Where is the Private Money Going?

Even with this economy, can companies find funding?

As more and more Wall Street investors get tired of their losses caused by this unstable economy and they think of alternate ways of investing their money. Wait....... didn’t these investors give their money to the so called “experts”, Portfolio Managers or Financial Advisors, these people who were supposed to put Stop Losses in all their clients’ portfolios?

Since January 1, 2008 all financial indicators were showing that the stock market was going down and many financial papers and websites services such as "Investor Business Journal" and "Vector Vest, Inc." among many others were recommending their readers and clients to sell ALL positions and be in cash...

Maybe this so called experts were the same people that were filling up the tee times at the golf courses at their country clubs, knowing that they were going to make their fees no matter wether their clients’ portfolio made money or had big losses...... these same Investors are becoming wiser and realize now that they can make more money or at least save their money if they make their own investments.

These investors are looking for alternative places to stash their money, billions of dollars all over the world.

And we all know that when we look back at times of economic stress, many technological developments, scientific breakthroughs, inventions took place during these times. People that are going to survive and make money are entrepreneurs which are the livelihood of challenging times as these. They are the innovators pushing these inventions forward.

From an article found in Fortune Magazine, November 2008 by Michael V. Copeland called Private Money's Balancing Problem

Points that a basic math problem is causing a sell off in private equity-and providing opportunity for a little-known subset of investors.

"NOT SINCE FOURTH GRADE have so many sophisticated investors been so troubled by a basic math equation. An asset allocation problem called the" denominator effect" is forcing the sell off of billions in private equity and alternative investments.

The problem is straightforward. Portfolio managers have strict guidelines for asset allocation (Harvard's endowment, for instance, is offloading $1.5 billion in private equity to get back to its 13% target.) As the public markets have collapsed and the prices ofliquid assets have plummeted, the value of the overall portfolio, or the denominator, has shrunk. But allocations to venture funds, buyouts, and real estate, which aren't priced often, have held-at least in theory. So a slice that once accounted for 10% of a portfolio now might suddenly account for 15%.

There are two things that fix the problem: a rising market for stocks

or portfolio managers rebalancing by selling off the private-money investments. The latter is starting to happen, with Harvard, Duke, and others unloading alternative-asset portfolios or portions of them. If they aren't already, say industry insiders, practically every big endowment or pension fund soon will be putting something up for sale.

The Great Unwinding of 2008 is providing opportunity for investors in the so-called private equity secondary market, an obscure corner of the private money universe that trades preexisting commitments to alternativeasset funds. By buying these castoff units, secondary-market investors hope to capture the higher returns of alternative assets, and because they can pick and choose among funds or even individual. companies, they do it with slightly less risk. Because these shares provide liquidity, they are typically discounted; in bad times, when everyone is scrambling for cash, they can get dirt cheap. " states Michael V. Copeland in his article.

HOW TO GO FROM CONCEPT TO COMPANY, LEGALLY.

By: Jeffrey A. Bojar of Snell & Wilmer L.L.P

Entrepreneur’s Guide to Legal Hurdles

Entrepreneurship is not a venture for the faint of heart. While support and guidance are available, the entrepreneur’s path to prosperity is marked by numerous legal issues. Here are a few tips and an organizational checklist to help traverse the road to success.

Forming the Business

A range of tax, accounting, structural, corporate governance and certain personal considerations will drive the process of selecting an appropriate business entity. While an entrepreneur is free to operate as a sole proprietorship or general partnership, the entrepreneur will be personally liable for the debts of the business. Fortunately, there are alternative structures — C-corporation, S-corporation, limited partnership, and limited liability company (LLC) — that offer enhanced liability protection. Additionally, these structures offer a range of attributes that are beneficial or detrimental to the entrepreneur depending upon their specific set of circumstances.

In addition to its favorable tax attributes, the LLC provides the most flexibility with respect to allocation of profits and losses, capitalization and corporate governance. Accordingly, the LLC has been gaining popularity as the entity of choice. A S-corporation also takes advantage of favorable tax attributes and may be easier to convert into a C-corporation if that is a longer term goal. Regardless of the business structure chosen, the entrepreneur is forewarned to respect corporate formalities by maintaining corporate records and minutes, holding an annual shareholders meeting, and taking care not to mix personal and corporate property. The absence of these measures could lead to a “piercing of the corporate veil,” depriving the entrepreneur of protection against liability.

Raising Money
To grow operations and in-license technology, many entrepreneurs find that they must seek outside capital. This typically results in the sale of company stock but may also involve promissory notes or a combination of the two. There are only two ways to offer company stock for sale without violating the securities laws (i) register the transaction with the Securities and Exchange Commission or (ii) seek an exemption.

For a start-up with limited funds, the enormous cost and time involved with registration makes that option impractical if not impossible. The most popular exemption available to the entrepreneur is a “Regulation D offering,” referring to Regulation D (Rules 501-508) of the Securities Act of 1933, as amended. To comply with Regulation D, the entrepreneur should limit sales of stock to “accredited” investors if at all possible. An accredited investor is an officer or director of the start-up, a person with a net worth of $1 million, or a person who consistently earns at least $200,000 per year individually or $300,000 with a spouse.

Protecting Proprietary Assets

The value of many companies is contained in proprietary technology and ideas; to preserve this value, an entrepreneur is well advised to properly protect all intellectual property. This involves a multifaceted approach including a trade secret policy and a combination of trademark, copyright and patent protection.
It is also important to capture newly invented intellectual property into the company with applicable licensing agreements/clauses with the University and possibly consulting/employment agreements through the Company. While an attorney can assist in establishing and implementing a plan for protecting intellectual property, it is ultimately that entrepreneur’s diligence that determines its value and integrity.


Checklist
Bringing an idea to market can be a monumental task, intensified by the appearance of unforeseen problems. However, the entrepreneur who approaches these challenges armed with the knowledge of what lies ahead has the ability to defeat disaster and significantly improve their chances of success. The following checklist provides a good starting place for start-ups. While the volume of documents may seem overwhelming, the goal is to provide a solid foundation for the company’s organic growth. Once in the midst of the peaks and valleys of building a company, bringing on shareholders, raising capital and creating intellectual property, it becomes more challenging and expensive to address these foundational matters.

1. Organizational resolutions: Written approval of the incorporators, directors, and shareholders of each of the organizational matters set forth below, in addition to other basic authorizations regarding banking, election of officers, fiscal year, and general authority. Provide a solid foundation for good corporate hygiene. Maintaining such formalities will serve to limit liability and produce clear, consistent, and accurate corporate records.

2. Bylaws: Establish the ground rules and manage the relationships among the Company and its shareholders, directors, officers, and third parties.

3. S-election (if applicable): Election to be treated as a partnership for tax purposes, which needs to be filed with the IRS within two months and 15 days of the Company’s formation.

4. Capitalization table: Reflects the authorized and/or outstanding capital stock and other equity instruments of the Company. Determined with a sensitivity toward long-term goals, including additional investors, dilution, and related matters.

5. Stock ledger: Clear, concise record of all stock certificates outstanding with related shareholder contact information.

6. Stock certificates: Actual certificates indicating ownership of capital stock labeled with appropriate restricted transfer legends

7. Shareholder Agreement: Sets forth the rights of shareholders to purchase, acquire, encumber, sell, dispose, and otherwise transfer capital stock of the Company.

8. Stock Incentive Plan; Notice of Award and Award Agreement: Plan designed with long-term view toward promoting the success and value of the Company by aligning the personal interests of the directors, employees, officers, and consultants with the success of the Company.

9. Charter for Scientific Advisory Committee or Business Advisory Committee: State the purpose and obligations of the Advisory Committees organized by the Company to provide strategic advice and recommendations.

10. Consulting Agreements: For key management and advisory committee members of the Company, designed to define obligations with respect to services to be performed, compensation, expenses, and ownership of intellectual property.

11. Indemnification Agreements: Provide adequate assurances and protection against inordinate risks of claims related to actions by directors on behalf of the Company.

12. Federal Trademark Application and Intellectual Property Plan: To protect the name of the Company and its chief product lines and detail the Company’s proactive plan to develop and protect its intellectual assets and competitive advantage.

Entrepreneurs Undeterred by Crisis

http://www.inc.com/news/articles/2008/11/entrepreneurs-crisis.html
From: Inc.com | November 5, 2008 By: Kelly Faircloth

Many business owners say they would've launched ventures despite the shaky economy, a survey finds.

An overwhelming majority of entrepreneurs say they're undeterred by the shaky economy and would have launched their businesses anyway, according to a survey released this week by Ernst and Young.

Of 116 business owners drawn from the New York-based accounting firm's Entrepreneur of the Year finalists, 92 percent said a poor economy would not have stopped them from launching their startup. As it is, most of the owners launched their businesses during recent boom times.

While many said they're worried the U.S. economy is weaker than believed, 54 percent said they're confident the country will maintain its global economic prominence, the survey found. Over half of the survey responds said they felt their greatest contribution to the economy was job creation, while 28 percent cited innovation and quality of life.

"This survey illustrates the contribution entrepreneurs make by creating jobs, improving local communities and bolstering the larger U.S. economy," Larry Haynes, Americas Director, Ernst & Young LLP Entrepreneur of the Year program, said in a statement.

At the same time, a majority of respondents said they wanted more government support for small businesses, with many saying they're personally involved in policy issues or have appealed to a politician for policy changes. Among their top concerns are rising health care and energy costs, the survey found.

Why do I need a Business Plan?

15 Reasons You Need a Business Plan By Tim Berry | March 13, 2006

Article from Entrepreneur Magazine: http://www.entrepreneur.com/startingabusiness/businessplans/businessplancoachtimberry/article83818.html

Whether you're just starting out, growing your business or seeking outside help, a well-thought-out business plan is the vehicle you need to get you there.

Why do you want a business plan? You already know the obvious reasons, but there are so many other good reasons to create a business plan that many business owners don't know about. So, just for a change, let's take a look at the less obvious reasons first and finish with the ones you probably already know about. Think of this as a late-show top 10, with us building up to the most important reasons you need a business plan.

15. Set specific objectives for managers. Good management requires setting specific objectives and then tracking and following up. I'm surprised how many existing businesses manage without a plan. How do they establish what's supposed to happen? In truth, you're really just taking a short cut and planning in your head--and good for you if you can do it--but as your business grows you want to organize and plan better, and communicate the priorities better. Be strategic. Develop a plan; don't just wing it.

14. Share your strategy, priorities and specific action points with your spouse, partner or significant other. Your business life goes by so quickly: a rush of answering phone calls, putting out fires, etc. Don't the other people in your business life need to know what's supposed to be happening? Don't you want them to know?

13. Deal with displacement. Displacement is probably by far the most important practical business concept you've never heard of. It goes like this: "Whatever you do is something else you don't do." Displacement lives at the heart of all small-business strategy. At least most people have never heard of it.

12. Decide whether or not to rent new space. Rent is a new obligation, usually a fixed cost. Do your growth prospects and plans justify taking on this increased fixed cost? Shouldn't that be in your business plan?

11. Hire new people. This is another new obligation (a fixed cost) that increases your risk. How will new people help your business grow and prosper? What exactly are they supposed to be doing? The rationale for hiring should be in your business plan.

10. Decide whether you need new assets, how many, and whether to buy or lease them. Use your business plan to help decide what's going to happen in the long term, which should be an important input to the classic make vs. buy. How long will this important purchase last in your plan?

9. Share and explain business objectives with your management team, employees and new hires. Make selected portions of your business plan part of your new employee training.

8. Develop new business alliances. Use your plan to set targets for new alliances, and selected portions of your plan to communicate with those alliances.

7. Deal with professionals. Share selected highlights or your plans with your attorneys and accountants, and, if this is relevant to you, consultants.

6. Sell your business. Usually the business plan is a very important part of selling the business. Help buyers understand what you have, what it's worth and why they want it.

5. Valuation of the business for formal transactions related to divorce, inheritance, estate planning and tax issues. Valuation is the term for establishing how much your business is worth. Usually that takes a business plan, as well as a professional with experience. The plan tells the valuation expert what your business is doing, when, why and how much that will cost and how much it will produce.

4. Create a new business. Use a plan to establish the right steps to starting a new business, including what you need to do, what resources will be required, and what you expect to happen.

3. Seek investment for a business, whether it's a start-up or not. Investors need to see a business plan before they decide whether or not to invest. They'll expect the plan to cover all the main points.

2. Back up a business loan application. Like investors, lenders want to see the plan and will expect the plan to cover the main points.

1. Grow your existing business. Establish strategy and allocate resources according to strategic priority. You can find more information about growing your business with a business plan by reading "Existing Companies Need Planning, Too."

Tim Berry is the "Business Plans" coach at Entrepreneur.com and is the president of Palo Alto Software Inc., which produces the industry's leading business planning software, Business Plan Pro, as well as other popular planning applications for businesses.

What to offer an Angel Investor?

A question that we hear all the time is best answered with an article from Inc. Magazine:

http://www.inc.com/magazine/20081101/raising-funds.html

Raising Funds
A candymaker wonders what he'll have to give up for an angel investment
We're expecting $400,000 in revenue this year and considering seeking outside capital for the first time. What do investors usually want in terms of percentage of ownership and rate of return?

Justin Post
Brandini Toffee
La Quinta, California

The answer, in two words: a lot. Which makes sense, because they are taking on a lot of risk. Out of any 10 investments, half will fail completely, says Lewis Gersh, an angel investor and managing partner of Metamorphic Ventures, an early-stage VC firm. Of the remaining five, two will break even and two will return a couple of times the investment. "The profit needs to come from that last company," Gersh says, "which means that every one of them has to have the potential of being a home run."

What's a home run? In an angel's ideal world, an equity investment of $100,000 would turn into $1 million to $3 million in five to seven years. Angels won't complain about a lower return, however, if they can exit more quickly.

You may have to give away a large stake to get the money you need. Whereas a tech company with your level of revenue might be valued at $4 million to $5 million, a toffee maker probably is worth from $1 million to $2 million, according to Rebecca Lovell, program director for the Seattle-based Alliance of Angels. If an angel estimates that your company is worth $1 million, then gives you $250,000, the investor will get a 20 percent stake. That's because the size of the stake is determined by the postmoney valuation of the company -- in this example, $1 million plus the $250,000 investment. If you can show that sales are growing rapidly, you may have some leverage to negotiate a higher valuation. But maybe not. Consumer products is a risky sector; even if your toffee is already on grocery store shelves, a larger company could drop its prices and drive you out.

Don't want to give up a large chunk of your company, only to see it sold off? You could approach friends and family members instead. Unlike a professional investor, Grandma probably can't tell you how to find a great new VP of marketing. On the other hand, she is much less likely to demand a full-ratchet anti-dilution provision. And there's something else to keep in mind. Like VCs, angels are increasingly asking for their shares to come in the form of participating preferred stock, which ranks higher than common stock. In an exit, your angels will receive the face value of their original investment plus any accrued dividends (usually worth about 8 percent a year) before you or any friends-and-family investors receive a cent. Then, if there's any money left over, the angels share in the rest of the pie. If the pie is big enough for all to share, great. If not? Well, you're in for an uncomfortable conversation with Grandma.