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
SDInnoUpinnovate-up.com
PMFLO
SDInnoUpinnovate-up.com
PMFLO
SDInnoUpinnovate-up.com
INNO VS TRADT’L
• scale (10x in 5yrs)
• exit expected
• less tangible
• nontraditional finance
• IP or trade secret likely
SDInnoUpinnovate-up.com
• $ 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
SDInnoUpinnovate-up.com
LEGAL FORMATION
SDInnoUpinnovate-up.com
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
SDInnoUpinnovate-up.com
• 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
SDInnoUpinnovate-up.com
• 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
SDInnoUpinnovate-up.com
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
SDInnoUpinnovate-up.com
• 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
SDInnoUpinnovate-up.com
• 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
SDInnoUpinnovate-up.com
• “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.
LEGAL FORMATIONC Corp
(certified corporation)
incorporated business composed of shareholders, directors, and officers
SDInnoUpinnovate-up.com
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).
LEGAL FORMATIONC Corp
(certified corporation)
incorporated business composed of shareholders, directors, and officers
SDInnoUpinnovate-up.com
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
SDInnoUpinnovate-up.com
• “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
SDInnoUpinnovate-up.com
• 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
SDInnoUpinnovate-up.com
• 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
SDInnoUpinnovate-up.com
• 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”?
SDInnoUpinnovate-up.com
• 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
SDInnoUpinnovate-up.com
INCORPORATIONLegally establishes the business and sets the structure
for operations
SDInnoUpinnovate-up.com
• 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
SDInnoUpinnovate-up.com
• 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
SDInnoUpinnovate-up.com
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
SDInnoUpinnovate-up.com
IP• Trademark
• Copyright
• Patent
• Trade secret
SDInnoUpinnovate-up.com
TRADEMARK
SDInnoUpinnovate-up.com
• Words
• Apple
• 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
SDInnoUpinnovate-up.com
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
SDInnoUpinnovate-up.com
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
SDInnoUpinnovate-up.com
protects its aesthetic appearance
utility design
FUNDING• friends & family
• convertible debt
• angel investment
• seed rounds
• series A
SDInnoUpinnovate-up.com
STAGES
SDInnoUpinnovate-up.com
FRIENDS & FAM• ~$50k typical
• can be formal or informal
• can be equity or debt
• usually no impact/control/rights
SDInnoUpinnovate-up.com
ANGELS
SDInnoUpinnovate-up.com
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
SDInnoUpinnovate-up.com
Sample Offer
$500k convertible note
2 years
20% discount
EQUITY• trade for equity
• investor provides cash
• gets a % of company ownership in
return
SDInnoUpinnovate-up.com
Sample Offer
$500k
10% of company
valuation $3M
THE DECK
SDInnoUpinnovate-up.com
1 elevator pitch2 problem3 solution
4 market size5 business model
6 tech7 competition8 marketing
9 team10 ask
COMPETITION
SDInnoUpinnovate-up.com
speed X X üprice
ü X üscalable manufacturing X ü üself washing X X ü
MARKET OPP
SDInnoUpinnovate-up.com
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
SDInnoUpinnovate-up.com
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
Ask for $ get advice
Ask for advice get $
SDInnoUpinnovate-up.com
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