? It’s not good, but at some point you just need to turn off the news and develop your product. If you are just fresh into your startup, your exit isn’t coming along for some time. But in the meantime, anticipate that a VC firm will give you less than you might expect and that the terms of their investment will be more investor-favorable.

If you would like to do further reading on venture-backed exits in 2008, the National Venture Capital Association released a report last week, which you can find in PDF format here.