Venture Capital Law

BUSINESS LAW – WHAT’S IN A NAME?

Thursday, August 26, 2010 by Scott Kreider

Your friendly Indianapolis attorney at Alerding Castor Hewitt LLP here with a history lesson and tie in to business law. Most of you have probably heard the term “gerrymander” and know that it refers to a process of dividing a territory into districts in order to give one political party an advantage over another by concentrating the voting strength of that party in as many districts as possible. Fewer of you probably know the origin of the term, and I imagine that even fewer know much about the man whose name spawned the term.

The term first originated in 1812 to describe a rather bizarre looking district boundary in Essex County, Massachusetts attributable to then-Governor of that state, Elbridge Gerry. Gerry had signed a bill passed by the state’s legislature to redraw districts that favored his party, the Democratic-Republicans, over the Federalists (whose influence was on the decline). Gerry would go on to be elected Vice President later that year and served under President James Madison; however, he died a couple of years later in office at the age of 70, thereby becoming the first Vice President who did not go on to become President.

Despite the notorious practice that has been associated with his name, Gerry was a Founding Father who made several contributions to the country: For example, he was a signer of both the Declaration of Independence and of the Articles of Confederation. He was also among the dissenting voices that refused to sign the Constitution because it did not contain a bill of rights. As those historians among you know, it was an agreement to create the Bill of Rights (the first ten amendments to the Constitution) that helped to secure ratification of the Constitution.

So how does this tie in to business law, and how does it relate to our business law, Saas law, entrepreneurial law, Indiana technology, and trademark clients? It illustrates how one false step can overshadow an individual’s contributions to our global community and then be forgotten to history. We at Alerding Castor Hewitt LLP know how important your name and reputation are to you; we feel the same way about our own name and reputation. It’s why we are committed to working with you at the planning stage of your business, in securing venture capital, and in helping you with your litigation needs so that you can secure and maintain that name and reputation, and the goodwill that goes with it, so that your name doesn’t get sullied and become the next “gerrymander.”

What it Takes to be a Leader

Friday, August 6, 2010 by Janet Monroe

This morning I attended the Techpoint event: What it Takes to Lead a Successful Entrepreneurial Venture Today and was reminded of some fundamental leadership qualities that I see in many of the successful business owners we work with as a business, entrepreneurial and information technology law firm.

Speaking today were Daniel DeHayes, a Professor Emeritus of Business Administration with the Indiana University Kelley School of Business and Delphia Croft, the Managing Principal of Solution Revolution Consulting.

In the studies that they have conducted collectively, they have found certain characteristics to be present in the leaders of today's successful companies. While they found several, in this session DeHayes and Croft discussed the following four traits:

Sovereign: trust in yourself, your intuition and judgment
Warrior-like: commitment to a greater cause than yourself (though not mercenary)
Open: extreme self-awareness
Intentional: possessing an intense, pro-active focus (shunning habitual thinking)

Considering these traits, I would have to agree that to be successful you must have the confidence to trust in your own capabilities, the strength to execute (while retaining the ability to quickly adapt to the unforeseeable), the humbleness to know your own strengths and weaknesses, and the determination to achieve the goals you set forth.

Successful companies don't happen on a whim, but are backed by the blood, sweat and tears of driven individuals. If you are contemplating striking it out on your own, take a moment to reflect on the above traits and decide for yourself if you have what it takes to be a leader.

As an attorney of a business, entrepreneurial and information technology law firm, it is an honor to work with our clients - those individuals who possess the leadership characteristics to build successful entrepreneurial ventures.

Radical Innovation - Searching for the new frontier

Wednesday, June 16, 2010 by Chris Stephen

I'm going to cheat a little on this. I read a great blog post by Jeff Ready over at the McStartup blog (www.mcstartup.com). The blog post is all about the importance of radical innovation. I have a place in my heart for radical innovation because I believe that in the legal community, we are the radical innovators. ACH strives after its goal to be an information technology law firm, a venture capital law firm and a business law firm, but we go about it in a way that is radical to many other attorneys, because we are business-minded first and we are looking at the areas of business that others are overlooking. So, rather than re-capsulate Jeff's thoughts, here they are in full quoted glory:

The Art of Radical Innovation

Following up on my post about Tom Mason and Rose-Hulman, I wanted to touch on something that Tom is a big believer in and used as the focus of his retirement speech: radical innovation.Radically innovation refers to that type of innovation so powerful and different that it can completely change the profession, institution, industry, business, or person in one fell swoop. Thinking about how radical innovations come about and how they impact the world around us is a favorite subject of Tom.

I bring it up here, because I believe that radical innovation is the key to success in whatever you do – and not just radical innovation, but, as Tom puts it, “continuous radical innovation” – the constant search for those things that will turn your world on its head.

It is true that most businesses are looking to innovate, but to think about radical innovation really changes the way you view things. It’s very different from thinking about “constant innovation” or “continuous improvement” which is the mantra of many businesses today. As Tom quipped during his speech, “General Motors followed the mantra of continuous improvement all the way into bankruptcy.”

Put another way, and to borrow from the world of academia, continuous improvement gets college campuses wired, installs the latest lab environments in the buildings, and creates a campus environment more rewarding for the students. Radical innovation moves the entire university experience online and does away with the campus altogether.
Continuous improvement puts shocks on your carriage. Radical innovation replaces the horse with an engine. Continuous improvement accelerates the reload speed and accuracy of your rifle. Radical innovation gives you a machine gun. You get the idea.

The challenge is to continuously seek the radical innovations in your business – to look for and to go after the very technologies that, if developed elsewhere, would bring a swift and painful end to your business. In the mean time, of course you need to look for ways to improve your business, your products, and your practices. However, time and resources need to be spent going after the radical, not just the better.

This probably sounds a lot easier than it is. Radically innovation is an unpredictable, expensive, and messy business. With limited resources, the temptation will always be to direct those resources toward the projects that will have the most immediate and predictable impact. Just as you would imagine the mad scientist to find himself surrounded by doubters (right up until the invention actually works), you’ll find that investors, employees, partners, and competitors will view resources directed to these “rogue projects” as wasteful, silly, and distracting.

Thus is the challenge of going after radical innovation within an ongoing enterprise. The near term benefit sits squarely on the opposite, and in a world of business that’s often driven by quarterly numbers, high rates of employee turnover and movement, and a desire for immediate satisfaction, it can be extremely difficult to manage the balance of resources between what is today’s reality, and what might change that reality.

The pressure will be on improving today’s reality. But if you’re not careful, you’ll have the world’s greatest carriage company – right up until Henry Ford hands you your lunch – just ask GM.

Funding Law - Investing in C2C Companies

Friday, May 7, 2010 by David Castor

I wrote a post a few weeks back on B2B, B2C and C2C technology companies in Indianapolis. Here are a couple of paragraph excerpts:

Indianapolis has done some amazing things in SaaS technology markets. As many readers of this blog know, much of my business law practice focuses on SaaS law, Internet law and funding law. Most of this is in business-to-business (B2B) SaaS markets. This week I was thinking about how this is not just true of my practice, but it also is true for Indianapolis as a whole. Most software companies in Indianapolis are in B2B markets.

It is clear that the Indianapolis entrepreneurial culture accepts and supports B2B companies. It is less clear to me how much it supports or fully understands B2C and C2C markets. I have seen companies in these markets struggle to win peer support or obtain first-money funding locally; Whereas I see coastal investors much more willing to back companies in B2C and C2C markets.

It makes sense to me that local investors are less interested in investments in C2C companies. C2C Internet companies, usually social media sites, build scale rather than profit in the early years. The company value is ultimately in the consumer database that is built over time rather than well thought through cash flow models.

Savvy venture capital and private equity investors who invest in C2C companies hedge their bets by investing in several C2C companies in a given period of time. C2C companies are high risk - they usually will either be phenomenal and show a 150x return or more or they will crash and burn. Let's say 1 of 10 C2C companies is successful - a wise investor will hedge his investments and put money in 10 to 20 companies over a period of time - knowing that most will crash and burn but a couple will work out. The success stories realize a return large enough to make the entire portfolio of investments worth while.

In a market like Indianapolis, which has not fully embraced C2C business models, I have seen investors invest in 1 or 2 C2C companies in their portfolio of investments made up mostly of B2B and B2C companies. This seems like playing roulette with all money on one number.

Culture of Private Equity

Monday, May 3, 2010 by David Castor

In my recent blog series, Entrepreneurial Law - Developing a Good Business Model, I addressed how an entrepreneur needs to work through three prongs in order to develop a sustainable business model developed for growth: Market Opportunity; Management Team; and Capital Structure.

Private equity investors asses the same prongs when determining whether to make an investment in an emerging company, but I find that investors tend to set the prongs in their own priority ranking. I think all three must be in place, but investors always seem to have one prong that they really focus on.

Some of this is cultural based on geographic region. Take New York, Midwest and West Coast investors for example. I do a lot of work with private equity groups in each region and consistently find investors in each region to rank the prongs in levels of their own importance. Here is what I find:

New York (financial center of the world):
1.    Capital Structure
2.    Management Team
3.    Market Opportunity

West Coast (land of emerging technology businesses and venture capital):
1.    Market Opportunity
2.    Capital Structure
3.    Management Team

Indiana (my home; land of hard work and community)
1.    Management Team
2.    Market Opportunity
3.    Capital Structure

Consider this if you are looking for private investors in your business. This affects how you may address certain investors and where you look for investments.

See also:

Entrepreneurial Law – Developing a Good Business Model – Part I
Entrepreneurial Law – Developing a Good Business Model – Part II
Entrepreneurial Law – Developing a Good Business Model – Part III
Entrepreneurial Law – Developing a Good Business Model – Part IV
Entrepreneurial Law – Developing a Good Business Model – Part V

US Private Equity - Consider Investors Outside of State

Friday, April 2, 2010 by David Castor

I love Indianapolis, but I find it a difficult place for emerging companies to raise capital through private placement offerings. More established companies have less trouble, but earlier stage companies often are caught in a chicken/egg situation – they need capital to move to the next business stage, but private equity investors don’t want to invest until they are through that next stage.

Part of what makes Indiana so great is that we are very fiscally conservative. In fact we were one of only three States with a budget surplus in 2009. Private equity investors in Indiana seem to be willing to accept lower expected returns for lower risk investment opportunities. That does not bode well for early stage companies as seed stage and early round equity raise companies are often seen as too high risk for investment.

There are some exceptions. Gravity Ventures, for example, is a private equity fund that invests in emerging stage companies. Also, Indianapolis is home of some angel investors and angel investment groups that are true patrons for the entrepreneur and have a passion for helping early stage companies. But, we don’t have enough of these funds and investors to take care of all of the great companies that are started in this city.

This is why I travel as often as I do to California and New York – to build relationships with investors and investment groups that make investments in companies in emerging stages. Coastal investors appear more risk tolerant than Indiana investors. They are not foolish (their due diligence processes often greatly outweigh what I have seen in Indiana), but they are willing to take more investment risk in hopes for higher returns. One particular CA investor this past week was telling me about a 40x return on a 4 1/2 year exit off of a $200k investment. That is $200k to $8M in less than 5 years. Key to such a high return was the investment at the seed stage. Of course, what he is not telling me is that he hits 1 for 10 of good returns.

~~~~~~~
Other posts that may be of interest:

A World of Private Equity
Two Types of Violations in Private Equity Offerings
Rules of Funding
Entrepreneurial Law - Proof of Concept & Proof of Scale

Rules of Funding

Thursday, March 11, 2010 by David Castor

There is a good article on the Mercury News Blog today on How dot-com start-ups have changed 10 years later. The article addresses the maturity of both technology companies and US private equity investors over the last decade. It is an interesting read.

There has been a lot of activity in angel investor groups and venture capital investments in Indiana technology companies over the last few months. 2010 has definitely started with a bang at Alerding Castor Hewitt where we have helped five companies secure funding this calendar year. I am traveling with two technology clients in a couple of weeks to meet with investors in Southern California.

Still, the same rules apply when seeking funding. An early stage company looking for funding must prove:

1.    Management Team (including expertise in field and proven financial and leadership ability)
2.    Market Opportunity (including the need, ability to meet the need and scale)
3.    Investment Opportunity (is the expected return worth the risk of investment)

~~~~~~

Alerding Castor Hewitt, LLP is an Indianapolis law firm focusing on business law, information technology law (including SaaS law and legal technology consulting), private equity consulting, and business and Internet litigation.

Entreprenuerial Law - Finalist Chosen for Purdue Business Competition

Thursday, February 18, 2010 by David Castor

A few years back, sometime in the mid 1990’s, while an undergraduate business student at Purdue University, a fellow classmate and I entered the Burton Morgan Entrepreneurship Competition. We were the only undergraduate students chosen as top 10 finalists in the event – an accomplishment for which I am still quite proud.

I remember the program as being challenging, informative and humbling. Following rounds of having our business plan reviewed and commented on by professors, we presented to a panel of judges which was made by business owners, private equity investors, and professors. The judges did not hold back on us. They told us exactly where our business model issues were. Most of the issues related to assumptions and implications underlying our financial projections and other business model variables that we had not taken into account.

I remember as a 21 year old being embarrassed by some of the points that we had not addressed in our plan, but the judges’ comments were not degrading – they were taken as a challenge and learning experience. We did not make the top 5, but the experience was invaluable.

It is amazing that I use these same comments today as a business law / funding law attorney with my business law clients. I review somewhere in the range of 75 to 100 business plans a year - either for clients seeking private equity or venture capital funding, for due diligence for clients looking to make investments, or for clients creating operational plans to launch out in their own venture. It is interesting how many of these plans fail to address financial assumptions and implications and business model variables.

Today I am closely connected to two of my three alma maters – Krannert School at Purdue and Butler College of Business where I did my MBA. Both schools have great entrepreneurship programs. Last month I guest lectured at Purdue’s entrepreneurship capstone course. Next month I am serving as a judge in their elevator pitch competition. I also stay tightly tied in with Butler and have worked on business or private equity deals with certain professors at the MBA program.

This week Purdue announced their top 10 finalists for the Burton Morgan Business Plan Competition. Our friends at Inside Indiana Business wrote a nice summary of the finalists. Check out the article.

Where Have I Been? - 2010 Update

Thursday, February 18, 2010 by David Castor

I have taken a few weeks off of blogging. Honestly, I felt like I needed the break, but I am excited about getting back on the saddle and writing again.

Since it has been a few weeks, let me give a brief update on what we have been up to. Alerding Castor Hewitt has had an exciting beginning to 2010. On January 1, Bill Boncosky joined us. Bill is a business attorney / technology and SaaS law attorney working with privately held companies, primarily in technology industries. Bill has spent the last seven years as General Counsel at ExactTarget. We all have much to learn from him and are thrilled to have him as part of the team. The IBJ put out a nice article in January on our firm's focus on entrepreneur law and Bill's joining us in this field.

This week Scott Kreider joined our business litigation group. Scott adds to a team headed up by Mike Alerding that handles a difficult and necessary discipline for any full service business law firm – handling business disputes. It is great to have him aboard. Also, Mike made the IBJ's 40 under 40 the other week. Good stuff.

Over the last few weeks our firm has helped four clients through capital funding processes - three from angel investors or private equity firms and one from a venture capital firm. It is always encouraging to see business clients grow, and we count it as an honor to be part of their process.

We have also been involved with many businesses and business owners through customer deals and strategic business growth matters. We will write more on some of those matters in future posts.

I was a guest lecturer the other week at Purdue’s entrepreneurship capstone course. Man I felt old, but I was very encouraged by the enthusiasm, drive and smarts from this class.

So there is the fire hose version of the last few weeks. 2010 is off to a strong start for ACH. I am looking forward to what is coming down the pike.

~~~~~~

Alerding Castor Hewitt, LLP is an Indianapolis law firm focusing on business law, information technology law (including SaaS law and legal technology consulting), private equity consulting, and business and Internet litigation.

SaaS Law – Don’t Use The Term “Affiliates”

Monday, December 14, 2009 by David Castor

There are several scope of license issues to work through when handling license agreement negotiations. In my SaaS law (SaaS legal consulting) practice I often see licensees wanting to open the scope of the license to its “affiliates”.

For many larger SaaS customers this makes sense as these businesses often operate as families of companies rather than single operating entities. The customer may need to open the license to its other companies in order to properly use the software. Just last week I was negotiating a Software License and Services Agreement with a Fortune 100 company that has over 50 companies in its U.S. operations alone. They needed SaaS user seats for most of these companies.

The problem with the term “affiliates” is that it is not precise and may mean different things to different parties. Some contract terms have clear legal meanings. For example, “subsidiaries” commonly means companies which are owned and controlled by another company. “Parent” commonly means the company that owns the subsidiary. “Joint venture” commonly means a contractual relationship between two companies to engage jointly in a particular operation.

“Affiliates” does not have a common meaning for most contractual purposes. At the highest level the term points to a working or organizational relationship between two companies, but it is unclear how related the two companies have to be in order for them to be considered affiliates. For example, are joint ventures affiliates? Are management companies or consulting companies affiliates?

The term is defined differently in Federal and State laws and by legal dictionaries.

The Banking Act of 1933, for instance, contains a very broad definition as any organization that a bank owns or controls by stock holdings, or which the bank's shareholders own, or whose officers are also directors of the bank. This definition is probably much broader than most licensees intend and most licensors are willing to accept.

The IRS defines the term much more narrowly (for purposes of consolidated tax returns) as a group of companies whose parent or other inclusive corporation owns at least 80% of voting stock. This definition may be more narrow than the licensee intends.

The Investment Company Act defines “affiliates” as a company in which there is any direct or indirect ownership of 5% or more of the outstanding voting securities. I am not sure if any licensee or licensor is intending that precise scope when using the term.

Black’s Law Dictionary defines the term broadly as a corporation that is related to another corporation by shareholdings or other means of control. By that definition a management or consulting company could arguably be considered an affiliate.

The Ninth Circuit court recently adopted the Black’s Law Dictionary definition as it applies to the TCPA (an opt-in privacy law related to telephone marketing), but interestingly, the court also determined that because there was no direct contractual relationship between the two companies, they were not affiliates. Thus, the court apparently also needs to see a contractual relationship between the businesses for them to be affiliates.

Finally, a note for Indiana technology companies – Indiana Code 23 (the Indiana business statute) does not define “affiliate” and Indiana courts have not yet addressed the definition in a business structure context.

You see the point. The term is messy – which is why it should be avoided. The point of contracts is to be clear and avoid ambiguity. This term can create ambiguity and lead to unnecessary disputes down the line.

Indiana Is More Than Low Cost Housing And A Good Family Enviornment

Friday, November 20, 2009 by David Castor

There are several business blogs that I follow. Most of these are written by SaaS law / Internet law clients of mine or other Indiana businesses in technology industries. Lately I have been falling behind on them. This morning I am trying to catch up.

I came across a very good, brief video on Kristian Andersen + Associates' blog.

The video is from the Bigger Ideas/Smaller Indiana conference this past summer. In the video Kristian Andersen shares his feelings on central Indiana's business environment and our tendency to minimize our solid business culture by holding ourselves out as having two strengths to attract businesses and entrepreneurial ventures to Indiana:

#1 - Indiana has low housing costs.
#2 - Indiana is a great place to raise a family.

Don't get me wrong, these are great attributes of our region, but I agree with KA that they do not create cultural excitement or substantive value for businesses. If you look at top tier business environments, they certainly do not market themselves in this way. They sell value. They sell cultural significance. They sell networks and incentives.

Kristian, very nicely done!

~~~~~~

Alerding Castor Hewitt, LLP is an Indianapolis law firm focusing on business law, information technology law (including SaaS law and legal technology consulting), private equity consulting, and business and Internet litigation.

Don't Drink the Kool-aid, Choose Your Partners Wisely

Tuesday, November 17, 2009 by Janet Monroe

Indiana Technology Lawyer, Indiana Technology Counsel I saw a great article awhile back in Entrepreneur and thought I should post the article for those in the formation stages of their next business venture.

I can't stress enough how much time and energy it takes to launch a start-up, and just how much the success or failure of a budding new company rests on the people involved. I see it everyday as an Indiana technology lawyer involved in Indiana entrepreneurial law.

You can count on spending hours upon hours of the day with your business partners, so consider who those people are wisely. At the very least, read this article by Scott Gerber, who is a columnist for Entrepreneur.com's Young Entrepreneur and the CEO of Gerber Entertainment.

Partnerships can turn out to be a blessing or a curse. For every thriving partnership featured in Entrepreneur, there are thousands that end up stagnant, dissolving, dysfunctional or worse--in court. More often than not, performing basic due diligence can keep you from ending up in bad partnerships. So, have you done your homework? Are you ready to trust your financial security on someone else’s personality, work ethic and business acumen? Before you drink the partner Kool-Aid, here is a list of the top ten worst business partners for your start-up--along with some tips to help you avoid this cast of characters:

Mr. Employee
Mr. Employee is a first-time entrepreneur with a pristine resume and an abundance of references. He enjoys collecting a weekly paycheck, health benefits, and eating dinner with his family nightly at 7 p.m. Unfortunately, Mr. Employee isn’t really self-sufficient and doesn’t know how to move the business forward without you instructing his every move. Plus if your investment deal doesn’t pan out soon he is going to need to find a “real job” to pay the kids’ college tuition. Tip: Risk-adverse individuals who do not share your priorities will not be productive partners. Pass up individuals who cannot commit equal time, energy and financial resources.

Mr. Perfectionist (also known as Mr. Procrastinator)
Mr. Perfectionist needs every “i” to be dotted and “t” to be crossed before he schedules an official product launch date. He enjoys researching competitors, building industry case studies and improving his 150-page business plan. Mr. Perfectionist really wanted the new business to be up-and-running by now, but still feels something isn’t quite right. He plans on putting together another comprehensive survey to send to all of his colleagues, friends and family in the next few weeks to help flesh out the concept further. Tip: A good plan today is always better than a perfect plan tomorrow. Steer clear of excuse-prone procrastinators. Seek out self-starters who run with the ball and make things happen.

Mr. College Buddy
Mr. College Buddy had a stroke of genius while out at the bar one night, wrote it on a cocktail napkin and asked you to help him “make it happen”. He enjoys bragging about his great idea and giving you directions on how to execute (he’s not into the “heavy lifting” thing). The issue: he’s moving across country to start med school in the Fall. But fear not, Mr. College Buddy will make himself available by phone when he’s not studying, working, in class or on a date. He’ll be sure to forward you the address where you can mail his 50% of the profits. Tip: Never assume all of the risk in exchange for half the reward. Ideas are worthless without proper execution. Before you bring a co-conceived idea to fruition, make certain that your partner plans to be around for the long-run. Napkins are not legally binding. Always execute an operating agreement.

Mr. Inventor
Mr. Inventor thinks he’s created the next billion-dollar widget. He enjoys giving two-hour dissertations on Chinese electrical engineering standards to investors and making business decisions based on ‘nice people’ and ‘gut feelings’. Mr. Inventor doesn’t really understand the phrase ‘in the black’, but feels it’s imperative to spend all of the company’s investment proceeds on research and development. Tip: Brilliant academics are not necessarily brilliant businessmen. In lieu of a partnership, first consider licensing deals or strategic partnerships. If you decide to go ahead with a partnership, be sure your agreements clearly distinguish the differences between product control and operational control.

Mr. Right
Mr. Right will be the first person to tell you that he is never wrong. His favorite phrase is ‘my way or the highway’. He will rarely discuss his decision making process because he views such discussions as a weakness. He enjoys demeaning partners who don’t agree with him and making decisions without telling them. Funny thing about Mr. Right: he always seems to blame everyone but himself when his plans don’t pan out. Tip: Communication is the key to a successful partnership. Find a collaborator, not a dictator. No one is always right.

Mr. Dreamer
You’ll hear Mr. Dreamer say this line a lot: “One day, when we’re millionaires…” He loves talking about retiring by 29 and how he intends to spend his hypothetical millions on a gold plated yacht that he’ll dock off the coast of his private island. One small problem with Mr. Dreamer: he doesn’t seem to know how to keep the business above water next month. Tip: Big paydays come from years of hard work and persistence, not excessive rambling and daydreaming. While it’s important your partner be both positive and optimistic, it is equally important that he or she is grounded and focused.

Mr. Spender
Mr. Spender can’t possibly survive without a six-figure salary, lavish office and an in-house cigar roller. Price is no object when it comes to entertaining a client or flying first class. If you’re lucky, Mr. Spender might even invite you to one of the extravagant dinner meetings that he charges on your company’s corporate card. Tip: There is no such thing as the unlimited checkbook. Partner with fiscally conservative, financially responsible individuals who strive to make every dollar benefit company growth and development--not their personal lifestyles.

Mr. CEO
Mr. CEO feels compelled to tell everyone that he is a CEO within 30 seconds of meeting him--even if his company is worth less than the paper on which his business card is printed. He loves cocktail receptions, his name written in fancy fonts, and stacks of luxury car magazines neatly piled on a coffee table in plain sight of customers. The only thing he doesn’t seem to like: real work. Tip: Successful companies are not built on titles, talking and toys. Keep away from selfish, egotistical individuals who want to talk the talk versus walk the walk.

Mr. Vacation
I’d tell you more about Mr. Vacation, but I don’t know much about him. He never seems to be around. Tip: No-shows are dead weight and eat away profits. Make sure that your operating agreement clearly outlines partner responsibilities and vacation days.

And the partner to avoid like the plague is…

Mr. Personal Issues
Mr. Personal Issues always has a sad story. On the same day as your company’s keynote presentation at the big conference, his son’s wisdom teeth need to be pulled and his dog died of pneumonia. He would love to attend next week’s investor meeting, but his divorce hearing might tie him up all day. Unfortunately, Mr. Personal Issues can’t afford his legal bills, so he’ll need to pull a little more money out of the company this month to avoid his ex-wife from taking 50% of his equity in the settlement. Thankfully, this will be the last time he needs money… Tip: You’re not in business to be a babysitter or a psychiatrist. Know everything there is to know about a prospective partner before you sign on the dotted line. Discuss everything from business to politics to family life to finances. If a potential partner seems to have a few screws loose, run as fast as you can in the other direction.

Funding Innovation in Indiana

Wednesday, September 30, 2009 by David Castor

Yesterday I had the honor of moderating the plenary panel on Funding Innovation in Indiana at the TechPoint Innovation Summit. This was just a great event.

The panel members included Michael Brown of Battery Ventures - Boston, Michael Arpey of Credit Suisse - New York, Steve Hourigan of the 21st Century Fund, Mathias Schilling of BV Capital - San Francisco, and Bob Compton, a serial entrepreneur most recently founding Vontoo, LLC. I want to thank the members once again for their participation.

The panel members represent private equity investors, angel investor groups, and grant funding organizations which look for funding and investment opportunities in Indiana technology companies. Each came with unique perspectives and advice for businesses and business owners seeking funding. Each has been a part of funding innovation in Indiana in the past, and each are looking for opportunities in the future.

My firm focuses on SaaS law, Internet law and funding law for technology companies. We serve as general counsel to companies in these industries and have walked with several businesses through the funding process. I am very proud to have shared in the event this week with such a prestigious group.

My colleague, Janet Croswell, mentioned to me afterwords that our panel set-up looked much like Kramer's talk show on Seinfeld. See the picture above. She may be right!

TechPoint Innovation Summit 2009

Monday, September 21, 2009 by David Castor

Funding Law / SaaS Legal Counsel - TechPoint Summing

Next week is the TechPoint Innovation Summit. This will be an exciting event for Indiana-based technology leaders.

This year I am pleased to moderate the plenary panel discussion on "Funding Innovation". As an Indiana tech lawyer / SaaS law attorney who helps clients set capital structures and meet capital goals, this is a topic I live and breath and am always striving to see fulfilled. Thus, I am thrilled to take part in this discussion.

The panel consists of venture capital and private equity investors from all over the nation - all with experience in funding innovative companies in Indiana. I have met a ton of technology business owners seeking capital investors to fund their innovation initiatives, but I have met very few who know how to navigate the process well (or even where to begin). This panel will address questions for early-stage, mid-stage, and later stage companies looking for capital infusion.

A bit on TechPoint:

TechPoint promotes technology-based enterprise and economic development through lobbying and government advocacy, educational and networking programs, and strategic economic development initiatives. TechPoint seeks growth in Indiana's emerging technology clusters, including advanced manufacturing, logistics, health and life sciences, and information technology.

The entire summit will be a great event. Many of the topics of the summit are going to be those that I have addressed with my business law / SaaS law clients. Check out the website and the agenda and consider attending.

Entreprenuerial Law – Financing Myths

Thursday, September 17, 2009 by David Castor

I read an interesting post yesterday on Small Business Trends by Professor Scott Shane, Professor of Entrepreneurial Studies at Case Western Reserve University. It is a good read for current entrepreneurs and those daring to dream of starting their own company.

Here is the post:

Most entrepreneurs believe a bunch of myths about financing new companies that hinder their efforts to raise money. Here are a few:

Myth 1: It takes a lot of money to finance a new business. Not true. The typical start-up only requires about $25,000 to get going. The successful entrepreneurs who don’t believe the myth design their businesses to work with little cash. They borrow instead of paying for things. They rent instead of buy. And they turn fixed costs into variable costs by, say, paying people commissions instead of salaries.

Myth 2: Venture capitalists are a good place to go for start-up money. Not unless you start a computer or biotech company. Computer hardware and software, semiconductors, communication, and biotechnology account for 81 percent of all venture capital dollars, and 72 percent of the companies that got VC money over the past 15 or so years. VCs only fund about 3,000 companies per year and only about one quarter of those companies are in the seed or start-up stage. In fact, the odds that a start-up company will get VC money are about 1 in 4,000. That’s worse than the odds that you will die from a fall in the shower.

Myth 3: Most business angels are rich. If rich means being an accredited investor — a person with a net worth of more than $1 million or an annual income of $200,000 per year if single and $300,000 if married — then the answer is “no”. Almost three quarters of the people who provide capital to fund the start-ups of other people who are not friends, neighbors, co-workers, or family don’t meet SEC accreditation requirements. In fact, 32 percent have a household income of $40,000 per year or less and 17 percent have a negative net worth.

Myth 4: Start-ups can’t be financed with debt. Actually, debt is more common than equity. According to the Federal Reserve’s Survey of Small Business Finances, 53 percent of the financing of companies that are two years old or younger comes from debt and only 47 percent comes from equity. So a lot of entrepreneurs out there are using debt rather than equity to fund their companies.

Myth 5: Banks don’t lend money to start-ups. This is another myth. Again, the Federal Reserve data shows that banks account for 16 percent of all the financing provided to companies that are two years old or younger. While 16 percent might not seem that high, it is 3 percent higher than the amount of money provided by the next highest source — trade creditors — and is higher than a bunch of other sources that everyone talks about going to: friends and family, business angels, venture capitalists, strategic investors, and government agencies.

As a business law, SaaS law/ASP law and private equity attorney, I see early stage technology business owners encounter these myths regularly. When looking at developing an early stage technology business, key is to consider market opportunity and your ability to meet the opportunity based on your constraints (including capital constraints and founding team abilities).

~~~~~~

Alerding Castor Hewitt, LLP is an Indianapolis law firm focusing on business law, information technology law (including SaaS law and legal technology consulting), private equity consulting, and business and Internet litigation.

SaaS Law - Enterprise 3.0

Thursday, September 3, 2009 by David Castor

Indiana Technology Counsel - Enterprise 1.0

I read an interesting blog post by Thomas Klein of Sand Hill Group this week on the evolution and future of enterprise software.

Klein states that a new wave of enterprise software has emerged and is “pulsating through the economy” and venture capital will soon take notice. The new platform is marked principally by SaaS and cloud computing. The industry visionaries are referring to this new era of enterprise software as Enterprise 3.0.

I found Klein's summary of the history of enterprise software interesting. Here is an excerpt of his post:

Enterprise 1.0 occurred during the great mainframe expansion that began in the early 1950's and ran until the minicomputer revolution in the early to mid 1970's. Enterprise 1.0 was characterized by "Big Iron" mainframe computers with a few thousand dedicated connections to the machine, and once-a-day batch processing. IBM was dominant in this field with several other players that together were referred to as "IBM and the Seven Dwarfs." The dwarfs were Burroughs, UNIVAC, NCR, Control Data, Honeywell, GE and RCA, later after mergers referred to as "IBM and the BUNCH" (Burroughs, UNIVAC, NCR, Control Data, and Honeywell). Operating and application software were initially written in-house by programmers dedicated to their mainframe systems, until mainframe adoption spread into most large enterprises in the late 1950's and early 1960's.

At that time, independent software companies emerged to write specific applications. The Computer Usage Corporation (CUC) was founded by two former IBM employees in 1955, and by 1967, CUC had 700 employees in 12 cities. The Systems Development Corporation (SDC), a division of the RAND Corporation, was formed in 1956 to develop a large air defense system. SDC employed hundreds of programmers and was referred to as "programmer university". The Computer Sciences Corporation was formed with five founders in 1969, and had 68,000 employees by 1990. Most of these early entrants into independent software development were formed by programmers writing custom programs for individual customers. By the mid-1960's, however, independent software companies began developing and marketing software packages that could be used by many different types of customers. One innovator in this era was Informatics, which wrote and sold the hugely popular Mark IV database in the mid-1960's.

Although minicomputers were developed in the 1960's, their widespread adoption in the 1970's marked the flourishing of Enterprise 1.0. Digital Equipment Company, formed in 1964, was the first successful minicomputer maker, but other companies along Massachusetts route 128 joined in the growth of the minicomputer market during the 1970's: Data General, Wang Laboratories, Apollo Computer, and Prime Computer. Tracy Kidder won a Pulitzer prize for his non-fiction book The Soul of a New Machine, detailing the development of Data General's minicomputer. In 1984, there were 91 minicomputer companies in the United States. By 1990, there were less than 10.

The last hurrah of Enterprise 1.0 was the flourishing of software companies developing products for the minicomputer market. Some names were American Software (1970), Tesseract Systems (1970), Walker Interactive Software (1971), ASK Computer and Ross Systems (1972), Compuware (1973), Cyborg Systems (1974), Computer Associates and SAS Institute (both 1976), and Candle Corporation, J.D. Edwards, Oracle Corporation, Softool (all formed in 1977). The most successful enterprise software at the time was Computer Associates, which acquired dozens of software product companies. A well-known pioneer during this period was John Cullinane who in 1968 founded Cullinane Software, which was the first software product company to go public, in 1978.

The PC platform was the death knell for minicomputers as client-server architecture took over the enterprise in the early to mid-1980's, heralding Enterprise 2.0. Enterprise 2.0 was marked by data continuously available and updated, millions of connections to the network rather than mere thousands, and data available from the network almost anywhere, rather than just at a terminal connected to a mainframe or minicomputer. The client-server architecture required entirely new software at the system level, management level, and at the client level. With decentralization and distribution, the advent of networks, and Marc Andreesen's Mosaic user interface to the Internet (later commercialized at Netscape), Enterprise 2.0 was at its height, and another flourishing of enterprise software companies took place. There were not only Netscape, Microsoft, Oracle, Peoplesoft, Sybase, Informix, Platinum Technology, BMC, BEA, and Red Brick, but also Arbor, Aurum, Broadvision, Scopus, Simware, Sun's Java platform, and hundreds of other companies offering platforms, management software (e.g. Remedy's helpdesk software), security software, enterprise applications, and of course even client-level applications. The industry consolidated again in fits are starts over the next decade, accelerated by the recessions in 1990-91, the mild slowdown in 1994-95, and the tech bust of 2000-2002.

Today, the software industry is at the threshold of Enterprise 3.0, where data is continuously updated and available all the time from multiple devices anywhere in the world, with billions of connections to systems and users through online networks that are not tethered to a specific enterprise's system. Saas and Cloud computing are part of Enterprise 3.0, and cloud vendors are capitalizing on the infrastructure needs of the new paradigm. Enterprise 3.0 is characterized by vendors solving highly specific problems and providing highly customized solutions for customers by bringing together just the resources needed for that solution, and doing so on a model where almost all the infrastructure and development are outsourced in one form or another. The hosting of the data may be outsourced to a hosting company, the software development might be outsourced to a development team, other software might be purchased on a Saas model, and storage might be purchased on a terabyte basis from a cloud vendor. The ability to collaborate and affiliate easily are central to effecting these solutions for customers and making money in Enterprise 3.0.

There is a flourishing of SaaS, cloud, and infrastructure vendors filling market spaces in new Enterprise 3.0 sectors. Companies like Cast Iron Systems, Cloudera, Corticon Technologies, Gridapp Systems, Instantis, Kace, Marketo, Mobclix, Nirvanix, SOA Software, SmartVault, Vkernel, Wize, and Zetta are a few of the companies penetrating the multitude of new segments opened up by the Enterprise 3.0 paradigm. Many of these companies have received venture funding, and the venture capital community is once again very interested in enterprise software, albeit looking for specific niches that each venture group perceives as potentially high growth. Fortunately, Enterprise 3.0 offers a superabundance of these niches for investment capital. Accordingly, venture capital is alive and well in the new enterprise software market, and that is reason for optimism in the enterprise software industry.

As an entrprenuerial law and SaaS business law attorney, I am always on the lookout for trends in US private equity and venture capital in SaaS industries. This area of entrprise software licensing is one area I have noticed interest from private equity firms in the last 18 months or so.

~~~~~~

Alerding Castor Hewitt, LLP is an Indianapolis law firm focusing on business law, information technology law (including SaaS law and legal technology consulting), private equity consulting, and business and Internet litigation.

US Private Equity - Culture of Private Equity Investors

Sunday, August 16, 2009 by David Castor

I have met with private equity firms, angel investor groups, and venture capitalists all over the nation about tying into private equity investments in Indianapolis – primarily with SaaS businesses. I am always amazed by the cultural differences of investors in different areas of the country.

In Indianapolis, for instance, investors typically want to consider investment opportuntities by looking at aspects of the business plan in the following order: (1) Management Team; (2) Market Opportunity, and then (3) Investment Opportunity. Maybe this is traditional Midwest relational values, but first and foremost, investors want to know who is involved. Ultimately the investor wants to know that he trusts that the individuals can carry out the businss plan before considering the business plan itself and the investment deal.

In California, on the other hand, this is flipped on its head. Investors typically want to see (1) Investment Opportunity, (2) Market Opportunity, and then (3) Management Team. Before you go into anything related to the opportunity or the ability of the team to carry it out, let’s talk about the deal. What is the expected return? What is the exit strategy?

Note that in both cultures, all three elements have to exist. You have to prove that the market has a business opportunity that can be met by this business, that this team can be trusted to carry out a plan, and that success on meeting this opportunity will provide a return to the investor that is significant enough for them to take the risk of making the investment.

~~~~~~

Alerding Castor Hewitt, LLP is an Indianapolis law firm focusing on business law, information technology law (including SaaS law and legal technology consulting), private equity consulting, probate and business litigation.

Raising Private Equity - Don't Get Lost In Pre-Money Valuation

Wednesday, July 22, 2009 by David Castor

Global Private Equity - Negotiate Your Position

I read an interesting article on the Seeing Both Sides blog last week which addressed valuation terms considered by private equity investors when negotiating deals. The article primarily addresses how an entrepreneur’s misunderstanding of valuation terms could harm the entrepreneur’s ultimate equity position following the equity raise.

Among other topics addressed, the article discusses the impact of management option pools on business valuations as considered by venture capitalists or other private equity investors. Here is an excerpt:

Another term that impacts the price is the size of the option pool. Most VCs invest in companies that need to hire additional management team members and sales and marketing and technical talent to build the business. These new hires typically receive stock options, and the issuance of those stock options dilute the other investors. In anticipation of those hiring needs, many VCs will require that an option pool with unallocated stock options be created prior to the money coming in, thereby forming a stock option budget for new hires that will not require further dilution after the investment. In our $4 million invested in a $6 million pre-money valuation example above (known in VC-speak shorthand as “4 on 6”), if the VCs insist on an unallocated stock option pool of 20%, then the investors still own 40%, there is a 20% unallocated stock option pool at the discretion of the board, and a 40% stake is owned by the management team. In other words, the existing management team/founders have given up 20% points of their ownership in order to go towards future hires.

This relationship between option pool size and price isn’t always understood by entrepreneurs, but is well-understood by VCs. I learned it the hard way in the first term sheet that I put forward to an entrepreneur. I was competing with another firm. We put forward a “6 on 7” deal with a 20% option pool. In other words, we would invest (alongside another VC) $6 million at a $7 million pre-money valuation to own 46% of the company. The founders would own 34% and we would set aside a stock option pool of 20% for future hires. One of my competitors put forward a “6 on 9” deal, in other words $6 million invested at a $9 million pre-money valuation to own 40% of the company. But my competitor inserted a larger option pool than I did – 30% – so the founders would only receive 30% of the company as compared to my deal that gave them 34%. The entrepreneur chose the competing deal. When I asked why he looked me in the eye and said, “Jeff – their price was better. My company is worth more than $7 million”.

The moral of the story here is that entrepreneurs seeking to raise funds should not get lost in pre-money valuations. Rather, they need to consider the entire impact of the deal terms on their ultimate equity position. The entrepreneur in the above example obviously did not get the better deal because he was hung up on the pre-money valuation.

~~~~~~

Alerding Castor Hewitt is an Indianapolis law firm focusing on business law, information technology law (including SaaS law and legal technology consulting), private equity consulting, probate and business litigation.

Indiana Considering Cutting Technology Funding by $70M

Wednesday, June 24, 2009 by David Castor

This ticks me off. I understand that in a struggling economy the State needs to make budget cuts, but instead of cutting spending in areas that ultimately do not lead to economic improvement, our State representatives are considering cutting spending in an area that have been the lifeblood of the State for the last quarter century – technology.

This may have a huge impact on my clients as my law practice centers on Indiana technology businesses – helping technology businesses get innovations to market and meet strategic business growth needs. In particular, I work with a number of SaaS and software licensing businesses (as well as many biomedical and biotech firms). My entreprenurial law / funding law firm provides counsel on private equity and venture capital, intellectual property and licensing, and general legal technology consulting.

I believe at least a part of the problem that led to the proposed cut is that past technology funding has not proved itself to the State as creating jobs and causing a respectable ROI / economic increase for the State. The State has sunk an overwhelming proportion of funded dollars into biomedical businesses (e.g., the 21st Century Fund has sponsored some 10 companies in the last 4 years that have products in development for cancer treatment).

Don't get me wrong, those businesses are great and need to be supported, but the process of getting innovative concept to market for biotech and biomed companies is long and expensive. Further, until the product is successful at market, significant numbers of jobs are not created. So, funding ROI decreases (at least for the short term). The overall funded portfolio should be diversified with other technology investments that will result in more jobs and more tax dollars back to the State quicker.

Investments in Internet and SaaS companies could be that answer. For $500k to $1M, most SaaS companies can get product to market and begin generating revenue. Job creation and the ROI on invest dollars is proven quickly. Innovation is encouraged, businesses are built, jobs are created. This all leads to fast economic impact.

I believe Indiana’s past approach on technology funding was flawed, and I think that is shown in the distrust of the State legislature to invest further dollars in technology.

That said, some recent conversations I have had with State leaders involved with technology funding gives me some hope. These particular unnamed individuals appear to be looking for more solid investments that will quickly lead to jobs. They are also not only looking at investments in companies that have connections to political dollars (another problem with certiain past State investments). They also seem to be thinking a bit more broadly about what defines “innovation”.

For those readers of this blog in Indiana, contact your State representative and ask them to continue to fund technology.

Beginning the story of an Indianapolis Technology Laywer

Thursday, June 11, 2009 by Chris Stephen

For my first foray into the world of blogging, I think the important first step is to answer the standard journalism questions necessary for any good story, namely, the who, what, when, where, and why. Sorry for the length. I promise that future blogs will be shorter. Without further adieu, here we go . . . .

Who: This one is easy because I know a lot about me. My name is Chris Stephen and I consider myself first and foremost a litigator. Some people in my field like to classify themselves first as attorneys and then focus into their specialty, but I start with what I love. I enjoy the law and I immensely enjoy helping people, which are both great aspects of being an attorney, but my passion is litigation. The constant strategy that is trial and appellate litigation is intoxicating and addictive, and I seek it out. Secondly, I consider myself a technophile. I enjoy learning about the new and emerging technologies and the implications that they have for our world (and more specifically for the microcosm that is the legal world). But for more about me, please feel free to check out my bio at http://www.alerdingcastor.com/professionals/cstephen.html

What: This question is slightly more difficult to answer. What is “technology litigation”? To me, it is the emerging areas of litigation that focus on the interplay of technology and our world. Globally, we are becoming evermore connected and technology is advancing at an outstanding rate. And, as with all areas of society, as innovation advances, the legal world is left to catch up. As the legal world transitioned from the radio to the television and from the telephone to the Internet, new laws and new legal interpretations are constantly evolving. This evolution has been evident for some time in the transactional side of the law as newly emerging companies seize new ideas and seek to make businesses out of them. But the litigation side is still burgeoning. This is a natural consequence of the legal framework. You often don’t have litigation first and transactions second. The transactions come first and then we litigators argue about where the transaction falls apart, and in doing so, law is created. But too often in the law, people are trying to use 20^th (or sometimes 19^th) century laws to deal with 21^st century problems. So my goal with this blog is to bring to light the new and emerging areas of law (and potential litigation minefields) that surround the interplay of technology in our world. This encompasses information technology, e-commerce, privacy, data ownership, cyberlaw, e-discovery, website ownership, some trademark and just about anything else that I (or you) can think of. Of course, I’m also likely to include general litigation points or developments that strike my fancy.

When: I make no promises, but the when is going to be as often as I can.

Where: While the scope of the issues I plan to address are global, my location is Indianapolis, Indiana, which is a beautiful mecca of the Midwest. Be it ever so humble there is no place like home. More specifically, the “where” is Alerding Castor LLP (or as I’m likely to affectionately refer to it “AC”). Alerding Castor is a quickly emerging law firm in Indianapolis that focuses on virtually all areas of business and corporate law, general and complex litigation and trials, probate litigation, real estate, private venture capital, and technology law. One of the name partners, David Castor is an outstanding transactional law who has established himself as a guru of SaaS law and transactions. The other name partner Michael Alerding is one of the best litigators I’ve ever met. Together they make a great team, and have brought together a great team. Obviously, I’m somewhat biased because they sign my paychecks, but, I think they both deserve a “shout out” for what they are doing and what they are building.

To learn more about AC, check out http://www.alerdingcastor.com/index.html . To learn more about David, check out his blog at http://blog.alerdingcastor.com/blog/alerding-castor.

Why: “What work I have done I have done because it has been play. If it had been work I shouldn't have done it. Who was it who said, ‘Blessed is the man who has found his work’? Whoever it was he had the right idea in his mind. Mark you, he says his work--not somebody else's work. The work that is really a man's own work is play and not work at all. Cursed is the man who has found some other man's work and cannot lose it. When we talk about the great workers of the world we really mean the great players of the world. The fellows who groan and sweat under the weary load of toil that they bear never can hope to do anything great. How can they when their souls are in a ferment of revolt against the employment of their hands and brains? The product of slavery, intellectual or physical, can never be great.” -Mark Twain