Blog

Dallas Startup Community: Inclusive or Exclusive?

Dallas Startup Community Inclusive

Yesterday I was shocked to read a tweet by Arlo (seen above) suggesting that our startup community was exclusionary to anyone who wasn’t white or Christian. I couldn’t disagree more. I immediately responded on Twitter and learned that there were people in our community who felt we were excluding non-whites and non-Christians. I knew I wanted to respond to Arlo’s tweet in a long-form blog post, but I wasn’t necessarily sure how to do it. Ironically over the years I have felt excluded from the startup community here in Dallas and San Francisco because of my religious and political beliefs. Most of my co-founders, partners, investors and employees have been non-religious (or atheist) Democrats (God forbid). I used to have a political blog called PoliticalMuse where I wrote about conservative politics; however, one of my investors quietly suggested I take it down before it hurt my ability to raise venture capital. In my twenties I decided to get baptized and invited my employees to the baptism. I was shocked by how many people complained to HR after receiving the invitation. Over the years there have been countless examples of situations where someone in the startup community would learn of my religious or political beliefs and ridicule me for them and as a result I try to keep them below the radar.

In preparation for this post I did two things. First, I put together a very short (non-scientific) poll to determine if other people agreed with Arlo’s opinion. He had suggested many people weren’t willing to publicly discuss their concerns so I figured a poll was the only way to get their feedback. About 20% of respondents were non-whites and 50% were non-Christian. Of these two groups I asked if they ever felt excluded from the community based on their race or religion – between 90-95% of them had never felt excluded (the results are below). The second thing I did was to talk to various people in the community who reached out to me directly suggesting they had felt excluded. The PRIMARY thread that ran through each of these conversations was that it was very difficult for racial or religious minorities in Dallas to raise capital – the capital markets seemed to excluded them.

Ironically, as I noted previously, I’ve always felt a little ‘excluded’ myself. Most of the investors I’ve worked with didn’t share my worldview when it came to religion or politics. If an investor didn’t agree to fund my company, in the back of my mind I assumed it must have been because of my religion or politics – it certainly couldn’t be me or my idea. I wonder if some of the people I talked to experience rejection and assume it must be due to their race or religion. The reality is that MOST white, male, Christian men in Dallas get rejected when they’re raising capital – most entrepreneurs will NEVER raise outside capital – it is a fact of life regardless of your race, sex or religion.

In my experience the Dallas startup community is very inclusive and after specifically discussing the issue with a bunch of people I remain convinced. Folks like Trey Bowles are Jeremy Vickers are VERY active in their efforts to bring minorities into the startup community. Jennifer Connolly and Kara Brown actively support efforts to bring more women into the startup community. There are scores of other people interested in engaging their various communities and constituencies into the startup community – I think we should encourage them – not exclude them simply because we don’t look like them or agree with them. What do you think?

——

The results of the Dallas Startup Community Inclusiveness Poll (3/20/2015-2/21/2015)

  • 80% White Respondents
  • 20% Persons of Color

race

 

 

 

 

 

  • 51% Christian Respondents
  • 49% Non-Christians

religion

 

 

 

 

 

  • 95% of Non-White Respondents do not feel excluded from the startup community.
  • 5% of Non-White Respondents have felt excluded from the startup community.

religion-exlusion

 

 

 

 

 

 

 

  • 90% of Non-Christians do not feel excluded from the startup community.
  • 10% of Non-Christians have felt excluded from the startup community.

race-exclusion

 

Comments

comments

Dallas’ Top Startup Lawyer: Kevin Vela

Kevin Vela, Startup LawyerEntrepreneurs ask me for referrals for lawyers all of the time and over the past couple of years my go-to-guy for startups has been Kevin Vela. I’ve worked with a number of lawyers over the years, but Kevin’s commitment to the startup community, reasonable billing and speed have convinced me that he’s the top startup lawyer in Dallas today. Kevin and his firm have helped me with a multitude of transactions including:

  • a management buyout of a seismic equipment company
  • organization of The Haul Company/ViewMarket Inc.
  • leveraged buyout of a media company

I’m pleased to announce that after two years of working together Kevin and his firm have decided to underwrite some of my efforts at StartupMuse and have become sponsors.

Kevin is the founding partner at Vela | Keller. He focuses on working with entrepreneurs and startups. He has performed hundreds of corporate formations and regularly handles governance matters, venture capital financing transactions, and M&A activities. In recent years, he has represented both startups and investors in over $30M in seed, angel and venture rounds. He is active in the legal and startup community, and regularly writes about startup issues on his blog.

Find out more: LinkedIn, Twitter, Facebook, Blog, Email.

Comments

comments

Don’t fall for the exploding termsheet!

e273df5d8c9a2ceba9239cbcc018182b_mLast year my co-founders and I got a termsheet from an investor here in Dallas that had a 48 hour deadline. I’ve never taken ‘exploding termsheets’ very seriously and didn’t really pay attention to the clause. We sent the offer to our lawyer and the first time he could meet was 50 hours from the start of the deadline – again I didn’t imagine the investor (after having spent weeks looking at our deal) would seriously pull the offer if we were two hours late with our response.

In the meeting with the lawyer we decided we needed to negotiate a few points and I texted the investor and asked him to email a document we could edit. He responded by saying the offer expired. He said he would consider extending the deadline if we would agree to take it ‘as-is’, without any changes. I was flabbergasted.

After that exchange I knew we were done. My partner insisted on negotiating the deal with the investor and ultimately he did agree to let us make various changes to the offer. But at the end of the day the investor showed his true colors in a single text message – I knew I could never be in business with him.

If you’ve received an exploding termsheet you have two choices. You can ignore it or you can talk to the investor and explain you’re going to need more time. Some very obvious reasons are that you need:

  • Time to review with your co-founders
  • Time to have your lawyer review the termsheet
  • Time to check some references on the investor

At the end of the day the investor, by including a short deadline, is signaling a lack of confidence. If he was confident with his offer he’d happily let you ‘shop’ it around town. Fred Wilson describes how he does it – find guys like Fred to invest in your company and avoid the exploding termsheet.

Comments

comments

Convertible Debt Sucks

This morning one of our investors, Dave McClure, created a twitterstorm when he went on an 18 tweet rant about convertible debt. You can read it here or see it below. It got me thinking about convertible debt and how much it can suck. First, for those of you who are unfamiliar with convertible debt I’ll briefly explain how it works.

B_2IbjlUIAAFB6u

Lets say you and your co-founder have starting building a mobile app and need a little money to get it across the finish line. You are likely too early for venture capital so you start looking for an angel investor. You find an investor who is willing to invest $250K, but you’re not sure how to value a company that in reality is hardly a company, lacking revenue or traction. You could argue it is worth NOTHING. You could also argue that is could be worth BILLIONS in a few short years. If the investor is interested in giving you $250K he believes the latter. Many entrepreneurs, instead of getting into a difficult valuation discussion at this early stage, decide to defer it by offering the investor something known as Convertible Debt.

Convertible debt is basically a loan that converts into equity, usually, upon a future equity financing at a discount of around 20%. Convertible debt, usually, includes a Cap – a maximum valuation for the conversion – early stage deals seem to have a $5M Cap. Dave was complaining about the fact that he’s seeing startups demanding higher and higher Caps – $8-12M. He’s responding by asking for 2X liquidation preference in the event the company is sold BEFORE conversion. I’ll argue that he’s right, but that we’re getting to a point where it almost never makes sense for the investor or the entrepreneur to do a convertible debt deal.

Let me recap why you THINK you want a convertible note:

  • it takes less time to close
  • the legal documents are easier and cheaper
  • you defer the valuation discussion (reducing the amount of time needed)

First, I’ll argue that early stage deals are so straight forward that you can get an equity deal done as easily and quickly as debt deal. Second, most securities firms, assuming they think you’re going to be successful, will do your first equity raise for $5,000 (the same price for the convertible debt). Finally, you’re going to haggle about price ANYWAY. The investor is going to set a maximum valuation for the conversion – usually $5M and you will want to set a minimum valuation in the event a conversion event does not occur – usually $3M. Um, your company is worth about $4M – why not just agree now and issue the investor stock? You avoid the discount. You avoid the interest. You avoid all of the possible downsides of convertible debt. Oh and in the event you sell your company before your next round you don’t have to pay your investors that 2X liquidation preference Dave was ranting about.

Of course, if you can raise convertible debt WITHOUT a cap (or a very high cap – say $12M) you should. Most convertible debt deals don’t have control provisions or board seats – you’ll be in total control of your startup. The reality is that high cap or no cap convertible debt deals are almost unheard of today. In my view the ONLY other reasons you might consider raising convertible debt is if you will be raising money from several investors – getting four or five angel investors to agree on a price might prove itself too hard and the bounded box of a max/min Cap might help get them across the finish line. Additionally, with a convertible note you don’t have to set the amount to be raised – if your first investor agrees to put in $100K you can take it and close and then as the second investor agrees a few weeks later to put in $250K you can it and close and so on.

I used to be a big proponent of convertible debt – we financed ViewMarket and ShopSavvy with convertible debt – but I’m fairly convinced that you might as well just raise equity instead.

Lots of people have opinions on this topic:

Ted Wang, Yokum Taku, Mark Suster, Fred Wilson, and Paul Graham.

 

Comments

comments

Who owns your startup’s software code?

software-developerYou might be surprised by the answer to this simple question. When I began mentoring entrepreneurs almost a year ago I was shocked that almost ALL of them using third-party contractors didn’t have written agreements. If you hire a third-party contractor to write software code for you, but fail to enter into a written contract specifying that the code is a “work-made-for-hire” you don’t own it, I’m not kidding. The courts use a three part test to determine who owns the copyright to the code written by third parties for your company:

  1. was the code commissioned by your company?
  2. is the code consumer facing? (almost all software meets this requirement)
  3. is there a written agreement between the developer and the company specifying the code was developed as a “work-made-for-hire”?

If you fail any one of these tests the actual developer who wrote the code, regardless of how much you have paid him, actually owns the copyright to the software you thought you owned. Even if there is a mutual agreement between you and the developer that the software is a work for hire, failure to obtain a written agreement PRIOR to commencement of the work means he owns the code, PERIOD. Oh and you can’t go back and fix your error. In Schiller & Schmidt Inc. v. Nordisco Corp., 969 F2d 410 (1992) the courts held that retroactive work-made-for-hire is not permitted. This means you can’t go back later and negotiate a contract in an attempt to ensure your startup owns the code.

Of course there is a way to ‘fix’ your screw up. You can enter into a Copyright Transfer Agreement. Work-made-for-hire agreements are far more desirable because the moment you execute the agreement the software is yours EVEN if the actual contract is breached. In the case of the a Copyright Transfer Agreement the developer (or his heirs) has up-to 35 years to terminate the agreement if he determines the contract has been breached. Copyright law is complicated so talk to your lawyer before you freakout, but whenever you hire someone to write software code for your startup make sure the written agreement specifies that the development work is “work-made-for-hire.”

Here is a simple bit of language you should get your lawyer to add to your contract:

The copyright in all works of authorship created pursuant to this agreement are owned by Client. All such works or portions of works created by Developer are “works made for hire” as defined in 17 U.S.C. § 201. Developer assigns to Clients all right, title, and interest in:

(a) The copyright to all works of authorship (“Work”) and contribution to any such Work (“Contribution”) created pursuant to this agreement;

(b) Any registrations and copyright applications, along with any renewals and extensions thereof, relating to the Contribution or the Work;
(c) All works based upon, derived from, or incorporating the Contribution or the Work;

(d) All income, royalties, damages, claims and payments now or hereafter due or payable with respect to the Contribution or the Work;

(e) All causes of action, either in law or in equity, for past, present, or future infringement of copyright related to the Contribution or the Work, and all rights corresponding to any of the foregoing, throughout the world.

Developer may use the Work only until Developer delivers a final product to Client, and may use the Work only insomuch as such use is necessary to the creation of the final product. Client grants no license to developer for any use of the Work other than as expressly described herein. Developer must request a separate license from Clients for any use of the Work other than as expressly described herein. Such license must be explicitly granted in writing, signed by Client, or it is void. Should a court of law with jurisdiction over the parties and the subject matter of this contract deem the Work not a “work for hire,” and should a court of law with jurisdiction over the parties and the subject matter judge the above assignment of copyright void, Developer grants Client an exclusive, royalty-free, irrevocable worldwide license to use the Work without limitation in any manner Client deems appropriate. [via the ASP]

Comments

comments

The ‘Uber’ of the Airline Industry

If you fly long haul you may have started to notice that airlines from the Gulf, including Qatar, Emirates and Etihad, have built huge fleets of brand new luxury jets AND they’re offering fairs at ‘super low’ prices. So low, in fact, that executives from American, Delta and United are asking Obama to step in and ‘level the playing field‘.

Etihad_press_05

The big 3 contend that they can’t compete based on quality or price and it isn’t fair. Much like traditional taxis company’s gripes with Uber, the airlines have conceded they can’t compete in the market and are seeking government intervention to preserve their business.

original_New_Cathay_and_Etihad_Routes_from_Los_Angeles_from_June_1_2014

They content that the Gulf states are subsidizing their airlines. I think it is great if the Gulf states want to subsidize my air travel. I love the new jets and the low low prices. Maybe these ‘Ubers’ of the airline industry will take the big 3 US airlines out of the long haul market in the near term, but eventually they’ll get their act together and figure out how to compete. Right? Truthfully? I don’t really care. I like great products at low prices. Via competition!

699113-etihad-first-class

Comments

comments

Startup Advice: Indemnity Boilerplate in Contracts

Entrepreneurs sign contracts ALL of the time and more often than not if you’re paying attention you’ll notice something called an indemnity clause. Here is a clause from an LOI related to an asset sale:

IMG_7039The Seller represents and warrants that the Purchaser will not incur any liability in connection with the consummation of the acquisition of the Business to any third party with whom the Seller or its agents have had discussions regarding the disposition of the Business, and the Seller agrees to indemnify, defend and hold harmless the Purchaser, its officers, directors, stockholders, lenders and affiliates from any claims by or liabilities to such third parties, including any legal or other expenses incurred in connection with the defense of such claims. The covenants of the Seller in this paragraph 13 will survive the termination of this letter of intent.

We see these sorts of clauses ALL of the time, so often in fact that you may assume they are ‘standard’ and ‘boilerplate’. I am here to tell you that you may be risking your ENTIRE business if you don’t take a moment to actually understand what you are agreeing to. Indemnity means YOU will pay for the other party’s lawyer, associated expenses AND any judgement. In many cases indemnity is warranted, but it must be taken in context with the scope and size of the contract.

For example, several years ago I licensed a piece of software to a billion dollar media company who used it in a mobile application. Subsequently a patent troll filed patent infringement lawsuits against more than 50 similarly sized corporations with mobile applications. I had agreed to a ‘standard’ / ‘boilerplate’ indemnity clause and my lawyer (who is no longer my lawyer) didn’t bother to negotiate it at all. According to the clause we would have to cover all of their legal bills (billion dollar media companies hire REALLY expensive lawyers) and pay any settlement/judgement against them. It was clear we would win the patent case, but the cost of defending against it would run into the hundreds of thousands of dollars – we only made $60K or so on the deal at the time. It was a stupid mistake that could have bankrupt the company.

There are two simple AND reasonable edits you should ALWAYS propose when you see an indemnity clause depending on the nature of your contract (BTW this is not legal advice, talk to your lawyer before signing anything):

Option One (I like this one best):

In no event shall the maximum liability hereunder exceed the sum of $10,000 (or whatever seems reasonable).

Option Two (good for larger contracts):

In no event shall the maximum liability hereunder exceed the amount actually paid to [your company] under this contract.

If the other party balks or has a problem with either one of these options you should really ask yourself “why”. Is there a high likelihood of litigation? damages? If there is maybe you shouldn’t do the deal in the first place. But never ever agree to blanket indemnification without a cap ever again. Okay?

Comments

comments

Texas Shootout: Silver vs. Ziosk

Every news outlet here in North Texas is covering a hometown patent dispute between Andrew Silver and local startup Ziosk. You can read more about the lawsuit on CultureMap.

Ziosk builds and markets a tabletop food ordering system used in more than 1,000 restaurants around the country, while Andrew spends his time filing LOTS of patents. For those of you who have been reading my blog for any time know that I believe the software patent system is VERY broken. Reading Andrew’s patent I continue to be surprised by the crap the USPTO will patent.

US08224700-20120717-D00000

Ironically, the dispute between Silver and Ziosk doesn’t have anything with the absurd patent, instead it relates to a contract dispute between the parties. Payments between the parties were contingent on the patent office granting the patent – a patent that I would argue should have never been granted. Anyway, check out the story – it is fascinating.

Comments

comments

Startup Funding: The problem is you, not your address.

asdfI had the opportunity to drop in on the opening ceremony for Dallas Startup Week 2015 on Monday. During the first panel Michael Johnstone of the Mark Cuban Companies was asked why it was so hard to raise money in Dallas and instead of agreeing with the premise of the question he argued that it wasn’t really harder to raise startup capital in Dallas versus San Francisco. I’ve been thinking about it and I’m starting to think he might be onto something.

Case in point, the other day I met a couple of founders at my StartupMuse office hours and listened to them talk about their mobile application. They’ve been working on it for two years and they’re struggling to raise outside capital. After asking the pair about their personal lives and determining they could easily pick up and move to the Bay Area I immediately told them they should move – that was the ticket to startup funding. The next week one of the founders dropped in on my office hours for a second time and we started playing with the actually mobile application – it was horrible. It was then that I realized moving to San Francisco would be a HUGE mistake for this company. Ironically, I imagine it would be EASIER to raise money in Dallas for this particular team – their deficiencies would be glaring in the Bay Area.

Optically, when you read TechCrunch, the startup publication of record, you’re reading about 90 Bay Area startups for every Dallas based startup so you might naturally assume it is easier for startups to raise money there. The truth might be very different.

10000 SFO Based Startups (unfunded)
1000 SFO Based Startups (funded)
10% funding rate

1000 DFW Based Startups (unfunded)
100 DFW Based Startups (funded)
10% funding rate

These numbers are simply for example, but I hope you get the idea. There are simply far fewer startups in the Dallas area seeking funding. I would imagine that for every 100 startups running around in the Valley there is just one here in Dallas. This is just conjecture, but I wonder if it is actually EASIER to get funded in Dallas? In the Bay Area EVERYONE is starting a company and very few of them are getting funded. In Dallas most everyone is NOT starting a company so those who do are the exception not the rule. Perhaps it is easier for Dallas startups to get attention because they look more like black swans than white ones.

In fact, I am the poster child for Dallas based companies raising venture capital. I have attempted to raise startup capital exactly three times. First with LayerOne (total investment $30M+), then with ShopSavvy (total investment $7M+) and finally with ViewMarket (total investment $10M+). In each case I was able to secure the initial funding as well as follow on funding – I really wonder if I would have been as successful if I was in San Francisco.

I am 100% certain that I am not certain whether or not it is harder for Dallas companies to raise venture capital, BUT I am certain raising money is hard. I do, in fact, believe that most of the companies that aren’t successful at raising capital aren’t successful BECAUSE of their product and team – NOT their location. Good products and teams WILL find investment capital regardless of location.

 

 

Comments

comments

You Only Have 90 Days to Exercise Stock Options

stock_options_cartoonWhen you first took that early stage startup job you were likely enticed by startup lottery tickets called ‘stock options’. These options to purchase shares in the company were granted to you at some exercise price and they vested over a number of years. Lets assume its been a couple of years and you’ve decided to leave to start your own company. Did you realize that in most cases you need to exercise those options within 90 days of the termination of your employment? If you don’t exercise those options you’ll lose them. Ouch!

Here’s how it works. Lets say you were granted 30,000 options at a dollar a share that vested over three years. You’ve been at the company for two years and you’re ready to leave. Within 90 days you need to write a check to the company for $20,000 to exercise your option to buy 20,000 shares (the amount that has vested). Again, ouch! You’re leaving the company and the absolute last thing you want to do is write them a check EVEN if you think the shares will be worth far more in the future.

So what do you do? My advice to employees taking early stage jobs at startups is to negotiate their employment contracts better. The easiest language to add to your agreement is a simple provision that requires the company to ‘loan’ you the money to exercise your vested options upon termination of your employment. In the case of this loan no money would change hands AND you only pay when you can sell your shares (the shares are the only collateral for the loan). Remember, your holding period does NOT begin in this case from an income tax perspective. If you want to begin your holding period upon exercise you need to ensure that the loan is full-recourse (i.e. you own the money even if the shares turn out to be worthless). My advice? Make sure the loan is non-recourse AND don’t worry about paying the higher tax rate. Good luck and keep exercising. :)

Comments

comments