2012 Los Angeles Startup Report [Infographic]

Check out this infographic posted by Built In L.A.,  an online community for digital entrepreneurs and innovators that launched in January 2013. The startup curates and promotes relevant news on L.A.’s startup community, hosts a job board for digital technology companies, publishes data on the digital tech sector and organizes events.

Some highlights: Los Angeles launched 220 startups in 2012, 100 of which secured at least $1 million in funding. Digital media and marketing were the fastest growing sectors. 43 companies were acquired, an increase over previous years. The fashion industry received the largest funding, with 22% of the investment. The fashion site JustFab raised top dollar – $76 million for more development.

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IP Corporate Attorney

3 Ways Your Startup Lawyer and Accountant Need to Collaborate

Blog post written by Michael Leventhal, Intellectual Property and Corporate Attorney, MC Squared Law and Consulting

Here’s a horror story: The lawyer for an Internet startup set the company up as an S-Corp. In two years, the business grew from nothing to grossing $5 million a month. Now, the owners wanted to take an investment, add a profit-sharing plan, and do other things that an S-Corp is not permitted to do. Converting to a C-Corp at this point meant a $5 million cash flow hit that could have been avoided had their lawyer and accountant been consulting from the get go.

If you want to get your startup off the ground, you need a strong relationship between your lawyer and accountant.  Several critical early stage issues require both perspectives and a collaborative flow of communication.  Here are three: formation, intellectual property, and sharing the wealth.

Startup FormationStartup

You’ve got an idea, and, maybe, some interest.  You need to form a legal entity to protect yourself, take in financing, and do business.  What’s it going to be?  Your lawyer should be asking questions, including these:

  • How many founders are there?
  • What is the potential size of the business?
  • Are you looking for investment?  What kind?
  • Where are you located?
  • What is your vision of the future of the company?  For example, are you in it forever?  Or do you want to build it and sell it to a bigger company?  Or go public?

The answers to these questions help determine the best legal form—LLC, C Corporation, S Corporation, as well as where you should incorporate—California, Delaware, somewhere else.  Lawyers seek the best form for legal protection, flexibility, and ease of operation.

Your accountant should be looking at a number of different issues, particularly taxes.  While I often like a California LLC for California companies, I want your accountant to be scrutinizing issues such as the gross receipts tax.  When does this issue offset the advantages of our preferred form?  Your accountant may not like the C Corporation because of the dreaded Double Taxation, and with good reason.  Sometimes, however, that’s the best form because investors won’t invest in anything else.  I’m not a tax guy.  Your accountant isn’t necessarily looking at issues such as flexibility or exit strategy.  To get the best solution, you need each perspective in the room.

How important are these choices?  Angel investor Stan Tomsic, a partner at ACODA Technology & Investments, says, “When we go through the process of due diligence, some of the most critical areas we address are making sure the company’s corporate house is in order, the intellectual property of the organization is well established, and the financials are accurate and make sense. We like to see experienced lawyers and accountants involved, especially those we are familiar with, who we know will provide sound advice.  We won’t write a check until we are satisfied with these areas.”

Intellectual Property for a Startup

So, you’ve created your entity—or you’re still figuring that out—and the basis of the business is its intellectual property.  Patent attorney Michael Zarrabian, a partner at Myers Andras Sherman & Zarrabian LLP, reminds us that, “You need to bring the IP into the company.” Smart investors will never put money into a company that doesn’t own the very thing they are betting on.  Zarrabian talks about the ways to get the IP into the company and get compensated for it.  “You can create a new entity just to house the IP, and then you have to decide whether it’s a domestic company or offshore.  Then, you would license the IP in to the new company in exchange for royalties or equity.  The license fee can vary.  Or, you can grant all rights to the new company in exchange for stock.”

While investors like to see the IP owned by the company, it doesn’t have to be that way.  Having your accountant at the table on this one determines which of the possible arrangements is going to be best for the inventor/owner from a tax perspective.  Your accountant’s input is critical.

Sharing Startup Wealth

You want the people who have been important to the creation of the idea, or will be important to the execution of the plan, to have a piece of the company.  How do you give it to them?

Your lawyer is watching out for voting control; protecting you from giving out ownership that hasn’t been earned yet; keeping an eye on too much dilution too early; looking for securities issues if the option strike price is too low.  Your accountant is on top of providing definitive answers to the tax side of the equation.  Brian Rabinovitz, president of Proactive Professional Solutions, Inc., points out that “any company looking to compensate employees or service providers, or otherwise provide equity for non-cash transactions, should consult with its attorney as well as its accountant about all of the possible accounting and tax ramifications.  The reason is that the Company should be aware of the accounting and tax treatment of the equity transactions and understand that there could be negative effects if the transaction was not well thought out.  Valuations could be incorrect and not understood, which could lead to financial statement and tax problems for the company, as well as tax problems for the employee or service provider.”

You also need your accountant and attorney working together to answer questions such as these: Is it better for the company to issue stock or options?  How about stock with a reverse vesting mechanism?  Should an option recipient file the 83(b) election?  When does that have to happen?  How does a low strike price affect your company’s financials?

An entrepreneur has a lot of ground to cover.  You need to keep your attention on turning the idea into a real technology/product/service.  You already know you need a lawyer and an accountant.  What most startups overlook is putting them together as a team.

Intellectual property and corporate attorney Michael Leventhal is a futurist, entrepreneur, and owner of MC Squared Law and Consulting.  He works to help companies grown in high tech, digital media, entertainment, Cleantech, and New Space.  You can reach Michael at 310-702-4048.

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A Tech Startup’s Guide to Navigating Insurance

Blog post written by Matt Carlson, CIC, Vice President, Risk Strategies Company

There are a lot of moving parts to a startup business. While all businesses need some amount of insurance protection, technology companies do have some special needs. The following is a checklist of insurance coverages that businesses can use to make sure they minimize their risk and liability.

Errors & Omissions Liability (E & O) + Cyber/Network Liability

Why You Need It – Form of liability insurance that helps protect professional advice- and service- providing individuals and companies from bearing the full cost of defending against a negligence claim made by a client, and certain damages awarded in such a civil lawsuit. The coverage focuses on alleged failure to perform on the part of, financial loss caused by, an error or omission in the service or product sold by the policyholder. These are potential causes for legal action that would not be covered by a General Liability Insurance Policy which addresses more direct forms of harm. Cyber/Network Liability can usually be added to an E&O Policy to protect your exposure of a network going down or private information leaking and causing financial damage

When You Need It – Once company goes beta/live, releases software or a client contract requires the coverage.

Approximate Cost –  $2,000-$5,000+;  Premiums  are  based  on  various  factors  including  gross revenue, founder resumes and financials.

Time It Takes to Get it In Place – 2-3 weeks. Need an application, resumes and financials.

Workers’ Compensation

Why You Need It – Protects you the employer for bodily injury to employees if they get hurt on the job. The injury must happen in the course of or arising out of employment to be considered a Workers’ Compensation claim.

When You Need It – Once the first employee is hired whether full time or part time. Founders/owners have the option of not purchasing Workers Compensation insurance for themselves.

Approximate Cost – Premium  is  based  on  payroll,  probably  $1,000-$2,000  for  a  few  office employees; Rate is established at beginning of policy and an audit is performed at end of the term.

Time It Takes to Get it In Place – 2-3 weeks. Need estimated annual payroll separated by the class code and state employed.

Commercial General Liability Insurance Policy and a Commercial Property Policy

Why You Need It – Commercial General Liability covers bodily injury or property damage cause to a 3rd party. Commercial Property coverage protects a business’s own business property within the office.  This policy can also cover the loss of use of the premises in the event of a covered loss such as a fire.

When You Need It – When you start a business but at minimum when office space is leased or when this insurance is required by contract.

Approximate Cost – $500-$2,500+

Time It Takes to Get it In Place – 1-2 weeks. Premium based on sales, square feet of the office and property limits.

Directors & Officers Liability Insurance

Why You Need It – Provides coverage for a loss as a result of a legal action (whether criminal, civil, or administrative) brought for alleged wrongful acts in their capacity as directors and officers of the company

When You Need It – When you start a company but at minimum once you have investors or are required by contract.

Approximate Cost – $1,000-$3,000+

Time It Takes to Get it In Place – 1-2 weeks. Need to fill out application and provide financials.

Employment Practices Liability

Why You Need It – Protect your organizations against employee suits for discrimination, wrongful termination, sexual harassment, failure to hire, etc.

When You Need It – Once you have a handful of employees.

Approximate Cost – $1,500-$3,000+

Time It Takes to Get it In Place – 1-2  weeks.  Premium based on number employees.  Need application and employee handbook (if any).

Key Person Insurance

Why You Need It – Helps with cost to replace expertise after an essential founder’s death.

When You Need It – Once you start making profit, have investors or want to sustain continuation of the company in case of a founders death. Can be required by investors.

Approximate Cost – $250+ per year

Time It Takes to Get it In Place – 2-4 weeks. Need an application and a medical physical.

Risk Strategies is dedicated to helping technology companies secure comprehensive and cost-effective insurance solutions. Risk Strategies is backed by unrivaled service, support and resources, and our national footprint and premium volume assures that our clients will have numerous solutions and carrier options. Please note that this blog post provides insurance information that is brief, general, simple and subject to specific policy provisions and individual circumstances.

For more information, contact Matthew D. Carlson, CIC, Vice President, Risk Strategies Company.

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Business Founders Need a Technical Advisor

I recently wrote a blog post on SoCalCTO about Technical Advisors: Every Web/Mobile Startup Must Have One.  In talking with literally hundreds of startups over the past few years, I’ve come to realize:

Business Founders Need Technical Advisors

Why?  Here are some things that come up:

imageWhat Do You Not Know to Ask?

Are you asking the right questions to make sure that the right things get built.  Take a look at Questions Developers May Have Forgot to Ask a Startup Founder.  If there are questions in there that you’ve not been asked or thought about, then you need some help.

…..DO NOT PASS THIS SPOT WITHOUT READING THE ABOVE LIST OF QUESTIONS….

Are You Using the Right Technology?

Developers (really everyone) has a tendency to use what they know.  Some developers are quite religious about technical choices.  What tends to happen is that without someone looking at technology strategically, you end up ignoring third party products that would get you there faster OR jumping onto technical choices that end up making your life miserable.  Get help so you feel comfortable about your choices.  Make sure you can answer those annoying technical choice questions by your potential investors.

Have You Engaged the Right Way with Developers?

Developers are an interesting breed of people.  They have a tendency to be pretty literal.  They don’t like scope change.  You need to really know to work with them to be successful.  You’ve never led a group of developers?  And now you plan to lead them?  You might want some help.

Please, please, please do not engage an outsourced development team without having a technical advisor review the product specification and the development agreement.  Many (probably most) outsourcing relationships do not end well.  Make sure you are doing the right things up front to avoid big gaps in understanding that leads to significant pain down stream.

And if you are engaging with an internal development team (or person), you still need someone who is making sure that you are building the right things using the right technology.  And you need to protect yourself.  Which leads us to …

Are You Protecting Yourself?

Developers often move around.  If they leave, do you have access to all the passwords?  Do you have the commercial relationship with hosting, domain, etc.?  Access to the source code?  Is the code workable?  Is there anything that your developer has that you would need to move forward?  Please make sure your developer is not going to leave with your keys.

Are You Planning Beyond the MVP or Next Version?

It’s really common for early-stage companies to be focused only on their next version.  This often causes some pretty short-sighted choices around technology and development.  Make sure you have someone thinking a little longer term.

Outsourced CTO and Technical Advisor

As a business founder, the reality is that you will need help with these things.  So how do you get help?  It’s going to come in the form of a Part-Time CTO or a Technical Advisor.  The difference really is amount of time they are engaging and it may vary during the life of a startup.

What a Technical Advisor Does

This person should be adept at addressing the kinds of issues raised above and will help by:

Where To Find a Technical Advisor

You are looking for part-time people in these rolls so you often are finding people who already are employed somewhere else.  In Los Angeles, I have easy access to a bunch of potential technical advisors through the LA CTO Forum.  If you need a strategic advisor, contact me and I will connect you with someone from the group.  Another avenue is looking for CTOs/VP Engineering via LinkedIn.  It’s going to be a numbers game to find the right person that way, but still quite doable.

Compensation

This is going to depend on the specifics of the work.  When advisors need to jump in and spend significant hours on a particular issue, then likely cash compensation is going to be required.  If it stays at a few hours per month, then using something like Founder Institute’s FAST agreement probably makes sense.  Just make sure its clear what the expectations are going into any engagement.

Investors Should Demand a Technical Advisor

I quite often get a call where a founder raised $150K of initial money and has spend $120K on in-house or outsourced development and the software is 90% done.  But they are having a tough time getting it all the way done.  As I mention in Symptoms of a Weak Development Team, the number one reason I get calls relates to an old software engineering adage:

The first 90% of a project takes 90% of the time.  The last 10% takes the other 90%.

In the case of these calls where the initial money has mostly been spent, it can be very tough to recover.  Most often the failure is both a result of the founder not doing the right things and because the developer over-promised and failed to ask the right questions.  Having a strategic and tactical advisor can greatly reduce the chance that this is going to happen.

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5 Signs Your Startup May Need a CMO for Hire

Blog post written by Jennifer Beever IMCP, CMO for Hire, New Incite

5Marketing is a critical area for start-up success. To get started, you may not need to hire a full-time CMO, but instead a marketing consultant or “CMO for Hire” will do what you need and more within your start-up budget.

Why would a business hire a part-time CMO (Chief Marketing Officer)? Here are a list of “trigger points” – events or situations that often trigger a need for an outsource CMO or other marketing resource at a startup company.

1. The organization needs marketing but doesn’t have the budget for full-time staff

Not every organization needs a full-time, senior-level marketing executive. A CMO for Hire can provide strategic direction, project management and some execution on a part-time basis, providing senior-level expertise but staying within budget.

2. No one on the executive team has marketing expertise

Often products and services get invented and sold, and overnight a business is born. The founding team can often take things pretty far, but at a certain point, they can use some outside marketing expertise to help them get systematic and strategic about marketing so that they grow even faster. The startup company is, as I often describe it, is “selling in spite of themselves.”

3. Current marketing is not working

Marketing money is being spent but greater awareness in the marketplace, leads and revenue are not the results. The startup may need some new strategies and new tactics to get them out of their marketing rut. Marketing has changed dramatically in the past few years, and there are many new tactics that are providing businesses and organizations with results: online and inbound marketing, social media including blogging, lead nurturing, video marketing and mobile marketing.

4. There is no written marketing plan

Lack of a written plan with strategic and tactical marketing information is a sign that a company can use some help. Sometimes the startup has made some assumptions that need to be validated in the process of creating the marketing plan. A CMO for Hire can help them step back, do some analysis and research, validate markets, products and services and put a strategic plan (in writing) in place. Then, the CMO can help them execute the plan.

5. No marketing metrics are being tracked

A startup may “think” their marketing is working, but gut feel or thoughts aren’t concrete results. A CMO for Hire can make sure that proper marketing measurements and reporting is in place so that the organization knows its return on marketing investment as a whole and for each activity.

Whatever your situation, it’s important to consider the benefits of outsource resources, especially when you are starting up. These are just a few of the situations that can warrant hiring an outsource Chief Marketing Officer.

For more information about outsourcing your marketing, contract CMO for Hire Jennifer Beever today.

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Outside Expertise for Your Startup

I recently read a great post by Charlie O’Donnell on the Minimum Viable Team for startups.  He started with the core questions:

You have a million things to get done at your startup, yet you only have a handful of people to do them. How are you ever going to get it done? Who should you hire? What should be the makeup of a founding team? What is the Minimum Viable Team, if you will, for a startup?

After he worked through the core functions:

    1. Engineering
    2. Marketing
    3. Sales
    4. Business development
    5. PR
    6. Design
    7. Product Management
    8. HR
    9. Operations
    10. Finance

he arrived at a three person startup team:

    1. “Outside person”
    2. “Customer experience”
    3. “Builder”

One aspect that Charlie left out except for a brief mention of PR was that this Minimum Viable Team likely needs a lot of support from outside experts.  As a 3 person core team, you simply won’t have expertise or time to address all the core functions yourself.

What do you do?  The answer is that you need to engage outside expertise, but you need to do it in a smart way.

Technology/Engineer – I’ve talked about the need for outside CTO expertise a lot before: Startup CTO or Developer, Startup Founder Developer Gap, Part-Time CTO, Technology Advisor, CTO Founder, Acting CTO.

Finance – The same issues come up around Finance.  Are you setting things up correctly?  Are you engaging correctly with a bookkeeper?  Does your early efforts support proving out your business model?  All of this can be addressed by a Part-Time CFO.

Legal – Of course, you need legal support for corporate formation, employment agreements, etc.  You need to look outside for that.

and the list continues with HR, Marketing, PR, etc.  There are outside experts available.  And there are lots of outside experts who can help from a CEO / business coaching standpoint.  This obviously relates closely to the Startup Specialist Timeline.  We mention Interim CxO – interim CTO, interim CEO, interim CFO, interim CMO, etc.

StartupSpecialistTimeline

In later posts, we will get into how you can effectively engage this kind of expertise when you are early-stage and cash constrained.

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Los Angeles Startup Ecosystem

A robust, vibrant startup ecosystem has always existed in Southern California, but recently it’s reached a whole new level.   What’s often not well represented is the incredible resources through individuals and firms available in all sorts of ways to help entrepreneurs.

This is partly captured by by Represent LA in their map of startups, accelerators, incubators, coworking facilities, investors, service providers and events:

image

And this really only partially covers what’s going on.  You can certainly find great coverage and lots of events to give you a sense of this.

Great Coverage

Lots of interesting bloggers and information sources as can be found via Socal Tech Central (sign up for the Daily updates) and certainly the leading source of content is found in Ben Kuo’s SoCalTech.

Tons of Events

There are numerous Los Angeles Startup Events and several great startup calendars:

Network of Experts

What entrepreneurs often need is access to specific resources that can help them with problems they face in their startup.  My experience with my own startups and working with lots of other startups, is that you have all of the same kinds of issues that larger companies have, but you don’t have the people involved who have specialized knowledge and skills.  Having a network is critical to getting help with specific issues.

Really, I started Startup Specialist Network because I constantly needed to find people to help with specific issues.  Going through normal networking channels just took too much time.  Especially, when I’m talking to almost one new startup each day because of my Free Startup CTO Consulting sessions.

The reality is that there’s a robust community of people who regularly work with early-stage companies and can provide the expertise needed.  They engage at different stages in the life of a typical startup:

image

What’s great about the Startup Specialist Network is that we have quick access to people who bring expertise in specific areas.  Early-on it might be the need for a consulting CFO, CTO, CMO.  As the startup grows, the problems grow and firms may be engaged to handle larger sets of needs.

The key for an entrepreneur is knowing that they are doing things right without having to spend time solving particular issues.  Obviously, the robust network of experts that exists in Los Angeles makes that significantly easier.

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