Rules of Funding
Posted Thursday, March 11, 2010 by David Castor
US Private EquityThere 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.

Comments (0)

Entreprenuerial Law - Finalist Chosen for Purdue Business Competition
Posted Thursday, February 18, 2010 by David Castor
Business LawA 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.




Comments (0)

Where Have I Been? - 2010 Update
Posted Thursday, February 18, 2010 by David Castor
Business LawI 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.
Comments (0)

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

Comments (0)

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







Comments (0)

Don't Drink the Kool-aid, Choose Your Partners Wisely
Posted Tuesday, November 17, 2009 by Janet Croswell

Indiana Technology Lawyer, Indiana Technology CounselI 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:

  1. 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. 

  2. 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.

  3. 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.

  4. 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. 

  5. 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.

  6. 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. 

  7. 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.

  8. 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.

  9. 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…

  10. 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.



Comments (0)

Funding Innovation in Indiana
Posted Wednesday, September 30, 2009 by David Castor
Funding Innovation in IndianaYesterday 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!







Comments (0)

TechPoint Innovation Summit 2009
Posted Monday, September 21, 2009 by David Castor
Funding Law / SaaS Legal Counsel - TechPoint SummingNext 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.



 

Comments (0)

Entreprenuerial Law – Financing Myths
Posted Thursday, September 17, 2009 by David Castor
Funding LawI 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.



Comments (0)

SaaS Law - Enterprise 3.0
Posted Thursday, September 3, 2009 by David Castor
Indiana Technology Counsel - Enterprise 1.0I 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.

Comments (0)

US Private Equity - Culture of Private Equity Investors
Posted Sunday, August 16, 2009 by David Castor
Word Cloud - Indiana Technology CounselI 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.





Comments (0)

Raising Private Equity - Don't Get Lost In Pre-Money Valuation
Posted Wednesday, July 22, 2009 by David Castor
Global Private Equity - Negotiate Your PositionI 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.




Comments (0)

Indiana Considering Cutting Technology Funding by $70M
Posted Wednesday, June 24, 2009 by David Castor
Indiana technology budget cutsThis 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. 




Comments (1)

Beginning the story of an Indianapolis Technology Laywer
Posted 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 20th (or sometimes 19th) century laws to deal with 21st 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

Comments (0)

Find Funding Where You Can
Posted Monday, May 18, 2009 by David Castor
I just returned back from another trip to Southern California.  This time I met with two investment teams – one angel investor group and a venture capital group.  My firm has built a good relationship with each team.  The investment world is getting smaller and smaller.

I took a portfolio of sixteen Alerding Castor clients’ equity deals to share with these teams.  As every investment group has their leanings of types of deals they like to see (e.g., real estate, emerging tech, SaaS and Internet, biotech, software licensing) and the investment risks and returns they like to see, it is nice to be able to present this type of portfolio and have them determine which ones they want to review.  I am excited that based on these fairly recent relationships we have several clients in the review process with these groups. 
Comments (0)

Private Equity Cultures
Posted Tuesday, May 12, 2009 by David Castor
Venture Capital LawI am leaving today for Orange County, CA once again.  I have meetings scheduled this week with two clients, one venture capital firm and one angel investor group in Southern California.  Regarding the later two, we are working on securing capital funding for several business clients of our firm.

When heading out to the East or West coast, I find it interesting how different the investment community cultures are from the culture of the Midwest.  When presenting to most Midwest angel investor groups, the presentation goes something like this:

1.  Raise excitement about the business concept
2.  Get buy-in from investors on the market opportunity and your business team's ability to meet that opportunity with the capital to be raised
3.  Present the investment opportunity

I find that Midwest investors in general want to be excited about the business strategy and opportunity before hearing anything about the investment opportunity.

Presentations to angel investor groups on the coasts are often inverted from this.

1.  Show that this is a respectable investment opportunity (ROI, Type of Equity, Exit Strategy...)
2.  If investment opportunity is worth considering, then raise excitement about strategy and market opportunity
3.  Prove that the business team can meet market needs

Know who you are talking to.  Before making the presentation, ask a director of the group how they typically like to see deals.  Find out who the potential investors are.  This is a sale, just like any other type of sale - so, know your customer.


~~~~~~~
See also:

A Private Equity Attorney
Angel Investors - Supply vs. Demand
US Private Equity - Requires Self Awareness

Funding Law - Buyer's Market
Funding Law - Investing in Midwest Technology Companies
Angels are Still Investing
Private Equity VIII – Environment for Buyers and Sellers

Private Equity in 2009 – Don’t Give Up
Private Equity VII – More on Angel Investors

Private Equity VI - Raising Angel Capital
Private Equity V - Raising Capital and Not Telling Lies
Private Equity IV - Angel Investors Get Picky
Private Equity III
Private Equity II
Private Equity I

Comments (0)

States Need to Support Innovation and Entrepreneurship
Posted Tuesday, April 14, 2009 by David Castor
Entrepreneurial Law - InnovationThe National Association of Seed and Venture Funds (NASVF), a national organization of public and private equity firms and private equity investors, released a study this week of 5,000 early stage funds and providers that support young entrepreneurial companies and found that State level funding for these companies is dire.

According to NASVF’s press release:

The survey found that the vast majority of young innovative companies across the United States – the emerging Microsofts, Ciscos, Apples and Genentechs of the 21st century --cannot find the early and seedstage financing needed to develop their products and services and bring them to market.  Many venture capitalists that used to provide this critical phase of funding aren't making new, early-stage investments are also having difficulty raising capital.

“We are very concerned that we could lose a generation of technology companies because venture funds can’t raise additional capital,” said Jim Jaffe, President/CEO of NASVF.  “The results of the survey were very disturbing and show that Congress and the President need to act quickly before hundreds of millions of already invested dollars and high paying quality jobs are lost.”

The study found:

• 90% of the already-funded companies can’t obtain follow on funds to get to the next level. 
• 75% of the money received by seed and early stage venture funds comes from private investors.
• 70% of the money needed to fill this early stage investment gap is less than a million dollars per company.
• 60% of early stage funds aren’t making any new investments.

Of course, we have seen this in Indiana where our only State sponsored technology venture fund, the 21st Century Fund, is extraordinarily limited in investment scope and may even go under this year.  Further, none of Indiana’s share of the economic stimulus funding is going to entrepreneurship and business innovation.  The only thing Indiana does have is healthy higher education institutions that foster innovation through their research parks and business incubators, but these businesses are limited to those that arise from university-born technologies.

It is time for State governments to step up and support entrepreneurship and innovation.  It is here that businesses grow, jobs are created, wealth is built, commercial spending climbs, and tax revenue for the State increases.  That is economic stimulus!

~~~~~~~
See also:

US Private Equity - Requires Self Awareness

Funding Law - Buyer's Market
Funding Law - Investing in Midwest Technology Companies
Angels are Still Investing
Private Equity VIII – Environment for Buyers and Sellers

Private Equity in 2009 – Don’t Give Up
Private Equity VII – More on Angel Investors

Private Equity VI - Raising Angel Capital
Private Equity V - Raising Capital and Not Telling Lies
Private Equity IV - Angel Investors Get Picky
Private Equity III
Private Equity II
Private Equity I

Comments (0)

West Coast Angels
Posted Friday, March 20, 2009 by David Castor
NewPort Beach, CAI am back in Irvine, California this week visiting with two angel investor groups.  One of which invited me and my colleague, Sam Schmutte, to attend their investors meeting this morning.  Yesterday, we had lunch with the two officers of this group.  We spent much of that time discussing the current economic climate and its impact on investment opportunities.

In the wake of Madoff, economic stimulus earmarks, and AIG bonuses the public’s trust of financial “experts” has been shattered.  This is true as well with angel investors.  Most investors have a fundamental distrust of how agents will invest money on their behalf.  It was interesting to see how in this particular angel community, investors were largely distrustful of investment funds.  These are funds where multiple angels pull their money together to make a larger, more significant investment in a particular venture.  Most funds have one to three managers that screen and oversee the investments.  The benefit is that the single fund investment will have higher control over the operations and direction of the business than a collection of individual investments.  The negative is that individual investors have less say over investment opportunities. 

The alternative is for angel investor groups to act as networks – where businesses present opportunities to the group, and individual angels decide whether or not to personally invest.

The good news with this trend is that businesses approaching private equity firms may have a higher chance of getting some capital from each group.  The bad news is that it may not be the windfall amount they are praying for.  So, businesses are required to approach numerous investment groups with private placement offerings to raise the capital sought.



Comments (0)

Gravity Ventures - Indianapolis Angel Investor Group
Posted Tuesday, March 10, 2009 by David Castor
Angel Investor GroupIndianapolis needs to foster innovation and entrepreneurship in order to withstand the current economic downturn and further develop culture.  One of Alerding Castor's Partners in Success, Gravity Ventures, is doing just that.

Gravity Ventures is an angel investor group / private equity firm designed to capitalize on the growth in entrepreneurial activity and venture financing throughout the state of Indiana and the Midwest.  Gravity Ventures seeks to enhance the wealth creation of its members by investing dollars as well as time and relationships in early stage, high quality, and high growth companies.  The fund invests in seed and early-stage companies in a variety of industries.  Gravity Venture membership is comprised of entrepreneurs, technologists, consultants, and seasoned investors.

To date, Gravity Ventures has made meaningful investments in Indianapolis technology companies, Compendium Blogware and Vontoo.

For more on Gravity Ventures, check out their website or the article in this week's Indianapolis Business Journal.

Alerding Castor is honored to continue its partnership in success with Gravity Ventures.



~~~~~
Partners in Success is a group of professional services companies, consultants, clients, and friends (e.g., marketing companies, accountants, wealth management firms, logistics or sourcing providers, business consultants) which have proven themselves to bring further value to us and our clients.




Comments (0)

Stop Making Excuses and Lead
Posted Friday, March 6, 2009 by David Castor

“In down economies, the only thing that’s going to change things is changing things.” 
                              - Seth Godin

 

Anthony Ware is a co-founder with Sam Schmutte and me of VentureSpring, LLC, a consulting and business alliance firm that helps emerging businesses structure and meet capital requirements and develop operational efficiencies.  Anthony had a great blog post this week.  Here is an excerpt:

 

The door is open. 

 

The time for complaining about the economy is over… it's time to walk through the door.

 

Now is the age of Madoff and Economic Stimulus.  People have a million excuses for not being successful, and today it is easier to blame lack of success on others than possibly ever before.  It must be someone else’s fault.  Right? 

As an entreprenuerial law / private equity attorney I hear these excuses all of the time: "US private equity has dried up"; "Angel investor groups and venture capitalists are not looking at pre-revenue businesses".  Fact is - yes, raising equity and building business is harder now than even one year ago, but don't fall into the pit of making excuses.  The opportunities are still there for those who will work for it.  Key is knowing where to look.

Making excuses leads to slothfulness.  Slothfulness disrupts innovation.  Innovation equates change.  “In down economies, the only thing that’s going to change things is changing things.”

Godin and Ware hit the nail on the head – Stop making excuses and lead.


 

Comments (0)
    Next