innovation bootcamp - innovateup - innovate up · innovation bootcamp starting an innovation-based...

SDInnoUp

Innovation BootcampStart ing an innovat ion-based business

innovate-up.com

A program of The Brink SBDC at USD

AGENDA• introductions

• Baseline PMFLO

• innovation vs traditional business

• legal formation

• intellectual property

• financing

• getting help

SDInnoUpinnovate-up.com

INTRODUCTIONS

name

company

30 second pitch


PMFLO


INNO VS TRADT’L

• scale (10x in 5yrs)

• exit expected

• less tangible

• nontraditional finance

• IP or trade secret likely


• $ for time

• owner/founder forever

• brick & mortar | service

• bankable

• IP or trade secret less prevalent

innovation traditional

LEGAL FORMATION• sole proprietorship

• general partnership

• limited liability company

• C corporation

• S corporation

• B corporation


LEGAL FORMATION


ISSUES TO CONSIDER

Funding: Does the business intend to seek venture capital?Tax Issues: Can the business partners benefit from a pass-through entity?Business Considerations: Do you run a business that entails high-risk activities?Special Issues for certain Professionals: Lawyers, Architects & Accountants can only use the form of Limited Liability Partnerships. Service Providers cannot use the Limited Liability Company structure.CA Secretary of State website: www.sos.ca.gov

LEGAL FORMATIONsole proprietor

(sole proprietorship)

most basic and simple form of legal business structure

unincorporated business with one owner or jointly owned by a married couple


• One owner

• Freelance/Independent Contractor status

• No filings necessary with the CA Secretary of State

• Check with the County and City for local business registration requirements. If using a name other then your surname: file the Fictitious Business Name with your County.

• Pass-Through Taxation: business income is reported on your individual income tax return; you can offset any losses against income earned from other sources.

• Personal Liability: any personal property which you own is on the line for business-related debts and any lawsuits or claims against the business.

• Insurance: you can obtain insurance to protect the business and yourself as its owner; however, insurance never covers business debts (money owed to creditors/suppliers).

LEGAL FORMATIONgeneral

partnershipunincorporated business with two or more

owners


• Two or more owners doing business together

• No filings necessary with the CA Secretary of State

• Check with the County and City for local business registration requirements. If using a name other then your surname: file the Fictitious Business Name with your County.

• Federal Employer Identification Number (Form SS-4)

• Partnership Agreement: not obligatory, but helpful to set out responsibilities of each partner, profit/loss allocation amongst partners & handling disputes. If you do not have a Partnership Agreement in place, the CA Revised Uniform Partnership Act kicks in: each partner has an equal share in profits/losses, each partner has equal management power, need agreement of all partners to add a new partner to the partnership.

LEGAL FORMATIONgeneral

partnershipunincorporated business with two or more

owners


Pass-Through Taxation: business income is reported by each partner on their individual

income tax return; losses can be offset against income earned from other sources. The partnership still has to file a tax return

with the IRS for informational purposes (FORM 1065).

Personal Liability: each general partner is personally liable for all business debts and

court judgments, regardless of which partner actually made the transaction on

behalf of the partnership; ie: the actions of one partner can result in personal liability

for all the other partners.

LEGAL FORMATIONLLC

(limited liability company)

registered business with limited liability for all

members


• Form of legal entity created in the early

1990’s: pass-through entity regarding taxes

(taxes paid on each member’s individual tax

return) and personal liability protection.

Cannot be used by professional service

providers (ie: rendering a service pursuant to

a license, certification or registration).

• One or more members

• Filings necessary with the CA Secretary of

State ($70)

• Pay CA Franchise Tax Board (minimum

annual tax of $800)

• Federal Employer Identification Number

(Form SS-4)

• Check with the County and City for local

business registration requirements

LEGAL FORMATIONLLC

(limited liability company)

registered business with limited liability for all members


• If using a name other then the corporate name: file the Fictitious Business Name with your County.

• Limited Personal Liability: generally the members of the LLC are not personally liable for the business debts. Each members’ personal assets are protected from LLC creditors. However, members are not protected from negligent or intentional acts and are liable for any breach of fiduciary duty (any fraudulent or illegal behavior; not acting in the best interest of the LLC).

• Pass-Through Taxation (if more than one owner: Form 1065 must be filed for informational purposes with the IRS). However, the LLC can chose to be taxed at the corporate level.

• Filing fees and minimum annual tax due to the FTB.

• Administrative Paperwork: Prepare and file Articles of Organization with the CA Secretary of State.

• Unappealing structure for Venture Capitalists (the “standard” for VCs is the C Corp format allowing for the issuance of common stock and convertible preferred stock).

LEGAL FORMATIONC Corp

(certified corporation)

incorporated business composed of shareholders, directors, and officers


• “C” refers to Subchapter C of the Internal Revenue Code (“IRC”). Profits are taxed twice: at the corporate level and again when distributed to equity holders (shareholders).

• The C Corp is a separate legal entity from its owners.

• File paperwork with the CA Secretary of State ($100 filing fee).

• CA Franchise Tax Board ($800 minimum annual tax owed; however, waived on first taxable year).

• Federal Employer Identification Number (Form SS-4).

• Check with the County and City for local business registration requirements.





If using a name other then the corporate name: file the Fictitious Business Name with your County.

Limited Personal Liability: owners are not liable for the business debts. However, owners are not

protected from negligent or intentional acts and are liable for any breach of fiduciary duty (any

fraudulent or illegal behavior; not acting in the best interest of the corporation).

“Piercing the Corporate Veil:” Legal doctrine which allows Courts to make owners personally liable for business debts if the Courts deem that the owners

are not treating the corporation as a separate entity (eg: treating corporate accounts as personal

funds).





Taxation: C Corp must pay taxes on profits made (salaries are deductible). Double taxation kicks in when the corporation

distributes dividends to shareholders who are not employees of the corporation (dividends are

not deductible: so taxed once as part of the corporation’s profit and then taxed a second time when received by the shareholder when

reported in his income taxes).Corporate Governance: Articles of

Incorporation, Corporate Bylaws, Written Consents of the Board of Directors and Written Consents of the Shareholders, Statement by Domestic Stock Corporation and Securities

Laws regarding Stock Issuances.

LEGAL FORMATIONS corp

incorporated business that is taxed as a pass-through entity


• “S” refers to Subchapter S of the IRC. Subchapter S was designed to ameliorate the double-tax burden of small companies (C Corps).

• Formed like a C Corp and then file an election to be treated as an S Corp.

• Pass-Through Taxation

• Governance issues: can only have 100 Shareholders (no corporate shareholders; family members can be treated as one shareholder; shareholders must be U.S. Citizens or residents).

• Only one class of stock can be created (hard to get cheap equity to employees).

• Taxes: losses cannot be used by the corporation to offset future income.

• Venture Capital: generally VCs will not invest in an S Corp.

LEGAL FORMATIONB corp

(certified B corporation)

for-profit corporation that is certified for meeting social and environmental standards


• B Corporations are “for benefit corporations.”

• B Corporations became effective on January 1, 2012. These corporations are organized in the same manner as a C Corporation, but must have the purpose of creating “general public benefit.” (Assembly Bill 361: “defined as a material positive impact on society and the environment, taken as a whole [….]”.)

• Formed like a C Corp, but must include in its Articles of Incorporation the following statement: "This Corporation is a benefit corporation."

LEGAL FORMATIONB corp

(certified B corporation)

for-profit corporation that is certified for meeting

social and environmental standards


• The Articles of Incorporation of a B Corporation may identify one or more specific public benefits that shall be the purpose or purposes of the corporation. (Assembly Bill 361: “including, without limitation, providing low-income or underserved individuals or communities with beneficial products or services, promoting economic opportunity for individuals or communities beyond the creation of jobs in the ordinary course of business, preserving the environment, and improving human health.”).

• Limited Personal Liability (same as C Corp)

• Directors can make decisions based on non-financial interests such as community and societal considerations, local and global environment, employees and workforce, and even their customers as the “beneficiaries of the public benefit purpose.”

• Very new form of entity. What are the unintended consequences, if any?

• Will it attract investors or limit choice of VCs?

LEGAL FORMATIONWhy does

everyone say “incorporate in

Delaware”?


• courts, tax system, laws and policies are favorable to business

• the Delaware Court of Chancery (established in 1792) allows companies to resolve disputes quickly with a judge rather than a jury

• tax system gives businesses several ways to legally minimize their tax bills

• doesn’t tax profits on royalty payments, trademarks, or copyrights

• easy for businesses to incorporate, avoid liability, and retain privacy

DOCS NEEDED• incorporation docs• founder docs• employee docs• 3rd party agreements


INCORPORATIONLegally establishes the business and sets the structure

for operations


• Certificate of incorporation

• Bylaws• Organizing minutes and

resolutions• Establish board• Appoint officers• Issue stock• Other admin

FOUNDER DOCSProtects the rights

of founders and establishes

expectations, roles, &

responsibilities


• Invention Assignment Agreement• IP assignments• confidentiality• non-compete

• Founder’s Stock• restricted stock purchase

agreement • basic tax principles • vesting• acceleration terms• 83(b) elections

83(b) Filing the 83(b)

with the IRS allows you to be taxed on your equity (shares

of stock) on the date the equity was granted rather than

the date it vests


Founders are typically taxed on FMV of shares as they vest

(general rule)

• File 83(b)• Choose to tax at grant• File within 30 days (hard

rule)

3rd PARTY DOCS• nda• consulting

agreement• privacy docs


IP• Trademark

• Copyright

• Patent

• Trade secret


TRADEMARK


• Words

• Apple

• Google

• Acronyms

• IBM

• BMW

• Tag lines

• Just do it

• Got milk?

a word, name, symbol or device that

is used in trade with goods to indicate

the source of the goods and to

distinguish them from the goods of

others

COPYRIGHT


a form of protection provided to the

authors of “original works of

authorship” including literary,

dramatic, musical, artistic, and certain

other intellectual works, both

published and unpublished

TRADE SECRET


information, maintained confidential,

and having commercial value

• undisclosed inventions

• technical data

• marketing data

• financial information

PATENT

protects the utility or functional aspects of an

invention


protects its aesthetic appearance

utility design

FUNDING• friends & family

• convertible debt

• angel investment

• seed rounds

• series A


STAGES


FRIENDS & FAM• ~$50k typical

• can be formal or informal

• can be equity or debt

• usually no impact/control/rights


ANGELS


investorsdefinition of accredited investor

4M qualified

300K active in last 2 years

net worth <$5M

26% ♀ 74% ♂

typical investment $10-50K/deal

deals77K deals/yr

$24B invested

avg deal $345K

avg valuation $2.7M

source: Angel Capital Association

CONVERTIBLE NOTE• Promissory note

• Interest rate

• Maturity date (usually 2 yrs)

• Automatically converts at next

financing event usually includes a

discount


Sample Offer

$500k convertible note

2 years

20% discount

EQUITY• trade for equity

• investor provides cash

• gets a % of company ownership in

return


Sample Offer

$500k

10% of company

valuation $3M

THE DECK


1 elevator pitch2 problem3 solution

4 market size5 business model

6 tech7 competition8 marketing

9 team10 ask

COMPETITION


speed X X üprice

ü X üscalable manufacturing X ü üself washing X X ü

MARKET OPP


assumptions• $29B sales projection of

kitchen accessories for 2025

• 2018 $26B actual sales of kitchen accessories

• 12% AGR due to increased drinking

segments

TAM $29B

SAM $2B

SOM $200Mmargarita

lovers 70%

Organic baby food

mamas 30%

2025 Kitchen Accessories includes manual, electronic, & household accessories

2025 Kitchen Electronics includes electric blenders, grinders, food processors, juicers

2020 Millennial Blenders includes specialty high speed blenders with attachments

ASK


Sales Marketing

64%Product Dev

12%

Inventory 15%

G & A 4%IP Legal 5%

$400Kconvertible note

$3M valuation20% discount

$1M raisedsales $2M/last yrseries A in <3yrs

FINDING INVESTORS• make a list

• start with you

• who you know F3

• LinkedIn

Ask for $ get advice

Ask for advice get $


SDAngelConfTheSDAngels.com

March 28, 2020

$200,000**Amount depends on number of investors

ElTRACK10/2 Fundamentals of Seeking Angel Investors

10/9 Alternative Funding

10/16 Decks & Investment Strategy

10/30 Marketing Research and GTM

11/6 Prepping Financials

11/13 Valuation, Cap Tables, Term Sheets

12/4 Preparing for Due Diligence

12/18 Application Deadline & Celebration

SDAngelConfTheSDAngels.com

6 Pitch Deconstructions1 minute speed round (no slides)

voting

3 minute round (with slides)

judges are investors & technical experts

overarching feedback after the speed round very specific feedback to each company after

the 3-minute round

9/25 12/11

10/23 1/28

11/20 2/11

SDInnoUp

THANK YOU

innovate-up.com

innovation bootcamp - innovateup - innovate up · innovation bootcamp starting an innovation-based...

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