Starting Up with Jim Price

Follow My “Business Insider” Column October 20, 2012

My new column in “Business Insider” on topics of entrepreneurship and innovation is gaining a growing readership.  You can follow it here:

http://www.businessinsider.com/author/james-price

Best regards,

-Jim Price

Most Tech Startups Aren’t Really ‘Tech’ Businesses At All August 6, 2012

Here’s my latest post in Business Insider: http://www.businessinsider.com/tech-startups-arent-really-tech-businesses-2012-8?utm_source=dlvr.it&utm_medium=linkedin

The 7 Principles Of Successful Entrepreneurship August 6, 2012

I’ve recently accepted an invitation from Business Insider to be a regular contributor.

Here’s my first post: http://www.businessinsider.com/why-corporations-should-act-like-startups-2012-7 .  Enjoy!

JOBS Act Legalizes Equity Crowdfunding. Thank You, President Obama and Congress! April 6, 2012

Great news: the Jumpstart Our Business Startups (JOBS) Act became the law of the land yesterday.  Thanks go out to President Obama for advancing this important legislation and signing it into law, as well as to both Republicans and Democrats in Congress, who overwhelmingly passed the bill – by a 73-26 margin in the Senate, and 380 to 41 in the House.

Why should we care about the JOBS Act?  It’s a truly meaningful step forward for startup businesses – especially tech-oriented ones – by providing legal legitimacy for crowdfunding on the Internet.

Here’s why this is important:  Until now, raising early-stage capital for your startup was regulated by the SEC and required that individual investors be qualified as “accredited investors” – defined by the SEC as having a minimum of $1 million in net worth or at least $200,000 in income over the past two years (or $300,000 in combined income with her or his spouse over the past two years) and a reasonable expectation of the same income level in the current year.

Raising money from so-called angel investors (high-net-worth individuals) has become increasingly professionalized in the past decade as angels have banded together in investor groups.  As VCs have shifted out to the right on the investment curve, becoming more conservative and insisting on seeing more company milestone achievements – a validated product, paying customers – prior to considering investing, angels have started behaving  more and more like VCs, having professional gate-keepers for their groups and negotiating VC-like terms.

As these trends have settled in since the tech bubble burst in 2000, it’s become inordinately difficult for early-stage startups to raise capital.  VCs say, Come back when you’re grown up (which sounds a lot like, Come back when you don’t need our funding).  Angel groups are as difficult to get an audience with as VCs used to be in the 1990s – and tell early-stage ventures the same thing: Come back when you’re more mature.  All of  which has left entrepreneurs in the 2000’s with the excrutiating dilemma of how to basically self-fund through the proof-of-concept stage (prototype and build the product) and the proof-of-market stage (garner the first few paying customers).  The result?  Failure to launch in many cases.  And, from an economic and public policy perspective, a lot fewer new companies creating a lot fewer new jobs.

As a company-builder, the JOBS Act excites me because so many of those entrepreneurs who’ve been left on the launch pad over the past decade will now be able to look to crowdfunding to seed early-stage growth.  Through Internet crowwdfunding platforms such as Kickstarter, CircleUp, Techmoola, Buzzbnk, Crowdfunder, EarlyShares, RocketHub, Peerbackers, Wefunder, Indiegogo, Microventures, Profounder and Conzortia (to name just a few), startups will soon be able to raise up to a total of $1 million from unaccredited investors in small amounts without registering with the SEC or providing audited financial statements.

Many of these websites are already doing organized crowdfunding now, but it’s a different sort of thing:  the only thing that’s been legal so far has been having “investors” either donate money or pre-purchase copies of your product in exchange for their up-front cash.  The huge difference now is that the JOBS Act will allow equity-based crowd-funding.

Before equity-based crowdfunding is actually legalized, the SEC has 180 days to develop and promulgate rules to implement the Act.  But it’s not too soon for entrepreneurs to start getting their ducks in a row – refining your pitch deck, executive summary, and financial forecasts.  As you can imagine, consumer-oriented businesses will have a greater appeal to smaller investors, and those with slick pitch videos will tend to be more successful.  We’ll take a closer look at the how-to of raising crowd-funding dollars as the rules are set and legalization kicks in.

The Definition of an Entrepreneur January 10, 2012

Eric Schurenburg, editor of Inc.com, posted this interesting piece yesterday – “What’s an Entrepreneur? The Best Answer Ever”.

Some interesting quotes from HBS prof. Howard Stevenson:

• “Entrepreneurship is the pursuit of opportunity without regard to resources currently controlled.”
• “They see an opportunity and don’t feel constrained from pursuing it because they lack resources. They’re used to making do without resources.”

And an interesting quote from Jon Burgstone’s book, Breakthrough Entrepreneurship:

“Every time you want to make any important decision, there are two possible courses of action. You can look at the array of choices that present themselves, pick the best available option and try to make it fit. Or, you can do what the true entrepreneur does: Figure out the best conceivable option and then make it available.”

A thought I’ll add to this:

Entrepreneurs learn by trying and failing.  They not only don’t fear failure, they embrace it as a learning opportunity.

What do you think makes a great entrepreneur?

Startup Flight Checklist Item #12: Legal and Corporate Matters January 1, 2012

Regarding any legal matters, I strongly recommend that business people to seek a lawyer’s advice.  (I am not a lawyer.)  But with that caveat, let me touch on a few of the most common legal-oriented questions I hear from people when they’re launching a new business:

When should I retain a lawyer?

Early.  Before you form the business, and before you start doing business transactions with multiple individuals or entities.  And certainly before you take in money from investors.

How do I find the right attorney?

There’s no replacement for networking.  Ask for referrals from other startup executives, entrepreneurs, as well as from complementary business service providers (e.g., business accelerators, economic development agencies, accountants, marketing firms).  When you’re referred to attorneys, ask them what other startups they’ve worked with in your field.  Ask for references you can talk to.  Find a firm, and an attorney, for whom your startup will be an important client.  (The big-name firms may schmooze you over dinner, but ultimately they’ll assign an inexperienced associate to your account who’ll be pressured to bill lots of hours – at the same billing rate at a partner from a small firm.)  Seek a small-firm attorney who is not only focused on business law, but has extensive experience with startups. (For more thoughts on this and the previous question, see my earlier post here.)

What are the top “to do” items I should address with my attorney?

First of all, take the time to tell your whole story to your lawyer.  I find that a good lawyer can only do his or her job if they know what questions to ask, and they can only do that if they have the deep background.  Then, your lawyers can help you with the following startup items:

• Legal formation
• State and federal tax filings
• State DBA (“doing business as”) filings
• Development of standard “form” legal agreements for your business
• Advice regarding the structure of shareholder agreements and capitalization

What kind of legal entity do I form, and why?

Even if you’re the sole owner of the business, you might want to consider operating the business as a limited liability company (LLC) rather than a sole proprietorship, since the former offers you the liability protections of a corporation.  (Awhile ago, I took a more in-depth look at this topic here.)

How do I protect my ideas and brands?

Basic business concepts are rarely if ever legally protectable by patent.  That said, there are some straightforward – and inexpensive – things you can do to protect your business’s ideas.  First, you can use nondisclosure agreements (NDAs): have your employees and contractors sign them, and be sure to sign them with people you meet with outside the company.  Second, you should copyright all written, graphical video and/or multimedia content that you put out in front of the public (e.g., “Copyright © Goofball, LLC 2012”).  You should also put trademark (^TM) or service mark (^SM) symbol, as appropriate, adjacent to your brands – company name, product names, logo, and tag lines.  You may wish to inexpensively file with the U.S. PTO to register a name or mark for the right to use the registered trademark symbol (®).

What should I expect to spend on attorney’s fees?

That said, if you’re the only owner, total legal fees and state filing fees associated with getting a new LLC organized and set up may be as low as $500-1,500, depending on the attorney and the specifics.  If the business has 2-4 partners but the structure is pretty straightforward, you might expect total legal startup and filing fees to be more in the range of $1,500-2,500.

It’s important to note that a reasonable startup-oriented attorney ought to be willing to: (a) give you a budget estimate and a not-to-exceed quote before starting on any project; and (b) put you on a payment plan, understanding that your business is cash-poor.

Can I save money by using standard legal forms on the Internet?

You might save money in the short-run, but in my experience, entrepreneurs who use such off-the-shelf form agreements regret it and pay far more later on to repair the damage done.  You can download forms – e.g., for an LLC operating agreement – off the Internet, but you get what you pay for.  The problem is that the standard forms are, by definition, designed for the lowest-common-denominator situation, and can’t possibly anticipate any specific current or future circumstances in your business.  In addition, they typically won’t be tailored to your state’s laws (although some are).

My brother-in-law (or parent, or neighbor, or old school friend, etc.) is a lawyer, and he/she is willing to do the legal work for cheap or free.  Is that a good way for my startup to save money?

No!  As with using standard forms, you get what you pay for.  Attorneys specialize – and accumulate specialized career expertise – just as physicians do.  Would you rather have your child’s pediatrician, or your dermatologist, perform complex brain surgery on your loved one, or a neurosurgeon who performs that specific brain-surgery procedure dozens of times per year?  The answer’s obvious with doctors, and it ought to be just as clear with attorneys.  Paying a modest amount of legal fees early on as you’re setting up your business entity will save you many headaches, and major expenses, in the long-run.

The value proposition of a good startup attorney:  mistake avoidance

Even though I’ve started and run a number of businesses myself and know more than I care to admit about business law, I would never dream of launching a new business without the active assistance of an experienced, startup-oriented attorney.  And yet I find it challenging at times to explain to first-time entrepreneurs the cost-benefit of lawyers – because the value proposition is one of indirect savings and avoided hazards.  In other words, a modest amount of money invested in attorney’s fees now is very likely to pay great dividends later on when bad things don’t happen to your business.

But “mistake avoidance” is a difficult value proposition to self-assured entrepreneurs, because they tend to think they can figure things out for themselves.  Unfortunately, I’ve seen quite a number of otherwise high-potential entrepreneurs commit what ended up being company-killing mistakes because they didn’t have the benefit of wise guidance in the early stages – and in the end, they had nobody to blame but themselves.

The comments and suggestions in this post do not represent legal advice.  The author is not an attorney, and recommends that entrepreneurs and other readers seek an attorney’s advice to address any legal matters. 

Startup Flight Checklist Item #11: Hiring and Managing People December 27, 2011

Once again, let’s remember that our purpose with this checklist is to keep the launch of our new business as simple and inexpensive as possible by leveraging existing, easy-to-access infrastructure.  In that spirit, let’s look at the arena of human resources.

The Advantages of Outsourcing and Contractors

As your startup business expands beyond just yourself (or you and your cofounder/partner), you need to decide, as you add more people, whether those functions, in the near term at least, can be outsourced.  For instance, do you really need to hire a full-time bookkeeper, or can you outsource that to a freelance bookkeeper/accountant for 4-6 hours a month at first?  Do you really need to bring on that full-time marketing person, or can you retain a small marketing firm, or hire a freelancer or contractor for a few hours a month instead at first?  Is that web development task going to be an ongoing need, or will it be a one-time task you might better address with a short-term contractor rather than a full-time employee?  Can you have your product orders packed and shipped by an outside company on an as-needed basis – perhaps more cost-effectively and with better quality control than by hiring full-time people who would be sitting idle when there’s no packing and shipping to be done?

Outsourcing and hiring contractors in this way offers you several important benefits as an entrepreneur:

1. It enables you, even as a tiny business, to surround yourself with deep domain expertise at a fraction of the cost of hiring full-time experts in each function.
2. At least in the short run, you can avoid the hassles of setting up all the human resources (HR) infrastructure such as benefits, payroll, tax withholding, etc. that you’ll need to do when you hire fulltime people.
3. While a given contractor’s services may cost you more per-hour than an internal employee – they, after all, have to charge enough to cover the costs of their own benefits and marketing their services to people like you – you can scale up a contractor’s involvement by a few hours a month as your company grows, rather than needing to consider hiring an entire additional person.
4. The cost to your business of an outsourced function is a variable cost – as opposed to the fixed cost of a salaried employee – making it a much more painless proposition to scale back expenses if that becomes necessary.

Things to Consider When You Bring on  Full-Time Employees

As your business continues to grow, it will probably make sense at some point to bring on certain people as full-time employees.  At that point, you need to understand that you are taking on a number of human-resources (HR) related legal responsibilities.

There are Federal employment and tax regulations to adhere to, and employment law and tax law also varies somewhat state-by-state.  But in general, as a business with full-time employees, you will need to pay attention to a new list of concerns, including (but not limited to) the following:

1. Employee manual – required by state employment law, detailing all terms of employment, standard work hours, pay policies, policies and procedures, holidays, paid time off, discrimination policies, healthcare benefits, etc., etc.
2. Employment agreements
3. Confidentiality and non-compete agreements
4. Payroll, including automatic deposit
5. Tax withholding (Federal and state taxes)
6. Payment of payroll withholding taxes
7. Healthcare benefits
8. COBRA mechanisms
9. Retirement benefits
10. Other benefits
11. …and the list goes on…

Let’s say your small business is the type that, in order to expand marketing and sales, needs to hire representatives in different remote locations around the country.   (These days, that can be done pretty cost-efficiently by having your remote-office reps work out of home offices.)   In this scenario, you need to be aware that both employment law and tax policies vary on a state-by-state basis, so your business will need to accommodate that administrative complexity.

In general, whether your business has employees in one or multiple locations, I find that a good solution for almost any growing business is to consider third-party administrators, or TPAs, to assist you with specifying, setting up, and administering your human resources administration systems.  TPAs are often independent insurance brokerages – a great example is Kapnick Insurance in Southeast Michigan.

This type of firm, I’ve found, is great to work with for a small-to-mid-sized business because they are able to completely spec, outsource-handle and manage many of your HR functions, as follows:

• Complete benefit plan analysis, design and ongoing administration;
• Medical, dental, vision, life, insurance plans, etc., etc.;
• 401k and other savings and retirement;
• COBRA;
• HR e-solutions online admin;
• Ongoing employee communications;

Some TPAs will also advise you regarding setting up an employee manual.  (As insurance brokers, most will also quote handle your business insurance needs — which has nothing to do with this post — such as general liability, directors’ and officers’ insurance, etc.)  Because TPAs tend  to be  independent agencies, we as entrepreneurs tend to get competitive rates quoted on the various insurance carriers and plans, and working with a “TPA” (third-party administrator) obviates the need for us to go out and try to hire an HR director with expertise in seventeen areas (which no one person could reasonably possess).

Meanwhile, you can go through the cloud to set up and manage your payroll easily and inexpensively.  Consider going through Quickbooks/Intuit – or alternatively a vendor such as Paychex or ADP – with biweekly or monthly, automatic deposits into your employees’ bank accounts,  complete with the appropriate tax withholdings, along with your vendor making automatic payroll withholding tax payments to the appropriate agencies (the IRS or state tax authorities).  You can integrate the payroll transactions transparently with your company’s online bank account, and via the Internet with your accounting and bookkeeping system.

Startup Flight Checklist Item #10: Accounting and Finance December 19, 2011

Now let’s take a look at Flight Checklist Item #10: Accounting and Finance.  As with every other element on our checklist, let’s keep our eye on the ball:  our purpose here is to keep things as simple and inexpensive as possible.

Because remember the whole point of the Flight Checklist: With the tech- and cloud-based tools and services available today, designing and launching a robust new business can be quick, easy and inexpensive.

Now, while as with any mature application space, accounting software has numerous full-featured competitive offerings, Quickbooks from Intuit is the dominant player and the class of the field.

A few very robust, stand-alone accounting app alternatives to Quickbooks include Sage Peachtree, Bookkeeper from Avanquest, Sage Simply Accounting Pro, and AccountEdge from Acclivity.  Quickbooks and most of these stand-alone accounting packages are available on a one-time purchase basis as well as (in most cases) in cloud-based forms

The following are the integrated functions you will look to accomplish with your small-business accounting software:

• Setting up and maintaining your general ledger
• Doing your daily bookkeeping
• Accounts payable (A/P)
• Accounts receivable (A/R)
• Reconciliation between your books and your bank account
• Financial statements
• Budget management – plan vs. actual

In addition, with Quickbooks, you can electronically coordinate through Intuit to automatically manage payroll transactions with your bank, including automatic deposits for your employees and automatic handling of tax withholdings and payments to the appropriate government agencies, etc.

What you’ll typically find is that if you’re using Quickbooks, which has become very much of a small-business standard, it’s easy to exchange Quickbooks-formatted files with your part-time bookkeeper, account, tax preparation accountant, and so on.

An interesting alternative to Quickbooks or other stand-alone accounting packages is NetSuite, which is a cloud-based ERP (enterprise resource planning) application suite that includes ecommerce and CRM (customer relationship management) apps in addition to the accounting and financial apps, all integrated together.  This is far more to bite off for a brand-new startup than Quickbooks, and significantly more expensive than virtually any of the stand-alone apps.  However, if you think your startup is going to grow big fast, it’s worth a serious look to establish this kind of integrated infrastructure – still quite cost-effectively – from the outset.