Category: Startups

Where I Add to the Pile of Opinion Regarding Corporations vs. LLCs for Startups

I got another (non-client) question about whether I prefer corporations or LLCs for startups.

Short Answer:

It depends.

Long-Winded Answer:

I have found that an LLC will often provide more flexibility in terms of division of rights and responsibilities from the default rules in many business entity statutes.  In addition, there is more flexibility in terms of pass-through tax treatment with an LLC than with a corporation, even with a Subchapter S election.

If there are a small number of owners, or it is owned by a single person, they can usually get to the same result regardless of the entity type.  In that case, the most important thing is to have some type of limited liability entity in place, and a corporation and an LLC are similar enough that the same results can be achieved through a variety of strategies.

Many people suggest a corporation because it is easier to attract investors, but that is not necessarily the case.  Only a small portion of small businesses attract the type of institutional investors (such as venture capital firms) that would require the company be organized as a corporation.  Investors in some industries may expect specific organizational forms for their investment.  For example, real estate or natural resources investors may expect the company to use a limited partnership.

If an entrepreneur is in discussions with, or knows it may want to approach, an investor prior to organization, the investor’s concerns can be met up front.  However, in the beginning the organizational form should be driven by the entrepreneur’s and business’ needs.  Unless the entrepreneur knows who will make the investment and what their criteria is, there is no way to predict the terms up front as every situation is different, and there is likely to be some required restructuring done prior to the investment in any case.

Startup Tips and Lessons from Zynga: Knowing When To Step Aside

Sometimes the skills needed to start a company are different from the skills needed to run a company.

Cross-posted at My Gamasutra Blog.

Earlier this week, Zynga made an announcement that was not too surprising to folks following the company.  Mark Pincus was out as CEO.

Zynga was a high-flying casual game developer sailing on the winds of its relationship with Facebook.  Zynga described itself as “the world’s leading social game developer.”  It went public in December 2011 at $10.00/share, and its stock price had traded as high as $14.69/share in early 2012.

Since that time, Zynga’s fortunes have fallen.  Its stock has traded below $4.00/share since Summer 2012 as its daily and monthly active users declined and it continued to lose a lot of money.

What was surprising was the Pincus was staying on as Chief Product Officer and Chairman of the Board.

In addition, reports state that Don Mattrick, the new CEO, was chosen by Pincus as his successor.  Pincus was quoted as saying:

“that if I could find someone who could do a better job as our CEO I’d do all I could to recruit and bring that person in. I’m confident that Don is that leader.”

So, what are the lessons here for startups, particularly tech startups?

I’ve previously written about how startups need people different skillsets at different points in their maturity.*  What is remarkable in the Zynga story is that Pincus seemed to understand that Zynga had grown past his skillset as a CEO, and a different kind of leader at this point in its development.

Most founders, even those that do not name the company after a beloved pet, consider that company to be “their baby,” even after taking VC money and public investor money.  They have nurtured the company from idea-to-business, and they believe that they should maintain control of it, even in the face of mounting evidence to the contrary, like, say, gigantic losses of money and declining user numbers, prying a founder out of a controlling role can be difficult and painful.  This can be particularly painful for the founder, who may be faced with a loss of confidence and sense of shame despite the company he or she may have built.

Pincus will continue to have a powerful role at Zynga, particularly as one of the two members of the Executive Committee of the Board of Directors.  However, if the reports of how this transfer of power took place are accurate, Pincus should be commended for his maturity and foresight in recognizing the changing needs of Zynga.

Or maybe he should be admired for his strategic foresight in maintaining a powerful role before being dispatched entirely by the Board of Directors and angry shareholders.  Maybe Mafia Wars does prepare you for real life after all.

*For Gamasutra readers, see here for a discussion of how companies begin to need salespeople as they mature, a position that founders may not be suitable.

Winklevoss Twins (Of Facebook Fame) To Create A Bitcoin ETF

The Winklevoss Twins, best known for their supporting role in the early Facebook saga, have filed a fascinating registration statement. The Winklevoss Bitcoin Trust has made a filing with the SEC to register around $20 million of Winklevoss Bitcoin Shares.

The point of this investment will be to reflect the performance of the “Blended Bitcoin Price” of Bitcoins. This price is the weighted average market price of Bitcoins on Bitcoin exchanges chosen by the Winklevosses.

The Winklevosses intend for the Trust to hold Bitcoins “using the Trust’s proprietary Security System,” whatever that means for a digital asset.

While this is sort of novel and interesting in its own way, what I found most fascinating is the fact that the financial statements filed with the Form S-1 were blank. Completely blank.

While initial registration statement filings often contain blanks, I’ve never seen “Form of Financial Statements” before. Financial statements may change over the course of a filing history, such as in response to SEC comments. However, it will be interesting to see if the SEC sends the Winklevosses a bedbug letter for this filing.

Best line from The Social Network.

Startup Tips: Knowing When To Add Salespeople

When you work in the startup world, you see it over and over again.  A company has founders, a product and, maybe, some angel or friends and family investors.  It is time to get that product out the door and some cash in your pocket.

Many founders believe that their wonderful and innovative idea combined with their passion will explode into sales.  This is not always the case, particularly when your target market is other businesses.

Being an inventor, administrator, financier or (even) attorney is not the same thing as being a salesman.  Selling is a talent and a skill.  Not everyone is born with the ability to sell.  Not everyone has taken the time to develop this particular skill.  However, if your business depends on personal sales calls to buyers, whether they are end users or intermediaries, you may want to consider whether you should hire a dedicated salesperson.

Generally, when the product has been tested and is ready for entry into the market, it is a good time for the startup to have a committed salesperson on board.  Preferably that person would know the industry and show up with a ready-made contact list, as ‘Rolodex’ is so-old economy.  However, even a person who has sales experience and can understand the product will be preferable to an inventor or founder who may not have the right experience to turn an opportunity into revenue.

SEC Highlights Warnings About Unregistered Broker-Dealers in Private Oil And Gas Offerings

The SEC is taking notice of private oil and gas offerings and has increased its scrutiny of these deals. They have noted the recent increase in fraud cases for these deals at the federal and state levels. Thus, the SEC has released an Investor Alert for Private Oil and Gas Offerings. And the first thing they recommend to investors approached to invest?

“Is the person recommending the investment registered? Most people offering you securities must be registered as a broker with the SEC and must be a member of the Financial Industry Regulatory Authority, or FINRA.”

The SEC cautions that being registered is not a seal of approval and that there may be conflicts of interest between the broker-dealer and the issuer.

In a general alert regarding the oil and gas industry, it is not surprising to find the SEC focused on the broker-dealer issue. Many advisors (including this writer) have been approached to sign off on an offering sales arrangement without a licensed broker-dealer with the explanation that:

  • “I do this all the time and it has never been a problem.”
  • “I am not acting as a broker-dealer, just a consultant who gets paid when the investment closes.”

Unfortunately for the would-be commission-eers, the SEC and state securities authorities do not share that analysis.

As the SEC said in the alert:

“If someone who is not registered solicits your investment, that person may be violating the law. One exception from broker registration is available to employees of the company offering the securities and who engage in strictly limited sales activities. If you aren’t consulting a registered broker or adviser, you should consider doing so. A registered broker or adviser that is familiar with the oil and gas industry and not connected to the offering can help you analyze the investment. Most importantly, working with a registered broker or investment adviser affords you certain legal protections.”

The SEC then illustrated benefits of using a licensed professional to assist in the investment decision:

Keep in mind that if the investment opportunity is an outright fraud, the written materials may look legitimate and every question you have about the opportunity may be answered to your satisfaction, but that doesn’t make any of it true. It is important to conduct your own independent research. One good way to do that may be to engage an investment professional specializing in oil and gas.”

It should be instructive to practitioners that in the course of a general industry investor alert, the SEC chose to highlight the risks of dealing with unlicensed broker-dealers. They are still clearly focused on this issue. Although some bad actors promote these deals, hoping to stay under the radar is a bad strategy for the promoter, issuer and investor.

Google Buys Waze, Among Biggest Startup Exits Of The Year

Deal demonstrates need for growth in mobile applications.

Waze, a community-based traffic and navigation app whose users share real-time traffic and road info, announced it was being acquired by Google.

Google confirmed the acquisition and noted that the Waze team will remain in Israel and operate separately for now.

The purchase price was reportedly in excess of $1 billion, rivaling Yahoo!’s purchase of Tumblr for mega-deals for private tech companies this year.  Deal terms were not announced, but a even a cash deal would not be a problem for Google as it had over $15 billion in cash at March 31, 2013.

Waze has been the subject of acquisition rumors for months, with many of tech’s biggest names as purported acquirors, including Apple and Facebook.  This deal demonstrates again that while “social” is okay for a business strategy, it is “mobile” that is driving growth.