Startup Legislative Agenda 2012

On Tuesday (the first anniversary of Startup America), President Obama sent a legislative agenda to Congress (press release attached here).

The agenda contains four small business tax breaks:

  • The 0% capital gain rate on QSBS investments (described here) would be made permanent;
  • A new tax credit in 2012 would provide a 10% income tax credit on new payroll for small businesses;
  • Startup expense deductions would double from $5,000 to $10,000; and
  • The 100% depreciation provision (for qualified property) would be extended.

In addition, the agenda contains four provisions to "unlock capital access":

  • Increase the Regulation A offering limit from $5 million to $50 million;
  • Allow "crowdfunding";
  • Creating an "IPO on-ramp"; and
  • Expanding the SBIC program.

The proposal also includes immigration reform provisions and additional regional and industry commitments.

Web 2.0 Cash Crunch

Today's WSJ has an article about nascent web companies facing a cash crunch -- specifically that they are having increasing difficulties obtaining financing.  Because the article is primarily about the financing market in the Valley, the challenges faced would come as a pleasant surprise to most Atlanta startups: valuations falling from $6-8 million to $3-5 million for angel backed companies (where Atlanta startups are lucky to see $1-2 million valuations at the angel financing stage); entrepreneurs reliant on bridge financing (where Atlanta companies may just be forced to go out of business) and a push to quick M&A rather than a big hit (where Atlanta companies typically see M&A as the only option). 

That being said, there are some lessons to be learned for companies in the Southeast.  First, the rush to finance consumer-focused web business is slowing after being undoubtedly frothy through the first half of 2011. Startups might be better served by focusing on other markets, including business applications-- always the heart of the technology market in Atlanta. Second, angel financiers are pulling back, perhaps having been overextended. Traditional financing sources -- friends and family and credit cards at the earliest stages, and venture at the later stages, will need to fill the gap. Third, and perhaps most troubling for the next 24 month cycle, venture fundraising in Q3 fell to its lowest level in 8 years (more on this in my next post).

In short, there are some suggestions that our current financing window may be closing, and entrepreneurs are going to have to batten down the hatches through some tougher times.  We will see.

Should Startups Move?

TechCrunch has an interview posted today focusing on whether startups should move locations (presumably to the Bay Area, but perhaps Boston or New York) to be closer to venture capital investors. The answer (in the interview at least) is no.

I often get this question from founders and entrepreneurs in the Atlanta area and my answer is generally no, as well. Although there is a well documented capital shortage here in Atlanta, that is mitigated by (1) the region's surplus of skilled technologists (esp. Georgia Tech grads), (2) the limited number of competitors for such capital and (3) the easy access through Hartsfield-Jackson to venture capital centers nationwide. It is just a day flight, even from San Francisco.

Admittedly, some entrepreneurs have chosen the path of relocation for various reasons. But many more have built strong businesses here in the Southeast.

Atlanta Startup List: Organizations and Events for Entrepreneurs

Author-Kiran.png

Atlanta’s startup ecosystem is bursting with events, organizations, and free services focused on helping entrepreneurs.  I regularly attend events associated with the following organizations:

VentureAtlanta.  The premier venture conference in Atlanta, typically drawing over 600 attendees and dozens of venture capitalists from around the country.  VA is currently accepting applications to present at the conference to be held on October 25-26, 2011 at the Georgia Aquarium.

The Indus Entrepreneurs (TiE). The world’s largest non-profit for entrepreneurs.  The Atlanta chapter hosts monthly events typically with friendly crowds between 130-200 people.  Their annual awards Gala is among the city’s premiere events, typically with over 500 attendees, in such locations as the GA Aquarium, the Ritz Carleton, and the Cobb Galleria and speakers such as Sanjay Gupta, JD Power, Bernie Marcus, and John Imlay, Jr.  TiE also has an impressive list of mentors available to help its members.

Continue Reading

Stock Vested Over Time? Don't forget your 83(b) election

Author-Kiran.png 

Our colleague Kevin Criddle in Seattle recently posted a great article entitled “Section 83(b) Election, A Founder's Best Friend."   An 83(b) election directs the IRS to tax restricted stock (i.e. stock that vests over time) at the time of the grant (when it may be worth very little or when payment is made), minimizing potential tax liability.

As Kevin explains, successful founders that fail to affirmatively make a Section 83(b) election may face staggering tax consequences years down the road.  Kevin discusses the various aspects of an 83(b) election, including who should and should not file, here.

2011 to be Breakout Year for Venture Capital

Hurley.jpg

By John Hurley, Senior Executive, DLA Venture Pipeline. John Hurley has advised hundreds of emerging growth technology companies on various aspects of their business plans, including management and recruiting issues, market development, strategic partnerships and financing strategies. He has helped more than 50 firms raise capital through DLA Piper's collective global network of angel, venture, institutional and strategic investors.

If the first quarter of 2011 is any indication of things to come, the Venture Capital market in 2011 may have a breakout year.  In Atlanta, for example, Venturesource reported 17 transactions for a total of $187M in venture financing in Q1 2011 vs. 11 transactions for $66M in Q1 2010. The success in ‘Q1 can be attributed to three key factors:  (1) an improving Venture Capital exit market; (2) a strong Venture Capital fundraising; and (3) an increasing size of Venture Capital investments. 

Continue Reading

Term Sheet Tips: Effective Valuation and Warrant Coverage

Author-Kiran.png

Early stage entrepreneurs often get caught up in negotiating valuation while failing to consider the impact of other critical terms of a financing transaction.  There is a great post on Venturehacks about the impact of an oversized option pool on a Company's effective valuation (i.e., the valuation that would put the founders in the same position as without such deal term).

Warrant CoverageThe same analysis can be applied to warrant coverage.   See our previous post "What is a warrant?" for background.

Continue Reading

What is a warrant?

A warrant is a security that gives its holder the right to exercise the warrant at a set exercise price for a given period of time and receive shares of stock of the Company.

Warrants are very similar to stock options except that they are typically used for investors, strategic partners, and other third parties (i.e. not for employees, consultants, advisors, or board members of the Company). Similar to stock options, warrants provide upside to the holder without requiring an immediate investment in the Company.

Continue Reading

Georgia: New Noncompete Law Should Assist Employers' Enforcement Efforts

Below is a slightly revised version of the FranCast article published by DLA Piper LLP (US) Atlanta partner Gerald Wells and associate Joe Englert on May 19, 2011 and edited by associate Jamie Konn for this blog.  The original article is available at http://www.dlapiper.com/georgia-new-noncompete-law-should-assist-franchisors-enforcement-efforts/.

Georgia: New Noncompete Law Should Assist Employers' Enforcement Efforts

Georgia Governor Nathan Deal has signed House Bill 30 into law, resolving some of the uncertainty surrounding recent legislative efforts to reform Georgia’s law on restrictive covenants. The new law, signed by the Governor on May 11, 2011, confirms the implementation of new rules regarding the enforcement of non-competition, non-solicitation and non-disclosure covenants that should benefit employers operating in Georgia. 

 

Continue Reading

Atlanta Startup List: Atlanta Home to Over 100 Venture Backed Startups

Author-Kiran.png

Atlanta is home to over 100 venture backed startups across a variety of industries and, with investment activity surging in recent weeks, this list is growing rapidly. Check out the list below.

Chemicals

Biopharmaceuticals

  • AerovectRx - Provider of aerosol therapeutics. The company's disposable drug cartridge system is unique tothe industry and is designed to improve patient compliance and eliminate cross contamination.
  • Altea Therapeutics Corp. - Developer of transdermal delivery technology. It aims to replace needle injection with transdermal patch technology.
  • Altiris Therapeutics Inc. - Developer of small molecule therapeutics for the treatment of aggressive and refractory metastatic cancers and inflammation.
  • Celtaxsys Inc. - Developer of chemotherapy repellant drugs.
  • InVasc Therapeutics Inc. - Developer of therapies for the treatment of hypertension, diabetes and vascular diseases.

Continue Reading

Option Acceleration

A client asked me yesterday "what's market" for option acceleration. A tricky question, especially because most entrepreneurs prefer an answer that favors broad-based acceleration of options in a change in control. Our nationwide Venture Cabinet -- which consists of DLA Piper emerging growth lawyers around the country, including in San Diego, Silicon Valley, Austin, Boston, Reston and here in Atlanta -- shared our thoughts on this topic several weeks ago, and the consensus was:

  • No acceleration for rank-and-file employees, even at the director level. 
  • In many cases, no acceleration even at the VP level.
  • So-called "single trigger" acceleration, which provides for acceleration upon a change in control with no termination of emplyment, is highly disfavored.
  • C-suite and other key executives may receive full or partial double-trigger acceleration in a change in control. By "double-trigger" acceleration, I mean that the options only accelerate if the employee loses his or her job in connection with the change in control.

I think this is a change from the historical view, especially here in Atlanta. We often see vintage 2000-2005 plans which contain across-the-board acceleration.