New Enterprises – 4/11/2005

It has been a while since we've had a lecture in my New Enterprises class due to spring break, SIP, and student business plan presentations, but the one on Monday was worth the wait. First, a lawyer that deals with start-ups named Bill Schnoor spoke to us about legal issues that entrepreneurs face, then Noubar (the professor) took over and described a bit about how venture capitalists work.

Bill is an experienced lawyer and a real personable guy (not the pretense you sometimes sense with lawyers). He gave us a lot of good advice; Noubar estimated at least $2000 worth :-)

Bill Schnoor's Biography

Notes:

The avg time from "test tube to tank car" is 7 years (ie, the average time to take a company public from inception)

He sees in tomorrow's winners: smaller scale (doesn't have to be a huge company); capital efficient; patient, slow incremental improvements

The difference between a fraud and an entrepreneur is a fraud tries to sell you something that doesn't exist, an entrepreneur tries to sell you something that doesn't exist YET.

"Legal issues with starting a company are simple by and large."

Rule 1: In the eyes of the law, there's no such thing as a "founder." It carries no legal rights.

You need to set the relations among founders: who owns how much; who keeps what if someone dies/quits/is fired; need for NDA or non-compete? Who makes decisions? Who goes on the board? Are the founders "clean"?

Stay away from a Limited Liability Partnership (LLP) because they are expensive. Set up a corporation instead.

Reoccurring Intellectual Property Problems: use of consultants; joint dev/ownership with another company; open source; loss of trade secret protection; absence of any strategy

Outside financing is a big deal – it means you will lose some control of the company

When splitting up shares, always use number of shares, not percentages

Top 10 Issues for raising venture capital money:
1. Track record for VCs
2. Understand the economics
3. Timing/conditions of funding
4. Future role for Founders
5. Board make-up
6. Vesting
7. Leverage for future financing
8. Obstacles to sale
9. Valuation
10. Personal liability

www.nvca.org has a template term sheet and other legal docs

www.pwcmoneytree.com is a good source of investing info

You should have a relationship with your lawyer. You need someone with expertise that is responsive at a reasonable cost.

Noubar Notes:

A venture capitalists two primary jobs: find money to back their fund and find companies to invest in

Noubar went into a bit of detail about the structure of a VC and how they operate. Quite interesting.

VCs are looking for 30-50% ROI and 5-10x multiple on invested capital

Uncommon for VCs to sign NDAs

Not uncommon for a VC to talk to 50-100 people about a company before investing