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:

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.

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.

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).

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.”

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. 

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.

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. 

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. 

Today, I received notice that the NVCA has formally rejected two parts of this lengthy-titled bill.  (You just have to love the names they put on these bills). 

Don’t let your eyes glaze over – this bill, if enacted with currently wording could really hurt innovation in this country.

As I previously wrote, Senator Dodd brought wants to repeal the existing federal preemption of state regulation over “accredited investor” securities offerings. This would end the uniform, national set of rules for financing start-ups. By eliminating regulation that is working well, the draft bill would expose technology startups to a potentially complicated system of patchwork, state-by-state regulation, resulting in higher costs, more legal risks, and the potential of not being able to raise capital because of different rules in different states.

Nothing would be gained from this change: no additional protections would be provided to the accredited angel investors and there would be no benefits to the national financial system or to the economy.  It would just make raising money much harder for entrepreneurs and line the pockets of corporate lawyers who would comply with these new rules.

Secondly, the draft of the bill recommends adjusting the accredited investor standard for inflation. As we understand it, this section would change the current requirement for an individual of $1 million in net worth or $200,000 in annual income to about $2.3 million in net worth or $450,000 plus in annual income. At a time when many accredited investors have lost more than 20 percent of their net worth in 2008 and innovative start-ups are having an increasingly difficult raising equity capital, decreasing the potential pool of angel investors is counter-productive to supporting the very companies that will create new high-paying jobs.

the Angel Capital Association has joined forces with the NVCA.  Hopefully Washington will listen to reason here.  Otherwise, this could have a tremendously bad effect on our ecosystem. 

Brad and I are thinking about updating our Venture Capital Term Sheet Series. We’ve heard over the years from folks that they’ve used our series to teach classes.  We are delighted by this and whenever we’ve been asked, we’ve always said (and will continue to always say) “with our blessing.”  However, we haven’t kept track of any of this over the year and have a few ideas for things we can do to update the material now that five years have passed.

So – I’m writing with a simple request.  If you’ve used, or encountered, our Term Sheet series in a college (undergraduate or graduate) course or any other teaching / seminar environment, can you leave a comment below with the information (school / program / year / professor) or email me the information?

For those of you concerned about nefarious plots on our part, I assure you that we are delighted this material is out there in the public and are happy to have it freely used and passed around for all eternity.  I promise we won’t send Jack Bauer your way.

Yesterday I posted about Young Startup Ventures trying to rip off Boston-based entrepreneurs.

Today, I’m pleased to report that after hearing of the pay-to-pitch requirements of Young Startup Ventures, Microsoft has done the right thing and no longer is allowing the group to use their facilities.  We should all congratulate them on doing the right thing. 

It appears that the event is no longer on their website, either.  Nice.

I’d also like to thank Dan Primack for the real estate on PEHub and all of you who supported my position via retweets. 

If any of you hear of other similar scams, let me know.  I’d like to weed out as many of these as possible.