Back of the Napkin
A Start-Up’s Legal Path from Idea to Enterprise
by
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CHAPTER 2 - PEOPLE WITH MONEY TO INVEST
BEGIN WITH THE END IN MIND….DEFINE YOUR GOALS
Before you start, you need to ask yourself some questions. Are you building a two-location gourmet bakery in your hometown, or are you looking to sell your company for $30mm in five years? Two extreme examples yes, but it is really important to know where you are going before you start raising money to get there. Both paths are legitimate, but they are extremely different.
A Mom & Pop Bakery may be creating a legacy for generations in their community. They will look for money from locals who want the best eclairs and croissants just around the corner.
On the other hand, a nationwide chain of fast and casual cafes is looking to build a global brand instead of a local reputation for the best croissants on the block.
CAMP CAR STORY: Our characters Alicia and Melinda have realized their end goal. After building their alternative car rental business they plan to search for a buyer; ideally joining a chain. With this goal in mind Alicia and Melinda can start raising money. Now, this is a boot strap operation. In the beginning they will need to rely on their FFF’s to finance vehicle purchases, employees, RV park concessions, etc. With a smart and solid business plan, they hope to attract some Angel investors as well. Alicia’s contact at a major car manufacturer may be helpful here if they can find an Angel investor with industry knowledge.
Initially, the funding for most businesses comes either from the Founders or from the "F's": Friends, Family, and Fools.
The trickiest issue around raising money is VALUATION. There is no single right answer. And lawyers can't really help you with this.
In the earliest stages, you can avoid the issue by raising money through Convertible Notes, or just charging everything to your credit card or drawing on your savings. Your FFF’s (see below) will likely lend you some money to get you started without having a valuation. But this won't last forever.
Mariella has a great idea for her second company. She’s built a great business with her brother and now wants to launch Company II. This time she borrows $500,000 from a couple of customers who see the value of Company II. After she launches and meets a couple of milestones, the customers agree (this time as Angels) to convert their loans into equity and to put in $2mm more. Mariella brings the Angels in as co-owners and now hopes to grow her company without additional investments by re-investing the profits into growth.
Eventually you'll need to figure out what you think your Company is worth, and what others think it is worth. This will require more than thoughts scribbled on the back of a napkin. When you are ready to take that leap, you start raising money by selling pieces of the pie – the equity – to outsiders, and by exchanging those initial notes for equity.
Below you will find a sample path to help you navigate raising money for your company. Note that there are excellent books dedicated just to this topic. The information in this chapter is a beginning guide. Find a mentor in an angel network to help guide you further.
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About the Book
Contracts are built on relationships—not documents and not handshakes.
If you start with a form document, the form will shape your relationships before you define your priorities and goals. You must take the time now—at the beginning—to figure out, as a team, where you stand and to clarify in writing the expectations and roles of each player. That means making sure you understand the core contracts that shape and protect your rights.
Alicia Goodrow, a trusted lawyer, explores how to save money in legal fees, headaches, and conflicts as you move from idea to enterprise in this business guide. Learn how to:
• begin with the end in mind;
• surround yourself with the right team members to accomplish your goals;
• determine who you want to join you at the “founders table;”
• identify your leadership paradigm; and
• know the legal basics for handling IP, leases, customers, suppliers, and employees.
The author also highlights various organizational models, tackling complex decisions, ways to court angel investors, and how to begin with the end in mind.
Packed with tips for individuals building companies, this startup guide will help you achieve entrepreneurial success.
About the Author
Alicia Locheed Goodrow, a trusted lawyer, has been coaching business leaders for thirty years and is a frequent speaker to professional and business audiences. She enjoys celebrating client successes while helping plan for bumps in the road. She has formed more than 1,500 new companies (and helped sell or unwind quite a few as well).
www.backofthenapkinbook.com;
agoodrow@backofthenapkinlaw.com