Month: August 2007

Aug 27 2007

How Will the New Tax Laws on Carry Affect Venture Capitalists?

Q: What’s going on with the changing tax situation on the “carry” relating to VC funds? Is it finalized? And how will this affect the VC market, if at all?

A: (Jason). Sandy Levin (from the great state of Michigan) introduced a bill recently to tax carried interests (“carry” or profit) as ordinary income, versus the long term capital gains treatment it enjoys today. The legislation is not finalized, but it is working through the channels. There is much debate on the differences between true venture capital investing versus other types of private equity and whether such tax modifications should apply to all private equity gains, or a limited scope (e.g. buy out versus venture).

I won’t go into the debate, as there are plenty of forums on the web.

As for potential ways the legislation, if approved, will affect the industry, it’s unclear. Some think that people in venture (who traditionally make less money than folks in PE and Buyout), will start looking to move to PE and Buyout. Others think that some folks will choose careers other than venture. Some think that more investment dollars will move offshore. It will be interesting to see how all of this shakes out over the coming months. One thing is for sure, if it does have a negative impact on the VC ecosystem, that affect will filter down to young, innovative companies in one way or the other.

Aug 17 2007

Does My Company Have to Exist to Get Funding?

Q: Does your company have to exist in order to get VC funding? I have an idea for a Web 2.0 company for which I have a business plan and a mockup, but I have not launched it to the public. Do VC firms even consider funding businesses that have not actually gone live?

A: (Jason) If you are an early-staged venture investor, you shouldn’t have a problem funding a company that doesn’t “exist” yet. Plenty of times we’ve invested in folks that have a small team a great idea and some PowerPoint slides. Upon investment your venture will need to be incorporated and will exist after that.

Aug 13 2007

Why Doesn’t My Question Get Answered on Your Website?

One question we’ve started getting lately is “why haven’t you answered my question yet?  How do you decide which questions get answered?” 

First of all, we apologize for any tardiness we have in answering your questions.  We’ve been very pleasantly surprised by all of the interest and great questions asked from the blogosphere.  The downside is that we’ve had a hard time keeping up, but pledge to get to all that we can.

In general, we try to answer questions in the order that we receive them, but also have two “filters” we apply:

1.  We try to answer questions on a priority basis that appear to need an immediate answer and that we think the dialogue will benefit a wide demographic of our readership; and

2. We don’t answer questions that are overly specific in nature and are essentially just asking for legal advice.  We aren’t your attorneys and wouldn’t want to steer your the wrong way with only a limited fact pattern to opine on.

Again, we appreciate your readership and patience. 

– Jason and Brad

Aug 13 2007

What’s the Climate for Venture Fundings In China?

Q: How difficult is it to get venture financing in China? What is the general climate?

A: (Jason) Seemingly after “everyone” setting up a China office / strategy and investing overseas, according to one report by NVCA and Deloitte and Touche, it’s not as easy as one thought.

Certainly, it’s more common for foreign start ups to attract U.S. VC money. As the global economy continues to truly become “global” it’s much easier to get one’s head around investing in a time zone different by more than 3 hours. That being said, I think that many U.S.-based VCs are cautions, as the report indicates. The amount of cycles it takes to monitor and add value to a company on the other side of the world is distinctly more than here in the U.S. In addition, different regulations make doing deals in other parts of the world inherently more complicated.

In general, those U.S-based VCs who have full-time people on the ground abroad are much better in dealing with these types of investments.

Aug 13 2007

What Are The Costs Associated With Changing a Company’s State of Incorporation?

Q: I have what I think is a really basic startup question, but I’m having the toughest time getting a straight answer, so here goes.

We’re starting a website and want to form an LLC for the business, thing is, we live in Texas but will soon be returning to Nevada. Should we do all the registration (dba, llc formation and anything else required) in Nevada or form it here in Texas and then transfer once we move? In general, what are the costs of changing the state of incorporation?

A: (Jason). It’s not too bad – usually a couple of hours of lawyer time, so it should be sub $1000. If you want to be incorporated in your state of residence and you are fairly certain that you are going to move, I’d skip the headache and just incorporate in Nevada and be done with it. It’s not a big deal to be incorporated in a different state than where you reside.

See our prior post on states of incorporation, as well.

Aug 6 2007

Creating a Board of Directors During an Angel Round

Q: We are in the process of raising early financing. Should the board be built after money is raised to meet the needs of the company and investors or should the board be used as a method to recruit angel investors?

A: (Brad) I view the creation of a board and the raising of an angel round as two separate activities that mutually reinforce each other. 

Given that you have already started raising your angel round, you have the opportunity to use a board seat or two to help recruit your angel investors.  However, you shouldn’t just give a board seat to whomever wants one – your board members should serve the interest of all shareholders, not just theirs or the angels that participate in the round with them.

You should always carefully and thoughtfully pick your board members.  You want the best possible folks you can attract on the board.  You should value experience and perceived contribution as a board member over the absolute dollar amount being invested, although often larger angel investors (and almost all VC investors) ask for a board seat as part of their investment.

All of your early board members should have a financial stake in the company – hopefully, they will all participate in the angel round.  However, this shouldn’t be a requirement for a board member (and vice versa – just because someone invests in your angel round, they shouldn’t be entitled to a board seat.)

Aug 6 2007

Quick Overview of Preferred Stock

Matt McCall of Portage Ventures has the VC post of the day up titled Term Sheet 101: Preferences.  It looks like Matt is working on a Term Sheet 101 series which would go nicely with the Term Sheet series that Jason and I wrote a while ago on Feld Thoughts.

Aug 1 2007

Can You Conduct A Confidential Venture Capital Job Search?

Q:  I am part of the founding management team of a start-up. We are backed by a few well known VC’s. While I think the prospects of the company are good, I am entertaining the thought of moving into venture capital.

I have a number of contacts in the venture capital community from grad school and from raising funds for my current company. I want to parlay these contacts into a venture job, but I am worried about the confidentiality of the job searching process. I am particularly concerned about:

1) Alerting my current investors and co-founders what I am up to; and

2) Making future fund raising efforts for my current company awkward, should I be unsuccessful in my search.

With that as context, here are my questions:

Should I be worried about VC’s keeping a job-related discussion with me confidential?  The firms I would speak to would be reputable firms, but my impression is that VC’s love to share little nuggets of inside information with each other.

If I should be worried about confidentiality, what steps can I take to lower my risk?

A:  (Jason)  You should be worried about word getting around.  I don’t think VC’s are any more likely to talk than if you were looking for a new CEO position at another company, but word tends to travel.  Plus, if you are really trying to get a job at one of the VC’s you speak to, they are going to need to do extensive background checks into you and this would include VC’s on your current company’s board.

Your concerns are genuine that if word gets out it will make life for you and your current company more difficult. 

I wrote a prior post that is tangentially relevant, here.