The good attorney
I could not resist re-posting this story, true (as claimed) or not. I laughed out loud and recognized my own impatience with incompetence, both a blessing and a curse. And if I were in need of a good attorney, I would want him or her to be just like this.
A New Orleans lawyer sought an FHA loan for a client who lost his
house in Hurricane Katrina and wanted to rebuild. He was told the loan
would be granted if he could prove satisfactory title to the parcel
of property being offered as collateral. The title to the property
dated back to 1803, which took the Lawyer three months to track down.
After sending the information to the FHA, he received the following
reply.
(Actual letter): “Upon review of your letter adjoining your client’s
loan application, we note that the request is supported by an Abstract
of Title. While we compliment the able manner in which you have
prepared and presented the application, we must point out that you
have only cleared title to the proposed collateral property back to
1803… Before final approval can be accorded, it will be necessary to
clear the title back to its origin.”
Annoyed, the lawyer responded as follows (actual letter):
“Your letter regarding title in Case No. 189156 has been received.
I note that you wish to have title extended further
than the 194 years covered by the present application. I was unaware
that any educated person in this country, particularly those working
in the property area, would not know that Louisiana was purchased, by
the U.S., from France in 1803, the year of origin identified in our
application. For the edification of uninformed FHA bureaucrats, the
title to the land prior to U.S. ownership was obtained from France,
which had acquired it by Right of Conquest from Spain. The land came
into the possession of Spain by Right of Discovery made in the year
1492 by a sea captain named Christopher Columbus, who had been granted
the privilege of seeking a new route to India by the Spanish monarch,
Isabella. The good queen, Isabella, being a pious woman and almost as
careful about titles as the FHA, took the precaution of securing the
blessing of the Pope before she sold her jewels to finance Columbus’
expedition. Now the Pope, as I’m sure you may know, is the emissary of
Jesus Christ, the Son of God, and God, it is commonly accepted,
created this world. Therefore, I believe it is safe to presume that
God also made that part of the world called Louisiana. God,
therefore, would be the owner of origin and His origins date back to
before the beginning of time, the world as we know it AND the FHA. I
hope you find God’s original claim to be satisfactory. Now, may we
have our damn loan?”
He got the loan.
Note to a young entrepreneur upon his commencement
“For last year’s words belong to last year’s language.
And next year’s words await another voice.
And to make an end is to make a beginning.”
– T.S. Eliot
My friend ~
You will make many new beginnings and many ends, and more new beginnings.
And you will find one voice, then another, and another, with each new beginning. And no voice is ever lost in an ending.
Remember to strive for excellence for its own sake, before any other reward.
And remember that to change your direction is the very freedom of life, and does not reflect back that the earlier direction was mis-taken.
For all the beginning and ends and voices will be the ever-becoming you.
Congratulations on stepping in to your next adventure, your newest voice, and your current beginning.
LEGAL LANDMINES IN NEGOTIATIONS TO DO A DEAL
Summary: Two recent decisions (in Delaware and Georgia) point out legal landmines when negotiating with potential business partners. Even though the decisions point in opposite directions, they also point out the need for clear drafting. One is about LOIs: Make it clear what is binding and what is not and terms like “good faith” actually have a meaning. The second, in Georgia: Make certain your NDAs are well-drafted especially when revealing trade secrets, e.g., draft for limited disclosure for limited purposes and with constraints on competing products.
The Details.
Two companies entered into an LOI under Delaware law and one of the two claimed that the other party did not act in good faith in accordance with the terms of the LOI and breached the exclusivity and confidentiality provisions. Please note that this was a decision only for a preliminary injunction.
In the second situation (this one an appeals court decision in Georgia), a company with a good idea (and some code) approached a couple of other companies about developing and selling a software product based on that idea and code. The first sale would be to a large insurance company known by all of the parties. So, the parties signed NDAs. Well, oops: Two parties decided to create their own product that was pretty similar to what was being developed and they went on to try to sell it as planned. But guess what? Both the trial court and the court of appeals held that there was no breach of the NDA (which was itself badly drafted, according to the court).
So What?
So, when it comes to an LOI, it is not an unenforceable “agreement to agree” but an actual agreement with specified rights and obligations. As the Delaware opinion stated, parties “[. . .] enter into [LOIs] for a reason. They don’t enter into them because they are gossamer and can be disregarded whenever situations change. They enter into them because they create rights.” What to do? Well, this court opinion says that parties can specify what is binding and what is not binding. Naturally, the opinion applies only to Delaware law but its principles extend to just about any LOI or term sheet. In particular, once a document is found to be an agreement, then covenants of “good faith” are incorporated into the deal. Pay attention.
As to NDAs, too little attention is paid to their precise terms—in other words, someone exhumes an earlier version and replaces the names of the parties. This is not smart. For example, specify—and we mean really specify—the purpose(s) to which the confidential information can be used. Define “confidential information” so that the person providing that material can control the information. This also means that one needs to make it clear whether or not copies of the confidential information can be provided and who has access to that information.
OK, OK, so we sound like a broken record: Pay attention to the agreements and, almost as obvious, make sure that the behavior of both (or all) parties comports not just with the agreements but also to expectations. Agreements are only a part of the relationship; behavior is another large part.
James C. Roberts III is my long-time colleague, a world-savvy attorney in new technology, new media, IP, entertainment, green and clean tech and mergers & acquisitions, as well as other transactions that matter. Check out his Global Capital Law Group at www.globalcaplaw.com
Rest & renewal & the larger spirit
It is holiday time for nearly everyone, the celebration of mid-winter, the passing of the Solstice and the shortest day of the year, and a looking forward to a new Spring in the New Year.
In the spirit of celebration, gatherings of rejoicing to have survived another dark time of the year, and all the religions of the world that have manifest rituals to this moment, let us rest for just a bit, appreciate our families and friends and close communities.
Rest is renewal before the next time of focus and effort. Joyful moments reflecting our blessings, our real blessings, not the hassle of the world, restore the soul. We need this balance, the yin of rest and the yang of action, to live in the world as impeccable persons.
It is a moment to acknowledge the larger spirit of the world around us.
Take a moment. Relax deeply. See the movement of the heavens and your place in it.
Bless yourself and those you love, and take my best wishes for a peaceful and prosperous coming year.
I will be back after the new year has turned, rested and ready.
I’ll be with you then.
An Investor’s Checklist
Investors have a rather straightforward wish list. The catch is, they want all of it filled at the beginning. And why not? Even the small firms read thousands of plans each year, and fund only a few. Larger firms see tens of thousands of plans each year, and fund only a few more. Yes, there is plenty of capital available, and a mad frenzy to invest it. But that doesn’t mean it is easy to score the capital.
A Unique Idea in an Empty Space
The time for building the generic tools, infrastructure and horizontal portals of the Internet is past. The players in these areas are in place and dominant. It is important to understand the current moment on the technology emergence curve to determine the viability of your new idea.
Investors want a unique idea in an empty or near-empty space. It’s OK to be second, if your competitor in first place has proven the market but not dominated it. Remember, in the Internet, there is only first and second place, nothing else. With all the new territory to explore, no investor needs to put his money on an also-ran in the making.
Scalability
Once your unique idea has proven its empty space, it must be scalable. Except for tiny niche businesses grown in bedrooms and sold for modest amounts, the rule of thumb holds that the business must scale to at least $100 million in valuation in three to five years’ time. We have already forgotten the names of those that couldn’t. It will be interesting to see how many well-funded businesses actually achieve this $100 million goal.
Defensibility
Sometimes overlooked by CEOs, but not investors, your business idea must be clearly defensible. “First to market” is often the defense put up against non-defensibility. It is an excuse. Yes, first to market gives a distinct advantage in an arena where there is only first and second place for players. But first to market does not make your idea defensible. You can be bumped off by copycats who do it better with more capital and brand. You become the pio¬neer with the arrows in your back.
Recently, one Los Angeles venture group passed on a start-up company with an in-depth site, good traffic, deeply experienced entrepre¬neurial management, and an impressive projected R.O.I, all built on a small initial investment — because the competitor in the number one position could create the depth of the content already created by the start¬up, even though the competitor’s focus was elsewhere. Given the global exposure of the Internet and the low barriers to entry for new competitors, defensibility must be based on some proprietary technology, unique assets or licenses, or access to exclusive information, services or branding.
Management Team
Here’s the catch-22: Investors tend not to fund companies that do not have a proven management team that can execute growth at the speed required to “flip” a company to a sale or IPO in the next few years. But without the capital, a company cannot attract the management team. It is critical to have the commitment of at least one executive with a proven track record in building an Internet business. Experience coupled with an entrepreneurial background is a big success with investors. Given the race to exit, there is no time for an executive’s learning curve.
Investors will support a management team that has had Internet experience within a corporate structure, but no entrepreneurial background. If this is you, it is helpful to align your start-up with an Internet-experienced consultant specializing in start-ups to strengthen the team.
Enough Money to Get the Job Done
Investors like to see business plans that ask for enough money to create critical mass, take first position and accelerate the company’s growth unhindered by a second, lengthy search for capital. So, make certain that you ask for enough money in the first round so as not to struggle during launch and initial market share. It is best to declare your search for both first and second rounds, to demonstrate that you understand the magnitude of money, particularly marketing money, required to take a significant position in this space.
The Adventure
There is no road map to capitalization in these uncharted territories. But sometimes the hand-drawn map will do.
Creating wealth from your venture
This is a call you make both personally and from your opportunities. If you have controlled your early capital and board membership, and have found VCs who understand your market space and can provide both market savvy and connections for growth, strategic alliances and ultimate valuation, then give over a good deal of your company to venture capital partners and collaborate with them towards profitability and exit. Be careful in your choice and conduct your due diligence on the potential investor (or have one of your advisors do this).
If you have not given away much of your equity, and have offered very limited or no preferred shares, and are gaining traction and revenue in the marketplace from your own capital, you do not need “professional” money until it is time to scale rapidly, if at all. Perhaps, if you have built a cash cow and own most of it with other private partners (a more organic growth), it may be better to keep the company for the disbursements of profits, or sell it simply to a strategic buyer for a big payoff, never having involved venture capital.
If you have messed up your early capital, sometimes professional money can clear up the confusion, simplify your cap table and board members, and clear the path to easier success.
Also, your exit will determine what kind of capital to accept. The “cash cow/simple sale” scenario may only need a boutique investment banker to exit. An IPO is likely to involve venture capital, at least in the penultimate round. Then, a Tier One VC and their connection to Tier One underwriters are useful for bumping up your valuation (say, from $600M to $1B), and for training you to maintain that valuation during and after the IPO.
One client had interest from a boutique venture group with excellent references (I did the due diligence) and a 2nd offer from a Tier One VC. He hadn’t launched yet. Although his other advisors told him to go with the Tier One VC, he had shaken hands with the boutique group, whose references were excellent for support when the going got tough. The Tier One VCs, 5 blocks away, had told the CEO he was “investment number 142.” I advised him to stay with the boutique guys, whom he liked (and had shaken hands with, after all), because he didn’t need the Tier One VCs for several more rounds of capital, not now. And he needed the support of the boutique guys in the coming years. More than eight years later those boutique guys are with him still, and the company is still private and at the top position in its market segment.
Another client funded his company with only 33 private-money investors, and later took 25% of this private company public, keeping control of the company. He had lined up 6 Fortune 500 companies interested in buying the company. He took this small portion public to maintain a market value (a “floor”), below which none of the buyers could bid. This “floor” avoided the possibility of one of the F500 buyers stepping forward, while the others stepped back, and forcing his valuation down. It also created a bidding competition among them based on the market value of the stock. Remember he still had control of the company and all the decision making power. This worked out very well for him.
So, exit strategy is more complex than it would seem, and should be strategic, and should be planned for from the beginning. Declaring and planning exit strategies fall in and out of favor with the investment community, especially VCs. For many years I have chaired a venture panel every quarter, and I’ve heard it all – only IPOs will be considered (boom times); there are no IPOs – a strategic acquisition is the only exit that makes sense now, and even “there doesn’t need to be an exit strategy – just build a profitable company and the exit will take care of itself. Show us the scalability and the revenue and the cost controls, and we’ll invest and don’t mention your plan for exit.”
Well, some of that is true – if you can build such a company then you are in control of your choice of exit. But I believe you need a strategic exit goal, so that all your build-launch-grow-create wealth plans have a path, and you can follow that path to the creation of wealth.
Why? Because success is often your greatest nemesis – and it can distract you from your goal of creating wealth, or from building a company you want to keep for generations, or from the exit you have determined. A plan and good advisors will keep you on the path, so you don’t build for success only to lose out on the ultimate gain – cashing out, or building the next new thing, philanthropy, or whatever your next idea may be.
The glass half full & bubbling
Long ago I realized folks saw the world through their own world-view – the glass was half-full, half-empty, half-full and bubbling with opportunity, or half-empty and poisoned. I believe there is little hope of changing these contexts after, say, the age of six. Once I heard a rumor that the Catholic Church said, “Give me the child until he is 6, and I have his mind forever” – or some such quote. (Not being a Catholic, I can’t verify any of this, but it has stayed in my mind for years).
On Thanksgiving, this gives me pause. I know there are hundreds of courses and seminars designed to empower and re-program our world view, to teach us a new “mindset” and change our behavior. Perhaps these work in some ways to give us new disciplines or tactics that remind us to behave with more integrity or to approach the world from a more positive view. This would be helpful, but I doubt these tactics change the underlying programming.
I think I chose to work with entrepreneurs because they tend to be fearless, optimistic glass-half-full kinds of folks. Egos, varying personalities and doubtful behavior aside, they believe in themselves and their vision, and their ability to prevail. They may be visited by demons in the night (http://tinyurl.com/yckwx38), but they do not see their glass half empty, much less poisoned.
So, before these pages go dark for the Thanksgiving holiday, I’d like to thank all the entrepreneurs out there, known and unknown, for adding to the world view of the glass half full and bubbling with opportunity. It is good to have company in this mindset. If you know some of these, you might thank them while you pass the turkey this Thursday.
The CEO’s demons in the night
There comes a moment in most startup ventures when you, the CEO, wake up in a cold sweat and face your fears that failure is near. Seeing anew all the time, investment, financial risk and doubt you have overcome in the last year or two, fear gets past your barriers sits on the bedstead.
The response to this is action on the market front, and privacy on the “sharing” front. You should speak of this fear only to your most trusted advisor who will know what you mean. You must not share these fears with your employees, market partners or investors, all of whom are looking to you for leadership and confidence.
Yes, the demons in your head are scary. They send you a chant, a threat, an image of yourself “broke and alone.” The consequences of all that risk you carried are valid. But these consequences are not new—you have known about them all along. They have been here, and will continue to be here. Only your fear of them is new. And your fear will pass if you continue to act aggressively towards your goals.
So, when your demons come chanting, get out of bed and read this list:
- Do not focus on the future and possible failure of your venture: you are scaring yourself and this fear could be your undoing after all your good work. You do not know what will happen in the future, or what new opportunities are about to appear.
- Focus on full execution. You must be in place to provide the excellence only you can provide, and the leadership to your team and to your market partners, especially those who are less experienced than you might have hoped.
- Do not share your fears with anyone but your most trusted advisor, and your family, if you have been confiding in them all along. This is what you’ve always heard about how it is “lonely at the top.”
- Being a CEO is about leadership. You must lead both your team and your market partners through this time to success.
- Do not focus on your possible personal failure. To fail at a startup (especially in these economic times) is not personal failure. It is just that this business may not make it in these times. It is not that you have failed as a person. I tell my clients that they are real entrepreneurs when they have “won one, lost one, and built the 3rd one.”
- When and if the time comes to close the business, you will tell the truth about what happened, and everyone will understand. But that time is not now. The investors understand their risk through their due diligence and your ongoing reports and meetings. The employees understand their risk, as they joined a startup with less than market-value compensation. Your family understands even if you don’t share the details with them – how could they not know? I believe everyone involved in a startup understands the risk they are taking, and will not blame you, if you are sincere with them (later, when and if the time of failure comes).
- Do not carry this burden of everyone else’s expectations at this time. Just keep executing. Focus on what you have accomplished so far, and carry on in that attitude of success.
- Do not let the public see you as anything but fully confident – that is what they buy into – you and your vision and your achievements.
If you lose this company, you will re-trench, you will change some things, and you will make new choices. I know entrepreneurs who have lost their first business, and gone on to build several more.
One is starting venture #5. He said to me recently – “I don’t regret losing that first company – I regret how much time it took me to get over losing it.” He is correct.
So, when the demons come in the night, get up and act on those tactics that can overcome the fear and move the business forward. It is the only way.
The iChing has a reading that goes like this: “Be like a clock in the thunderstorm.” When all is raging outside, just keep on keeping on, calm and ticking.
CREATING SEED CAPITAL BY PROFIT- SHARING OR REVENUE- SHARING
ONE OF MY CLIENTS ASKED RECENTLY ABOUT HOW ARRANGING FOR SHARED PROFITS COULD BE USED TO SEED CAPITALIZE A NEW COMPANY. HE HAS A COLLEAGUE WHO WOULD LIKE TO PARTICIPATE IN THE NEW VENTURE, AND WHO WILL BRING VALUABLE CONTENT AND CONNECTIONS.
PROFIT SHARING IS BASED ON THE NEW COMPANY’S ULTIMATE PROFITABILITY AND IS LIKELY TO ENDURE THROUGHOUT THE LIFE OF THE NEW VENTURE.
REVENUE SHARING (“REV SHARING”) IS MORE OFTEN BASED ON SPECIFIC PROJECTS THAT GENERATE REVENUE, AND POSSIBLY PROFITS, IN TO THE COMPANY. REV SHARES TEND ENDURE FOR THE LIFE OF THE PROJECT’S REVENUE-GENERATION, AND NOT NECESSARILY FOR THE LIFE OF THE COMPANY.
THESE ALTERNATIVE FUNDING ARRANGEMENTS REQUIRE A GOOD DEAL OF THINKING-THROUGH BEFORE BEGINNING, ESPECIALLY IF YOUR FIRST DEALS MAY SET A PRECENDENT FOR OTHER CONTRIBUTORS IN THE FUTURE.
HERE ARE SOME INITIAL IDEAS TO CONSIDER:
MAKE CERTAIN THAT THE NEW PARTNER IS ACUTALLY BRINGING SOMETHING OF VALUE THAT THE NEW VENTURE NEEDS NOW, IN ITS EARLY STAGES. IF THE CONTRIBUTION IS MORE SUITED FOR A LATER STAGE, YOU MAY BE WASTING VALUABLE TIME AND EFFORT NOW, WHEN YOU SHOULD BE RAISING THAT SEED CAPITAL.
DETERMINE IF THIS IS A PROFIT SHARE ON THE COMPANY OR A REV SHARE ON PROJECTS. IF POSSIBLE, START WITH A REV SHARE ON PROJECTS. IF NECESSARY, CONSIDER A REV SHARE ON PROJECTS, WHICH LATER CONVERTS INTO A PROFIT SHARE ON THE COMPANY.
SET THE ARRANGEMENT SUCH THAT THE PARTNER MUST DELIVER ON HIS OR HER PROMISES, AND THAT THE PROJECTS MUST CREATE REVENUE OR PROFIT, BEFORE THERE IS ANY REVENUE OR PROFIT TO SHARE. ENTHUSIASM IS NOT ENOUGH.
FOR REV SHARING, TRY TO SET A FAIR VALUE, MAXIMUM CAP ON HIS OR HER COMPENSATION, AND/OR A CAP ON THE DURATION OF THE REV SHARE, FOR EACH PROJECT.
IF THE ARRANGEMENT IS FOR PROFIT SHARING AT THE COMPANY LEVEL, COMPENSATION SHOULD CONTINUE AS LONG AS THE PARTNER IS STILLL ACTIVELY INVOLVED WITH AND CONTRIBUTING TO THE COMPANY.
IF THE PARTNER NEEDS SIGNIFICANT UPFRONT FEES, CONSIDER A HIGHER REV SHARE OR PROFIT SHARE UNTIL SOME FAIR-VALUE COMPENSATION LEVEL IS REACHED, THEN REDUCE THIS SHARE TO A “STANDARD” SHARE (WHICH OTHERS MAY ALSO GET IN OTHER DEALS).
WITHIN THESE GUIDELINES LIES A GREAT DEAL OF CREATIVITY. STRIVE FOR SIMPLICITY AND FAIRNESS. REALIZE YOU MAY BE SETTING A PRECEDENT WITH THIS WHICH OTHERS MAY WANT TO FOLLOW, SO CONSIDER WHAT WOULD HAPPEN IF YOU MULTIPLIED THIS DEAL BY 5 OR 6 MORE SUCH DEALS.
A moving portrait of the spirit of the American entrepreneur
The real creators of the National Parks are the entrepreneurs who followed their passions about protecting these wilderness places… millionaires, politicians and wandering students, the prominent and the unknown, those out for commercial gain and those dedicated to wilderness conservation. The idea and development of the Parks at the turn of the 20th century was a unique American endeavor.
The PBS documentary, The National Parks: America’s Best Idea, beautifully created by director/producer Ken Burns and producer/writer Dayton Duncan, is a moving portrait of the spirit of the American entrepreneur
John Muir dedicated his long life to the Parks. It is interesting that his wife Louisa supported his release from his management of her family’s 2600 acre ranch in California after only 10 years, returning him to his public pursuits.
Theodore Roosevelt supported the formation of the first National Parks and Monuments during his Presidency, at the urging of John Muir and others,
John D. Rockefeller, Jr. left his father’s company and dedicated himself to philanthropy, including the support of the Parks, and his design and building of Maine’s Acadia National Park’s 40 miles of carriage roads, to this day open only to hikers and bicyclers, horses and cross-country skiers.
Stephen Mather, an industrial millionaire, established the National Park Service in Washington D.C. to protect the parks.
Horace Albright, son of a California miner, lived in a room in Washington D.C.’s YMCA upon his arrival there, and became the legal assistant to Stephen Mather. He functioned as Acting Director of the NPS during Mather’s 18-month illness, later succeeding him as the 2nd Director of the NPS.
The early directors of the railways pursued the opening of the Parks to tourists and the building of hotels and tourist attractions, bringing in the people for whom the Parks were built.
Brothers Emery and Ellsworth Kolb built their photographic studio on the South Rim of the Grand Canyon in 1904, photographing hikers and mule riders on their way down the Canyon, and just managing to process the prints by end of day when their subjects returned to the Rim at the top. Taking one of the first motion picture cameras down the river through the canyon (only the 8th such successful river trip known at the time), they produced the first motion film of the river and the canyon and each other, often in precarious moments. For 60 years afterwards, Emery’s narration, in person and on tape, was shown twice a day at their studio on the South Rim.
John Dorr, one of the wealthy “cottage” owners of Mt. Desert in Maine, rallied his friends, including John D. Rockefeller, Jr., to buy, donate and preserve the island from the results of the newly-invented gasoline-powered sawmill. He convinced President Woodrow Wilson to set aside 6,000 acres into what is now Acadia National Park, the first Park east of the Mississippi. Dorr became the Park’s first superintendent in his 70s, for 25 years, spending all of his inherited wealth over his lifetime on his passion. It is said there were funds for his burial only because his trust fund administrator hid $2,000 from him.
These stories from 100 years ago show the American history of these capital, political and social entrepreneurs, who represent as much of our national character as the Parks themselves.