Tuesday, July 26, 2011

Lessons #36 thru #70: A Recapped Index of Startup Advice by Topic

Posted By: George Deeb - 7/26/2011

Here is an index of all startup lessons from our blog to date, for your quick reference by topic. Please forward to anybody that you think...

Here is an index of all startup lessons from our blog to date, for your quick reference by topic. Please forward to anybody that you think may be interested.

Click Here for an Index of Lessons #1 thru #35

Lesson #36: Picking the Best Technology for Your Web Startup

Lesson #37: The Plusses and Minuses of Franchising

Lesson #38: Things to Consider When Buying a Business

Lesson #39: The Art of Negotiation

Lesson #40: Focus! Focus! Focus! Build One Business at a Time.

Lesson #41: Security Considerations for Your Startup

Lesson #42: Is Working With Family Members a Good Idea?

Lesson #43: Examples of Barriers to Entry For Your Business

Lesson #44: The Importance of Blogging

Lesson #45: Find a Business Mentor or Business Coach

Lesson #46: 23 Motivational Quotes for Entrepreneurs

Lesson #47: The Importance of Networking

Lesson #48: Trade Show Strategies for Startups

Lesson #49: How to Get a Loan, or Not!!

Lesson #50: Do What You Love!! Passion Drives Success.

Lesson #51: No Public Displays of Rejection

Lesson #52: Viral Marketing Via Social Media

Lesson #53: Search Engine Marketing Strategies

Lesson #54: Incorporate Video Into Your Marketing Efforts

Lesson #55: Creating a Healthy Office Environment

Lesson #56: Frequent Legal Questions of Startups

Lesson #57: Required Reading for Startup Entrepreneurs

Lesson #58: How to Determine Employee Compensation

Lesson #59: Determining Employee Benefits for Your Startup

Lesson #60: Importance of Employee Handbooks

Lesson #61: Set Up Proper Accounting Controls

Lesson #62: Insurance Protection for Startups

Lesson #63: Determining Exit Options for Your Startup

Lesson #64: How to Find Buyers for Your Business

Lesson #65: How to Structure the Sale of Your Business

Lesson #66: Preparing for a Due Diligence Process

Lesson #67: Managing Accounts Payable & Accounts Receivable

Lesson #68: Mobile Apps & Location-Based Services

Lesson #69: The Marketing Power of Free Publicity

Lesson #70: Protect Your Intellectual Property

Click Here for an Index of all Lessons #1 thru #101

Hope you are finding these lessons helpful. Check back soon for more lessons to come.

For future posts, please follow me at:  www.twitter.com/georgedeeb

Monday, July 25, 2011

Lesson #70: Protect Your Intellectual Property

Posted By: George Deeb - 7/25/2011

Intellectual property includes all human-built assets of your business, from your company name, logo, content, technology, contracts or ...

Intellectual property includes all human-built assets of your business, from your company name, logo, content, technology, contracts or any other proprietary trade secrets of your business.  It is often the lifeblood of any startup, and should be protected, as you would protect any other assets of your business.

Right from the start, you should file a trademark for your company name and logo, that prevents others from using the same name or logo in your space (including a clear TM mark on your logo).  And, if you are producing a lot of content, for use on your website or otherwise, you should make sure that it is copyrighted, to prevent others from re-publishing your hard work, as their own (including a clear copyright mark in the footer of your website).  And, when budgets can afford such, consider getting patents filed for your unique inventions or processes, to prevent others from claiming such inventions or processes as their own.

A couple interesting case studies from iExplore, as it relates to intellectual capital.  One hurt us, and one benefited us.  The one that hurt us was when iExplore went to expand into Australia and we could not secure a trademark because a similar adventure travel business, called iXplore, had been in business and filed a trademark before us.  This was particularly troublesome since iXplore's business was in trouble, impacting their customer experience and reputation.  Which ultimately rubbed off on iExplore in the U.S., with the iXplore customers calling us at iExplore for refunds for trips we had nothing to do with.  So, make sure you research and file for trademarks in all countries you plan on operating right from the start, to prevent issues like this happening to your startup.  It may be useful to re-read Lesson #24 on How to Choose a Name for Your Startup to make sure you are covered here.

The second case study was where our trademark helped us.  There was a company that was trying to "piggyback" on the iExplore name, by launching travel websites like iexploreegypt.com, iexploreturkey.com and iexploregreece.com, including a logo that looked very similar to our own.  Here too, customers were getting confused, thinking they were buying from us, but were not.  We sent a cease and desist letter and threatened a lawsuit, and amicably resolved the situation, making them change their logo, feature their company name in the header (not iExplore), and clearly state they were not affiliated with iExplore on their About Us page.  So, make sure you keep an eye out at all times, for potential competitors trying to piggyback on your success.

As for protecting your other intellectual property, I suggest you re-read Lesson #56 on Frequent Legal Questions of Startups, which has a section on patents and protecting all employee work as company inventions.  In addition, please re-read Lesson #60 on The Importance of Employee Handbooks, which has a section on getting all employees signing acknowledgement that they are hired on a "work for hire" basis, and all work is the property of the company.  And, re-read Lesson #41 on Security Considerations for Your Startup for other things to consider for protecting your facility and digital files related to your intellectual property.

For future posts, please follow me at:  www.twitter.com/georgedeeb

Friday, July 22, 2011

Lesson #69: The Marketing Power of Free Publicity

Posted By: George Deeb - 7/22/2011

Before you put a penny into traditional marketing activities, you need to figure out how to get the free buzz started in the media via a...

Before you put a penny into traditional marketing activities, you need to figure out how to get the free buzz started in the media via a formal public relations (PR) effort.  And, I am not talking about engaging an expensive PR firm here, as that does not make sense for the tight cash position of most startups.  But, what I am talking about, is identifying all the places where potential customers are reading, watching, listening or engaging about products and services for your industry, and reaching out to the various editors/producers/bloggers of such magazines, websites or radio/TV programs.

Keep in mind, when you approach these key influencers, you need to do so with "kid's gloves".  They are often bombarded by a lot of other startups trying to get free publicity for their business.  So, you need to figure out a way to approach them in a win-win kind of way, that clearly distinguishes your product or service from the masses of others.  But, the good news is, they are already in the "news" business, and are constantly on the hunt for the next big thing in their industry.  So, they should be open to hearing from you.  But, do so in a way that helps them look smart, not is a way that tries to simply promote your company.

For example, with the trade media, you don't open with "I want to introduce you to my new startup".  You open with "this key trend/pain point is happening in the industry, and I think we have the right fix which may be interesting to your readers".  The difference is, you are helping to make them smart on a particular industry topic, which will be the feature of the article.  But, you will get mentioned and quoted in the article as an expert in the space, which accomplishes your goal of getting the free exposure you desired.  Sending the media free samples of your product or service, also goes a long way to getting their attention.  And, for smaller publications, actually helping them write the articles as a guest or ghost writer, can assist them with the heavy legwork and speed up the process.

In addition to the low-cost, high-return benefit of getting your startup mentioned in the media, it is also a great way to get a "trusted stamp of approval" to help stimulate more sales.  As an example, after your company has been featured in USA Today, you can add an "as featured in the USA Today" logo to your home page (including a link to the article), to help new users build trust and gain confidence in using your product or service.  The logic being: if the expert editors of the trusted USA Today like it, so should I.

And, don't forget, public relations is more than magazines or radio/TV programs.  It is very much an online world today, ripe with industry websites and blogs that you need to reach out to, as well.  I recommend re-reading Lesson #52 on Viral Marketing via Social Media, as it discusses how to identify the key professional bloggers in your industry, whom you want to educate on your business and get them to be trusted, third-party brand ambassadors and cheerleaders for your business.

I am huge proponent of getting the media to spread the free word on your business, especially if you can dig up the key media relationships on your own and not waste money on a PR firm.  And, then, once such relationships are identified, they need to be properly nurtured over time to build long term trust between the parties.  Then, good things should most likely follow, with free media mentions from key industry influencers and the trusted stamp of approval benefits therefrom.

For future posts, please follow me at:  www.twitter.com/georgedeeb

Thursday, July 21, 2011

Lesson #68: Mobile Apps & Location-Based Services

Posted By: George Deeb - 7/21/2011

Mobile apps and location-based services (LBS) for smart phone users have been the rage for the last couple years, and rightly so.  Peopl...

Mobile apps and location-based services (LBS) for smart phone users have been the rage for the last couple years, and rightly so.  People have their phones with them all the time, and over 350,000 app developers are fighting for their attention in the iPhone app store alone (and over 250,000 in Google's Android market).  Because smart phones are GPS enabled, users are tapping into many location-based services that previously were never imaginable as a consumer, or as a marketer.  The goal of this lesson, is to highlight a couple of my favorite "next generation" mobile applications, to help stimulate thinking about ways you can take your business mobile.

In the beginning, mobile apps were largely built as a mobile version of a company's website, for users to take with them while they were on the go, away from their desktop PC.  This included apps for news/information, maps, video, photos, music, social networking, e-commerce, games, travel, business tools, etc.  This generation of apps was all about convenience for people on the go.  Examples include checking-in for a United flight with United's app, getting a map for your current location from the Google Maps app, making a real-time tweet with the Twitter app or getting reviews on a near-by restaurant on Yelp.

The current generation of apps, is all about targeting offers and services based on a smart phone user's location.  As an example of how businesses are evolving their apps, Groupon is less concerned with showing you the same daily deal from their website, and is more concerned that Groupon Local is showing you real-time deals to stores and restaurants that you are in close proximity to, based on the GPS signal from your phone.  Below are a couple other really interesting case studies.

Last summer, I was one of the mentors to Fango, a startup within Chicago's Excelerate accelerator program.  Their app was really a great use of mobile technology, allowing you to order your hot dog and beer while in a sports stadium from your phone (avoiding lines and missing the game), and having it delivered right to your seat based on your GPS location.  Very cool!  But, as we studied their business, even bigger market opportunities emerged for mobile ordering and delivery, in industries they had never previously thought about.  As an example, hotel guests could pre-order their room service meals from their phone, to having it waiting for them in their room upon arrival at the hotel (and not lose an hour waiting for room service if ordered when they returned).  Or, long haul truckers could pre-order truck parts from the road, to have them waiting for them at the next supply depot (instead of losing valuable driving time waiting for parts had they ordered when they arrived at the depot).

Another interesting example is Aisle Buyer.  The Aisle Buyer app not only delivers you timely and targeted offers while you are still shopping in a grocery store (better than Catalina Marketing that spits out coupons at the register after you have checked out), but it also allows you to check-out real-time while you are shopping.  So, as you are putting items in your cart, you scan the items bar code with your phone app, and drop it in a shopping bag.  No longer do you need to unload your cart at the register, wait in long check-out lines or deal with slow baggers.  When you are done shopping, the app charges your credit card and you walk right out the door with no hassles at all.  Nice!

Another example is Geotracker, an app from Venture DNA, that offers GPS-enabled tours of the national parks.  Based on the location of your car within the national park, the "tour guide" app describes the various sites you are currently looking at, at that exact point within the park, and provides driving directions to the next point of interest.   And, Uber, will have a private sedan sent to your exact GPS location within five minutes of your request for a taxi. 

As you can see from these few examples, mobile technologies and location-based services are really improving the user experience in a wide array of uses and industries.  I challenge you to take a critical look at your own businesses, to see how mobile apps or location-based services can dramatically improve efficiencies for your business, and more importantly, for your customers' businesses.

Please re-read lesson #36 on Picking the Best Technology For Your Startup, as it discusses various ways to build-out mobile apps.

For future posts, please follow me at:  www.twitter.com/georgedeeb.

Wednesday, July 20, 2011

Lesson #67: Managing Accounts Payable & Accounts Receivable

Posted By: George Deeb - 7/20/2011

The more diligent you are at managing your working capital, specifically your accounts payable and accounts receivable, the easier it is...

The more diligent you are at managing your working capital, specifically your accounts payable and accounts receivable, the easier it is to manage the ebbs and flows of your cash flow.

Accounts payable are current liabilities less than one year old.  And, more practicably, they represent your normal monthly operating expenses which get invoiced to you monthly.  One way to stretch your cash resources as a startup, is to stretch out the timing on when you actually pay your monthly bills.  Most bills get invoiced with 30-day due dates.  But, stretching those payments to 45-60 days can give you an extra 15-30 days of time to allow cash from revenues or other sources (e.g., financing) to materialize before having to go cash out of pocket.

That said, the longer you stretch out the timing on paying your bills, the higher odds you piss off your vendors, where they may want to drop you or implement prepayment terms to continue the relationship.  In addition, late payments by you also increase the odds such late payments get reported to business services like Dun & Bradstreet (D&B) or the Better Business Bureau (BBB).  So, you don't want to use any long term techniques that would impact your public facing business credit ratings or corporate image.  So, only use these techniques when you have no other choice.

Accounts receivable are current assets less than one year old.  And, more practicably, they represent your normal monthly revenues which you invoice monthly.  So, the keys here are: (i) make sure you are invoicing your customers on the first date of each month, to get the collections clock started sooner than later; and (ii) make sure you have a process each month to follow up with late paying customers, to collect your cash sooner than later (e.g., monthly aging reports, controller who tracks down late payments).  The longer you take to invoice clients and the longer you take to collect late paying receivables, the more cash strains you are putting on your business.

And, manage your customers accordingly.  If you find yourself with consistently late paying customers, change the terms of doing business with them (e.g., to prepay only).  Or, an effective tactic is to shut off your services, until such late paying customer becomes current with paying your bills.  When all else fails, after months of delays in collecting payments, you may have no choice but to terminate the relationship with that customer, report them to D&B and the BBB and turn over your materially past-due receivable to a collection agency.  So, keep a budget for bad debts expense based on the credit of your customers, and what percent of your receivables they represent.

Don't get so bogged down with the running of your startup, that you forget to manage the timing of bills you need to pay and the timing of receivables you need to collect.  It can make a material difference to your cash flow, and can more easily get you through the tough times.

For future posts, please follow me at:  www.twitter.com/georgedeeb

Tuesday, July 19, 2011

Lesson #66: Preparing for a Due Diligence Process

Posted By: George Deeb - 7/19/2011

Whether you are selling your business or raising new capital from professional venture capitalists, you are most likely going to be requ...

Whether you are selling your business or raising new capital from professional venture capitalists, you are most likely going to be required to prepare for, and complete, an exhaustive due diligence process on your business.  So, the sooner you can prepare for such process, before you start it, the better off you will be.  Due diligence usually revolves around questions about the business and questions of about your financials.  I will summarize the high level topics you should expect below.

Business information requests will include things like: (i) organizational documents (e.g,. charter, operating agreement, board minutes, ownership chart, list of managers, lists of investors); (ii) key customers/suppliers (e.g., top 10 customers, top 10 suppliers, key relationships); (iii) litigation (e.g, all pending, settled or threatened lawsuits; (iv) key contracts (e.g., standard forms, non-competes, joint ventures, acquisitions, oral agreements, material breaches); (v) regulatory matters (e.g., violations of any government regulations for environment, employment and anti-trust, business licenses, regulatory filings, workers' compensation history, employee training documents; (vi) insurance matters (e.g., list of all active/cancelled policies, claims history); (vii) employee matters (e.g, list of all employees, salaries, hire dates, benefit plans, employment agreements, employee handbook/policies, tax status); and (viii) security/data protection (e.g., policies, procedures, credit card compliance, technical firewalls, password access, disaster recovery).  

Financial information requests will include things like: (i) debt obligations (e.g, lines of credit, bonds, investor notes); (ii) historical and projected financial statements (e.g., income statement, balance sheet, cash flow, accounting policies, A/P and A/R aging schedules); (iii) tax matters (e.g., federal/state/city income filings, sales, payroll, unemployment, abandoned assets/property, tax sharing agreements); (iv) key assets/property/liens of the business (e.g., real estate, leases, mortgages, appraisals, titles); and (v) intellectual property (e.g., patents, trademarks, copyrights, owned software, licensed software, domain names)

By no means is the above intended to represent an all-encompassing due diligence list, as investors/buyers may ask for much more than what is listed above, depending on the depth of their due diligence process.  And, as you can see, this process can be quite time consuming (both in preparing the requested materials and educating the investor/buyer on such information), and it will certainly distract you from your core business for a couple months.  But, hopefully, you are keeping clean files, as part of your everyday normal operations, to make this process less painful than it could be, by having to create a data room from scratch.

And, worth mentioning, the same due diligence list that is being asked of you, as a seller, can be used by you, as a buyer in any acquisitions you are considering.  So, keep this lesson handy to make sure you are asking the right questions of any acquisition targets.

For future posts, please follow me at:  www.twitter.com/georgedeeb

Monday, July 18, 2011

Lesson #65: How to Structure the Sale of Your Business

Posted By: George Deeb - 7/18/2011

Following my previous lesson on How to Find Buyers for Your Business, next we are going to talk about how to best structure the terms o...

Following my previous lesson on How to Find Buyers for Your Business, next we are going to talk about how to best structure the terms of your sale.  Please understand, structuring the sale of your business can be really complicated and has many different considerations you need to weigh.  So, make sure you get good legal advice for more detailed thoughts beyond my high level guidance below.

Valuation.  Obviously, the first thing the parties need to agree on is the valuation of the business.  As you remember, we discussed How To Value Your Startup back in Lesson #32.  So, I won't go into too much more detail that that, as the valuation priniciples are largely the same, whether you are doing a venture financing or selling the business outright.  So, please re-read that old lesson for details here.  The only thing worth mentioning is strategic buyers will place different valuations on your business than a financial buyer will, depending on how important your business is to them (e.g., taking out a key competitor, or simply adding a minor product line), and whether you are filling a near team hole for them or bringing them a long term revenue pipeline and growth vehicle.  So, you can only negotiate as hard, as you think you are important to their business.

Equity or Asset Deal.  An equity deal is when the buyer takes over 100% of your capital stock, and all the related assets and liabilities of the business.  An asset deal is when the buyer only acquires the key assets of the business (and whatever specific liabilities they are willing to take on, like current accounts payable).  For the most part, buyers of startups are looking to do asset deals.  It helps lower their downside risk of not knowing what skeletons are in your closet to creep up and bite them on the butt.  So, that means, asset deals will be your most likely requested scenario from your prospective buyer, which is fine.  Provided you understand you will need to resolve all open liabilities not taken by the buyer with any proceeds you get from the sale, which are hopefully enough to cover them.

Cash Now or Seller Note.   Of course, getting 100% of your cash upfront is your most desirable outcome.  That said, you as the seller may want to get additional performance-based upside, in the form of an earn-out, which we will discuss below.  And, certain buyers feel more comfortable when the seller still has a little "skin" in the game, not taking all your chips off the table day one.  And, in other scenarios, the buyer may not have 100% of the cash to fund the business day one, and may ask to pay 50% now, and 50% over the next year or two in the form of an interest-bearing Seller Note to you.  This is particularly true for smaller businesses with limited capital.  So, like negotiating valuation, you need to negotiate the timing of the payments, based on what works best for both parties and the circumstances at hand.

Earn-outs.   Earn-outs are mechanisms to get the seller additional cash payments over time, based on hitting some preset performance metrics.  These are great for sellers that feel "the best is yet to come", but still need to sell for other liquidity-driven reasons.  The timing of the earnout can be whatever you want:  my iExplore sale was 18 months (very typical) and my MediaRecall deal was seven years (very atyptical).  Buyers typically don't like earnouts that last too long, since they want to fully control the business operations, and won't want to tinker with the business, and risk a lawsuit from the seller, in the middle of the earn-out period.  And, although sellers like the upside opportunities from earn-outs, earn-outs are very difficult to contract in a way that doesn't leave the buyer with loopholes to manipulate the payout calculation. 

As an example, a seller will want revenue-driven earn-outs (to keep it clean and simple), but the buyer won't like that, since you can load up expenses/losses to drive revenues.  And, on the flip side, the buyer will want profit-driven earnouts (which you won't want, as buyer can pushdown corporate overhead expenses to manipulate your profits to levels the earn-out would not be paid).  In addition, it is preferable to having any revenues coming from promotional support by the buyer, help to credit your earnings and earn-out as the seller (which the buyers may or may not be willing to do, since they are the ones helping to increase your earnings--and hence their cash payouts to you for the business).  So, it is a very delicate dance to negotiate a happy middleground that works for both parties and still has a lot of "teeth" both ways. 

Net Working Capital at Closing.   Net working capital is your current assets less your current liabilities.  The buyer will typically ask for the seller to deliver the business with an historically average level of working capital at closing.  So, as an example, if your average net working capital is $50K, they will want the business delivered with $50K of net working capital.  Any more than that, and the sellers keep the overage as additional sale proceeds.  Any less that that, and the seller needs to fund it to the buyer, to catch them up.  This item by itself is a big negotiating point, especially since the balance sheet used for such calculations (and related auditing of the sub-accounts that comprise it), are usually prepared and calculated within the first 30 days after closing the sale, allowing opportunities for the buyer to manipulate the numbers in between the closing date and the calculation date.  So, be careful in constructing language that is fair and protects you here, so you are not going out of pocket to make up for any shortfalls.

Representations & Warranties.  Representations and warranties are basically the seller's guarantee to the buyer that what they have communicated to the seller in terms of the assets and revenues of the business is accurate, and the fact the seller is willing to back it up in writing.  So, in the event the buyer ever uncovers anything as inaccurate (and, in essence, had them buy the business under false pretenses), the buyer can come after the selling shareholders for a refund of such amount.  Now, typically there is a minimum basket set aside to cover minor things (e.g., no refunds for first $100K of issues).  But, after that, they can get any monies paid to seller refunded to them, in a like amount (e.g., $500K unknown issue, means $400K refund to the buyer after the $100K basket is used up).  These warranties typically have a 12-18 month life before they expire.

So, a couple of important things here.  First, shoot to have any indemnifications provided by the selling shareholders as "limited to your own personal stake" in the business, not to be jointly and severally liable, having to cover the liabilties of your other selling shareholders, if they do not have the funds to refund their portion of the monies.  Buyers will firmly try to negotiate otherwise, to maximize their protection.  Secondly, because of this issue (the risk of refunding monies), I would suggest holding 100% of all monies paid for the business, in an interest-bearing escrow fund, not to be distributed to individual shareholders until the warranty period expires, and there is no risk of refunds.  That ensures every shareholder's cash will be there, when and if you need to refund it.  That said, it will be a pain to you, if liquidity was the primary reason for selling the business.  So, weigh your pros and cons here, before distributing any cash.  Sometimes you can purchase indemnification insurance to cover items like this, allowing distribution of cash.  But, insurance companies hate it, and it is very expensive and often not worth it compared to the escrow option.

Once again, this was intended to be a very high level tutorial on a very complex topic that only a seasoned M&A lawyer should help you with.  But, hopefully, it presented some key issues to consider, so you are smarter in negotiating your sale, when that time comes.

For future posts, please follow me at:  www.twitter.com/georgedeeb

Thursday, July 14, 2011

Lesson #64: How to Find Buyers for Your Business

Posted By: George Deeb - 7/14/2011

Following my last lesson on Determining Exit Options for Your Startup , today will will discuss how to find both strategic buyers and fi...

Following my last lesson on Determining Exit Options for Your Startup, today will will discuss how to find both strategic buyers and financial buyers for your business. 

Finding a strategic buyer for your business is the most likely liquidity event scenario for your startup.  Remember, a corporate buyer is only going to buy you if you bring them some sort of value to their business (e.g., your technology, market share, client list, cash flow, growth vehicle for them).  So, you need to critically assess what the core assets of your business are, and identify a list of targets that would find such assets most useful. 

This could include direct competitors in your exact business, looking to grow market share (e.g., Office Depot acquiring Office Max).  This could be a similar business looking to expand their product line (e.g., Amazon acquiring Zappos to get into shoe business).  This could be a tangential business, serving the same demographic, looking to diversify revenue streams (e.g., commerce company Expedia acquiring media company Trip Advisor, both in the travel space).   And, this could include entirely different businesses altogether that have synergistic technologies (e.g., eBay acquiring Skype to allow commerce buyers an easier way to communicate with each other).  These are just a few examples.

When I was selling iExplore (online adventure travel website), I had considered direct competitors like Away.com and Gorp.com, trying to increase market share.  Big online travel agencies like Expedia and Travelocity, looking to get into the adventure travel space.  Offline travel companies like Abercrombie & Kent and TUI Travel, looking to increase their expertise in online e-commerce.  Travel content companies like Travel Channel or Lonely Planet, looking to add a commerce offering around their content.  Companies like Spafinder or Luxury Link selling into similar high end demographics.  Big online portals like Yahoo or Google, wanting a platform in the travel space. 

So, critically assess your business and think creatively who such targets could be.  And, remember, the bigger the buying company, the bigger your business needs to be to get their attention.  Expedia wouldn't even talk to iExplore, without having $5MM in EBITDA, since any acquisition smaller than that, was less than a decimal point rounding error for their multi-billion dollar business.  The flipside of this is, the small the business you approach, the less likely they will be able to fund an acquisition with free cash or otherwise, which may push them to only considering a stock-based deal (which may not be as attractive to you as a cash based deal).  So, prioritize your prospective suitors accordingly, to find the right mix of business size and liquidity to increase the odds you get to the finish line.

As for finding a financial buyer, it is very similar to How You Raise Capital for Your Business, which we covered all the way back in Lesson #4.  The primary difference is the stage of the business and the types of investors you approach.  Most likely, by the time you are ready to sell your business, you have grown to the scale of a private equity investor (later stage), instead of a venture capital investor (earlier stage).  Private equity firms will be looking for high cash flow businesses, that will allow them to lever up the business with debt (to reduce their equity investment), and pay off the debt over time with the cash flow from the business.  So, make sure you have at least $10-$20MM of revenues and $3-$5MM of positive cash flow, before approaching a private equity firm that has experience in your industry. 

If you are less than this, you are most likely taking about negotiating a "recap" with a venture capital firm, which is a lot tougher to do, since venture capitalists prefer their cash to grow the business, not take out selling shareholders.  And, remember, both private equity firms and venture capitalists are not going to play unless a going forward management team is in place.  So, plan accordingly with members of your own team, or otherwise.

In my next lesson, we will discuss "How to Structure the Sale" of your startup.

For future posts, please follow me at:  www.twitter.com/georgedeeb

Wednesday, July 13, 2011

Lesson #63: Determining Exit Options for Your Startup

Posted By: George Deeb - 7/13/2011

Hopefully, you are not already thinking about an exit for your startup.  But, it is always good to have a sense to what your long term e...

Hopefully, you are not already thinking about an exit for your startup.  But, it is always good to have a sense to what your long term exit options are, in case prospective investors (or you) are curious about how to liquidate their investment down the road.  Your exit options basically come down to: (i) selling the business outright; (ii) merging the business into another entity; and (iii) taking the company public.  We will discuss each of these options below.

Selling your business outright is your most logical exit opportunity for most startups.  Here, we are talking about selling to a corporate or financial buyer that sees value in what you have built (e.g., your technology, market share, client list, cash flow, growth vehicle for them).  So, make sure value has actually been created in your business over time, to attract a buyer long term.  Most buyers are going to look to management to stick around for at least some period of time, to help transition the business.  Corporate buyers will need a 6-12 month transition and financial buyers could require you to stick around longer term to lead the next phase of the company's growth.  In this scenario, you have sold 100% of the assets or equity of the business, depending on the deal structure, in exchange for cash, equity or other compensation, either paid upfront or spreadout over time.

In the merger scenario, it is largely the same as a corporate sale, but instead of selling 100% outright, perhaps you merged with an equally-sized, similar business in a 50%/50% merger.  In such case, you most likely took equity, instead of cash upfront.  Which means, you would need to create a mechanism for the merged business to distribute funds out to you over time, to repurchase your 50% stake with cash from operations or otherwise.  And, in this scenario, the combined entity may not need your management team, since they already have a team in place running a similar business.  Although cash sales for 100% are my preference, deals like this can sometimes make sense where a bigger entity may be more appealing to a long term buyer (e.g., you are too small to attract buyer interest on your own, but combined with a bigger business you are more attractive).  And, this road also makes sense when you are trying to phase out of the business, but don't need immediate cash to facilitate your exit.

As for an IPO, "fuhged about it" (said with my Robert De Niro accent).  Very few startups reach the scale of being able to take it public, and of the ones that do, only the creme-de-la-creme actual do go public.  And, for most of the last few years, the IPO markets have basically been closed altogether based on poor market conditions, and only recently have premium companies like LinkedIn, Zynga, Groupon, Facebook and Pandora decided to give it a shot.  And, if you are lucky enough to build a successful business like that, running a public company is a complete pain in the ass, dealing with public shareholders, reporting quarterly earnings and disclosing all your financial information to all your competitors.  Unless the valuation upside is materially higher than a corporate sale route, I suggest avoiding the IPO route altogether.

In following lessons, I will discuss "how to find and approach buyers" and "how to structure the sale".

For future posts, please follow me at:  www.twitter.com/georgedeeb

Tuesday, July 12, 2011

Lesson #62: Insurance Protection for Startups

Posted By: George Deeb - 7/12/2011

With startups, many things can go wrong.  But, the last thing you need is to be caught in a jam without the proper insurance protections...

With startups, many things can go wrong.  But, the last thing you need is to be caught in a jam without the proper insurance protections when an unexpected situation arises.  Below are a few policies to consider for your startup, some mandatory from the start and some optional based on your specific situation or when budgets can afford them.

Business Property.  Since a good portion of your precious startup capital may be going into physical assets or equipment, it makes sense to protect such with business property insurance.  This protects the company's physical assets from things like fire and theft, so they can easily be replaced in the event of a casualty.  The level of your capital investment in physical assets dictates the level of criticality of this insurance.  It is usually affordable and an easy add for peace of mind.

General Liability/Umbrella.  This covers any claims that arise due to the damage or loss of third party property, and injury or loss of life in your office premises or your customers’ premises, due to the negligence of the company or its employees.  It specifically covers expenses related to property damage, bodily injury, medical expenses, and the cost of defending law suits.  I classify this one as mandatory for any business to protect itself from the unknown.

Business Interruption.  This covers any loss of revenues due to an unexpected castrophe to the business (e.g., natural disasters, fires, crime, terrorism).  The importance of this is how dependent is your revenue stream on any one facility.  If your revenues are driving by an outside sales team, probably not all that important.  If you are e-commerce driven based on your technologies run in one central data center, it is more important.  I put this in the category as nice to have if you can afford it.

Errors & Omissions.  This covers any claims that comes from your customers, based on malpractice, mistakes or negligence by the company or its employees.  As an example, since iExplore's business was driven by travel agents booking trips for our customers, we needed this protection in case any of our staff made a mistake in booking any components of the customers' trips (where the opportunity for human error was quite high given the complexities of the product).  So, if you are a people-driven, professional services business, this coverage is very important.

Workers' Compensation.  This covers cases where the employees of a company get injured or lose their life in the company premises or while working for the company in any other location. In these cases the company is responsible for the damage caused and should pay for the medical expenses, rehabilitation expenses or lost wages.  Much like your general liability policy, workers' compensation is a pretty critical coverage needed, and is often required for businesses in many states.

Directors & Officers.  If you are taking in outside capital, your investors will most likely require you to add D&O insurance to protect them as investors and members of the company's board of directors, in case they are ever sued by the company's shareholders for any loss of shareholder value or not acting in the best interests of the shareholders.  This coverage is less important in tightly-held companies where the founders have largely funded the business themselves and own most of the company's equity themselves.

Key Man Insurance.  If your business is dependent on the skills of certain key individuals, key man insurance is a nice-to-have policy to provide additional protections for the company and its investors.  So, in case you get hit by a bus, and the business suffers a short term impact, the key man insurance provides some additional liquidity to recruit your replacement, offset any loss in revenues in the interim and provide monies to distribute to shareholders, if they require such with such key man.

In addition, there may be other policies which are specifically needed for your industry.  So, get good advice from your lawyer or your insurance broker, and make sure you put the proper insurance protections and coverage levels in place from the start.

For future posts, please follow me at: www.twitter.com/georgedeeb

Friday, July 8, 2011

Lesson #61: Set Up Proper Accounting Controls

Posted By: George Deeb - 7/08/2011

Startup entrepreneurs are typically too busy executing on their vision, that they sometimes forget to implement the proper accounting co...

Startup entrepreneurs are typically too busy executing on their vision, that they sometimes forget to implement the proper accounting controls for their business.  And, the sooner you put these controls in place, the easier it will be down the road, when dealing with banks, investors or auditors, during a due diligence process or otherwise.

I don't think you need anything fancy here.  All you really need is some basic and inexpensive small business accounting software, like QuickBooks or Peachtree, to track all revenues and expenses of the business, all balance sheet accounts (e.g., accounts payable, accounts receivable) and related cash flow items.  In addition, keep a good paper trail in your files (e.g., invoices paid including check numbers, invoices collected including deposit records), that backs up all numbers entered into the accounting software system, in case an auditor ever needs to see them.

I do not think a startup needs to engage an auditor, nor will prospective investors require them.  As, formal audits can get expensive and are not worth the investment for small, private businesses with limited capital to spend.  That said, I would engage a competent accounting firm that can assist you with your annual tax filings.  They will ask to review your internal financial reports from the business in preparing your tax filings, and that is like getting professional third-party validation that your financial reports are "clean", assuming you have a proper paper trail backing up everything you entered into the system.  Annual tax work should cost you no more than $5K-$10K a year.

Prospective investors will be impressed with accounting controls like this, to ensure their invested monies are in "good hands" with competent business people.  And, if you don't have your accounting controls set up like this from the start, investors will most likely make you set it up this way before they invest, as part of the due diligence process, which can be a complete distraction, trying to recreate all the historical financial records down the road.  And, frankly, it is just good business sense to run your business like this, whether investors require it or not, as it will give you an easy and immediate look at all your financial accounts, for any period and at any point in time.

For future posts, please follow me at: www.twitter.com/georgedeeb

Thursday, July 7, 2011

Lesson #60: Importance of Employee Handbooks

Posted By: George Deeb - 7/07/2011

Following my previous lesson on Determining Employee Benefits For Your Startup , I thought we would talk about the importance of having ...

Following my previous lesson on Determining Employee Benefits For Your Startup, I thought we would talk about the importance of having a well-written employee handbook, a step which is often forgotten about in the early days of getting a startup off the ground.

First of all, what is an employee handbook?  It is basically the "rules of engagement" for all employees of the company.  It clearly lays out key employment policies, expected employee conduct, expected hours and compensation policies, company operations policies, leave of absense policies and employee benefits policies.  I will try to summarize the guts of an employee handbook below.

Employment policies deal with topics like equal opportunity employment, employing disabled persons, classifications of employment, treatment of personnel files, employment references, employing family members, restrictions on outside employment, performance evaluations, promotions and advancements, and termination process, to name a few.

Expected employee conduct deals with topics like anti-harrassment, violence, health and safety, no weapons, accidents, keeping the office drug free, romantic relationships with staff, appearance, personal calls, restrictions on use of company resources, internet code of conduct, smoking and complaint resolution procedures, to name a few.

Expected hours and compensation policies deal with topics like hours of operation, payday, automatic payroll deposits, absentism, tardiness, emergency closing, time sheets, overtime, and wages and salaries, to name a few.

Company operating policies deal with topics like travel, gifting, use of company vehicles or assets, and no solicitation rules, to name a few.

Leave of absence policies deal with topics like family and medical leave, continuation of benefits, military leave, education leave, public service leave, bereavement leave, jury duty and workers' compensation, to name a few.

Employee benefit policies deal with topics like national holidays, vacation days, sick days, personal days, voting days and other company benefits, to name a few.

This document serves to: (i) communicate the company's policies to the entire staff; (ii) create a formal paper trail, upon execution by the employee confirming they have read, understood and agreed to such policies, in case there are any employee issues down the road; and (iii) creates a formal defense for the company, in case you or your staff are ever accused on not treating employees fairly, or implementing actions not previously communicated.

So, your lawyer should be able to help you with a good template handbook.  But, if you want to look at an example, I am happy to send you one for your review.  Long story short, clearly document all company policies and expected "rules of engagement" to protect yourself, and make sure all staff members execute an agreement acknowleding their receipt, review and understanding of such handbook.  It will save a lot of unnecessary heartache down the road, in case any employee issues develop over time.  And, as your employee policies change, which they may from time to time, make sure to send out a revised handbook to all employees, and get them to sign their acknowledgement of the amendments.

For future posts, please follow me at:  www.twitter.com/georgedeeb

Wednesday, July 6, 2011

Lesson #59: Determining Employee Benefits for Your Startup

Posted By: George Deeb - 7/06/2011

Following my previous lesson on How to Determine Employee Compensation,   I thought this would be a good time to talk about deciding wha...

Following my previous lesson on How to Determine Employee Compensation,  I thought this would be a good time to talk about deciding what employee benefits your startup should offer its employees.

Before we jump into the details, it is worth mentioning that many of these programs only can be offered if a certain minimum number of employees are met (e.g., 10 person staff size).  And, in my opinion, they should only be offered if the company can actually afford them (so wait until proof of concept is behind you).  Yes, employee benefits will help you to attract and retain employees, but some of the below carry more expense than others, so budget and phase-in overtime, according to where you are in your growth curve.

Let's start with the "cheaper to implement" benefits.  Offering your employees vacation days and holidays off is pretty much expected in any company.  At the time of hiring, entry level employees typically get 10 days of paid vacation and executives typically get up to 20 days of paid vacation.  In addition, employees can typically earn one additional vacation day per year, for each additional year of service with the company, capped at up to an additional five vacation days.  When designing your vacation plan, structure them in a way that employees can carry-over no more than five unused vacation days to the following year.  Which, in essence, is like saying "use it or lose it", so you are not building up huge unpaid vacation day liabilities at the time an employee terminates their employment with the company.

Another easy to implement benefit is offering employees flexible time, to work whatever days/hours are most convenient for their personal schedules.  This allows the working parent flexibility to drop off and pick up their kids from school, when a rigid 9am start-time can often get in the way.  It also allows them to schedule doctors appointments or home repair services during the day, provided they work late that night or on the weekend to make up for it.  Don't manage your staff based on their "face time" in the office during the normal work day.  Instead, manage them based on the work quality and output, regardless what hours they are working (as long as they are working, one way or another).

Offering "employee pricing" on your products and services is also a nice benefit.  When I was at iExplore, our staff could purchase any of our trips at cost, typically saving them 35% of the retail prices, a savings up to $1,000 per person.  And, we extended these benefits, not only to the employees, but to their friends and families, as well.  So, there can be some real savings and benefits to employees from programs like these.

Another low cost benefit is offering your employees basic life insurance, accidental death and disability insurance.  These benefits are typically offered as an inexpensive add-on to your base health insurance package, which we will discuss below.

Now comes the more expensive benefits.  The first of which is offering your employees healthcare coverage.  At a minimum, that could simply be medical insurance, or it could also include other perks like dental insurance, vision coverage and flexible healthcare spending accounts.  There are also many variations on a theme, to keep your costs at a minimum.  This includes deciding: (i) if you are only offering a low cost HMO option, or also an expensive PPO option; (ii) if the plan will be provided by a big brand insurer like Blue Cross, which can be expensive, or a cheaper provider; (iii) what percentage of plan expenses will the company pay for (with market rate at least 50%); (iv) what basic coverage levels will be provided by the insurer (with 90% in-network expenses and 70% of out-of-network, a typical plan); and (v) what level of annual deductibles are required of the employee (typically in the $500 to $1000 range). 

So, depending what mix of the above decisions you make, will have a material impact on your overall healthcare benefit expenses.  But, cost of the plan is only part of your thinking, as you should also make sure whatever plan you offer is "juicy" enough to have real benefits for your employees (e.g., a plan from a less known insurer where the employee's doctor is not in-network will be meaningless to them).

And, worth mentioning, more and more companies (especially startups) are cutting healthcare benefits altogether.  The plan expenses have been rising so quickly over the last decades, that they have created a terrible burden on the employers' budgets.  And, frankly, employees are not staying with companies for decades at a time, they are hopping from job to job every couple of years.  So, because of this, many people are buying their own individually-sourced and funded healthcare plans on their own, so they don't always have to reapply and risk getting denied for pre-existing conditions down the road. 

And, individual healthcare plans are easier to buy than ever from the big insurers websites, and the costs of these plans can often be comparable (or cheaper) than paying for the same coverage via a company-sponsored group plan (especially for startups).  As, an example, my family coverage at iExplore was a $20,000 annual bill to me, and my individually-sourced plan (also from Blue Cross) was only a $12,000 bill to me, as I was able to customize it to exclude maternity coverage, since we were done having kids.  So, it can offer be cheaper to give an employee an extra $5,000 in salary (for them to cover their own healthcare expenses) than for the company to carry the costs of funding their own healthcare plan for the company.

Another popular benefit is offering your employees a 401k plan, including a modest annual company match (e.g., 3%-5%).  But, again, this can get expensive and should only be implemented if your business can afford it.  If employees are desiring a way to create the tax benefits of 10% payroll withdrawals and taxes deferrals until funds are distributed from the plan down the road, you can always educate them on how to set up an individual IRA plan for themselves, outside of the company.

At the end of the day, each employee is driven by different things.  Ask them what benefits are most important to them, offer them what you can afford and offset any benefits shortfalls with increased salaries, to stay competitive.  The job market is very competitive, and you always want to make sure your employment packages (salary and benefits) are in line with the market, for a company of your size.  Your insurance broker will be able to coach you to the right answers here, based on what they are seeing in the market based on the actions of their large mix of clients.

For future posts, please follow me at:  www.twitter.com/georgedeeb

Tuesday, July 5, 2011

Lesson #58: How to Determine Employee Compensation

Posted By: George Deeb - 7/05/2011

At the end of the day, a couple key themes rule your employee compensation strategies: (1) the market is the market, so you need to pay ...

At the end of the day, a couple key themes rule your employee compensation strategies: (1) the market is the market, so you need to pay competitively to attract talent; (2) you get what you pay for; and (3) you can creatively lower cash salary with equity-based compensation, to keep your cash burn rate at a low.  I will tackle each of these points below.

There is a "market rate" for each job within your company.  And, the market rates for any one position can wildly vary based on: (i) the stage of your business; (ii) the industry/competitive skills you are hiring for; and (iii) the city you work in.  As an example, check out Crains Chicago's 2010 Wage and Salary Survey to get a good sense to average wages and salaries by job position for employees in the Chicago area.  You should try to find something similar for your home cities, or use the Chicago numbers as a rough ball park, understanding bigger/more competitive cities, like New York and San Francisco, have be pay more, and smaller cities can pay less than what is paid in Chicago (given the lower cost of living in those smaller markets).  And, don't forget the laws of supply and demand for specific roles.  As an example, if tech coders with expertise in C+ and Ruby are in high demand and short supply in your town, they are going to be paid more than people with more readily available HTML coding skills.

Sometimes you will see CFO's being recruited in the $100K salary range, and other times you see them being recruited in the $1MM salary range.  Why the huge discrepancy?  Because proven Fortune 500 companies have to report to their public shareholders and need proven CFO veterans with public company expertise and a track record of successfully managing multi-billion dollar P&L's.  But, a CFO of a startup does not need that level of expertise, and most likely can get a away with a less experienced CFO, who would probably be more of a VP level executive within a bigger company.

But, the message "you get what you pay for" never holds more true than in your recruiting efforts.  So, you never want to be "cheap" in your recruiting efforts.  If you want a battled tested startup CFO, as an example, you are going to have to pay more than you would for a first time CFO with limited startup experience and no track record.  But, that past startup experience is worth its weight in gold.  In the CFO example, knowing how to "stretch pennies into manhole covers" and attract outside capital could be the key difference between getting your company funded or successful.  So, don't always go with the cheapest alternative.  Go, for the best alternative you can afford.

That said, there are creative ways to structure compensation packages to attract "A Players", without having to pay "A Prices", and that typically comes down to offering them rich equity packages in your business.  As an example, the CFO who takes a straight salary may get $150,000 in a startup company.  But, you may only need to pay them $100,000 if you add 2.5% stock options to their package.  And, frankly, if they are not willing to "put some skin in the game" and work for some piece of equity, they may not have the risk profile for a startup or the confidence in their own abilities, and perhaps should not be pursued for the position. 

I typically offer employees a matrix of options to choose from including a mix of high salary/low equity; medium salary/medium equity; and low salary/high equity, and letting them choose the right mix for them.  But, if your goal is to keep cash low, then you have to do an equally compelling job of selling them on the future value of the company, and their resulting equity value (where a lot of equity is their best option).

There is no exact science or "one size fits all" to creating a motivating compensation structure for all employees, as every exployee has their own specific objectives and cash cushions to rely on.  So, it is usually best to let the employee throw out a starting salary that works for them (validated by asking their most recent salary history), and then negotiate it down from there with equity.  But, be realistic and disclose your "salary range" in your job postings, to ensure you are pulling in candidates you can reasonably afford.

For future posts, please follow me at:  www.twitter.com/georgedeeb

Friday, July 1, 2011

Lesson #57: Required Reading for Startup Entrepreneurs

Posted By: George Deeb - 7/01/2011

Part of the magic of a successful entrepreneur is to stay on top of key trends that are happening, both for their specific industry/comp...

Part of the magic of a successful entrepreneur is to stay on top of key trends that are happening, both for their specific industry/competition, and for the startup/venture scene overall. 

I won't go into too much detail on specific industry resources, as there are too many to list.  But, instead, I will tell you how best to find these resources for your industry.  While I was at MediaRecall, I had to learn the B2B online video space from scratch.  So, I started doing various Google searches for things like "online video blogs", "online video resources", "online video trade shows", "online video associations", "online video magazines", "online video blogs", etc.  I clicked through all the first page links, and came up with a list of about 100 valuable resources where I could: (i) stay on top of key industry/competitive trends; and (2) market MediaRecall's services to similar B2B readers of these outlets.  I then signed up for all their relevant email or Twitter feeds so I could stay up-to-date on all happenings and discussions over time.  Repeat this process for your business, and you will be surprised with the wealth of knowledge that is quickly available at your fingertips.

As for generic resources that apply to most startups (particularly with a tech/online focus) , below is a list of some of my favorite, and most widely read, resources.  Be sure to subscribe for all of their email/Twitter feeds:

Entrepreneur Magazine
Inc. Magazine
Fast Company

Blogs Only:
Tech Crunch
Silicon Alley Insider
The Next Web
All Things Digital
Venture Beat
Venture Hacks
Startup Report
Startup Digest
Startup Weekly
On Startups
Startup Meme
Media Post

In addition, I find it useful to follow relevant people to your industry, or startups overall, on Twitter, to review what they are talking about.  This could be key venture capitalist firms, or their specific partners therein (e.g., Fred Wilson, Brad Feld, Dave McClure).  Or, it could be the CEO's or other executives within major companies in your industry (e.g., Google, Twitter, Facebook).  Or, it could be trade associations or other entrepreneur-focused organizations in your home city startup ecosystem.  I do my best to follow these types of people or organizations within my Twitter account, so feel free browse the list of people I am following at www.twitter.com/georgedeeb.  Or, from time-to-time, I will retweet the best-of-the-best of what I am reading on Twitter, so be sure to follow me there.  And, scour the Twitter follow lists of other people who are relevant to your industry, or do relevant keyword searches within Twitter, to learn about other key influencers in your space.

Do you have other favorites that you think I am missing?  Be sure to add them to the comments field below.  Happy reading!

For future posts, please follow me at:  www.twitter.com/georgedeeb

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