The Small Business Jobs Tax Relief Act of 2010, signed into law on Monday Sept. 27th, increases the exclusion from gross income for the gain from the sale or exchange of "qualified small business" stock (aggregate gross assets not in excess of $50 million) acquired after enactment and before January 1, 2011 from 50% to 100% if held for 5 years.
Admittedly that may sound like a bigger deal than it turns out to be because qualifying investments already had a fairly low tax rate, but it is still something to think about when considering a small business investment (or angel investment).
Rabu, 29 September 2010
Selasa, 28 September 2010
What is the appropriate discount rate for a startup DCF valuation?
Following a recent discussion with a local investment banker about the DCF valuation of a client where the topic of appropriate discount rate was a hot issue, I wondered what others were using and if there was a "right" rate.
For those that don't live and breathe financial jargon, a DCF (discounted cash flow analysis) is a method of calculating the present value of a future benefit and they are often used whenever someone needs to figure out a justifiable valuation for something that doesn't have a ready market value (and sometimes looking for valuation mistakes in things that do).
The most common reason I will use a DCF is for determining pre/post money valuations for startups, since they by definition have little more than pro-forma financials.
In preparing a DCF for a startup I need to know the expected cash flows and the appropriate discount rate. I can pull the expected cash flows from the proforma financial statements, but the discount rate is really mine to decide. As a definition, the discount rate is:
Of course a lot has changed in the economy since November 2007, so I wonder what others are using for a discount rate now or if that metric still holds true?
For those that don't live and breathe financial jargon, a DCF (discounted cash flow analysis) is a method of calculating the present value of a future benefit and they are often used whenever someone needs to figure out a justifiable valuation for something that doesn't have a ready market value (and sometimes looking for valuation mistakes in things that do).
The most common reason I will use a DCF is for determining pre/post money valuations for startups, since they by definition have little more than pro-forma financials.
In preparing a DCF for a startup I need to know the expected cash flows and the appropriate discount rate. I can pull the expected cash flows from the proforma financial statements, but the discount rate is really mine to decide. As a definition, the discount rate is:
the rate of return that could be earned on an investment in the financial markets with similar risk. WikipediaWith that rate in mind, I have started to use 27% as my discount rate for startup companies. Why 27%...because the Marion Kauffman Foundation published a report in November of 2007 based on their research that indicated a national average IRR (internal rate of return) of approximately 27% on angel investments. I haven't seen anything since then that would purport to be a better number, so that is still what I use.
Of course a lot has changed in the economy since November 2007, so I wonder what others are using for a discount rate now or if that metric still holds true?
Senin, 27 September 2010
Birmingham Angel Network - Meeting Update
Overview of the update that was sent to Bham Angel Network ("BAN") group members Friday:
BAN,
We had a good meeting last night and came away with three new candidates that will be presenting in our 4th quarter cycle.
We also had updates on some of our open deals and portfolio companies. Specifically, we covered Cuestion tequila and their latest news along with a status update on the due diligence report from TransactionTree along with general comments about others. Everyone seems to be moving along and that bodes well for both the companies and our group.
We will have a lot going on in the fourth quarter with the Southeastern ACA meeting, supporting our growing portfolio and current deal flow. It looks to be a banner end of the year for 2010 with a lot of good activity. See you in October and keep an eye out for updates in the meantime.
Best,
Josh
Rabu, 22 September 2010
New California Employer Workplace Poster and Pamphlet
Effective October 8, 2010, two new regulations impacting California employers go into effect:
1. All employers must post the new Notice to Employees, Injuries Caused by WorkFor more on employer workplace posters or to retain an employment attorney to advise and counsel you on California or Nevada business law issues, please click here.
2. Each new employee who begins work must be provided with the new Worker's Compensation Pamphlet, available here.
Senin, 20 September 2010
Branding...DNA of the business
I had a long conversation with one of our clients Friday about branding. The company is launching a new product and we were discussing the branding strategy.
Usually in the planning process we start with the Blue Ocean Strategic steps (article) as a beginning. We can use the value proposition developed in that planning process in conjunction with our adoption plan as the basis for our core message. Of course, at some point that high level strategy has to hit the ground and this is referred to in our office as the "roll out plan." The roll out plan is where we figure out the details of when& how we are going to reach our target audience...media types, creative messages, frequency, etc.
But the conversation we had Friday was a bit different because we weren't just talking about a strict "utility" to the consumer, but a more esoteric "who do we want to be and how do we want to be viewed" type conversation.
This has been interesting so far because we are looking hard at our target market and trying to determine the common traits, interests, etc. so that the brand image can be developed to maximize connection with that audience.
The reason I call it the DNA of the business is because, once the client settles on an initial brand image (we could change based on results), all of the marketing will be developed with that image in mind. We will try to take dead aim on that image and try to capture that ground while avoiding any muddying of the message with non-correlated messaging.
***For those of you that follow along, you may be able to guess the client and if so, keep and eye out and let me know how you think it is going.
Usually in the planning process we start with the Blue Ocean Strategic steps (article) as a beginning. We can use the value proposition developed in that planning process in conjunction with our adoption plan as the basis for our core message. Of course, at some point that high level strategy has to hit the ground and this is referred to in our office as the "roll out plan." The roll out plan is where we figure out the details of when& how we are going to reach our target audience...media types, creative messages, frequency, etc.
But the conversation we had Friday was a bit different because we weren't just talking about a strict "utility" to the consumer, but a more esoteric "who do we want to be and how do we want to be viewed" type conversation.
This has been interesting so far because we are looking hard at our target market and trying to determine the common traits, interests, etc. so that the brand image can be developed to maximize connection with that audience.
The reason I call it the DNA of the business is because, once the client settles on an initial brand image (we could change based on results), all of the marketing will be developed with that image in mind. We will try to take dead aim on that image and try to capture that ground while avoiding any muddying of the message with non-correlated messaging.
***For those of you that follow along, you may be able to guess the client and if so, keep and eye out and let me know how you think it is going.
Kamis, 16 September 2010
Debt Collection Scam Phone Number 760-284-1423
Please note that if you have received a call from an alleged paralegal or other person claiming to work at, with, or from the Law Office of Jonas M. Grant, and demanding the payment of an alleged debt, and threatening "prosecution" or anything else if payment isn't made, note that these calls are not originating from this office, which does not practice consumer debt collection law and does not employ paralegals or others to make calls on behalf of debt collection agencies or creditors.
Calls have been reported to originate from 760-284-1423, an area code in which this law office does maintain an office, employees, attorneys, paralegals. Nor does this office have or use any 760 area code telephone. Note that the number displayed on the caller ID may be spoofed, and therefore the owner(s) of this telephone number may or may not be involved in this scam.
Furthermore, the United States abolished debtor's prisons more than a century ago; all collections and debtor-creditor matters are civil in nature, there is no jail time or criminal prosecution for failing to pay a debt (unless there's also fraud or something else going on).
Please do not cooperate with these individuals, and report to them to appropriate authorities. If you have any additional information about their whereabouts or identity, or aren't sure if a call is originating from this office, please contact the office.
Here's what others have reported about the nature of calls from this number. In sum, it's always a scam, but the scam and the alleged name of the caller varies from call to call.
Calls have been reported to originate from 760-284-1423, an area code in which this law office does maintain an office, employees, attorneys, paralegals. Nor does this office have or use any 760 area code telephone. Note that the number displayed on the caller ID may be spoofed, and therefore the owner(s) of this telephone number may or may not be involved in this scam.
Furthermore, the United States abolished debtor's prisons more than a century ago; all collections and debtor-creditor matters are civil in nature, there is no jail time or criminal prosecution for failing to pay a debt (unless there's also fraud or something else going on).
Please do not cooperate with these individuals, and report to them to appropriate authorities. If you have any additional information about their whereabouts or identity, or aren't sure if a call is originating from this office, please contact the office.
Here's what others have reported about the nature of calls from this number. In sum, it's always a scam, but the scam and the alleged name of the caller varies from call to call.
Selasa, 14 September 2010
Moonlighting (and IP transfer provisions)
As we are working with a number of deals at the moment, but without a lot ready to report, I thought it would be a good time to talk about one issue that has been a thorn in my side on past deals. Moonlighting...
Now, don't get me wrong, I am not in the "you aren't committed if you don't quit your day job" camp, in fact, I think keeping the cash flow pressure off of the newco until it is ready is a sign of good thinking. However, I have had situations where founders did a lot of work moonlighting on the front end only to realize that they had broad intellectual property ("IP") transfer provisions in their employment agreements. What a disaster...and those provisions are very common for technical employees.
Of course, there are arguments that can be made and the founders may end up succeeding in court, but the cost/risk is significant and probably more damaging, the cloud from potential litigation can (and often does) run off any would be investors.
So, with that in mind... PLEASE, if you have a great idea, make sure and read your employment contract before you spend a bunch of time/money developing that idea. Furthermore, if you find out that you do have language in your contract that is problematic, go see a proper employment law firm and talk to them about it because you may be able to fix it.
Now, don't get me wrong, I am not in the "you aren't committed if you don't quit your day job" camp, in fact, I think keeping the cash flow pressure off of the newco until it is ready is a sign of good thinking. However, I have had situations where founders did a lot of work moonlighting on the front end only to realize that they had broad intellectual property ("IP") transfer provisions in their employment agreements. What a disaster...and those provisions are very common for technical employees.
Of course, there are arguments that can be made and the founders may end up succeeding in court, but the cost/risk is significant and probably more damaging, the cloud from potential litigation can (and often does) run off any would be investors.
So, with that in mind... PLEASE, if you have a great idea, make sure and read your employment contract before you spend a bunch of time/money developing that idea. Furthermore, if you find out that you do have language in your contract that is problematic, go see a proper employment law firm and talk to them about it because you may be able to fix it.
Senin, 13 September 2010
2010 Southeast ACA Regional Meeting (Oct. 19-21)
Dear Southeast Angel Group Leaders:
I hope the Fall is off to a great start for you and your group. With the cooler weather finally starting to arrive, we are now just over one month away from our annual fall Southeast ACA Regional Meeting in Greenville, South Carolina (October 19-21st). In light of the rapidly approaching event, we wanted to reach out with a few reminders and requests...
1. Please encourage your members to register for the Meeting sooner rather than later. Here's a link to the registration page: 2010 SOUTHEAST ACA REGIONAL MEETING REGISTRATION. I've also attached a copy of the registration packet to this note so you can re-distribute to your members.
2. The deadline for securing our block room rate at the Westin Poinsett is Tuesday, September 28, so please have your folks make their reservations within the next two weeks. Here's the HOTEL RESERVATIONS PAGE.
3. Please nominate one of your deals for Syndication prior to the the (extended) deadline of Tuesday, September 28. To nominate a deal, simply refer it to the ACA Southeast Angels Group (listed under North Carolina) in AngelSoft. Remember that qualified deals must have received an investment or signed a term sheet with the sponsoring group. If you run into any issues making a nomination, please just contact me directly.
4. In order to facilitate our discussion at the meeting related to Syndication efforts in the Southeast, please take 3 minutes to complete this SYNDICATION PREFERENCES SURVEY. We will discuss the survey results and their implications during the afternoon session on October 20.
5. Finally, we are planning to have a panel discussion on day two of the meeting related to your experiences with implementing strategies for Early Exits. If you have an instructive story on how your group has successfully executed or made preparations for an Early Exit, please contact me so we can include your story in our discussion.
Thanks very much, please let me know if you have any questions, and we look forward to seeing you in a few weeks.
Best regards,
Matt D.
I hope the Fall is off to a great start for you and your group. With the cooler weather finally starting to arrive, we are now just over one month away from our annual fall Southeast ACA Regional Meeting in Greenville, South Carolina (October 19-21st). In light of the rapidly approaching event, we wanted to reach out with a few reminders and requests...
1. Please encourage your members to register for the Meeting sooner rather than later. Here's a link to the registration page: 2010 SOUTHEAST ACA REGIONAL MEETING REGISTRATION. I've also attached a copy of the registration packet to this note so you can re-distribute to your members.
2. The deadline for securing our block room rate at the Westin Poinsett is Tuesday, September 28, so please have your folks make their reservations within the next two weeks. Here's the HOTEL RESERVATIONS PAGE.
3. Please nominate one of your deals for Syndication prior to the the (extended) deadline of Tuesday, September 28. To nominate a deal, simply refer it to the ACA Southeast Angels Group (listed under North Carolina) in AngelSoft. Remember that qualified deals must have received an investment or signed a term sheet with the sponsoring group. If you run into any issues making a nomination, please just contact me directly.
4. In order to facilitate our discussion at the meeting related to Syndication efforts in the Southeast, please take 3 minutes to complete this SYNDICATION PREFERENCES SURVEY. We will discuss the survey results and their implications during the afternoon session on October 20.
5. Finally, we are planning to have a panel discussion on day two of the meeting related to your experiences with implementing strategies for Early Exits. If you have an instructive story on how your group has successfully executed or made preparations for an Early Exit, please contact me so we can include your story in our discussion.
Thanks very much, please let me know if you have any questions, and we look forward to seeing you in a few weeks.
Best regards,
Matt D.
Kamis, 09 September 2010
Don't do "mandatory redemptions" in seed deals...
I had a conversation with one of our BAN company founders last night (I have a very understanding spouse) about term sheets and our preferred structure. He was really asking about convertible debt vs. preferred equity, but we ended up talking more about share redemption requirements or puts and related change of control provisions.
We have had this discussion several times in our BAN meetings and my opinion is fairly clear...don't put mandatory redemptions and change of control provisions in seed stage deals.
Why? Because it is a seed deal and they are inherently more fluid than later stage deals, so the flexibility is helpful. Also, we are talking about $300-400k (not $3-30mm), usually in increments of $10-25k per investor, so it is almost always in everyone's best interest to have the founders tackle whatever obstructions may arise and have the investors "keep their day job."
As an investor, I would much rather focus on doing good due diligence and valuing the deal properly for the risk involved (which btw explains part of why I prefer preferred stock deals rather than debt that punts valuation to the next round) than trying to force a deal to work that has developed issues. Furthermore, if a deal is so sideways at the pre-revenue/seed level that someone else needs to come in and rescue it from the founders, then it is probably headed for the scrap pile anyway.
But, this is not just a theory that reduces the investor's risk of throwing good money after bad, I think experience is showing that by focusing on due diligence and hammering out the details rather than trying to contractually bind a minimum return, our BAN deals have a much higher chance of success both short term and long.
We have had this discussion several times in our BAN meetings and my opinion is fairly clear...don't put mandatory redemptions and change of control provisions in seed stage deals.
Why? Because it is a seed deal and they are inherently more fluid than later stage deals, so the flexibility is helpful. Also, we are talking about $300-400k (not $3-30mm), usually in increments of $10-25k per investor, so it is almost always in everyone's best interest to have the founders tackle whatever obstructions may arise and have the investors "keep their day job."
As an investor, I would much rather focus on doing good due diligence and valuing the deal properly for the risk involved (which btw explains part of why I prefer preferred stock deals rather than debt that punts valuation to the next round) than trying to force a deal to work that has developed issues. Furthermore, if a deal is so sideways at the pre-revenue/seed level that someone else needs to come in and rescue it from the founders, then it is probably headed for the scrap pile anyway.
But, this is not just a theory that reduces the investor's risk of throwing good money after bad, I think experience is showing that by focusing on due diligence and hammering out the details rather than trying to contractually bind a minimum return, our BAN deals have a much higher chance of success both short term and long.
Rabu, 08 September 2010
Indie Candy on Talk of Alabama showing off some yummy goodness...
Indie Candy was on ABC 33/40's Talk of Alabama today (link) letting everyone know about their yummy organic candy boxes.
They showed off chocolate dipped oreo style cookies, gummies, lollipops and other goodies that are all allergen free and suitable for a variety of specialty diets.
And now that they have moved the store online, in addition to the retail location in Crestline, customers all over the country can enjoy the goodness of a seriously tasty treat, even if they have serious allergies or other dietary sensitivities.
Way to go ladies!!!
Selasa, 07 September 2010
Cuestion tequila dominates in local taste test...
What a nice way to start the long weekend. Jason Fandrich, CEO of Cuestion Spirits Company, Inc., came down from Nashville to meet with some local investors and to participate in a taste test at a local bar/eatery.
There was plenty of good company and fun was had by all, but at least as important for the BAN portfolio company, Cuestion (www.cuestiontequila.com) topped the charts out of all the tested tequilas which included both big names and special reserves. Only one special reserve was considered close and it's tasting led to a long discussion about the various hints of flavor imparted by the differing barrel types and everyone's personal preferences.
At least one participant noted that they really didn't think that tequila could be a sipping drink, but that they had changed their mind after experiencing how a really good tequila tasted.
Probably the only down side to the afternoon/evening was when Jason had to tell the participants that it would be several months before Cuestion would be available for sale in Alabama.
Of course, he did encourage them to come visit Nashville and check it out in the meantime.
There was plenty of good company and fun was had by all, but at least as important for the BAN portfolio company, Cuestion (www.cuestiontequila.com) topped the charts out of all the tested tequilas which included both big names and special reserves. Only one special reserve was considered close and it's tasting led to a long discussion about the various hints of flavor imparted by the differing barrel types and everyone's personal preferences.
At least one participant noted that they really didn't think that tequila could be a sipping drink, but that they had changed their mind after experiencing how a really good tequila tasted.
Probably the only down side to the afternoon/evening was when Jason had to tell the participants that it would be several months before Cuestion would be available for sale in Alabama.
Of course, he did encourage them to come visit Nashville and check it out in the meantime.
Jumat, 03 September 2010
The three musketeers is best for co-founders...
Anyone starting a business with someone else will eventually have to tackle relative ownership and compensation questions.
For some founders the answers are simple, but for most it is a sticky issue that creates a lot of stress and runs the risk of ruining both friendships and the business.
With the possible risks in mind, these are certainly issues that don't need to be avoided. They need to be discussed openly and honestly. Many situations have been made worse by trying to avoid the thorny issues... you may be able to, at least, until they just blow up.
To try and take some of the emotion out of the negotiations I like to lay out some initial thoughts:
1. The initial founders should have the "skills"/"essentials" necessary for the core business plan;
2. if someone is not "essential" they don't really need to be part of the original founders; *(no one is "in" just because they were at lunch the day it was discussed)
3. if each founder is truly "essential" then lean toward more even splits;
4. shareholders should earn "profits" and employees should earn "wages"; and
5. once the core team is in place it's "pay to play" for equity.
With that in mind, I do tend to favor a 1/x approach to "equity" splits among founders in most startups, unless there is a compelling reason to do otherwise.
I don't, however, think that all founders need to receive the same "wage" unless their relative job functions would demand a similar wage on the open market. For founders wages, I am in favor of creating a specific wage and keeping track, even if there is no money to pay initially (just keep it on the balance sheet as a liability).
How to set that specific wage for each founder is another negotiation. I like using Monster.com (and the like) as a starting spot because I can get reports for average wages based on specific job functions. It's also good to think about how particular jobs are typically compensated (ie - salary, hourly, commission, etc.) and to try and stay in keeping with industry standards, unless there is a compelling reason not to.
Certainly, it is easier if all the core parties can put in equal skills, effort and resources then just split everything equally, but in most instances that is not sustainable (maybe even on the front end), so it is important to think about what is fair to all parties involved for both the beginning and the years ahead.
For some founders the answers are simple, but for most it is a sticky issue that creates a lot of stress and runs the risk of ruining both friendships and the business.
With the possible risks in mind, these are certainly issues that don't need to be avoided. They need to be discussed openly and honestly. Many situations have been made worse by trying to avoid the thorny issues... you may be able to, at least, until they just blow up.
To try and take some of the emotion out of the negotiations I like to lay out some initial thoughts:
1. The initial founders should have the "skills"/"essentials" necessary for the core business plan;
2. if someone is not "essential" they don't really need to be part of the original founders; *(no one is "in" just because they were at lunch the day it was discussed)
3. if each founder is truly "essential" then lean toward more even splits;
4. shareholders should earn "profits" and employees should earn "wages"; and
5. once the core team is in place it's "pay to play" for equity.
With that in mind, I do tend to favor a 1/x approach to "equity" splits among founders in most startups, unless there is a compelling reason to do otherwise.
I don't, however, think that all founders need to receive the same "wage" unless their relative job functions would demand a similar wage on the open market. For founders wages, I am in favor of creating a specific wage and keeping track, even if there is no money to pay initially (just keep it on the balance sheet as a liability).
How to set that specific wage for each founder is another negotiation. I like using Monster.com (and the like) as a starting spot because I can get reports for average wages based on specific job functions. It's also good to think about how particular jobs are typically compensated (ie - salary, hourly, commission, etc.) and to try and stay in keeping with industry standards, unless there is a compelling reason not to.
Certainly, it is easier if all the core parties can put in equal skills, effort and resources then just split everything equally, but in most instances that is not sustainable (maybe even on the front end), so it is important to think about what is fair to all parties involved for both the beginning and the years ahead.
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