Starting a New Business

1. Unix Users Association of Southern California May 11, 2009 Starting a New Business

2. Overview • Introduction • General • Why? • Getting Started • Legal Options • Location Options • Solo Consulting Practice • Legal Issues • Accounting and Taxes • Finding Clients • Shooting for the Moon • Incubators • Resources • Investors • Other Resources

3. Introduction – What do I know? • Consulted for about 10 years, 5 as a solo practice • Employee of 5 different startups • Eventual IPO: TCSI, Meta-Software, GetThere (Internet Travel Network) • On the runway: LeisureLink • Failures: TRW spinout • But don’t take my word for it – talk to as many people as you can • Disclaimer: Use this free advice at your own risk!

4. Getting Started – First Steps • Formulate a plan and goals • Research as much as possible • Plan financials • Identify (preferably land) first customer • Choose a name and legal structure • Print business cards • Sell yourself (or at least your services) • Go to work

5. Legal Stuff • If you used your previous employer’s resources or paid time to develop your idea, your employer owns the idea • Legal Structure • Sole Proprietor • S Corporation • Not for those planning venture capital raising or IPOs • Limited Liability Company • C Corporation • Licenses, zoning ordinances, etc. • IRS Employer Identification Number • Liability Insurance • The Legal Guide for Starting & Running a Small Business – Nolo Press (nolo.com)

6. Locations • Your garage/loft • Home office deduction • Client sites • Renting an office • Incubators (less of an option for consultants)

7. Accounting • Track your financials • Know all your expenses for deductions • Create invoices for customers • Record keeping for the IRS • Accounting software: • Excel or other spreadsheet • Quickbooks • Peachtree • Niche accounting for your specialty

8. Taxes • You are both employer and employee • Pay employer’s Social Security, SDI, etc. • 1099 vs. W-2 (Contractor vs. Employee) • Affects and affected by your legal structure • IRS’ 10 Questions • 1099 Pros: • Generally more profitable • Tax deductions • W-2 Pros: • Less IRS paperwork, • Less likely to trigger an audit • Some clients insist you are ultimately paid by W-2

9. 1099 Options • True, direct outside consultant with 1099 filed • Intermediary agencies (pass-throughs) • Pay you as a W-2 employee while maintaining a 1099 relationship with your client and numerous other firms • Keep a percentage of their services • Varying level of services and benefits • Some even offer some benefits, but the second you are without a contract, you are unemployed • The more benefits, the bigger their cut • Part-time employee on W-2

10. Consulting Contracts • Get it in Writing!! • Detail work and requirements as much as practical • Rate and Payments • Disclaimers, waivers, etc. • Sources for examples • Canned consulting contracts • The web • Borrow an existing contract

11. Finding Clients • Network, Network, Network • Old colleagues and friends • If (when) you’re desperate, troll job boards • Do not plan to land your first customer this way • Agencies, head hunters, pass-throughs

12. Changing gears to Launching a Tech Startup • So… • you’ve got an idea… • And you’ve always wanted to own your own company… • And maybe you even dream of making it big… • But, be prepared to… • Work really long hours, • Make the coffee, clean the office, buy pencils, • Lie awake at night worrying about deadlines, sales, employees, investors, legal stuff, and whether you are getting enough sleep

13. The Business Plan • Slides explaining your idea(s), but more importantly, explaining how you will make money with your idea(s) • What is your idea, and why will people pay for it? • What do you need to do to build or your product(s)? • How much money do you need for R&D? • Who are your customers, how many are there potentially, and how will you reach them? • How much money do you need for Sales and Marketing? • Who are your competitors and what are your roadblocks? • How much will you make per sale, per year? • Tool to recruit employees and most especially, investors • How much investment will you need, and how will you spend it, and how long will it last? • What is your “exit”? • Many books and web sites on writing a business plan

14. Incubators • Typically not for consultants • Share resources • Lobby, reception, copier, phone system, network, kitchen, conference rooms • Close contact with fellow entrepreneurs • Camaraderie, mentoring • Share ideas, even partner with fellow tenants • Advice from others who have done exactly what you are doing • Referrals for lawyers, accountants, consultants, etc. • Source of introductions to investors

15. Incubator Facilities • LA CDC Business Technology Center • Altadena • County run • Economically distressed zone • Orange County Digital Media Center • Santa Ana • Rancho Santiago Community College affiliated • Digital music and video oriented • Idealab • Pasadena • Private, for profit • Overture, eToys, CitySearch, … • Founded by Bill Gross (not the PIMCO Bill Gross)

16. Entrepreneurial Resources • Incubators • Professional Organizations • OCTANe • Tech Coast Venture Network • Orange County Business Incubation Network (UCI affiliated, creates various incubators) • IEEE Orange County Entrepreneurs' Network • Others • Executive Networks

17. Angel Investors • You, your relatives, friends, and mentors • Wealthy individuals interested in investing in small companies • Usually opportunities too early or small for VCs • Less capital than VCs • Professional angel investors • Tech Coast Angels • Pasadena Angels

18. Venture Capitalists • Professional money managers • Primary goal is their Return on Investment, not necessarily your success • Not even 1 in 10 investments succeeds • 10:1 or even 20:1 ROI prospects • Structure your pitch and business plan accordingly • HIGHLY recommend “High Tech Startup” – John Nesheim

19. Finding Angel Investors and Venture Capitalists • Investors scout entrepreneurial groups • Incubators • Executive networks • Entrepreneur Organizations • Friends and colleagues • Fellow entrepreneurs and business owners • Always have your elevator pitch ready

20. Making the Pitch • Present your business plan – 30 minute presentation • Review it and practice it in advance • The VC wants… • A reasonable plan to make him 10:1 on his investment, or 25% annually • Smart and passionate management • Experienced management – people who have “seen the movie.” • Barriers to competition – “the moat,” an “unfair” advantage • Exit options • 1 in 10 get to pitch, 1 in 10 who pitch get funds • Pitch to as many VC as will listen • Don’t count on just one investor • You can negotiate among multiple deals • Typically takes a year from start of process to close

21. The Term Sheet • The investors’ financial and legal terms, including: • How much money they will provide, on what schedule, for how much ownership of the firm • How many people will represent the investors on your Board of Directors • What positions in your firm will be filled by the investors • Typically has an expiration date • Review with an attorney familiar with term sheets • The money isn’t yours until you deposit the check!! • VC have been known to cancel signed deals • Expect to own much, much less than 50% • Less than 4% at IPO is typical

22. Other Funding Sources • Banks generally want 5 years of successful financial history • Exception: Silicon Valley Bank • Equipment leasing with payment in some stock in lieu of cash • Vencore, EMC? • Your credit cards, savings, and mortgage

23. Life in a Start-Up • Draw a reasonable salary for yourself once you’re funded • Expect tremendous personal reward as you realize your ideas and grow the firm • Expect tremendous stress from running the business, from investors, from employees • Your personal life will suffer • Always seeking to reach/maintain hockey stick growth • Beware “Founder’s Syndrome” • Investors will take some control • Professional managers generally do their specific jobs better than you • Find a mentor

24. The Finish Line • Initial Public Offering (IPO) • Hire a CFO who has done it • Relatively tough regulatory climate in the US • Acquisition by a industry conglomerate or competitor