The Sunday New York Times ran a special tax section on February 10. One article focused on the tax costs and savings from owning your own business. Many people think it's great that they can deduct all their business expenses. However, they may not realize that they have to pay both sides of the employment taxes (Social Security and Medicare) -- the employer's and the employee's sides. You also have to set up books to track your business expenses separately from your personal expenses. You can read more of what the NY Times has to say at this link:
http://www.nytimes.com/2008/02/10/business/yourtaxes/10entre.html?ref=yourtaxes
Since tax time is rapidly approaching, I'll be writing more about this topic in the days to come.
Monday, February 11, 2008
Friday, February 8, 2008
More on Demystifying Term Sheets
From the CVG Workshop on Term Sheets on Jan. 24, 2008 --
Business founders may not realize that investors will be looking for milestones to be achieved. That's why investors list milestones in a term sheet. Sometimes, they dole out the funds as the company reaches the milestones. This is called "staged closings." For example, if you have a dot-com, soft launches or hard launches can be milestones. As you negotiate, make sure your milestones are achievable.
Other things to know: Think about what you as a business owner are giving away to the investors. Is it worth it to you?
VCs usually want preferred stock so that their dividends can be accrued and they can get their money out before others. Preferred owners also get veto rights when voting on corporate matters.
VCs usually want to get their money out in 4-5 years. And they want a clear path to liquidity. The term sheets will have details about conversion of preferred to common stock. Remember that investors want to maximize their investment.
Most entrepreneurs think that they can raise capital quickly, but that's not true. VCs need to do background investigations into the company and the owners -- called "due diligence". Then, there's the negotiation of value and dithering over the term sheets. Once you've signed a term sheet, there's still a lag before you get the funds.
Keep in mind that more important than raising funds quickly is to make sure that your investors have deep pockets and will want to stay in the game for future rounds of investing, as needed. The section of the term sheet that addresses keeping the original investors in the game is called "Pay to Play."
Other clauses that protect investors are ones on antidilution and information rights.
As you go through a term sheet, it's really important to be sure you understand what all these clauses are doing for the investor and for you. That's why you need good attorneys by your side. Institutional investors bring a lot to the table, as they have experience you may lack. On the other hand, remember that they are out to maximize their investment with a clear path to liquidity. That may or may not be your goal. Protect yourself by negotiating intelligently.
If you want to maximize your valuation, do the following:
Business founders may not realize that investors will be looking for milestones to be achieved. That's why investors list milestones in a term sheet. Sometimes, they dole out the funds as the company reaches the milestones. This is called "staged closings." For example, if you have a dot-com, soft launches or hard launches can be milestones. As you negotiate, make sure your milestones are achievable.
Other things to know: Think about what you as a business owner are giving away to the investors. Is it worth it to you?
VCs usually want preferred stock so that their dividends can be accrued and they can get their money out before others. Preferred owners also get veto rights when voting on corporate matters.
VCs usually want to get their money out in 4-5 years. And they want a clear path to liquidity. The term sheets will have details about conversion of preferred to common stock. Remember that investors want to maximize their investment.
Most entrepreneurs think that they can raise capital quickly, but that's not true. VCs need to do background investigations into the company and the owners -- called "due diligence". Then, there's the negotiation of value and dithering over the term sheets. Once you've signed a term sheet, there's still a lag before you get the funds.
Keep in mind that more important than raising funds quickly is to make sure that your investors have deep pockets and will want to stay in the game for future rounds of investing, as needed. The section of the term sheet that addresses keeping the original investors in the game is called "Pay to Play."
Other clauses that protect investors are ones on antidilution and information rights.
As you go through a term sheet, it's really important to be sure you understand what all these clauses are doing for the investor and for you. That's why you need good attorneys by your side. Institutional investors bring a lot to the table, as they have experience you may lack. On the other hand, remember that they are out to maximize their investment with a clear path to liquidity. That may or may not be your goal. Protect yourself by negotiating intelligently.
If you want to maximize your valuation, do the following:
- Have a solid plan, a good revenue stream and solid management.
- Consider a staged closing.
- Establish a stock incentive pool (5-15%) to incentivize employees.
- Consider tax ramifications of all your business decisions. (Get a good accountant.)
Le me know if this has been useful. And please send questions for me to answer.
Thursday, February 7, 2008
Demystifying Term Sheets - Valuation
More from the CVG Jan. 24 meeting:
How do you value a company? Virtually every one of my clients asks me that. The answer given at this Term Sheet Workshop echoed the ones I've heard countless times before, "It's a negotiation." But how do you, the entrepreneur, get the best valuation for your company?
The workshop leaders said that professionally produced financials really help. For later stage companies and companies with revenues, having a CPA help with the developing the best tax structure for the company is also valuable. And while LLCs are becoming more popular, and VCs are beginning to fund LLCs, making your business a C-corporation makes the funding process easier.
For more information on preparing professional financials, visit PriceWaterhouse Cooper at: http://www.pwc.com/extweb/industry.nsf/docid/F3576670492E1BEA85256AC50079E169.
Also understanding the process, including valuations at:
http://www.pwc.com/Extweb/industry.nsf/docid/CF30E217F86F676D85256AB60074EAB7#valuation
How do you value a company? Virtually every one of my clients asks me that. The answer given at this Term Sheet Workshop echoed the ones I've heard countless times before, "It's a negotiation." But how do you, the entrepreneur, get the best valuation for your company?
The workshop leaders said that professionally produced financials really help. For later stage companies and companies with revenues, having a CPA help with the developing the best tax structure for the company is also valuable. And while LLCs are becoming more popular, and VCs are beginning to fund LLCs, making your business a C-corporation makes the funding process easier.
For more information on preparing professional financials, visit PriceWaterhouse Cooper at: http://www.pwc.com/extweb/industry.nsf/docid/F3576670492E1BEA85256AC50079E169.
Also understanding the process, including valuations at:
http://www.pwc.com/Extweb/industry.nsf/docid/CF30E217F86F676D85256AB60074EAB7#valuation
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