Prior to enactment of this legislation, much rumbling surfaced within the private equity community over the ultimate extent and potential impact of the proposed regulations on angel and venture capital investment. The concern was that anything that made raising capital more difficult for early-stage companies was bad – for businesses, for investors, for job creation, and hence, for the economy.

Background on the Sale of Securities

Most emerging companies seek to raise capital by selling securities.  The securities must be either registered with the Securities and Exchange Commission and applicable state securities law commissions, or sold pursuant to an exemption from registration.  Startup companies frequently rely on an exemption from registration, since registration can be a lengthy and prohibitively expensive process. The most frequently used exemptions are found in Regulation D under the Securities Act of 1933.  Of the exemptions under Regulation D, Rule 506 is the most commonly used by startup companies, because of the relatively modest disclosure requirements and compliance costs.

Under Rule 506, a company can sell its securities to an unlimited number of accredited investors and up to 35 non-accredited investors without registration (definitions of “accredited” and “non-accredited” described below).  Although a company is not required to make any specific disclosures to accredited investors, if a sale is made to a non-accredited investor, the company must disclose to the non-accredited investor certain information that is generally the same as is required in registered offerings, such as information about the company, the company’s business, the offering, and the risks involved.  Because of the increased and substantial costs of providing such information (think of additional attorney and accountant fees), I advise startup clients to avoid non-accredited investors.

Unaccredited Investor: Additional time + Very expensive + Other risks + IncessantlyDemanding = AVOID!

Non-compliance with the securities laws can result in significant monetary and injunctive penalties against a company, including the right of investors to receive their money back plus interest.

Generally, dealing only with accredited investors is much less costly and easier for the company and for investors.

So, what is an “accredited” investor?

The SEC uses the accredited investor test as a means to determine whether an investor has the ability to bear the economic risk of a private placement investment.

An “accredited” investor, as defined in Regulation D, is one of the following:

1. a bank, insurance company, registered investment company, business development company, or small business investment company;
2. an employee benefit plan, within the meaning of the Employee Retirement Income Security Act, if a bank, insurance company, or registered investment adviser makes the investment decisions, or if the plan has total assets in excess of $5 million;
3. a charitable organization, corporation, or partnership with assets exceeding $5 million;
4. a director, executive officer, or general partner of the company selling the securities;
5. a business in which all the equity owners are accredited investors;
6. a natural person who has individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase;
7. a natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year; or
8. a trust with assets in excess of $5 million, not formed to acquire the securities offered, whose purchases a sophisticated person makes.

An investor that does not meet any of the above criteria is non-accredited.

Why should a startup be concerned about the Dodd-Frank Act?

Under the Dodd-Frank Act,

• The standard for determining the net worth of a natural person now excludes the value of the person’s primary residence.
• The SEC may review the definition of “accredited investor” as such term applies to natural persons to determine whether any modifications are appropriate for the protection of investors, in the public interest, and in light of the economy.
• Beginning in July 2014, the SEC is directed to review the definition of “accredited investor” at least once every four years to determine whether changes are needed for the protection of investors, in the public interest, and in light of the economy.

By most accounts, the Dodd-Frank Act is not as onerous as feared, because many of the proposed provisions relating to the private placement of securities were omitted in the final legislation.  Venture capital was spared, since certain regulations in the bill that would have required VC firms with over a certain amount of assets to register with the SEC were excluded from the final Act.  The Act did, however, address the definition of “accredited investor,” which had not been revised since 1982, to account for increases in salaries and home values since the early 1980’s, and to provide a mechanism through which the SEC can revise the definition as appropriate going forward.

For emerging companies, changes to the definition of accredited investor could potentially reduce the number of individuals who qualify as accredited investors, which could have a negative effect on angel and venture capital investment by raising the cost of obtaining financing.

Most pressing for a company in the middle of a funding transaction or seeking financing: review subscription and disclosure documents immediately to ensure compliance with this new standard, or risk running afoul with federal and/or state securities laws.

Next up for venture capital:  The Carried Interest debate.

Notable highlights:  Investment in the Clean Technology sector doubled in the second quarter compared to the first quarter of 2010; seed and early stage investments rose 54% over the last quarter; and first-time financing dollars rose 7% from the last quarter.

As noted previously, the venture investment landscape is tough, and perhaps you should explore other career options if the fire is too hot for you.  These recent figures suggest, however, that the amount of dollars invested and the number of deals are increasing — very positive signs for the skeptic.

What can your company do to increase its chances of obtaining funding?  To repeat:  you must ensure that your company’s ducks are in order.

> You must have a solid strategy and business plan.

> You must understand the hurdles facing your business and be able to articulate how to overcome those hurdles.

> You must be prepared for the business and legal due diligence process.

> You must have a strong management team with relevant experience — both technical and business.

> (NEW) You must be willing to adjust your expectations with respect to what you must give up in exchange for dollars.

Starting a business can be an incredibly busy and often painstaking endeavor, and it’s easy for a few things to get lost given all the business planning, legal legwork and preparation. Don’t let surety bonds be one of those absent items. Not only are they legally mandatory for a host of new businesses, but they’re an incredibly important risk-mitigation and customer support tool for businesses that aren’t required to purchase them.

Surety Bonds: What They Do

In essence, these are three-way agreements that protect consumers, taxpayers and other companies or private entities. More like a form of credit than insurance, surety bonds guarantee that a company or person will follow all laws and regulations and the letter of a contract. They also give consumers and taxpayers who are harmed a way to recover funds. For many types of businesses, Florida surety bonds are required in order to receive a license and legally conduct business in a the state. Examples include real estate brokers, fitness club owners and automobile dealers. Contractors and construction firms are also subject to surety bonds in most building environments. They play a key role in ensuring construction projects are completed on time and up to contract and code. But businesses and start-ups that aren’t required to obtain surety bonds can still benefit by purchasing them. Fidelity bonds can protect businesses from financial ruin in the event their workers steal or conduct other illegal activity. Smaller start-ups can give consumers a greater degree of confidence by securing bonds – prospective customers will know their interests are taken to heart.

Surety Bonds: How They Operate

In cases where bonds are mandatory, the company secures bonding and files the bond with a state agency or other proper obligee. In turn, that agency then releases a license and allows the firm to legally conduct business. With construction bonds, if a contractor fails to pay subcontractors or somehow else violates the contract, for example, stakeholders can file a claim against the bond and seek to have the work finished or receive proper compensation. Consumers who feel a business has harmed them can also file a bond claim and seek financial redress. Surety companies rarely take losses and will go to great lengths to ensure the principal makes good on compensation.

Surety Bonds: How Do I Get Them?

Entrepreneurs can purchase surety bonds from insurance companies or standalone surety firms. Some bonds can be processed in one day, while others require a strict underwriting procedure not that different from obtaining a loan. In terms of costs, they vary depending on the type of bond, the financial condition of the applicant and the market at large. In general, the premium cost for a bond will range from 1 to 3 percent of its face value. But applicants that wind up in a high-risk market can pay anywhere from 5 to 20 percent in bond premiums.

Great to see the interest and energy among the attendees and speakers.

Two resonating messages:

• One doesn’t need to have millions in order to be a VC; investing one’s time, knowledge, experience, and network in support of an entrepreneur can lead to his/her success
• Never allow anyone else to determine your fate — if all else fails, at least go out swinging!

This effort is the start of something big in Miami and in Florida in general!

The legislation would enable immigrant entrepreneurs who are creating new companies to secure visas to come to the United States, if there is investment capital available from a sponsoring US venture capital or angel investor of at least $100,000 in an equity financing of not less than $250,000.   If, after two years, the immigrant entrepreneur can show that he or she has generated at least five full-time jobs in the United States, attracted $1 million in additional investment capital or achieved $1 million in revenue, then he or she would receive permanent legal resident status.

Similar legislation (H.R. 4259) was proposed in the House of Representatives last year by Representative Jared Polis (D-CO), and was rolled into the House Comprehensive Reform Bill.

The Startup Visa Act is a tremendous positive step for immigrant entrepreneurs, and has been endorsed by over 100 venture capital and angel investors.  Unfortunately, the House version’s inclusion in the contentious immigration reform debate makes its outcome uncertain.

Follow the progress of both the Senate and House legislation on the Startup Visa blog.

When: March 19-21, 2010!

Location: Miami Tower (100 SE 2nd Street, Miami, FL 33131)

More details to follow as released by event organizers.

What is Startup Weekend?

Startup Weekend is a 54 hour startup event that provides networking, resources, and incentives for individuals and teams to go from idea to launch.  Get connected with local developers, innovators, and entrepreneurs.  Build community.  Start companies.  No talk.  All action.  Startup Weekend Miami will take place Friday, March 19 through Sunday, March 21, 2010.

Who can attend?

Anyone!

Why attend?

• Have you ever thought about starting your own business?
• Have you ever had an idea and wondered how to turn it into a business?
• Do you want to to network with other creative and motivated people?
• Do you want to participate in something that will raise the image and profile of Miami ?

If you answered yes to any of these questions, then you should strongly consider participating in Startup Weekend – Miami.  (The networking opportunity is alone makes the event worth attending.)

Cost:  $75.

For more information, visit the Startup Weekend Miami website.

Background:

Startups often choose to hire a worker as an independent contractor rather than as an employee.  The independent contractor relationship may be advantageous for both the worker and the company:  the worker may desire to retain autonomy and flexibility; the company may seek certain expertise possessed by the worker that its employees do not have.  Often, however, a business engages a worker as an independent contractor rather than as an Employee because the business expects to avoid the costs and responsibilities associated with the typical employer-employee relationship, most notably, unemployment taxes, workers’ compensation insurance, and wage withholding responsibilities.  Businesses also save from not having to provide independent contractors with health benefits, which are a significant burden on small businesses.

A business cannot, of course, simply classify all workers as independent contractors. Doing so just might simplify the complicated administrative processes of running a business to the point where one might be able to focus on the business itself and not the administration. Humor aside, classifying everyone as an independent contractor would deprive the system of tax revenue and thwart labor laws meant to protect employees.  As a result, the improper classification of a worker can have serious legal consequences for a business.  Again:  the failure to properly classify workers can financially destroy your business. If a business makes an error in classifying workers, the business will be liable for employment taxes, interest, and penalties, and may also be subject to claims for violating state and federal labor laws.

Enter the IRS:

The key factor in determining whether a worker should be classified as an employee or an independent contractor is control:  who has control over how the worker accomplishes the work.  Because this determination is sometimes unclear, the Internal Revenue Service has developed a set of factors that employers should use to determine whether a worker is an employee or independent contractor.  These factors are grouped into three categories:  Behavioral Control (http://www.irs.gov/businesses/small/article/0,,id=179111,00.html), Financial Control (http://www.irs.gov/businesses/small/article/0,,id=179113,00.html), and Type of Relationship (http://www.irs.gov/businesses/small/article/0,,id=179116,00.html).  The IRS will determine the classification for you if you are still uncertain (use IRS Form SS-8 (http://www.irs.gov/pub/irs-pdf/fss8.pdf)), but be forewarned that the IRS’s determination may take up to six months.

Your trusted attorney should be able to advise you regarding the employee/independent contractor distinction, and, if necessary, prepare an Independent Contractor Agreement that outlines the terms of the engagement and further documents the nature of the worker’s relationship with your company.

Volunteers and Interns

Can businesses control costs by using volunteers or interns?  Free labor always seems good, right?  Not so fast.  If you intend to engage volunteers or interns, then your company will subject itself to both legal and financial perils, namely the same federal and state labor and tax laws relevant to traditional employees.  Using unpaid volunteers in a for-profit enterprise is inherently suspicious, and using unpaid interns must comply with a very limited exception under federal and state wage and hour laws.  Consider the following:  could your business withstand claims for unpaid wages and benefits from volunteers and/or interns, whose relationship with your company has soured?  Suddenly, the savings derived from using inexpensive labor is no more, and your business may in fact have incurred additional costs and penalties.

As businesses look for creative ways to control expenses and survive during challenging economic times, independent contractors, volunteers, and interns are seemingly practicable options for reducing labor costs.  Because of the significant legal and financial consequences of improperly classifying workers, however, business owners and managers should take care to properly designate workers in order to avoid unanticipated and debilitating financial penalties.

Entrepreneur’s “How To” Webinar Series

Webinars are broadcasted seminars that you can access from anywhere.
All you need is a phone and computer to access it.  We bring the seminars to you!

Spring 2010 Webinars
“You’re Not Crazy – You’re an Entrepreneur”
“Wiring Product Innovation into your Company DNA”
“Shameless Self Promotion: Pitching Your Business”
“Social Media Marketing”
“How to Fund Your Company & Bring It to Life”

All webinars are held online on Tuesdays from 11:00 a.m. – 12:30p.m.
(1 hour presentation, 30-minutes Q&A)

Fee:
$25 per session
To register for a webinar, please click here.

Tuesday, March 9, 2010

“Shameless Self Promotion”
Pitching Your Business

Leader: Alex Acosta, Analyst, Trivest

Determine whether your company is ready to attract investment. This session will introduce you to the decision making process of private equity and venture capital firms when evaluating investment opportunities.

“Social Media Marketing”

Leader: John C. Fleming, Founder and CEO, Outcome Labs, LLC

This session will introduce practical tools and tips for establishing a cost effective online presence that any business can implement. Become familiar with different processes such as domain registration, website development, ecommerce, hosting, search engines, ad networks and social media.

“How to Fund Your Company & Bring It to Life”

Leader: Camilo A. Mejia, Associate in Litigation and Intellectual Property Practice,
Hunton & Williams, LLP

Learn how to determine the right legal, management, and financial structure of your business. This session will introduce how to generate sources of funding for your start up and how to use your business plan to tell a story.

Pricing:
$25 for each session.

To register for a webinar session, please click here.
For more information, please send an e-mail to: entrepreneurship@fiu.edu.

Entrepreneurship Workshop Series

FIU’s Pino Global Entrepreneurship Center’s popular Workshop Series promise to equip you with and deliver practical tools and real world knowledge from experts in each field.

Spring 2010 Workshops

“Developing a Killer Business Plan”
“Creating Breakthrough Products”
“Business Plans that Raise Money”
“Going to Market in a Customer Centric, Social World”
“How to Fund Your Company & Bring it to Life”
“The FIU Pino Shark Tank”

All workshops are held from 9:00a.m. – 4:00p.m.
at
FIU’s College of Business Complex
Special Events Center, CBC 232
Modesto A. Maidique Campus
11200 SW 8th Street
Miami, Florida 33199

Fee (per session):
$95 – General Admission.
$75 – FIU Students, Alumni, Faculty and Staff.

To register for a workshop, please click here.

REMAINING WORKSHOPS:

Speakers:
Rade Zrilic, Chief Executive Officer, Technia North America
Robert H. Hacker, Managing Director, GH Capital Partners

Learn how to analyze the market through technology landscaping and product profiling. Assess intellectual property (IP) by analyzing partners, suppliers, competitors and M&A candidate. Find a new market for existing technology (or a new technology for an existing market). Build IP barriers around existing and future products and processes while leveraging regulatory constraints.
Additionally, develop your product definition to be more aligned with your customer’s needs. Discover the tools to learn how customers perceive your product or service. Learn the Porter’s 5 Forces of Industry and how to create competitive advantage.

“Business Plans that Raise Money”

Speaker:
Robert H. Hacker, Managing Director, GH Capital Partners

Uncover the financial health of your business by using an industry-tested and strategy-driven method. You will learn one of the most effective tools for understanding your business’s potential and its driving forces.

Speaker:
John C. Fleming, Founder and CEO, Outcome Labs, LLC

Learn how to develop an effective “go to market” strategy that is optimized for your company and market. You will learn about the elements of a focused and affordable marketing plan. You will see how to leverage the latest in social media to have conversations with your customers and people who influence your potential customers. You will learn how to develop a channel strategy to sell your products and services that will give you the widest market coverage at the lowest possible cost.

“How to Fund Your Company and Bring it to Life”

Speaker:
Camilo A. Mejia, Associate, Hunton & Williams, LLP

Learn about the available sources of funding for your start up, how to present to these sources and what their expectations are for market opportunity, growth and financial return. Learn the different alternatives to form a legal entity for a start up and the governance issues that must be addressed.

Are you ready to launch your business? Consult with the experts! The FIU Shark Tank is your opportunity to have your start up’s business plan reviewed and critiqued by our panel local entrepreneurs and investors. Reconstruct and strengthen your plan to provide your company a blueprint towards success.

Please note that while everyone is welcome to attend, to participate and have your business plan reviewed by our panel it is required that you attend all 5 workshops in the Spring 2010 Entrepreneurship Workshop Series.

To participate in the “FIU Pino Shark Tank,” please submit an executive summary of your business plan to entrepreneurship@fiu.edu no later than Friday, May 28th!

Special Pricing Offers:
$95 for each session.
FIU Alumni Association members &
FIU Students:
$75 per session


To register for an Entrepreneurship Workshop, please click here.
For more information, please send an e-mail to: entrepreneurship@fiu.edu.

“First-time financings fell to the lowest dollar level and deal level since the MoneyTree began reporting venture capital investing in 1995.”

Pouring gasoline on a burning house does not help raise spirits, I realize.   But the report does confirm that financing dollars were in 2009, and likely will be in 2010, exceedingly difficult to obtain.  You can either concede and start your job search (more bad news), or you can buckle down and prepare for the turnaround.

I do not doubt that investments will reach their peak levels again, as the abundant cash that is on the sidelines now will eventually fund the next wave of innovative companies.  Until then, or if you are actively seeking financing now, you must ensure that all ducks are in order within your company.

> You must have a solid strategy and business plan.

> You must understand the hurdles facing your business and be able to articulate how to overcome those hurdles.

> You must be prepared for the business and legal due diligence process.

> You must have a strong management team with relevant experience — both technical and business.

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