Monday, June 2, 2014

Six tips for first-timers starting a business

There is no dearth of information about starting a new business. But there's less guidance about courting and closing a funding deal with individual investors. Experience in this area has, however, offered a few time-worn bits of advice.

Let's assume that: 1. A new company entity ("NewCo") is being formed, and 2. Founder has located a funding source consisting of previously unknown high net worth individuals.
With that background, here are six of those bits of advice:

1. Find a lawyer with experience in helping entrepreneurs contract with and get funding from non-institutional sources (Investors). Buy an hour's worth of time from this attorney and let her/him advise on first meetings and negotiations with investors before they take place, and hold off discussing company ownership percentages until future meetings.

2. If the Investors show sincere interest, ask them to sign a Letter of Intent, subject to completion of their due diligence, meeting the entire management team, etc. If that can't be accomplished, at least try to get a reply email confirming interest in NewCo's funding. There are many reasons that this written contingent commitment is important. Keep that information confidential.

3. If NewCo has a hot idea or product and has a choice of Investors, give serious consideration to the one(s) who have had success in a similar business, or which have a database full of contacts with helpful third parties in the target industry. At the same time, Founder is also urged to trust her instincts. Don't expect the Investor to do a great deal of work for the company even if he says he will. Getting the funding from the right Investor is job No. 1 for Founder.

4. Unless Founder is financially stable, she should get a decent salary so that she can attend to the business every day. If the Investor has negotiated a preferential allocation of distributed cash (say, until the investment is fully recovered plus an agreed return), Founder should keep in mind that she is working for the Investor until there is an allocation shift permitting the Founder to receive a significant portion of distributed cash.

5. Unless the deal requires that Founder contribute her intellectual properties, she might choose to license those properties to NewCo instead of assigning all rights in them. This way, if the company doesn't work as planned, the Founder can possibly terminate the license and retrieve her IP to make another deal.

6. Obtain advice from a securities lawyer before any written material is handed to potential Investors. Assuming the Investor is an accredited investor, the documents that would otherwise be required or expected could be minimized, so long as the complete truth is told.