The Magazine for Utah Entrepreneurs
Grow Utah Ventures
summer 2008
Reality Check
Don’t Get Slammed on the Road to Startup Success by Unrealistic Expectations >> Risks vs. Rewards >> Opportunities vs. Ideas >> Myths of Entrepreneurship >> Make Sense of Term Sheets >> Funding Options
My moment. “I won a 2 million dollar account for my company. And guess what I got for it? A 2-for-1 dinner coupon. That was the moment I knew I’d be happier being my own boss. I went to the Zions Business Resource Center where they assisted me with my business plan, financial projections and counseling. And it was absolutely free, thanks to Zions Bank. You know, I got all the resources I needed to go new places—and park new places, too.” Zions Business Resource Center. Growing your business is our business. Call 801-594-8363 to set up an appointment.
resources.zionsbank.com
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contents contents Grow Utah Ventures
The Magazine for Utah Entrepreneurs
startup
4 Editorâ&#x20AC;&#x2122;s Note
8 Dashboard
ascent 10 Marketing Column Jennifer J. Johnson
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12 Funding Column Jeff Roberts
14 Sales Column Brent Middleton
full throttle 16 Risks vs. Rewards
Understanding the pains and pleasures of starting a business.
20 Myths of Entrepreneurship
Understand the realities instead of succumbing to the illusions.
24 Opportunities vs. Ideas
You need to understand the difference
to build a successful business.
28 Funding Options for Startups
Odds are youâ&#x20AC;&#x2122;ll never see VC money;
look at these other options.
32 Making Sense of Term Sheets A primer regarding terms involved in raising equity capital. summer 08
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>> editor’s note
t. craig bott <<
We think it’s time for a reality check. Time for entrepreneurs and would-be entrepreneurs to look seriously at all that comprises the rewards and the risks of entrepreneurism. Time to take off the rose-colored glasses and see what you are getting yourself into. One of the biggest challenges for most entrepreneurs is managing expectations — their own and those with whom they work. Understanding this challenge is an important reality check as you prepare your startup. In this issue of Launch we share stories of those who have done well, but we also spotlight those who have struggled to succeed and what they learned from their experiences. We also provide insights that help decipher the difference between what you might think is a great business idea and one with real opportunity. And with real opportunity comes a need for funding. We offer tips on ways to make sense of the mass of legal terms included in your financing documents. It’s a great time for a reality check. Because we believe you want it straight, head on, with all the curves and all the thrills. Enjoy the read! - T. Craig Bott Grow Utah Ventures President and CEO
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Results. One word says it all. Let Snapp Conner PR show you what a strategic public relations program could be doing for your business.
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launch Grow Utah Ventures
The Magazine for Utah Entrepreneurs summer 2008 Editorial Chairman Alan E. Hall alanhall@marketstar.com Editor-in-Chief T. Craig Bott craig@growutahventures.com Director of Partners and Sponsors Justin Bott jbott@growutahventures.com Publisher Arkin Hill ahill@luminpublishing.com Executive Editor Colin Kelly Jr. ckelly@luminpublishing.com Creative Director Kevin Kiernan kkiernan@luminpublishing.com Production Artist Shane Wolf swolf@luminpublishing.com Associate Publisher Jennifer Black jblack@luminpublishing.com
Editorial Board Christian Anderson, Brock Blake, Ryan Coombs, Brian Cummings, Jeremy Hanks, Tim Hunt, Chris Knudsen, Jeremy Neilson, Kent Thomas, Greg Warnock Contributing Writers Chris Anderson, T. Craig Bott, Jeremy Hanks, Jennifer J. Johnson, Colin Kelly Jr., Brent Middleton, Kathryn Peterson, Jeff Roberts Contributing Editors Breeann Ashton, Kathryn Peterson Photography Kevin Kiernan For advertising information e-mail: advertising@launchutah.com Send press releases or editorial requests to: press@launchutah.com Send comments and feedback to: feedback@launchutah.com Published for Grow Utah Ventures by: Lumin Publishing, Inc. 6183 S. Prairie View Drive Suite 103A Salt Lake City, UT 84118 801.417.3000
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Building world-class research teams & facilities Multi-million dollar research & recruitment funding Aligned with Utahâ&#x20AC;&#x2122;s life sciences, energy, imaging & advanced materials areas Outreach services to help innovators strategize markets, secure funding & commercialize
The Utah Science, Technology and Research Initiative (USTAR) is a catalyst for technology development through state-of-the-art research facilities and world-class science, innovation and commercialization teams. As part of a broad and integrated economic development strategy, USTAR is designed to increase the research capacity at Utahâ&#x20AC;&#x2122;s research universities resulting in accelerated flow and commercialization of discoveries, inventions, and innovations. We invite researchers, inventors, entrepreneurs, investors, and other interested parties to join our Collaboration Network at:
www.innovationutah.com For more information, call (801) 538-8622 or email ustar@utah.gov. 324 South State Street Salt Lake City, Utah 84111
>> dashboard
Send submissions to press@launchutah.com
News and Dealflow MWCN Names Amy Rees Anderson 2008 Entrepreneur of the Year
MediConnect Global CEO, Amy Rees Anderson, was selected in April by the MountainWest Capital Network as the Entrepreneur of the Year for 2008, becoming the first woman to be chosen for the honor. MediConnect Global is a leader in online medical record retrieval. Anderson is responsible for all aspects of the MediConnect business including the overall management and strategic direction of the company. Under her direction, MediConnect launched an aggressive domestic and international expansion, and posted three consecutive years of record sales growth more than doubling revenues year over year. As an entrepreneur and business leader she has raised more than $50 million in capital, is a well-respected public speaker, and teaches courses on entrepreneurship at several Universities. Each year, MountainWest Capital Network recognizes a Utah business executive who has built a successful Utah-based company, inspiring others to participate in the risks and rewards of entrepreneurship. Some past recipients of the award include: Kirk Benson (Headwaters), Dr. Ted Stanley (ZARS), Ken Wooley (Extra Space Storage), Dr. Hunter Jackson (NPS Pharmaceuticals), David Evans (Evans & Southerland Computer Corp.), Ray Noorda (Novell), Dale Ballard (Ballard Medical Products), and Dr. Dinesh Patel (TheraTech). “MWCN has never recognized a more deserving entrepreneur than Amy Rees
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Anderson,” says Devin Thorpe, president of the MountainWest Capital Network and managing director of the USTAR Technology Outreach and Innovation Program. “Amy epitomizes the values we seek to recognize in an entrepreneur, creating a successful business, sharing the wealth and giving back to the community.” U of U is No. 2 in Spin-off Companies
The Association of University Technology Managers (AUTM) that ranks public and private research institutions throughout the country released its 2006 numbers in February listing the University of Utah as No. 2 in the nation behind No. 1 MIT in the number of new companies formed from university-developed technology. In 2006, the U of U spun out 20 companies compared to 23 companies from MIT that same year. While AUTM hasn’t released 2007 numbers, the U of U is clearly on track to best its 2006 showing. The No. 2 placement in 2006 is a result of the U of U’s revamped technology commercialization pipeline. Thanks to that pipeline and legislation passed by the Utah State Legislature allowing universities to hold equity stakes in companies, we should expect to see increasing numbers of new companies formed from university technology in the future. As USTAR ramps up it will add even more fuel to the spin-off fire. With the governor’s blessing, the vision of U of U Vice President of Technology Venture Development Jack Brittain, and the direction of Technology Commercialization Office
Director Brian Cummings, the new pipeline now in place offers components to vet new ideas, study the feasibility of taking certain technologies to market and work with private funding sources to launch new companies around university-developed technology. Fusion-io Closes $19 Million in Series A Funding
Salt Lake City-based Fusion-io recently picked up $19 million in an A round led by New Enterprise Associates. Founded in 2006, Fusion-io, has reinvented storage and storage architecture using new advances in solid state design and manufacturing. The funds from this round will be used to manufacture the company’s first product, the ioDrive — a PCIe Card that delivers the power of a storage area network (SAN) at a fraction of the size and power. Have something you’d like featured in the Dashboard section? Send it to press@launchutah.com.
Click here for the HTML version of this article on launchutah.com.
>> marketing
By Jennifer J. Johnson
Think Internally, Act Externally
Jennifer J. Johnson is the president and founder of Johnson & Company, The Virtual Agency, is a contributor to Business Connect magazine and serves on the Editorial Board of Ad News magazine. Known as “The PR Savant” on social networks, she introduced Marketing House Party (www. MarketingHouseParty.com) to Salt Lake Marketers at a kickoff event April 25. Send any examples of smart marketing companies to jjj@joandco.com.
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Surprised to be, momentarily, without either Outlook or a cell phone, I find myself looking on a colleague’s Web site for his contact information. I call the number listed on the site and am immediately shocked. “Who?” the voice on the other end asks, almost as if I have said something insulting. I repeat the name — the head of a respected Utah startup. “Hmmm ... we don’t have anyone here by that name.” When I took the time to outline the credentials of the guy — CEO and founder of the company — the rep finally connects the dots, indicating that that gentleman does not work out of that office. This “information” comes to me after placed on hold for several seconds. No forwarding phone number is offered and the conversation is ended. What can we learn from the above experience? Sometimes startups or nonprofit organizations are so focused on internal operations and business at hand that they under-appreciate, under-prepare for, and under-maximize everyday opportunities for making a positive company impression. Every communication is a chance to communicate our brands. As such, organizations need to “think internally” to communicate externally. Working at Novell during the early years of battling Microsoft, it was agonizing for me to watch and actually feel Redmond turning the tide of the marketing war. A big part of that was the company’s frustratingly aggressive battle to control the message.
Microsoft was almost irritatingly proactive in promoting its vision, products, people and market/ technology positions. Everyone, from big boys like Bill Gates and Steve Ballmer, down to program managers and phone support folks spoke from the same playbook: They all, uniformly, knew Microsoft’s messaging — both big-picture vision and focused, wolverine-like answers to tough questions. They knew it all, and they, assertively would communicate such, whether responding to a negative press article or addressing a technology glitch. During the same period, Novell was reactive — often doing nothing in response to journalists’ inaccuracies or misguided opinions, then leapfrogging the issue and responding to the wrong side of the house by pulling ad dollars from publications reporting negative press. While few of our companies will ever fight marketing wars made of the sweat and saga of Microsoft vs. Novell, each of us, daily, needs to engage in the most important of battles: Maximizing every customer, partner and influencer to further our brand. To conclude, I offer a few suggestions for maximizing your brand through consistent communications:
>> Make sure all internal resources (even if internal means outsourced) have companycrucial information, at hand, both electronically, and, as backup, in print.
>> Set the default home page on all employees’ Web browsers to your company’s Web site so employees see it on a regular basis.
>> Create cheat sheets with company exec information, critical phone numbers/addresses, mission-vision-values statements, company FAQ’s on big-picture issues and on “crisis” or problem issues regarding product, channel, pricing changes, etc.
>> Make an elevator pitch and teach employees how to incorporate it regularly in real conversations to real customers. Engage employees in the process of developing or updating your elevator pitch. $
Click here for the HTML version of this article on launchutah.com.
>> funding
When Does Your Venture Warrant Debt?
By Jeff Roberts Jeff Roberts is a senior vice president of the Technology and Life Science Division of Comerica Bank. He has covered the greater Salt Lake region for the last five years where the bank has committed over $125 million to early stage businesses in the area. Contact him at jdroberts@comerica.com or 425-452-2529.
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An early stage company is constantly under pressure to find its next source of capital — whether it be to fuel innovation or to expand its sales and marketing efforts. There are now many forms of debt available to the early stage company, which is generally referred to as “venture debt,” and this evolution in lending has taken hold in Utah. Commercial banks and traditional leasing companies have long played a role in the development of Utah’s emerging market economy. Now there is a strong emergence of venture lenders, drafting off of the growing equity interest in the region, which may cause early and middle stage companies to ask, “When is debt appropriate and what are the costs?” The founding premise in a lending relationship is that borrowed money is to be repaid. It is up to each lender to determine which source(s) of repayment fits within its risk parameters. Traditional lenders (commercial banks and leasing companies) have historically utilized operating cash flow and liquidation to evaluate the prospects of repayment. Venture lending introduces a new concept — investor support. Deep-pocketed or relationship-driven investors with material investment in a project are viable sources of further capitalization, and may represent an alternative source of repayment. Due to the intangible nature of the relationship between the investor and the lender, it is impossible to clearly define
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the “perfect fit,” but borrowers should recognize the option exists in today’s lending market. But is debt the appropriate vehicle? When evaluating venture-lending options, a borrower should consider factors that go beyond simple economics. Debt offers a company a way to reduce its cost of capital. Similar to equity investors requiring mechanisms such as BOD representation or control provisions, a lender requires demonstration of a company’s financial health through reporting requirements and operational milestones. Other important considerations include how a lender’s structure (i.e., covenants) can dictate strategy. While it may not be in the long-term best interest of a company to abstain from investment in NPV positive project(s), it may be necessary when strictly abiding by a loan agreement. This scenario represents a potential cost when utilizing other peoples’ money, and illustrates an important cost consideration (both hard dollar and opportunity) before obtaining debt. In addition to the cost-benefit of debt, it should be noted that factors surrounding debt can be viewed as a positive for a company in its formative stages. The compulsory discipline and accountability inherent in a lending relationship creates an environment where all stakeholders understand a company’s objectives, and pull in the same direction. This acts to moderate the distraction of non-core opportunities that can plague companies at vulnerable times, and keep a management team focused on maximizing the company’s core competencies. There are some very compelling reasons why a lending relationship makes sense, and now, more than ever, viable debt options exist for companies of all stages in the region. It is a strong sign to see increased interest in Utah’s early stage business environment. Companies should fully consider their options regarding capitalization in order to fully derive the most benefit from this trend. $ Click here for the HTML version of this article on launchutah.com.
Innovation Campus Administration Office 1770 N Research Park Way, North Logan Phone: (435) 797-9610 http://innovationcampus.usu.edu
“A Place Where People And Ideas Come Together” USU’s Innovation Campus is northern Utah’s premier high tech research park. Home of USTAR at USU, the Innovation Campus has 33,000 square feet of USTAR research space, with an additional 100,000 square foot research building to be completed in the spring of 2010. The Campus offers a top-notch research environment, access to multiple facilities, and business start up assistance through Utah State’s Technology Commercialization Office. Come see how Innovation Campus will help your business excel! UTAH STATE UNIVERSITY
Innovation CAMPUS
Specific Benefits Include: Discounts at University Inn and Conference Center Use of Merrill-Cazier Library Discounts at Select USU Sporting Events USU Data Services, One Gigabit Connection Discounts at USU Bookstore Access to Chem Stores for Research Supplies Discounts for USU’s Partners In Business Seminars Use of Campus Recreation, And More!
>> sales
The Formula for Business Success
and income. Many good companies have disappeared from the radar screen because of two little words — cash flow. Part of success is living to work another day and it takes an attitude of planning and control to help make that happen. Effective Marketing Marketing needs to be planned, budgeted and implemented year-round. Successful companies are deliberate, planned and purposeful about their marketing and sales plans. Effective Salespeople You can sing the praises of engineers, lawyers and accountants, but the people in business who really drive the economy are sales professionals. If no one is selling, the rest of it just doesn’t matter does it?
By Brent Middleton Brent Middleton is the owner of the Sandler Sales Institute in Salt Lake City, with more than 170 training centers nationwide. SSI is dedicated to the development, support and training of sales people, sales managers, as well as entrepreneurs who must sell for their businesses by learning new innovative selling techniques licensed by the Sandler Sales Institute. He can be reached at 801-990-3265.
In his book “Good to Great,” Jim Collins starts with the challenge, good is the enemy of great. In working with many companies over the years, I recognize that to be true. I have also found that real success often comes from the following pieces of the puzzle being in place. And I do mean all the pieces — even one missing piece can mean a company will fall short of its goals. Inspiring Leadership Show me a successful company and I’ll show you a monomaniac with a mission. Strong leadership is the first ingredient for success and the motor that drives all the other pieces of the puzzle into place. An inspiring leader is not only the CEO, but the managers he or she surrounds himself or herself with. A great deal of time and energy is spent to recognize in others the qualities of leadership that inspire. Strong Organizational Structure From that inspiring leadership comes the backbone necessary to implant a strong organizational structure. Often a strong structure gives people the freedom to perform without the insecurities associated with wishywashy rules and blurred lines of authority. Team Development is a Top Priority at Every Level Within successful companies is the profound belief that their biggest assets go home to their families every night. Investments in bricks and mortar, technology or product development pale when compared to the return on investment realized from developing people. An interest in the future well-being of an employee is the best insurance against losing your braintrust. Superior Financial Management There is no substitute for being in control of expenses
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Production In great companies, production is efficient, timely, cost-effective and service oriented. This sounds like a no-brainer piece of the puzzle, but successful companies have had to be deliberate and focused on making this piece happen. Just as we hold salespeople accountable to their behaviors, goals and results, it is imperative that production standards and results be just as accountable. You may be fast but if the job is executed poorly, the former customer will remember that. Client Satisfaction Can you think of a company you love to do business with? Have you ever considered how your clients, your competition and the public as a whole see you? Might be time to investigate further. Are you accepting mediocre standards in your business? How does that affect your business and your profits? Content Owners Is the owner content with his or her role in company for the foreseeable future? What does that tell your staff, suppliers and customers? Would you be comfortable putting your best interests in the hands of someone who is coasting? Remember, the culture of any company comes from the top. The speed of the leader determines the rate of the pack. It all starts with you. Business, like any pursuit, whether it be sports, career, family or community, must have leadership and dedication. In the words of actor Johnny Depp, “Total satisfaction with your skills is death for your professional life.” $ Click here for the HTML version of this article on launchutah.com.
WWW.SLCC.EDU/MBRC
DISCOVER THE MILLER BUSINESS RESOURCE CENTER Most entrepreneurs are aware of the obstacles their emerging businesses face. However, they might not know that an amazing set of resources is available to help their businesses break through and grow.
Welcome to the Miller Business Resource Center (MBRC). The only facility of its kind in Utah, the MBRC provides powerful resources for the local business community. Those resources include training, one-on-one business counseling, start-up office space, and much more. Whether you’re trying to get your start-up started, keep your small business busy or ensure your established business remains strong, the MRBC can help. You know what you’re working against. Now find out what you’re working with.
801-957-5200 BUSINESS INNOVATION CENTER | CORPORATE TRAINING | EVENTS & CONFERENCING GLOBAL BUSINESS CENTER
| SALT LAKE SBDC | WOMEN’S BUSINESS INSTITUTE
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If you donâ&#x20AC;&#x2122;t mind
the possibility of failure,
long work hours and unwanted or unexpected responsibilities, then launching a business just might be for you. On the other hand, itâ&#x20AC;&#x2122;s not as bad as it sounds.
The rewards often compensate for the frustrations. Rewards include the chance to be your own boss, tap into your creativity, see ideas flourish, help others and build a legacy. For many Utah entrepreneurs, weighing the risks versus the rewards of starting a business boils down to one thing: Without risks, there are no rewards. Five local entrepreneurs share their greatest risks and rewards of starting a business.
By Kathryn Peterson
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Tim Hunt Successfully Unemployed Entrepreneur Risk: Unpredictable financial conditions. Reward: Being able to make a difference.
Teri Sundh CEO and Co-founder, Podfitness Risk: Venturing in unknown territory. Reward: Leaving a lasting legacy.
After more than a decade of negotiating multimillion dollar contracts at Franklin Covey, Teri Sundh bowed out of corporate culture and into the unknown realm of entrepreneurism. After launching seven businesses, each with highs and lows, she is now successfully at the helm of Podfitness, maker of customized audio workouts. “My story has had its ups and downs,” says Sundh. “There have been lots of challenges and, frankly, disastrous failures. But I love to take ideas to the market. For me, the greatest risk is wondering if consumers and investors are going to buy the idea. Once they do, the next hurdle is figuring out how you’ll survive the building and development stage. With Podfitness, it wasn’t too hard to persuade consumers and investors that MP3 space is a hot space. It has fun, sexy and attractive rewards. You don’t have to do much talking before people get it. It’s fun to be a part of something that doesn’t require a lot of convincing. “In business, there are huge ebbs and flows. Your business model may totally change and you must learn how to survive, be flexible, revise and adjust. It takes longer than you plan. Nothing happens as fast as you want it to happen — from funding and shareholder expectations, to launching and seeing a return. We thought we’d be at break even at 18 months, but we just hit our three-year mark and just made break even. Setting realistic expectations requires disciplined management. “For me, the great reward is hearing an idea in your ear and seeing it fulfill its potential. Podfitness is cooler today than what I thought three years ago.”
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After working for The Church of Jesus Christ of Latter-day Saints for 14 years, Tim Hunt took one of the biggest risks of his life by launching Lingotek in 2006. The language translation company did so well that investors bought him out with enough money for him to walk away as a comfortably “unemployed entrepreneur.” But the experience didn’t come without its risks and challenges. “I went the first nine months at Lingotek without a paycheck,” says Hunt. “I worked as an adjunct professor to pay the bills and mortgage. And I worked incredible hours, usually from 3 a.m. to 11 p.m. I could have quit. I could have failed. But it wasn’t in me. I kept at it, and in the end I feel good about where we came out. “For me, the great reward is being able to make a difference in the world. That doesn’t necessarily mean I’m more philanthropic, but I enjoy doing something that make people’s lives more productive. I enjoy raising the money and putting teams together. With Lingotek, the intent was to create a simpler and easier way to do translation work. In the end, I could decipher and translate documents from languages I didn’t even know. “Becoming an entrepreneur is an education and sometimes ignorance is what makes you walk into it. You get an education unlike any you’d get anywhere else.”
Kent Millington President, IPDevPro
Risk: Potential failure. Reward: Satisfaction of success. Kent Millington started a wholesale distribution company in Texas several years ago, which eventually went through bankruptcy. He wasn’t prepared for the business failure or the significant amount of money that was lost. “But money was all I lost. I didn’t lose self-respect or enthusiasm,” says Millington. “I went on to enjoy many successes and see businesses flourish, which has been a source of great satisfaction. Now I have investments in five companies. There’s great fulfillment in being able to pull it off.
“I learned that there are things you can do to keep an optimistic attitude and move forward. When a business begins to struggle, don’t get so discouraged and withdrawn that you are unable to seek help. There are things you can do and people you can turn to. You may have to put it in the tank, like I did, but at the end of the day it’s just money; and it shouldn’t be family, friends or yourself — those things continue on and can still provide you satisfaction. You simply regroup and start over. “That being said, expectation should be tempered with realism. Know when to cut your losses and do something else. Remain optimistic, work hard and good things will happen. It may not be this business, but it will be another.”
Joshua Steimle CEO, MWI
Risk: Personal well-being. Reward: Being your own boss.
Joshua Steimle’s first real business was a Web development firm called Mindwire Interactive, which he started in 1999 while a student at Brigham Young University. He sold it in 2003 and started MWI, a Web design firm in Draper. Steimle also works to raise seed funding for the SEO Consultants, a project that uses automation of basic SEO tasks to provide high-end search engine optimization services to low-end customers. “Risk, what risk? That’s how I looked at things before starting my business. I was hopelessly optimistic,” says Steimle. “But there are very real risks and a lot of the risks I took didn’t yield the rewards I expected. I risked my marriage, health, financial well-being, reputation and sanity. I’ve been through some very tough times with my business, so the risks seem a little more real for me than they might for others. “The biggest rewards for me, so far, haven’t been financial — I’ve run my own business for eight years SFQSFOFVSTIJQ now and I’ve only been paid half the time. But I’ve loved it just the same. There’s something incredibly satisfying about calling the shots and being 100 percent responsible for the results. Even if you don’t like the results, you can’t beat the feeling of taking the plunge and knowing that, succeed or fail, it’s all up to you. “If I could go back in time and have just one minute with myself, part of me would be tempted to not say anything, because I’m grateful for all I’ve learned, but if I ignored that temptation I’d tell myself to sleep on major decisions, never go into debt, ditch the ego, and take my wife’s advice more seriously.”
Michael Proper CEO, DirectPointe
Risk: Time away from family. Reward: Reprioritizing and creating value for others. Michael Proper has one of the most endearing ragsto-riches entrepreneurial stories you’ll ever hear. Proper, a former foster child and 16-year-old manual laborer, has led his technology company to massive growth and success. Proper and his wife invested their savings to launch DirectPointe in 2000. “When you start a business, it isn’t like you can punch in and punch out,” says Proper. “You’re always in. There’s an emotional risk when you miss out on things such as family. However, it’s truly rewarding to force yourself to find a balance, to reprioritize and to focus. That’s been a growing point for me as an individual. I’m constantly asking myself, ‘What am I not going to do today?’ “I’ve always valued relationships. As you start and grow a business, you end up losing that basic intimate relationship that you once had with friends. Even from an HR standpoint, because our business has grown, there are people who walk down the hall that I don’t know. I used to personally interview and hire everyone. For me, those relationships are really important. “But by taking risks, you get huge rewards. We get to create businesses and use them as a vehicle to create value and help others. That’s one of the reasons I started a business.” $
Click here for the HTML version of this article on launchutah.com.
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Myths of
Entrepreneurship By Jeremy Hanks Before you read this article, click here and take this entrepreneur quiz.
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I’m reluctant to admit that I didn’t score very well on the entrepreneur quiz — 45 percent to be exact. Guy Kawasaki, a leading thinker on all things entrepreneurial, scored 40 percent. I’d venture a guess that you scored in the same ballpark. This quiz and the related book, “The Illusions of Entrepreneurship: The Costly Myths That Entrepreneurs, Investors, and Policy Makers Live By,” were written by Scott Shane, a professor of entrepreneurial studies at Case Western University. Shane is also a researcher on new businesses for the Ewing Marion Kauffman Foundation and an angel investor with the North Coast Angel Fund. He’s the author or editor of 11 books and more than 60 scholarly articles on entrepreneurship. He knows what he’s talking about. “People start businesses based on the myths we tell ourselves about entrepreneurship and then are hurt when confronted by reality,” Shane says. “Investors believe these myths and invest money and they’re disappointed when they don’t hold true. Policy makers make policy based on these myths and then wonder why the economy isn’t growing with all these entrepreneurs now in it.” So for my own education (based on my score it seems like I need it) and to help aspiring entrepreneurs here in Utah, here are my favorite 10 myths (written by Shane) that are dispelled in this great book:
It takes a lot of money to finance a new business. Not true. The typical startup only requires about $25,000 to get going. Successful entrepreneurs 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.
Venture capitalists are good place to go for startup money. Not unless you start a computer or biotech company. Computer hardware and software, semiconductors, communication and biotechnology account for 81 percent of all VC 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 startup will get VC money are about one in 4,000. That’s worse than the odds that you will die from a fall in the shower.
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 startups 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.
Startups 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.
Banks don’t lend money to startups. This is another myth. Again, 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.
Most entrepreneurs start businesses in attractive industries. Sadly, the opposite is true. Most entrepreneurs head right for the worst industries for startups. The correlation between the number of entrepreneurs starting businesses in an industry and the number of companies failing in the industry is 0.77. That means that most entrepreneurs are picking industries in which they are most likely to fail.
The growth of a startup depends more on an entrepreneur’s talent than on the business he chooses. Sorry to deflate some egos here, but the industry within which you choose to start your company has a huge effect on the odds that it will grow. Over the past 20 years or so, about 4.2 percent of all startups in the computer and office equipment industry made the Inc. 500 list of the fastest-growing private companies in the United States. Conversely, 0.005 percent of startups in the hotel and motel industry and 0.007 percent of
startup eating and drinking establishments made the Inc. 500. That means the odds that you will make the Inc. 500 are 840 times higher if you start a computer company than if you start a hotel or motel. There is nothing anyone has discovered about the effects of entrepreneurial talent that has an equally powerful effect on the growth of new businesses.
Most entrepreneurs are successful financially. Sorry, this is another myth. Entrepreneurship creates a lot of wealth, but it is very unevenly distributed. The typical profit of an owner-managed business is $39,000 per year. Only the top 10 percent of entrepreneurs earn more money than employees. And the typical entrepreneur earns less money than he otherwise would have earned working for someone else.
Many startups achieve the sales growth projections that equity investors are looking for. Not even close. Of the 590,000 or so new businesses with at least one employee founded in this country every year, data from the U.S. Census shows that less than 200 reach the $100 million in sales in six years that venture capitalists talk about looking for. About 500 firms reach the $50 million in sales that sophisticated angels talk about. In fact, only about 9,500 companies reach $5 million in sales in that amount of time.
Starting a business is easy. Actually it isn’t, and most people who begin the process of starting a company fail to actually get it up and running. Seven years after beginning the process of starting a business, only one-third of people have a new company with positive cash flow greater than the salary and expenses of the owner for more than three consecutive months. Any aspiring or current entrepreneur, investor or policy maker should read “The Illusions of Entrepreneurship.” Understanding the realities instead of succumbing to the myths of entrepreneurship can only mean good things for entrepreneurs and entrepreneurship in Utah. Jeremy Hanks is an entrepreneur and founder of several successful technology companies. His most recent venture is Doba, which he co-founded in 2002, and is its current chairman and president. $
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$37,192,000.00 WORTH OF COMPANIES CAN’T BE WRONG
Discover how the “U” can drive your next innovation “We have been successful in the biotechnology business by collaborating effectively with University researchers and working with the University of Utah’s Technology Commercialization Office to take products to market. It’s as simple as that!” Kirk Ririe, CEO, Idaho Technology, Inc.
www.tco.utah.edu/csr.html | (801) 581-7792
Opportunities vs. Ideas By T. Craig Bott
President and CEO Grow Utah Ventures
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Discovering the difference between a good business idea and a solid business opportunity can make all the difference between creating a successful business and having a water cooler war story. Distinguishing between ideas and real opportunities is the fundamental challenge facing every entrepreneur. Entrepreneurs who can correctly sniff out the real opportunities are the ones who will build successful businesses and create real value. For these entrepreneurs it is not so much a hunt for that one golden idea but is instead a constant process of sifting and sorting through a range of prospective opportunities. Leading entrepreneurs have learned to do this as systematically as possible. They employ a variety of filters, from the coarsest down to the finest, to quickly eliminate most opportunities to find the few that possess real value. Identifying real opportunities requires a systematic consideration of key characteristics and relying on a decision-making discipline that not all entrepreneurs have but which can be learned.
Most of the information presented in this article is based on research and writing conducted by Greg Warnock and presented in the Junto Partner Training series. Opportunities Are Revealed, Not Created
It is important to understand that business opportunities surface virtually without assistance from anyone. They are revealed by circumstances and not created. They lie waiting to be discovered and pursued by the observant entrepreneur. Such things as market conditions, advances in technology and changing customer demands create opportunities that will exist until change occurs and the opportunity is lost. Some opportunities, even some with great potential value, are never really discovered nor fully exploited. Some are simply passed over and others are never given the resources needed to nurture them into anything of value. But those who learn to discover opportunities early on in their lifecycle where there is sufficient time to mature them and cultivate the opportunity before competitors step in, win the entrepreneurial game. In fact, the earlier an opportunity is discovered, the less resource it generally requires to advance it to a stage where value is created for the customer and the entrepreneur. The entrepreneur who develops and hones the skills to detect opportunities early in their life cycle will be much more successful in creating business value. Characteristics of Entrepreneurial Opportunities
The very best opportunities reflect a common set of characteristics. It is this set of characteristics that most distinguishes an opportunity from simply an idea. Each year, Inc. magazine reports on these characteristics. Consider some findings from their recent report:
$10 million sales: Entrepreneurial opportunities generally serve markets that are smaller, regional or even local in nature where services can be customized to meet unique customer demands.
200 percent growth: Targeted business opportunities offer the potential for growth of 200 percent or more. 10 to 25 percent margin: These opportunities are profitable, strong and attractive.
manage their costs and preserve their cash for what really matters â&#x20AC;&#x201D; sales. Finding the Best Business Opportunities
So where do entrepreneurs find the best business opportunities? For the most part, they find them in the environment in which they currently work, live or have an interest. Consider again these facts from the Inc. 500:
>> 47 percent of business opportunities were discovered in work-related activities. That means that while on the job the entrepreneur saw an opportunity related to what he or she was currently doing and chased it.
>> 15 percent of the opportunities were discovered by making an improvement on what someone else had already done.
>> 11 percent came from noticing an unfilled niche in the consumer market place.
>> Markets that are undergoing significant change create opportunities for the quick response and flexibility an entrepreneur can bring to meeting market needs, beating out even well-established businesses.
>> Markets that lend themselves to selling directly to the customers create opportunities for the entrepreneur who has the personal ability and drive to build customer relationships and make the sale.
Shaping Your Own Opportunities
Trying to find that one unique business opportunity that no one has yet discovered is pretty much a wasted effort. There simply are very few truly unique opportunities that no one else has considered. The fact is that most entrepreneurial success is achieved simply by taking an existing business concept, building on it, and converting it to a new opportunity. Entrepreneurs can shape their own opportunities and increase their value by doing some of the following:
Opportunity in Execution: There is often an untapped wealth of opportunity in simply doing things better than the rest. Call it customer service or building customer loyalty, but the fact is that business opportunities can and are created solely on the basis of superior execution even in the face of significant competition.
$10,000 to $40,000 launch cost: These opportunities are not expensive to pursue. These entrepreneurs carefully summer 08
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A good exercise for any entrepreneur is to take a marginal business model and consider how to make it better.
Copying Another’s Business Model: Copying another’s ideas and even their business model may in fact be the best and smartest way to launch a business. Many entrepreneurs have achieved success by simply taking another’s basic business model and making minor improvements in content or execution. A good exercise for any entrepreneur is to take a marginal business model and consider how to make it better — provide a better service, higher quality, more customization, longer life, or make it easier to purchase. By doing so, new opportunities will surface. Apply Technology: Consider what happens to the business model when technology is applied, or newer more advanced processes and workflows are employed. Often such improvements significantly enhance the business to a degree that a higher price can be charged, costs can be reduced, or more customers served — all resulting in a more viable business model. Deciding Which Opportunity to Pursue
After considering all of these opportunities, the entrepreneur must decide which one to pursue. This is a time to be strictly objective. Entrepreneurs need to take on the mindset of a financial investor. Investors consider hundreds of businesses before making an investment decision and they learn to do so objectively and with discipline. Entrepreneurs must do the same, as they too are about to make a sizeable investment of time, energy and resources. The factors to consider most at this point are highly personal to each entrepreneur but should definitely include the following:
Probability of Success and Size of Payoff: It will generally take the same energy and time to pursue a good opportunity as one with little likelihood of success and a low payoff. Choose those opportunities that have the highest probability for success and will yield the greatest personal payoff. 26 launch
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The probability of success for any opportunity and the size of the final payoff must be estimated early on by the entrepreneur and considered carefully in making the final decision.
Resources Required: Each opportunity requires critical resources in order to be developed. These resources certainly include money, but also time and specific skill sets. The amount of required resources is often a factor of the complexity of the business opportunity. The entrepreneur must carefully consider the amount of resources that are at readily at hand and let this reality check force a focus on those opportunities that more closely match available resources. It is better to pursue an opportunity that you have the resources for than to spend precious time and energy trying to raise additional resources to pursue what you might feel is a grander opportunity. Timing Is Everything: There is a time frame associated with each opportunity — a ticking clock that meters out the life cycle of the opportunity. It is possible for the entrepreneur to pursue an opportunity too soon before market needs have been defined or before customer segments arise. It is just as possible to pursue an opportunity too late, long after competition has arisen, or customer needs have changed. Pursuing even an opportunity of great value out of sync with this timing will result in failure regardless of its overall merits.
Evident Fatal Flaw: One final consideration is making sure the opportunity is not marred by a “fatal flaw” — some element that predicts failure such as overly entrenched competitors, current vendors or suppliers who are better positioned to meet customer needs, or an entity in the supply chain that is better able to offer the solution. If such is discovered, the wise entrepreneur will walk away from the opportunity instead of blindly moving forward feeling that their drive and passion alone will be enough to succeed. Conclusion
There are countless opportunities entrepreneurs can pursue — many with tremendous potential. Entrepreneurs who can set their emotions aside and carefully work through their evaluation are more likely to select the very best and achieve the ultimate success they are seeking. $ Click here for the HTML version of this article on launchutah.com.
Funding Options
for Startups By Colin Kelly Jr.
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Think your highly disruptive business plan for that Everything On a Stick fast-food franchise idea will start a VC bidding war? Think again. No matter how convenient and tasty your bleu-cheese-filet-mignon corndog prototype is, odds are you wonâ&#x20AC;&#x2122;t be getting a $2 million Series A round from a venture capitalist anytime soon.
In fact, fewer than 1 percent of companies in the United States ever see VC money. Why? The short answer is because VCs have very tight and defined criteria for investment. They look only for high-growth deals with the potential of returning 10 times an initial investment within five to seven years. Back in the real word, the rest of us a have a wide range of other options. Many options involve debt financing — some type of loan requiring eventual repayment. Other options involve equity financing in which you give up a percentage of ownership. Some options may involve a combination of both debt and equity funding. One word of warning: Anytime you accept some type of equity funding, pay special attention to the effect of share disbursements on your company’s capitalization table (often called a cap table). Consult a business and finance attorney or get advice from a seasoned entrepreneur. This is especially true if you ever plan to seek VC money at a future date, as a messy cap table will often sour any potential VC interest. There may be a better way to structure the deal saving you headache down the road. In no particular order, here are some of the more popular means of funding a startup:
Friends and Family
Typically a debt and/or equity arrangement, friends and family money is a broad term describing funding you get from anyone you know. Typically this person likes you and believes in your idea. Remember, this is also a person you still may have to hang out with on a regular basis even after your company tanks and you lose his or her money, so be careful. Even if the money is a gift, get a business and finance attorney to help structure the deal. Getting everything on paper now helps avoid lawsuits, cap table issues and blood feuds later. Angel Investors
While money from friends and family can be considered angel money, a typical angel deal involves someone a bit more sophisticated at investing than your uncle. Angels invest their own money and often work together in groups. Deals can involve debt, equity or a combination of both. Angels don’t have the same requirements as VCs and are much more flexible in the types of terms they can offer. See growutahventures.com for a list of Utah angel groups. Self Funding
One of the best ways to start a business is from your savings account. If you’ve just some made money by selling a previous business and live in Utah, you can avoid some capital gains taxes by rolling the money into a new business. Bootstrapping
The classical definition of bootstrapping involves starting a company with very little up-front capital then ratcheting the company up step-by-step based on incremental revenue growth. Bootstrappers justify every penny spent and keep budgets lean. Profits earned during the early years typically are invested directly back into the company to spur growth. Bootstrapping often means slow growth, but also reduced risk. Seed Fund Incubators
Pioneered by Y Combinator and new to the scene, seed fund incubators offer an intensive multi-week entrepreneurial mentoring course and $5,000 to $30,000 in funding in exchange for 2 to 10 percent of the equity in your company. Seed fund incubators generally look for promising software or Internet startups with one or two founder/employees. Other U.S. seed fund incubators include TechStars, LaunchBox and Summer@Highland. 30 launch
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Bank Loans
Signature loans and bank lines of credit are good ways to get quick cash, but they are hard to qualify for if you don’t have collateral or haven’t been in business for at least two years. Venture Debt
There are different flavors of venture debt out there, but at its core, venture debt is a loan for young companies that can’t qualify for a bank line of credit. In addition to repaying the loan with interest, you may need to give up a small part of your company’s equity but it’s generally less than 5 percent. You may also have to sign a personal guarantee on the loan. For many growing companies, it’s cheap money since there’s not much equity given away. Silicon Valley Bank (SVB) first launched the idea. Comerica and SVB are two active classic venture debt lenders that will fund Utah companies. Locally, Zions Bank recently began doing some venture debt funding and InnoVentures (formerly UTFC) has been funding startups using its own version of venture debt for years. SBA Loans
Small Business Administration loans are great, but often to qualify you need to be in business for two years and/or come up with collateral. For many, that means putting their house on the line. Leasing/Financing
If your startup requires a substantial amount of equipment, you may be able to lease or finance the gear instead of purchasing it, thus freeing up money garnered from other funding sources for various other uses. Credit Cards
Many a business has been started on $50,000 in credit card debt spread out over 10 different cards. Make sure to constantly monitor interest rates and make payments on time or you can quickly get in trouble. Home Equity Loan
Although it can put your house at risk, home equity loans are one of the most popular methods of financing a startup.
months without a regular paycheck? If you can, you’ll greatly increase the chance of surviving the first few years. Making payroll every two weeks is a cash-flow killer. Seller Financing
If you’re buying an existing business, you may be able to get the seller to finance part of the purchase price over time structuring the deal like a bank loan. Grants
If you spend enough time looking, odds are you will be able to find a local or federal grant related to your industry. The hardest part of getting a grant is often figuring out where to start since finding the right grant is truly the proverbial needle in a haystack. Be cautious of companies who offer grant-finding services. Some are legitimate, but many are scams. Factoring
Factoring is the process of selling part of your account receivables at a discount to a third party (called the factor). The factor buys a percentage of your unpaid invoices then collects money directly from your customers. Factoring isn’t a loan, it’s the outright selling of assets so your credit score isn’t an issue. Factoring is a quick way to raise money if you can’t get some kind of a loan. You take a pretty big hit on the discount given to the factor but at least you don’t have to wait 30, 60 or 90 days to collect on your invoices. Of course, you need to actually have a business up and running with real account receivables before you can take advantage of factoring. Micro Loans
A local nonprofit organization, the Utah Microenterprise Loan Fund (UMLF) has helped hundreds of Utah startups with loans ranging from $1,000 to $25,000. UMLF is more flexible than the SBA or a bank when considering credit score and collateral. Visit umlf.com for information. $
Sweat Equity
Every entrepreneur puts in a lot of hours, but can you and a few key employees afford to go the first 12 or 18
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Making Sense
of Venture Term Sheets By Chris Anderson Chris Anderson is a partner at the law firm of Ballard Spahr Andrews & Ingersoll. He is in the Business and Finance Department and is also a member of the Technology and Emerging Companies Group, Mergers and Acquisitions Group, Securities Group, Private Equity Group and International Group. He practices primarily in the areas of business, securities and international law.
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If you are soliciting or hoping to receive a term sheet from a venture capitalist or angel investor, or expect to discuss with potential investors the terms on which they might make an equity investment in your development stage company, prepare yourself. Investors use a lot of terms that may be unfamiliar to you. A little homework will help you speak and understand the lingo, and to know which terms are likely to have the most significant impact on the founding stockholders and their investments. The following is a simplified key to understanding
a few of the new terms that might start swirling around you as you look to raise needed equity capital. Common Stock vs. Preferred Stock
Common Stock is the basic ownership unit in a corporation. The holders typically have voting rights, and the right to receive the net assets of the corporation upon dissolution, subject to any preferential rights granted to holders of Preferred Stock. Preferred Stock consists of a group of shares that are given
certain rights and preferences regarding matters such as voting, dividends, liquidation preferences, conversion rights and antidilution protections. Investors typically like Preferred Stock, because of the rights and preferences that can be built into the shares. And having investors purchase Preferred Stock can also have a benefit to the company, as it can maintain a differential between what the investors pay for their shares, and the price at which Common Stock may be sold to employees. Pre and Post-money Valuation
A pre-money valuation is simply the value established for the company immediately prior to giving effect to the financing. A postmoney valuation refers to the state of affairs immediately after completing the financing, and is simply the pre-money valuation plus the amount of the investment. So when a valuation figure comes up, any given number is more attractive as a pre-money valuation, because the post-money valuation will by definition be higher, and the purchase price per share will be based on the pre-money valuation (and is simply the valuation divided by the number of shares outstanding — or deemed to be outstanding). Note that investors will want your option pool created and in place pre-money, so that the reserved shares are counted as the stock price is computed, with the effect that the founders and not the new investors are diluted by the option shares. Liquidation Preference and Participation Rights
Pay attention, as this provision will have the most direct impact on the return ultimately realized by the founders, when the proceeds of a liquidation transaction are divided up. A liquidation preference is the amount the purchasers of Preferred Stock are entitled to receive before the holders of Common Stock get anything. It is typically calculated in reference to the purchase price paid for the Preferred Stock. The basic right would be a return of that investment (plus any dividend that is owed). However, in an investor favorable market, a 2x or 3x return on investment may be requested, before the holders of Common Stock get anything. A participation right means that after the preferred investors get their preferential
payment, they also share in distributions made to the holders of Common Stock, typically on a pro-rata basis. A company may negotiate for a cap on what the holders of Preferred Stock may receive in a liquidating transaction. And remember, if the return to a preferred investor would be less that what the holders of Common Stock will get, the investors may convert their shares to Common Stock (and they may be required to convert on certain events, such as a qualifying IPO). It is worth running through a few examples to see how the investors and founders would each come out under various exit scenarios. Anti-Dilution Protections
A mechanism to protect the investors from having overestimated the value of the company, or in the event of a downturn in company fortunes. Implemented by changing the conversion rate of the Preferred Stock, so the investor gets more shares on conversion if the company issues shares to others at a price below what the investor paid. Can be in the form of either a “direct ratchet” or “full ratchet” adjustment — with the investor treated as if having paid the lower price, or a “weighted average formula” adjustment — with the investor benefiting from a weighted average adjustment to the conversion price, based on the number of shares issued at the lower price. Pay-to-play
Extends the benefit of the full anti-dilution protection and to participate in future offerings only to investors who participate in the lower-price offering. Dividend Rights
Generally, a dividend must be paid to the holders of Preferred Stock before any dividend is paid to the holders of Common Stock. The dividend may be non-cumulative and discretionary, or it may be cumulative so that it accrues until paid. The Preferred Shares may also be entitled to participate in any dividends that are then declared with respect to the Common Stock, on a pro-rata basis. The board of directors typically decides when dividends are going to be declared. Development stage companies don’t typically pay dividends, but an accruing dividend may have to be paid out in an exit transaction.
Co-sale Rights
A right granted to investors to participate in a sale of shares by founders or other designated stockholders. So if the designated stockholder wants to sell shares, the preferred investors can participate as sellers in that transaction. Drag Along Rights
A right to require founders or other designated stockholders to go along with an exit transaction approved by the preferred investors. Redemption Rights
A right to require the company to repurchase the Preferred Shares at a specified price (often the issuance price plus the amount of accrued but unpaid dividends), typically triggered by a vote of the preferred investors at some time in the future. This gives the investors leverage in exit discussions, but not frequently carried out. Registration Rights
Rights to require the company to register shares, to facilitate their sale to the public. This gives leverage to the investors holding such rights, but typically the underwriters engaged by a company will ultimately dictate what will happen and when. Warrants
Just rights to purchase additional shares (often Common Stock) for a period of time into the future at a fixed price, giving the investors an additional “kicker” in case the company does well. There are many other terms to consider, as well as variations on the terms indicated above. But hopefully, this introduction will help you feel more comfortable as you begin your discussions with investors. Also, don’t forget the importance of soliciting input from professional advisors and entrepreneurs who have been through the process before, as you contemplate term sheet negotiations. They can help you identify investor demands that exceed contemporary market norms. $ Click here for the HTML version of this article on launchutah.com.
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Weâ&#x20AC;&#x2122;ve got two places for you to grow your business. e
When you've outgrown your basement or garage, both you and your business need more than to move into a vacant office with a desk.
You need a place where there is excitement and enthusiasm, a place filled with energy from other entrepreneurs, and a place where advisors and mentors are available to assist you. You need a place that you and your employees will be proud to call your first official business home. We at Grow Utah Ventures know all about this. And so we've opened two Entrepreneurial Stations,-eStations- just for you. Our first eStation is located on historic 25th Street in downtown Ogden. Housed in a refurbished bus depot built in the 1940's this location surrounds our eStation entrepreneurs with the ambiance and excitement that is unique to this eclectic location. Businesses have access to state of the art
communications technologies, private work cubicles and conference rooms for customers and the entire team. Our second eStation was just opened at the new Simmons Entrepreneurship Center located on the campus of the Davis Applied Technology College. Look for other eStations to follow. Each business that we locate at the eStations receives assistance from our seasoned team of experienced business advisors and mentors. The eStation simply is the best place to begin your exciting entrepreneurial journey. Just another way we at Grow Utah Ventures are assisting the growth of Utah's entrepreneurs. Learn more at www.growutahventures.com.