I moderated last week’s meetup of Bootstrappers’ Breakfast at Bouding Bakery in Embarcadero 4, and once again we had a great meeting.  Attendees brought a very diverse background.  Software developers, social media gurus, marketing and business consultants, and lawyers all came armed with unique perspectives as attendees took turns introducing themselves, their businesses, and their bootstrapping issues.

The sales and marketing themes were prevalent this week.  One entrepreneur had extensive experience selling software into businesses, but he thought his new venture would require selling directly to consumers, an activity he found a bit intimidating.  After hearing about his software offering, many around the table thought partnering up with other, complimentary businesses that already had an existing customer base was a viable marketing and distribution channel.  Much to this entrepreneur’s relief, his experience selling into businesses might still be of use.

Another entrepreneur had a product offering with a marketing play that sent all profits to micro-financing organizations around the world.  The entrepreneur had a large database of buyers’ names and contact information within his targeted businesses.  The marketing wonks around the table began developing all sorts of marketing campaigns around the product and the micro-financing angle, offering ways to simplify the message so that partnering businesses and the end consumer would not be confused and would ‘get it.’  In this particular case, the entrepreneur was wondering how to automate the sales process.  He had his product, he knew the names of the potential buyers, and he knew their contact information.  He was worried he might have to pick up the phone and call each person directly.  After a few minutes of discussion, the group came to the conclusion that, while there are ways to automate your sales message (e.g., email marketing campaigns), there really is no substitute for the tried and true technique of picking up the phone and calling.

Another lesson shared by one of the attendees: Complex financial structures at an early stage have a tendency to scare away future sources of capital.  This particular attendee was considering joining a company that was having a hard time raising money because its early money raising efforts were non-conventional.  When you’re looking for help from friends and family, keep it simple!

An interesting moment in the meeting occurred when a successful serial entrepreneur explained his latest idea.  He had gone the VC route before and was really turned off by the experience due to how much control and ownership he and the other founders lost.  Another attendee asked him about his exit strategy.  This entrepreneur’s response, “I am not concerned about an exit strategy.  I am more concerned about building a successful business, and then opportunities open up.”  A refreshing perspective in our IPO/M&A obsessed environment!

One last gem of wisdom from the group came out when an attendee was explaining his idea for a social media play for musicians.  The idea seemed very broad and there were several musicians in the group who began discussing the various challenges of implementing the idea.  The group recommended user testing and someone pointed out that user testing a broad idea may lead to an actual, discreet problem that no one has ever considered; your very broad problem that is hard to execute upon and solve becomes a definable problem that is easier to focus upon and build a business around.

I hope to see you at our next meetup!

I moderated the latest San Francisco Bootstrappers’ Breakfast this past Friday.  Entrepreneurs, first-timers and serials, gathered at Boudin Bakery, Embarcadero Four, to discuss common challenges facing those bold individuals seeking to start a business from scratch.  The basic idea behind Bootstrappers’ Breakfast is that entrepreneurs and founders are ideally situated to help each other out because many of the problems facing entrepreneurs are industry agnostic.  It doesn’t matter what your product or service is, you’re still going to have to find a way to finance your business, you’re still going to have to hire help, you’re still going to have to understand how to market and sell your product/service, etc.  By spending time with other people going through the same process, you’re more likely to both better understand your business’s challenges and identify appropriate solutions because someone else at the breakfast has probably already been down the path you’re on.

Some challenges discussed at this meeting:

1)  How to develop a viable sales and marketing plan.

The founders had a product that was producing revenue.  The founders also had a small group of customers who were wildly enthusiastic about the product and were willing to actively participate in sales calls with potential customers.  The current sales process was to have one of the management team along with a current customer meet with the potential customers.  The founders correctly identified this process as non-scalable.  In order to be successful, this company would need to approach hundreds, maybe thousands, of potential customers across the country.  The question presented was, how to make the sales process scalable across the country?  The group discussed tactics on how to close a sale once a customer was identified, but this really didn’t address the problem of replicating the entire sales cycle across the country at the necessary volume.  Ultimately, this is the age-old problem of how to develop a sales channel from scratch.  Hard to do, especially when you’re bootstrapping.  One suggestion I had was to identify companies with complementary products and services who already have a well developed sales channel.  The company could then leverage an existing sales channel and avoid the cost of developing its own.  While the group at the breakfast couldn’t solve the problem, I believe we did help the founders get a better understanding of what the problem actually was.  It’s much easier to solve a problem once it’s properly defined.

2)  Founder was worried about the scalability of an application under development; can handle 1,000 user, not sure about 10,000+.

The founder has developed a cross-platform application that he will be deploying in major cities across the country.  The app is currently stable at 1,000 users, but the founder is worried about stability once that number increases dramatically (and the founder is optimistic that it will).  The group helped address this particular founder’s concern by pointing out that increasing hardware/network/database capacity is fairly cheap these days given the recent development of ‘cloud’ computing.  When the app needs more horsepower, the major service providers should be able to respond immediately.  From a financial standpoint, the founder expects revenue from the first set of users.  This revenue should be used to fund the increase in hardware/network/database capacity as needed.

This was a good example of a problem presented by one breakfast attendee which had already been solved by another attendee.

3)  Non-conventional ways to raise capital

This is a very common topic at the breakfast.  While the answer is the same, the execution of the answer is extremely difficult (hence its continual appearance at Bootstrappers’ Breakfast).

Some common examples of how to raise capital:

• Family
• Friends
• Angel investors
• Organically (i.e., sell your product/service to paying customers)
• Other non-conventional entities like Compound Profit (asset based lending)

4)  Founder at the idea stage – trying to figure out how to simplify the code building process

This part of the breakfast was devoted to how an entrepreneur gets an idea on which to build a business in the first place.  During this particular breakfast, a serial entrepreneur talked about how he had taken some time off after a successful exit and contemplated what to do next.  His approach was to ask, “What problem annoys me most?”  His answer: he was most irritated at the complexity of creating an application.  His point was there should be no ‘coding’ involved in this day and age.

Lots of questions around what this means and this particular entrepreneur’s vision.  What does he mean by ‘no coding?’, and who exactly is his customer?, etc.  But this is how it starts, find a problem, then try to solve it.  The definition of your problem will/should change over time based on feedback.  Exciting to see in action at Bootstrappers’ Breakfast.

I hope to see you at the next meeting!  We meet on the first Wednesday and third Friday of every month.

Where does insulting your users and your potential business partners fit in a business plan?  I’m pretty sure it doesn’t.  The creators of Foursquare seem to have missed this little nugget of wisdom when they were designing the popular geo-location based game.

What is Foursquare?

Foursquare is a geo-location based, mobile gaming app that allows players, or users, the ability to ‘check in’ at any venue they are visiting using their mobile device.  The game awards users points for actions like checking in at a venue and identifying new venues.  The game also awards badges (i.e., boy scout merit badges) when a user takes specific actions like checking in to multiple venues in one night, or checking in to the same venue multiple times in one week.  One of Foursquare’s most compelling features is its ‘Mayor’ concept.  Whoever checks in the most at a given venue is awarded the title of ‘Mayor.’  For more background on Foursquare, Jennifer Grove has an extensive Foursquare overview post over at Mashable.

I am a big fan of Foursquare generally, both from a user’s and a venue’s point of view.  From a user point of view, I have been one for six months now and I’m hooked.  I admit I’m a little obsessed with earning and defending the Mayor title at my favorite hangouts, and have met other users who are trying to oust me.  The resulting competition is a bit addictive to say the least.

From a venue’s point of view, this is a great tool for budget-friendly marketing and advertising. As more and more users compete over mayorships or venue hop to earn more points, the venues see more traffic.  Foursquare also allows venues to partner up and offer in-game specials (free first beer for the mayor, $1 dollar off lattes when you check in, etc.).  I assume Foursquare is kicking around ideas to monetize this relationship once the game reaches critical mass.

Here’s the problem: Foursquare curiously created a badge labeled “Douchebag.”  Huh?  I don’t get it… a Dbag is a derogatory term.  If you’re unfamiliar with its meaning, check out the urban dictionary.  Being called a Dbag is a bad thing (think Jersey Shore).  I was under the impression Foursquare users should want to earn Foursquare badges.  Why would I want to earn a badge that labels me in a derogatory way?  I wouldn’t… and a quick twitter search tells me I’m not the only one.  I don’t understand Foursquare’s thinking here.  How is insulting your users a good thing?  Is Foursquare contemplating other derogatory themed badges?

On top of that, how should the venues react to the Dbag badge?  First, you’ll need a little background on how badges work.  Users are free to ‘tag’ venues with labels.  For example, Crunch has been tagged by users with the label, ‘gym’ by users.  Because of this tag, when you check in to Crunch 3 times, you are awarded the ‘Gym Rat’ badge.  I’m happy with the gym rat badge.  Unfortunately, Crunch was also tagged by users with the label, ‘douchebag.’  When you check in to 3 different venues that have been tagged ‘douchebag,’ you are awarded the Douchbag Badge.  I’m not happy about that badge.  But think about it from the venue’s perspective.  Foursquare allows, and even encourages (look under “What Are Badges?”), random users to label your business with the derogatory term.  Then Foursquare labels your patrons with the derogatory badge.  Why would you want to partner up with a service that insults both your business and the people who patronize your business?  The only answer I can come up with is you wouldn’t.  Does Foursquare’s competitors Yelp, or Gowalla, or myTown insult their users and venues?  Not that I’m aware of…

If I’m missing something here, please fill me in… if I’m not, Foursquare, it’s time to clean up your tags and badges!

Settle That Case!

Lawsuits Are a Cost of Doing Business

When you start a business, you must understand there is a risk you will get sued as a result of the business’s operations. Whether it’s a vendor suing because you haven’t paid an invoice, an employee suing for wrongful discharge, a customer suing because your product or service injured them (economically or physically), or a patron slipped and fell on your premises, the risks are all around you.

While there are ways to minimize this risk, eliminating it is impossible. So, account for it when you do your business planning.

Rule #1: Buy insurance!

Partner with an experienced insurance broker who intimately understands your business. This will ensure that your insurance policy covers all the high risk areas of your business.

Rule #2: Understand the business decisions that arise when you are being sued.

Example: I represented a client who was being sued by a patron of his business. In my opinion, the patron had an extremely weak case against my client. The patron sought a settlement offer and I recommended my client take it. Why? Because the settlement amount on the table was less than the overall cost of proving in court that the patron had no case against my client. My client was emotionally reluctant to ‘give in’ to the patron and his frivolous lawsuit, but the business decision was fairly simple: pay more in legal fees to defend his case, or pay less to the patron to go away. Distasteful? Yes, but there are costs to doing business, this is just one of them. Note: if my client had followed Rule #1 Buy Insurance!, he wouldn’t have needed to go through this experience.

Rule #3: This is America, you can be sued by anyone for almost anything… and defending a lawsuit is expensive!

Understand the difference between, “Can I be sued for X?” and “Am I liable for X?” While it is fairly easy for a person to sue you or your business, whether or not that person suing you will be awarded a judgment in a court of law is an entirely different question. But you must understand the business implications of these concepts. In my example above, my client was sued on very weak legal grounds, but I will reemphasize, this is America, you can be sued by anyone for almost anything. My client had a strong legal case, but litigation is expensive and asserting that legal case was much more costly compared to settling with the other party.

Rule #4: Buy insurance!

Before your business does get sued, make sure your insurance company will cover the bill.

What Matters Now

Protect Your Piggy Bank!

When you think about protecting your business and reducing unnecessary risk, you should think in terms of layers.  No single layer can eliminate all risk, but by using multiple layers, you can eliminate as much unnecessary risk as possible.

A business owner can reduce risk by intelligently drafting his or her contractual agreements with co-owners, vendors/suppliers, customers, and strategic partners.  A business owner can reduce his or her personal risk by creating a distinct legal entity for the business (forming a corporation, LLC, etc.).  A business owner can reduce risk by designing and implementing a formal hiring process, complete with background and reference checks.  The list of ways to reduce risk is unlimited, and a great business attorney can help you implement all of them.  One of the more critical layers on your list is insurance. I call it the ‘safety net’ or layer of last resort.

Insurance is a broad topic in that if you are willing to pay the premiums, you can insure just about anything.  For the typical business owner, however, I will break down the most common types of business insurance.  A more detailed guide for small businesses is available here from the California Department of Insurance.

Property (or first person) Insurance:

This protects your assets, for example, your building and all the stuff inside, from theft, damage, or destruction.

Casualty (or third person) Insurance:

This protects you against claims from third parties, like a customer who slips and falls while at your business, or if an employee is involved in an auto accident on the way to deposit the business’s earnings at the bank.  Worker’s Compensation insurance falls into this category.

You will want to make sure you have both types of coverage.

Make sure you find a great insurance broker/agent.  Get references from trusted advisors or other established businesses and interview several broker/agents.  MAKE SURE YOUR BROKER/AGENT IS LICENSED!  You can check on license status at the California Department of Insurance.

This last point is important and it’s easy to do.  I have encountered several businesses which paid premiums to a broker who did not forward those payments on to the insurance company.  That means the insurance policy was not in effect.  The businesses were subsequently sued for non-related reasons and there was no insurance coverage.  The businesses were on their own when it came to defending themselves in the lawsuits and paying the respective settlement amounts.  Paying lawyers to defend you and paying a plaintiff to waive his or her claims is a very expensive thing to have to do without an insurance company backing you up.

Thinking of hiring someone to help you out with your new or small business?  Here are some important things you should know about the tax classification of your workers:

Independent Contractor versus Employee Classification

The way you classify your worker is very important.  There are two categories: Independent Contractor and Employee.

Independent Contractor:

You pay them a fixed fee for their work.  They take care of their own taxes.  Your only responsibility is reporting basic information (name, amount paid, etc.) to the appropriate federal and local regulatory agencies.

Employee:

In addition to their wage, you are responsible for payroll taxes.  Payroll taxes consist of withholding for income tax, withholding for the employee’s contribution to social security and Medicare, contributing to social security and Medicare on behalf of the employee, paying for unemployment insurance (federal and state), and paying for worker’s compensation insurance.  These last three items are all expenses to the employer.

Costs Associated with Employee Classification

From an employer’s perspective, classifying the worker as an independent contractor is attractive from both budgetary and administrative perspectives.  Expect total costs for an employee to be around 20-30% higher than independent contractor costs because of those extra payroll taxes.  Additionally, managing employees means extra time and effort associated with calculating how much to withhold, remembering to make timely payments to the regulatory agencies and paying penalties when you miss a filing deadline.

What Should You Do?

While it is tempting to simply categorize your worker as an independent contractor to avoid the cost and administrative burden, regulatory authorities (IRS, state/local taxing agencies, Worker’s Comp Board, etc.) can be very strict when it comes to improper classification.  The cost and administrative savings by classifying your worker as an independent contractor is significantly outweighed by the costs and penalties resulting from improper classification.  In the long run, it is best to play it safe.  Where a worker is clearly an employee, treat them as an employee.  Where a worker is clearly an independent contractor, treat them as an independent contractor.  When you’re not sure, speak with an experienced business or employment law attorney.

The IRS has posted a page here that summarizes its perspective on this issue.

Information from California’s Employment Development Department about independent contractor misconceptions can be found here.

There are many variables that go into choosing the appropriate legal entity for your business.  One of those variables is how much personal liability will be taken on by the founders/owners.  Some entity forms limit the liability of an owner to the amount invested in the business.  If a business owes somebody a debt, that person can only go after the business’s assets, he or she cannot go after the personal assets (e.g., house, cars, bank accounts, etc.) of the business’s owner.

Using either the corporation or LLC forms provides this type of limited liability for the owners of the business.  There are some requirements, however, that must be met so that this type of personal liability protection will be recognized by the law.  Simply filling out the appropriate state required paperwork and paying your fee is not enough.  Among other things, ‘corporate formalities’ are required.

In order to cut off the personal liability of a business’s owners, the business must act like an independent legal entity by following acknowledged corporate formalities on a continual basis.  How does a business act like an independent legal entity and what are these formalities?

Generally speaking, a business must properly address the following issues:

1. Maintain Corporate Records

2. Produce Annual Reports

3. Fulfill Your Meeting Requirements

Corporate Records

While records requirements vary from state to state, generally a business will need to maintain past corporate records at its principal place of business.  Relevant records include the current Articles of Incorporate (Corporations) or Articles of Organization (LLC’s), the Corporate Bylaws or Operating Agreement, minutes of shareholder, directors, or members meetings, written communication between owners and the business, the ownership interest ledger, the names and addresses of current owners, directors, and officers, and the most recent annual report and financial audits.

Annual Reports

Most states require that corporations or LLC’s file a statement and pay a fee annually.

Meeting Requirements

An organizational meeting is required after the initial incorporation paperwork is filed.  All owners, directors, and officers should attend this meeting.  This meeting addresses initial corporate matters such as electing directors, adopting articles, bylaws or operating agreements, electing officers, and issuing stock certificates.

While each of these steps are straight-forward, the complications that can arise by failing to take these steps can be disastrous.   A business owner’s personal assets are at stake.

If you have questions about your business and personal liability, feel free to contact me or any other qualified business attorney.

Starting up your own business requires a lot of work.  The to-do list can seem overwhelming at times.  I’ve come up with a list below of some of the bigger issues that should be on your radar screen.  Take a look at the list and make sure you’re not missing something important that may come back and haunt you later on down the line.  If you are feeling overwhelmed, or just have questions about something on this list, give me a call, send me an email, or just leave a comment below.  I can help…

• Legal entity considerations
  • Personal liability
  • Taxes
  • Flexibility of ownership structure
  • Ownership (e.g., shareholder, member, partner) agreements
  • Corporate formalities
  • For an overview of the various entity types, see here
• Financing
  • Personal
    • Savings
    • Friends/family
    • Credit
  • Bridge financing
    • Angels
  • Institutional investors
    • Venture Capital
    • Joint ventures
• Risk management
  • Insurance
    • First party insurance
    • Liability insurance
    • Workers’ Compensation insurance
    • Directors’ and Officers’ insurance
  • Indemnification
    • Licensors
    • Licensees
    • Independent contractors
• Intellectual Property
  • Trade Secret
    • Instituting a trade secret protection program
      • Identify trade secrets
      • Secure employee commitment
        • NDA’s
        • Non-compete agreements
        • Employee education
        • Dealing with outsiders
  • Copyright
    • Registration
    • Ownership issues
  • Patent
    • Registration
    • Ownership issues
  • Trademark/dress, Service mark
    • Registration
• Contractual obligations
  • Leases
  • Licenses
    • State, local agencies
    • Fictitious business names
  • Vendor agreements
  • Customer agreements
  • Employment agreements

I attended Startup Idol, a Webguild event down in Redwood City, CA, yesterday. In all, I thought it was a successful event. I didn’t take a headcount, but there must have been a few hundred attendees. The speakers gave a good synopsis of the state of the startup market relative to the overall, struggling market and provided valuable advice to those getting started as entrepreneurs. On top of that, we were able to hear from a few of the up and coming startups themselves… I would go again.

Here’s a recap:

Ethan Kurzweil, Bessemer Ventures, pointed out that there has been an up-tick in first time financing for Q1 09. This is the first increase in first time financing in 9 quarters. Positive sign!

He also listed markets vulnerable to disruption (i.e., markets where startups can do well):

• Web video
• Social gaming
• SaaS
• Mobile
• Security
• Energy
• Internet
• Stem Cells
• Virtualization

No real shockers there…

Ethan also stated that the cheapest way to determine if you have a viable product/service is to put it out there and see if anyone wants it. This is due to the fact that putting something out there is becoming cheaper and cheaper as technology advances. Ethan provides Twitter as an example of this concept.

Additional tips from Ethan:

1. New sales force = your web page
2. Design: less is more
3. Find ways to customize your product to your different customer sets
4. Offices are overrated

Jeremy Toeman, Stage Two Consulting, also spoke.

He started out by defining ‘marketing,’ an oft misunderstood term. According to Jeremy, marketing is all activities involved in getting your product/service to customers.

Jeremy recommended using sites like getsatisfaction.com and usertesting.com to stay in touch with your customers and be informed about what’s working, what’s not, and possible ways to improve your product. Feedback from your customers is the most valuable type and sites such as these are making it much easier to obtain.

Regarding blogs, stay consistent and be transparent. I am in total agreement. To me, anything that feels like a sales pitch will do more harm than good.

Adeo Ressi, founder of TheFunded.com, gave a spirited presentation about common start-up issues and his recommendations. Adeo has an in-your-face style and exuberance that will keep you on the edge of your seat waiting to see what comes out of his mouth next. Some tips from him:

• Talk to 30 people a week about your startup/product
• Ideas don’t matter … passion matters!
• Hire slow and fire fast
• Fake it till you make it

Dharmesh Shah, from Hubspot.com and the Onstartups blog, was up next. Dharmesh had a lot of points similar to the previous presenters.

• Feedback from customers and potential customers is key
• Mine all the data you can get your hands on in order to identify the metrics that can help your business grow (e.g., what functionality do returning, paying customers use that one-time customers do not use, then move that key functionality to a prominent spot on your website’s landing page)
• Your idea is not perfect, get it out to customers as soon as possible so they can help you perfect it via their feedback
• Do not solve a problem before you have one (i.e., keep it simple)
• Experiment cheaply; no non-linear event is ever planned for, so don’t spend any money trying to plan for one

I like what Dharmesh has to say. You can check out a video of him speaking here. If you are an entrepreneur and/or are involved in a startup, I highly recommend checking this out.

The Q&A session from successful entrepreneurs was not very engaging. These guys might be great at getting VC’s to give them money, but engaging a live audience was not their strong suit. Not surprisingly, I don’t seem to have taken any notes from this part of the conference.

The final part of the conference was the startup idol ‘competition’ itself. Five startups presented their pitches and were judged by:

• Jonathan Abrams from Socializr and Friendster
• Philip Kaplan from F’ed Company
• Daya Bara, Webguild president

Startups presenting were:

• Pixelpipe
• Indinero
• MReplay
• Jibe
• Feedback Jar

Indinero was the first runner up and Pixelpipe took first place (largely, I believe, due to their rapping capabilities).