Archive for the ‘Financings’ Category

Wanted – Colorado-based Entrepreneur to Pitch My Me at Class

I co-teach a class at the University of Colorado Law School called “VC 360.”  We have MBA, Engineering and JD candidates and the course deals with all things in the entrepreneurial / venture ecosystem.

Each year, we have a pitch day where one entrepreneur comes in and pitches me.  The students get to watch.  The entrepreneur and I get an hour together and then the students get to ask questions for 20 minutes.

This is a real pitch.  It’s not any different than if someone comes to our offices, but there is a “studio audience.”

So if you are interested in pitching Foundry Group and want to do something great for the Boulder education community, let me know.  I can only take one.

The pitch date is 10/7 at 8am in Boulder.

September 11th, 2013     Categories: Education, Entrepreneurship, Financings, Venture Capital    

The “VC Bargain”

With the recently announced acquisition of our portfolio company MakerBot, the conversation invariably turns to “was this the best time for the company to sell?”

It’s a question that is asked every time a company sells and it usually creates a lot of noise by people whose opinions are usually misinformed and even more so, irrelevant.  The question is asked over and over and over again:  “When is the correct time for a startup to sell itself?”

The answer is simple:  “When the founders want to sell.”

Period.

Unfortunately, many investors do not feel this way.  Clearly, a VC can be very helpful in advising the founders about past experiences, the current state of the M&A market and their thoughts around valuations, but when the founders want to sell, it’s time to sell the company.  Who are we to tell the founders that they aren’t allowed to fulfill their dreams and create an event that will change their lives?

Brad and I have written a lot about venture term sheets.  (Plug:  buy our book!).  One thing we haven’t written about, however, is what we call “The VC Bargain.”

We believe this “bargain” is inherently created when VCs invest in a company.  And no, this isn’t in the legal documents, but should be part of a mutual understanding by both parties.  (Note, however, we’ve seen some VCs and many late stage funds actually try to draft into the documents at what valuations founders may sell at and we find this practice distasteful).

If a VC is playing for a longer / bigger outcome, then it is the responsibility of the investor to create some financial liquidity for the founders and employees that makes them feel secure.  The situation we hate is one where the founders and employees receive nothing except the message “no, you can’t sell, keep running the business.”

But this isn’t solely as one-way bargain.  If you take venture money, you have a duty as well.  You have a duty to actually work toward a liquidity event.

From time to time, we’ve encountered entrepreneurs who really aren’t interested in selling their company.  This has been expressed both explicitly “I have no intentions of ever selling my company” to more implicitly whereby an entrepreneur continually finds fault with potential buyers (“I hate their culture,” “I don’t like big companies,” etc.).

Few companies can expect to go public.  Therefore, the acquisition market is the only way for investors to create proceeds to return to their limited partners.  And everyone should know that our job is to take our investors money, invest it and return a lot more money to them.   Without acquisitions, we can not do this.

It amazes us, but we find that some entrepreneurs don’t actually realize (or respect) this when they take on investment.  Yeah, we know you don’t normally gravitate working for big companies (otherwise, why start your own?), but at some point, if things go well, BigCo may be correct path of the company.

Bottom line is that this VC Bargain is an important one in the startup ecosystem, but one that is not well understood by some.

June 25th, 2013     Categories: Entrepreneurship, Financings, Venture Capital    

Calling All Angels – Fort Collins Version

Three keys to a building a strong ecosystem for startups are: (1) entrepreneurs; (2) technology; and (3) investors.   For a long time, newer entrepreneurial communities have relied on the first two segments to attract the third.  We are now realizing that to sustain and grow a vibrant entrepreneurial community, we need to support all three.

Angel investors are typically very bright, successful entrepreneurs who want to give back after they cash out in one or two of their own ventures.  Although they understand how to build products and companies, they may not have a lot of experience in taxes, financing, and investment.  One of the big areas that can come back to bite them later is taxes.

My friend, Roger Glovsky, along with EKS&H, the Rocky Mountain Innosphere, and Impact Angel Group are trying to shine a light on tax issues that may be critical for angel investors to understand, such as 83(b) elections, tax qualified stock options, and trading equity for services.  In addition, they will talk about tax loopholes for investors, the Colorado enterprise tax zone credit, and tax deductible philanthropic funds to support Colorado startups.

If you are in the Fort Collins area next week, be sure to sign up for this special event (free!) on May 31 at the Rocky Mountain Innosphere.

May 22nd, 2013     Categories: Financings, Law, Venture Capital    

Venture Summit | West: Wrongly Charging Entrepreneurs to Pitch VCs

What is old is new.  Entrepreneurs  are stil being asked to pay to pitch.  It’s WRONG.

Two and a half years ago, I wrote a post about a Boston group trying to charge entrepreneurs $4500 to pitch venture capitalists at an event.  Many in the startup community were appalled by this especially folks like Jason Calacanis who created the Open Angel Forum specifically to create an event where entrepreneurs could gain free access to investors.

To quote my partner Seth:

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THERE IS NO CIRCUMSTANCE IN WHICH ENTREPRENEURS SHOULD PAY TO PITCH THEIR BUSINESS TO PROSPECTIVE INVESTORS.

PERIOD. END OF STORY.

 

Microsoft, who had been a sponsor of the Boston event, terminated their relationship after the pay-to-pitch arrangement was publicized.  I thought all of this activity would die, but it’s 24+ months later and it looks like the idea has been resurrected.  And it makes me just as sick today as it did then.

Venture Summit | West, being held February 13th is an event looking to make money off of entrepreneurs who need to raise money.  The price?  $1585.00.  I suppose the good news is that if you apply and don’t make the cut, they don’t charge you.  But $1600 bucks to pitch VCs?  This is completely backwards and distasteful. They also offer startups a ticket for $400 if they just want to come and network with the VCs at the event.

They are charging the VCs to attend ($500) and they have a bracket for “others” at ($700).  So at least the investors are not getting a free ride on the backs of the entrepreneurs, but can we finally be done with trying to make money off of startups that don’t have any cash?  Come on folks, create a business model where you can make some money but NOT charge the entrepreneurs.  My bet is that many of the VC attendees have no idea this is even going on.

Lastly, if you are trying to raise money, do you homework.  You have many other outlets to meet VCs, including OAF, and simply going to VC websites and finding email addresses.  There are events all over the place where you can network and / or pitch.  Even online.

I hope that companies aren’t taken in by their slick marketing materials.

 

December 12th, 2012     Categories: Company Running, Entrepreneurship, Financings, Frustrations, Venture Capital    

Why is Everyone Hatin’ on Form D?

More and more I’ve been hearing about companies not filing Form D’s in conjunction with their financings.  The reason:  We don’t want the press picking up on our fundraising / we want to control the message / we are stealth, etc.

This post isn’t about the value of being stealth.  I’ve always thought stealth mode is a little silly.  After all, a startup’s best indication of success is the people that it puts together, but like I said – to each his own.

What this post is about is why I think people should still file Form D’s despite many law firms saying “eh, don’t worry about it.”  I’ll go all lawyer on y’all for a moment.

Regulation D requires a filing, but per Rule 507, if you don’t file it, doesn’t eliminate your ability to rely on RegD for the financing.   Therefore a company that wants to be stealth and elects against the advice not to file the Form D is violating an SEC rule, but it doesn’t jeopardize the offering exemption.    4(2) always exists, but that is factual, and in these very early rounds you may have small angels or others who are tricky.

My sense is that some law firms are loose and cite 4(2), so that VCs have come to believe that it doesn’t really matter whether you file the Form D.

The SEC has not gone after anyone yet (but could), but as some of you may recall the S-1 (IPO filing document) requires disclosure of what exemption you relied upon (and I have heard of current situations in which the SEC was really reading this section closely which isn’t surprising in this era of SecondMarket), so a company that doesn’t file the Form D has to decide how they disclose what they did, and risk more SEC questions.

Note, you no longer need to list the names of the investors in the Form D, so it is less of an issue to file it.  Even if a company doesn’t promptly file, once they have announced the round publicly I would recommend that they then file theForm D.

Note also that if a public acquirer is picking up your company, they are, too, going to go through each financing with a fine tooth comb.

Bottom line:  seems like little value for a potential problem later that you don’t need.  Suck it up and file the D’s and keep all of our reporter friends happy at the same time.

August 13th, 2012     Categories: Financings, Law, Uncategorized    

For the Best Chance of Getting Funded, Move Your Startup to Colorado

From website FormDs.com, this is a somewhat surprising map of Form Ds from the last year by state.  Form Ds are filed when a company raises money, so it’s a great proxy of where companies are getting funded.  (The original map can be found here).

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You’ll note that per million people, Colorado is in the top bracket for financings.  Now, many will argue that a place like California has a much greater population and therefore there is dilution to this study.  However, the population difference is 37 million to 5 million (7x), but there is way more than 7x the amount of venture capital money and presumably amount of startup companies as well in California compared to Colorado.

The conclusion:  Clearly Colorado is importing a lot of VC money has has high quality companies to fund.  As we like to say in Boulder:  ”We Love Our Bubble.”

December 10th, 2010     Categories: Entrepreneurship, Financings, Venture Capital    

Brightleaf Automates the NVCA Model Documents (a.k.a. Why Brad Feld will Succeed)

If you are a reader of this blog, or Brad’s you know that we are keenly interested in the ideal that we should be able to arrive at a model document set for venture financings.

Whereas, I argued that he’d never succeed in coming up with a standard set of seed documents, I used the story of the model form document project from the NVCA.  The project actually produced model forms of documents, but most of us were disappointed by the actual usage.  In my opinion, this was because the documents had too many options and took lawyers a while to deal with them.  (For instance founders reps which you never see on the West Coast and things like that).

But at the same time, these documents live and breathe and are updated by some of the great minds in our business on a regular basis.  I feel safe in saying that are more vibrant and accurate than most law firms. 

Today, I’m delighted to announce that our portfolio company Brightleaf has released their platform including the standard form of NVCA documents.  In short, their document automation and assembly software can save lawyers a ton of time using the NVCA forms, while giving them the piece of mind that they are always using the latest and greatest forms in the business. 

Oh yeah.  Did I mention that it’s FREE?

They are offering free “NVCA ASAP” trial accounts to a limited number of VC’s and Emerging Companies law firm practices. For more information about the project (and how to get a trial account) please visit their NVCA ASAP page here.  For a quick overview demo of how Brightleaf works, watch the video here

This could quite possibly be the tipping point in getting us to one standard set of documents.  Maybe Brad won’t fail after all. 

November 5th, 2010     Categories: Financings, Frustrations, Law, Law Firm 2.0, Venture Capital    

Great Business Plan Competition in Michigan

Have a great company in Michigan that needs funding?  In what is the largest award that I know of, Accelerate Michigan is offering $500,000 to the winning team.  And if you company isn’t in Michigan, but you want to move there, you are eligible. 

Ann Arbor is still one of my favorite cities.

Here is the official blurb:

Accelerate Michigan Innovation Competition is an international business plan competition which highlights Michigan as a robust and vibrant venue for innovation and business opportunity. The competition fuels innovation-based business growth by uncovering the best and brightest new business concepts from local and global entrepreneurs, exposing those opportunities to potential investment capital and fostering their growth within Michigan.

The Accelerate Michigan Innovation Competition targets mid-to-late-stage business start-ups with potential to generate an immediate impact on Michigan’s economy, as well as student concepts with longer-term business viability.

With more than $1 million in cash winnings, plus in-kind awards of services, staffing and software, the Accelerate Michigan Innovation Competition is the world’s largest business plan competition.

September 24th, 2010     Categories: Financings, Venture Capital    

Looking for an Entrepreneur to Pitch My CU Class

I’m looking for a local entrepreneur to pitch their business in front of my VC 360 class that I teach.  The class is held at the University of Colorado Law School and is comprised of both law and business school graduate students.

The class is October 25th from 8am to 9:15am.  The format would be sitting with me and pitching me as you would if you came to my office, but the students get to watch.  We also let the last 20 minutes go to student questions.

It’s a great opportunity to pitch Foundry Group and do something good for the community.  If you are interested, let me know.  I’ll pick the company that closest fits one of the Foundry Group investment themes. 

September 24th, 2010     Categories: Education, Financings, Venture Capital    

The Convertible Debt Debate – An ex-Lawyer’s Twist on the Argument

Today, my partner Seth wrote a great piece on the merits of early-stage startups raising convertible debt rounds versus traditional preferred stock equity structures.  The piece was inspired by Paul Graham’s recent tweet that said:  “Convertible notes have won. Every investment so far in this YC batch (and there have been a lot) has been done on a convertible note.”

Seth’s piece is a must read in this debate that is only gaining more participants, including a nice follow up from Mark Suster about his thoughts.  I can’t do justice to either Mark’s or Seth’s pieces trying to summarize them, so I strongly encourage you to read them.

I’m going to go out on a limb and break out my old law bar card and bring up one issue that I don’t think is getting enough focus in the debate:  the use of debt fundamentally changes the fiduciary duties of managers and board member of the company.

If a company raises cash via equity, it has a positive balance sheet.  It is solvent (assets are greater than obligations) and the board and executives have fiduciary duties to the shareholders in the efforts to maximize company value.  The shareholders are all the usual suspects – the employees and venture capitalists.  Life is good and normal. 

However, if a company is insolvent, the board and company now owe fiduciary duties to the creditors of the company.  By definition, if you raise a convertible debt round, your company is insolvent.  You have cash, but your debt obligations are greater than your assets.  Your creditors include your landlord, anyone you owe money to and folks that you might owe money to you, like former disgruntled employees and founders who have lawyers. 

How does this change the paradigm?  To be fair, I have had no personal war stories here, but it’s not hard to construct some weird and scary situations.

Let’s look at the hypothetical:

Assume the company is not a success and fails.  In the case of raising equity, the officers and directors only own a duty to the creditors (landlord, etc.) at such time that cash isn’t large enough to pay their liabilities.  If the company manages it correctly, even on the downside scenario creditors are paid off cleanly.  But sometimes it doesn’t happen this way and there are lawsuits.  When the lawyers get involved, they’ll look to try to establish the time in which the company went insolvent and then try to show that the actions of the board were “bad” during that time.  If the time range is short, it’s hard to make a case against the company.

However, if you raise debt, the insolvency time is forever!  Not just when cash got below the ability to pay liabilities like the equity situation, because the company has never been solvent. 

What does this mean?  It means that if your company ends up failing and you can’t pay your creditors, landlords, etc. that their ability for a plaintiff lawyer to judge your actions has increased dramatically.  And don’t forget, if you have any outstanding employment litigation, etc., all of these folks count as creditors as well.   

The best part of all of this is that many states impose personal liability on directors for screwing up things while a company was insolvent.  Read this to be:  “some states will allow creditors to sue directors personally for not getting all of their money they are owed.” 

Now I don’t want to get too crazy here.  We are talking about early-stage / seed companies and hopefully the situation is clean enough that my doomsday predictions won’t happen, but my bet is that few folks participating in convertible debt rounds are actually thinking about these issues.  And no, I don’t know of any actual cases out there, now.  But I’ve been around this business long enough to know that there is constant “innovation” in the plaintiff’s bar as well. 

August 30th, 2010     Categories: Financings, Law, Venture Capital