Jeff Clavier's Software Only

How about friends and family financing ?

Quite a bit of discussion took place in the comments and offline following my post on accredited investors, especially as it relates to friends and family financing. These investors will typically be “easier” to convince to support and finance your idea, but at the same time they might not qualify for the accreditation as defined by the law.

So what can you do as a young entrepreneur/team needing some cash? First order: can your savings and credit cards get you anywhere meaningful? Second: in order to avoid being stuck between a rock and a hard place, a loan that will be re-imbursed as opposed to converting into the next round of equity financing might be a temporary solution. Unfortunately for the unaccredited lender, he/she will not be able to benefit from that early support through the perks angels typically get: discount to Series A, warrant coverage, etc. because only accredited investors can acquire equity. And once again, you want to make sure that this is a solution that works legally (for the nth time - I am no lawyer).

Coming back to this set of rules and regulations: they have put in place ages ago to protect investors, and make sure they do not end up involved in highly risky illiquid investments like... financing startups. Not only is this exercise not for the faint of heart - because of the ups and downs startups go through during the initial 2 to 3 years - but probabilistically most of the investments angels will make will end up hitting the wall.

Of course, everyone's goal is to beat the odds, it just does not always happen. Quite the contrary.

Why startups must only take financing from accredited investors

Seed stage investing is getting very busy these days, and over the past few months I have started hearing about companies taking money in small amounts from a large number of friends and family investors. Easy money ? Maybe, but…

Whilst it is great to get that kind of support from your close circle, it often involves investors who are not accredited. The accreditation has nothing to do with the sophistication of the investor, nor having gone through a formal exam but a set of criteria clearly defined by the SEC (Rule 501(a) under the Securities Act of 1933) – which are related to a minimum level of yearly income or a minimum NAV (net asset value).

Not complying with this rule, which means – yes – turning money down, will come back and haunt you down the road when it is time to further finance or sell your company. Just as an example: unaccredited investors can rescind their investment at any time – that means they can ask for their money back. You should also get your personal investors to sign a statement regarding their accreditation.

I have been meaning to write this post since I have given this advice 4 or 5 times in the past two weeks (in the context: How/From whom do I raise my initial capital ?), and Brad Feld has beaten me to it: check out his post (and the second comment) for more detailed problems you will be facing if you don’t respect that advice rule.

PS: As I am at it – I apologize to the 50 or so startups that have recently sent me some information about their deal. I am completely swamped and therefore my response/feedback might take a few more days (or weeks ?) to come.

PPS: Should I really go to bed for just one hour ?

Hornik's Deal or No Deal: There is always a price

Damn I should be sleeping by now, but I could not help reading buddy David Hornik’s last post: “Google/Yahoo: Deal or No Deal” in which he makes an interesting analogy between the eponymous US TV show and early startup M&As. It is a well written post that is worth the read.

As large Internet companies maintain or increase their M&A activities, several entrepreneurs and/or founders teams will be faced by this dilemna: should we sell now and reap the benefits of our efforts at a current price (potentially leaving future gains on the table) vs. should we push further and hope for a higher exit value (at the risk of taking additional dilution or not seeing any increase in value).

Each case is different, and depends on the hopes, expectations and situations of the teams. In my experience, there is a “magic number” between $5M and $15M per founder that makes a deal a no-brainer, especially if this is their first hit. Whatever the number, it is one that can materially improve their living conditions.

I will also suggest this: because of the increased chatter about Bubble 2.0 – either one we are in, or are about to see coming – first time entrepreneurs having an early exit opportunity will tend to take a conservative view as to their future prospects –leading them to consider an early sale perhaps more favorably than otherwise, if less people were crying wolf bubble.

Jason (Calacanis) has added his two cents to the conversation, and for him, it is essentially about the number of times an entrepreneur can say No to acquisition offers.

Delaware re-incorporation and entity conversion just got easier

Startup companies sometimes need to re-incorporate in Delaware if they did their incorporation in a state where corporate law is deemed less friendly to business operations or investments. Other times, it is the legal structure which has to be changed (say from an LLC to a C Corp).

Brad Feld has started a useful set of posts on the topic a while back, and just mentioned that both changes got easier in Delaware:

The first innovation (Section 265 of DCGL – Delaware Corporate General Law) creates a simpler process for the reincorporation of non-Delaware corporations in Delaware (through a one-step "conversion" rather than through the traditional but cumbersome reverse merger of the non-Delaware corporation into a wholly-owned Delaware sub.) In English - if you are incorporated in a state other than Delaware and want to reincorporate in Delaware - it's now a lot easier.

The second innovation allows for the one-step conversion of non-Delaware limited liability companies into Delaware corporations.  These conversions/reincorporations have historically required 2 steps - for instance, an Ohio LLC would be merged into a newly-formed Delaware LLC, and then that Delaware LLC would be converted into a Delaware corporation.  Now you can go from an Ohio LLC to a Delaware corporation in one step.  This eliminates one of my main objections to LLC’s that I wrote about in S-Corp’s vs. LLC’s.

A California incorporation is acceptable for most startups, but VCs will sometimes ask for the company to re-incorporate in Delaware. It is therefore good news that it got easier, which hopefully means cheaper as well.

Speaker update for the The Search for Attention - March 16th 6:30pm @ AOL - Featuring Memeorandum, Root Markets & Technorati

Dick Costolo is unfortunately grounded in Chicago by a snow storm, and he will be replaced by TechCrunch’s Mike Arrington in tonight’s session on “The Search for Attention”.

Information overload has become the typical issue of anyone using the web to access or search for nuggets of information. Both the search and the subscription paradigms lead to countless results, posts, articles that one needs to sift through to extract relevant facts. Using Attention metadata (blog subscriptions, document hyperlinks, URLs and keywords entered by a web user,…) is one of the mechanisms infrastructure providers will use to elevate relevant pieces of information – as demonstrated today by the first generation of meme trackers (like Memeorandum, TailRank,…).

Our host for the March session of the Search SIG is one of the pioneers of the Attention movement: Steve Gillmor, as the co-founder of the AttentionTrust and co-creator of the original Attention.xml specification with Technorati’s Dave Sifry, has evangelized the growing importance of Attention metadata over the past two years. He is also the host of the famous podcasting series: Gillmor Gang, Gillmor Daily and AttentionTech.

Steve will be joined by TechCrunch’s Mike Arrington and a group of startup founders who have developed key pieces of infrastructure of the nascent Attention economy:

• Gabe Rivera, Memeorandum
• David Sifry, Technorati
• Seth Goldstein, Root Markets

The session will take place (tonight) on March 16th, at AOL’s Silicon Valley Campus in the Shasta Conference Room (Building 12), 401 Ellis Street, Mountain View, CA – map event. We are very grateful to AOL for hosting us for the first time. 

The now well established Search SIG Agenda format will be used:

6:30-7:00pm - Registration / Food & Drink
7:00–7:05pm - A few words about the Search SIG
7:05-8:15pm - Act I: the Search for Attention, a panel discussion with the Attention Gang
8:15-8:30pm - Intermission: Search Networking & Geeking Out
8:30-9:00pm - Act II: Product Demos from GestureBank, Root Markets, Memeorandum & Technorati – and Q&A with the audience
9:00-9:15pm - Open Mike Geek: Announcements (30 seconds of fame & fortune)
9:16pm - You Don’t Have To Go Home, But You Can’t Stay Here

Please pre-register on the SDForum site to speed up the sign-up at AOL, and allow us to plan pizza and beverages. Attendance is free for SDForum members, and charge is $15 for non-members.

Directions to the AOL Campus:

• Take the Ellis St. on 101
• Turn Right on Ellis if you are driving down from San Francisco, or Left if you driving up from San Jose
• AOL is located about 3 blocks down on the left hand side.  It is a 3 story mirrored glass building. 

Note:  If you get to the light at Middlefield you have gone to far and need to come back a block. 

Tags: listing,events,searchsig,94043, Mountain View California, USA

Podcasting news: PodTech.net's funding and TalkCrunch's first show

Busy evening on the podcasting front: first came the inaugural show of a new weekly podcast, TalkCrunch. Given the highly recognizable brand, you won't be surprised to listen to the audio extension of TechCrunch. The first show is about events and calendars, and you can subscribe to the feed here.

The second piece of news that I am delighted to relay is the Series A funding of PodTech.net, the podcast production company of John Furrier: the company just raised $5.5M (!!!) from US Venture Partners and Venrock Associates. Over the past year, John has tirelessly recorded and produced hundreds of shows with entrepreneurs, VCs, lawyers and senior executives - creating a market and a business model for himself and his growing team on both the consumer and the corporate side. It is not common for VC investments to get into content creation - traditionally a space where revenue multiples don't exceed 3 to 4.

Here a brief overview of PodTech.net's products:

PodTech is well known for its innovative InfoTalk™ podcast which has established itself as the leading Silicon Valley technology and business podcast. The Silicon Valley InfoTalk™ podcast has been host to some of the biggest names in technology and business. Notable personalities include Steve Forbes, Mark Cuban, and Sandy Berger, and hundreds of technology and media moguls. In addition PodTech has attracted leading corporations that include Yahoo, Intel, IBM, Juniper, among others.

In the past few months PodTech has innovated and expanded the InfoTalk model to include a new set of podcast media offerings. With this financing announcement, PodTech is launching the following media properties:

• PodTech News: Dedicated independent podcasting news team
• PodTech InfoTalk™ Network: Dedicated set of PodTech original and 3rd party podcasting content
• PodTech Sponsorship Network: Aggregated set of sponsors and paid content

Congrats John, it is fantastic news and I am really delighted for you, Linda and the team. You just have to add these Loomia recommendations we have been talking about.

More:

• Press release announcing the funding.
• Matt Marshall got the first analysis out (NPR is already heavily into podcasting by the way) .

S3's launch and the forthcoming Storage 2.0 bloodbath

One of the companies I led a discussion on at the TechDirt Greenhouse last week was Openomy, which is a small storage startup developed by two young entrepreneurs. Openomy’s pitch was that their Open API was a key differentiator as compared to their competition (great overview on TechCrunch here).

My comment to them was that their differentiation (having open APIs) would only last a week (it was more an image than an inside knowledge of Amazon’s announcement), and that an ad-supported storage offering was challenging from two standpoint: one, the idea of a company crawling my personal files and data to ad-target me freaks me out – sort of implying that I have darker secrets on my hard drive than my gmail archive – and two, the notion of using ad support in a storage context was far fetched. Unlike so many other Web 2.0 companies storage and bandwidth are still expensive at scale, and storage does not benefit from economies of scale delivered by web caches. I likened this offering with the free ISP’s of the late 90’s that all disappeared from the face of the earth. One of my comments is that I was expecting a bloodbath in the online storage market b/c of the large number of companies attempting to penetrate it, as big as that market is.

Fast forward 3 days (gee), Amazon.com announced S3 (for “Simple Storage System”) yesterday, a grid storage infrastructure that is available through a set of web APIs at a cheap cost of $15c per GB of storage (per month) and $20c per GB of bandwidth used. It is actually interesting that Amazon decided to meter both elements.

Because of the economies of scale available to Amazon, it is clear that their cost of provisioning is much lower than any startup can hope to reach (unless it has built a unique storage back-end). Will all Storage 2.0 startups jump on S3 and use it as a wholesale filesystem, building their differentiation in the application and services they will develop on top ? I don’t think that this will be sustainable in the long term, especially as 1Gb of bandwidth can be provisioned for less than $20c at scale. However, as Mike Arrington wrote, it is going to create an additional pressure on all the companies looking at competing in the space, for which the cheap and dirty online backup is no longer the killer app.

Note that I am not saying that it is no longer possible to create interesting Storage 2.0 companies, it still was last week with the expected release of G-Drive, and it still is today. It just became harder.

 

If you are still wondering whether to buy an EVDO card - read this

It has been a few days since I bought an EVDO card (using the excuse that my new office would not have Internet access for about a week), and I must say that I am totally bought in: this is the best productivity tool I have bought in a while, both in terms of convenience and time saved.

Time saved can be measured in the (sometime long) minutes one has to spend testing, configuring and sometimes paying for Wifi access. Convenience is due to the ability to access the Net during a “downtime” (like this morning when I waited for the airport shuttle) where this was no Wifi access point around.

Add to this the fact that the first couple of hours of a large conference is generally spent screwing around with a non-working Wifi (apparently Etech’s attendees faced that last week), and you will very quickly rationalize that $60 to $80 a month is *nothing*.

I for one had hesitated for a while not beig sure of the actual usage I would have of an EVDO contract, I thought I would help those of you who are facing the same interrogation.

PS: Stewart Alsop in the comments points out that this is also a solution for people riding buses or trains or cars (not the drivers!). I actually experimented this last week, going down highway 101 whilst IM'ing a friend.

PPS: Many PC Forum attendees are going through that time-wasting exercise of switching from one hotspot to the next. In the meantime Dan Farber and I are blogging. 'nough said.

Josh Kopelman has avoided it for a long time - but he's finally done it: he blogs

It is with delight that I have discovered that my friend Josh Kopelman, the Managing Director of First Round Capital, and one of the early stage investors I respect the most, has finally given up and has launched his blog a few days ago. “Redeye VC” relates to the fact that Josh seems to exclusively fly the redeye from SFO to Philadelphia, his home base. Here is his feed.

In his first post, Josh tries to explain why he has taken so much time to give in: #4 rings so true (it is 4:29am as I type this on Sunday morning).

4. I don't have the time.
There are currently 364 unanswered emails in my inbox.  I have 14 phone calls to return.  Six meetings a day.  I'm currently sitting on the redeye flying back from SFO to PHL. I have a wife.  Two kids.  If I had an extra hour a day, I'd rather spend it sleeping.

When the music stops is also worth the read.

Welcome Dude, about time!

Off to PC Forum

Another day, another conference. In 4 hours, I will head down to Carlsbad  with Keith Teare and Mike Arrington for PC Forum, where Edgeio will be one of the presenting companies. If you are also attending and want to meet up, feel free to get in touch (jeff [dot] clavier [at] gmail [dot] com)

Talking about Edgeio (and remember that I am an investor/advisor), check out the new Instant Add feature that was just implemented. It is one of the many features in the pipeline to make publishing to Edgeio easier (and easier). Keith also talks about it.

PS: Bringing the two topics together, Edgeio will present at PC Forum at 2:15pm on Monday 3/13 in Salon B.

Tags: pcforum2006, edgeio