Tim Marman's Loosely Coupled

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• TheFunded brings more transparency to raising venture capital

  Asymmetry of information plays a major role in negotiations, and it is often said that venture capital investments are made under extreme information asymmetry. On one side of the table, the limited partners don't know much about the company, the VCs know a little (relatively speaking), and companies know everything. This is one reason VC investments are made in stages - it serves as an incentive to keep the company on track and a way to minimize the risk. When it comes to funding, though, the VCs also typically have an advantage in the sense that they do a lot of deals and know the landscape of the business better than an entrepreneur, particularly a first-time entrepreneur. TheFunded started as a site to review VCs. Like in the investment banking world, a VC's reputation is everything because he relies on repeat business. In theory, transparency in these dealings is a good thing, but the question was whether the data was actually worthwhile. As Charlie put it , TheFunded is "1... Posted Jan 27 2008, 04:16 PM by Tim with | with no comments Filed under: Business, Law, Entrepreneurship, Startup, Venture Capital

• More about raising too much venture capital

  I recently wrote about the dangers of "taking as much as you can get" in a series A. Shortly after that, Dick Costolo wrote an absolutely amazing post about raising too much money. Nonetheless, I don’t think it makes sense for most entrepreneurs to raise big A rounds, because you don’t want to price yourself out of interesting opportunities in the first year or two. By raising too much money, you force your hand on the kind of company that you have to build, whether you want to or not. That was exactly my point. It creates certain expectations for an exit, and you're making that commitment very early in the life of the company. This may not be as big of a deal for a seasoned (and well-off) entrepreneur like Jason or Marc, but it can be a big deal for the rest of us. Let’s look at two scenarios for a very promising startup with technology that may be of strategic interest to several profitable public companies: Scenario 1: You raise 1 on 3 pre in an A round, so you’ve sold... Posted Aug 24 2007, 11:49 AM by Tim with | with 1 comment(s) Filed under: Business, Law, Entrepreneurship, Startup, Venture Capital

• What's the best state to incorporate in? (Hint: Delaware)

  AskTheVC recently addressed the question of what was the best state of incorporation . The short answer is one of 3 preferred states: "Delaware, whatever state the company is in and whatever state(s) the VCs are located in." Obviously, the last is hard to determine if you're going to incorporate before you close financing. California is notoriously employee-friendly so it should be avoided. Some of those laws may still apply if you are based in California, but if you are elsewhere you should definitely assume those burdens. New York is also undesirable. It's fairly balanced when it comes to dealing with owners vs. employees, but the one big red flag is Section 630 of the NYS BCL. This section states that the top 10 shareholders are liable for employee wages if the company goes out of business and employees aren't paid. This statute does not apply to foreign companies (i.e., those incorporated in other states) even if they're doing business in New York. Considering... Posted Jul 23 2007, 05:53 AM by Tim with | with 6 comment(s) Filed under: Web 2.0, Business, Law, Entrepreneurship, Startup, Venture Capital, NextNY

• Valuation: Sometimes you *can* take too much money

  If you're raising capital for a technical startup, how much should you take? Marc Andreessen says as much as possible , a sentiment echoed by Jason Calacanis . Jeremy Liew expounded on some of the risks of having a valuation that's either too high or too low . Marc and Jason are two guys who definitely know about building successful companies (and, perhaps more importantly, successful exits). Jeremy's example focused on an angel round that gave a company a valuation of $30m, where he most certainly would have valued the company less than that (and thus either passed on, or lost, the financing). Despite what Marc and Jason say, though, you can raise too much money in a given round - not because of subsequent rounds, but because of the expected exit. After all, as Jason says, if you raise "too much" money in an earlier round, the big challenge is just not too burn it too fast. This applies especially to VC rounds, which are typically very standard as compared to an angel... Posted Jul 10 2007, 09:46 PM by Tim with | with 4 comment(s) Filed under: Business, Law, Entrepreneurship, Startup, Venture Capital

• Choosing a corporate entity for your startup

  Generally speaking, tax and liability drive the choice of entity. Taxation From a tax perspective, all of the entities except for C-Corps are known as "pass-through" entities, where any income and losses show up on the owners' tax returns. With a C-Corp, taxes are paid by the corporation itself, independent of the individual owners. If you anticipate huge tax losses early on, one of these pass-through entities can be desirable (unless you anticipate taking VC money soon). In some cases, you can even allocate the income and losses differently if you have one owner who can take advantage of the tax loss while the other does not. (There are limitations on the tax losses you can claim with a pass-through entity - the At-Risk rule and limitations of Passive Activity losses - but these are not relevant for now. I'll try to discuss this more in-depth in a future post.) Liability Corporate forms can also provide liability shields. Partners are personally liable for any debts and torts of the partnership... Posted Mar 06 2007, 06:22 AM by Tim with | with 2 comment(s) Filed under: Business, Law, Entrepreneurship, Startup, Venture Capital, NextNY

• The Dark Side of Drag-Along/Tag-Along Rights

  Michael Arrington talks about the sale of FilmLoop . Due to drag-along rights, ComVentures was able to force an unfavorable sale to another company in its portfolio - leaving the founders with essentially nothing. One day, the founders and employees of FilmLoop had a viable company with $3 million in the bank. The next day they had no stock, no job, and no company. Drag-along rights (and its counterpart, tag-along rights) are fairly standard terms in a stock agreement. Drag-along rights mean you can force the other shareholders to join in the sale of the stock at the same price, terms and conditions. This would normally come into play if someone made an offer for the company but one of the founders decides not to sell - this clause allows the VC to compel the sale. Tag-along rights are the opposite, usually giving a minority shareholder the ability to participate in a sale - if the majority shareholder wants to sell, he can't do so without including the minority shareholder. I'll post more... Posted Mar 02 2007, 06:23 AM by Tim with | with no comments Filed under: Business, Law, Entrepreneurship, Startup, Venture Capital

• Why do VCs only invest in C-Corps?

  VCs are typically LLCs or LLPs (pass-through entities) with investors including pension plans, endowments, and other not-for-profit entities. Not-for-profit entities can make money from business or passive investments without paying tax, but must pay tax on unrelated investments. The sale of stock in a C-Corp is considered a passive investment and thus not taxable. By contrast, though joining a partnership is not an income-generating event for tax purposes, it no longer becomes a passive investment and any income from the sale of the business would be taxable. Furthermore, this form of ownership would likely lead to phatom income (i.e., income that exists in the IRS' mind but not in your pocket). Let's assume a VC fund owns 50% of a company. If that company makes $100 but retains it for the operation of the business, it is still considered taxable income in a pass-through entity. Instead of having an additional $30, they fund will actually owe $20. A second major issue is that the owners... Posted Feb 19 2007, 09:58 PM by Tim with | with 2 comment(s) Filed under: Business, Law, Entrepreneurship, Startup, Venture Capital

• Equity-Based Compensation

  Anthony points to a good overview on equity-based compensation. Motivation issues aside, such plans are also a key means to attract and keep top talent when you might not otherwise have the means (i.e., an early stage startup). The article discusses the three primary forms of equity - Incentive Stock Options (ISOs), Non-qualified Options (NQOs), and a stock bonus plan. ISOs are preferable because of the tax treatment for the recipient, but there are stricter requirements in issuing them. A brief matrix outlining the tax implications of ISOs and NQOs is below. Event ISO - Tax to Employee ISO - Tax to Employer NQO - Tax to Employee NQO - Tax to Employer Grant None None None (if close to FMV) None Exercise None None Ordinary Income None Sale of Stock Capital gains above exercise tax None Complicated (if held for 2 years, capital gains only) None As I briefly discussed with regard to the options scandals , the goal is to postpone and potentially lower the tax to the recipient. Posted Jan 30 2007, 05:48 AM by Tim with | with no comments Filed under: Business, Law, Entrepreneurship, Startup, Venture Capital