Non-local investments made by venture capital firms based in the Valley, Boston, and New York outperform their local investments.

This is according to a working paper titled “Buy Local? The Geography of Successful and Unsuccessful Venture Capital Expansion” just published by Henry Chen, Paul Gompers, Anna Kovener, and Josh Lerner.

The authors conjecture that local underperformance is due to venture capital firms having higher hurdle rates for non-local investments. But I’m pretty sure most of you entrepreneurs are thinking it has something to do with less visits from the VC.

Overall, the working paper attempts to demonstrate how geography affects performance of venture capital firms. It’s a somewhat long, but very interesting read.

PEHUB posted the entire working paper on Scribd here.

A corporation’s registered agent must be located within the relevant state. For example, if your Texas company is incorporated in Delaware, your company will need to hire a registered agent in Delaware. If your Texas company is incorporated in Texas, you or another shareholder or officer could be the Texas registered agent (assuming each resides in Texas).

The registered agent must be available during normal business hours and supply a physical address in the relevant state–no P.O. boxes or private mailboxes. Since this address is public record, some people opt to hire registered agents to maintain privacy.

The most common mistake startup companies make is failure to update the name and/or the address of the startup’s registered agent. For example, if you fail to update registered agent information with the secretary of state, your company could be sued–and lose–without your knowledge. In Texas, the secretary of state becomes the registered agent on behalf of your startup if your startup fails to maintain a registered agent, or the registered agent listed with the secretary of state cannot be found with “reasonable diligence.”

Rates for registered agents tend to range between $50 to $360 per year. Finally, here’s a link to the Delaware General Corporation Law regarding registered agents.

Of course, I’m writing this from the Southlake Town Square Starbucks, the un-official yuppie suburb headquarters of north Texas. And yes, I’m wearing the official yuppie job uniform: grey slacks and a blue dress shirt.

But what better day than today, 2pac’s birthday, to keep my word to those closest friends of mine. I’ll just keep the music down so as not to freak out the other tenants on my floor.

(1) About how much debt and equity capital has been provided to your business?

(2) How long do you think it would take to obtain additional funding for your business?

(3) How often do you evaluate your cash flow status/plan?

(4) What’s your degree of business planning?

(5) What’s the approximate annual growth rate of your market?

(6) How many years of management experience do you or your team have?

(7) How many years of industry experience do you or your team have?

(8) Over what timeframe do you want to know your chances of success?

The Venture Capital Dispatch blog at the Wall Street Journal did a mock trial using Twitter’s information and got a 46% “odds of success” over the next 5 years.

Of course, the calculator is a pretty good way to generate web traffic and get registrations in the same way that Younoodle did so with their “Startup Predictor” which gave a projected valuation for your startup.

So far, the offers for this blog have not reached Younoodle’s prediction of $2,340,000.

Thus, failure to make an 83(b) election could leave the founder with a tax bill without experiencing a liquidity event.

The 83(b) election neutralizes this potential disastrous tax consequence, and the founder recognizes “income” upon the initial restricted stock purchase. This income is usually $0, as the initial restricted stock purchase price is usually made at FMV.

The biggest mistake first time entrepreneurs make is that they fall prey to the idea that they need to put together a five year P&L forecast and cash flow projection. I can guarantee – with 100% certainty – that this model will be wrong. As an investor, I don’t really care about this; rather I want to see how you are thinking about getting to “the next stage” of your business. You get to define the next stage, what it’ll cost you to get there, and what things will look like when you get there.

I think this is critical advice every entrepreneur needs to follow. And the post reminded me of some of the things potential clients send me.

About once a month, a startup founder will send me a “5-year business plan” with a cap table that anticipates 4+ rounds of funding. Typically, the future cap table will estimate what each founder’s future ownership will be down to the 1/100th of a percent.

I suspect that the majority of these 5-year business plans come from entrepreneurs with corporate/consulting/finance backgrounds. These new entrepreneurs are quite skilled at producing such documents and are eager to use these skills at their startup. While such skills are an asset, their importance is minimal in the early stages of a startup.

As an attorney, I really don’t need to see multiple excel worksheets of projections. And an entrepreneur, regardless of their background, does not need to be creating a projected cap table with four rounds of funding. If you do this, you are spending time working on something that will be incorrect.

As Brad mentions in his article, work on the implementation of your idea. How is your startup going to reach the next stage? How are you going to sell, etc.?

Don’t oversmart your business startup’s plan. Figure out the answers to these shorter-term questions and the long-term numbers and cap tables will work themselves out.

June 1 – SpringStage Startup Happy Hour
What: The happy hour is a monthly get together for entrepreneurs interested in building a local startup community.
Where: 1950 Stemmons Freeway, 1st Floor High Tech Bar, Dallas, Texas 75207
When: 5pm-8pm
Cost: $0

June 4 – FundingPost.com Dallas Early Stage Venture & Angel Conference
What: Panel of investors will discuss early-stage investing, how to get funded, hot sectors, and networking.
Where: Sheraton Suites Market Center, 2101 N Stemmons Freeway Dallas, TX 75207
When: 2pm-6pm
Cost: $75

June 5 – SpringStage First Friday Jelly
What: Entrepreneurs and Developers come work at the Big in Japan offices the first Friday of each month. They provide the desks, chairs, sofas, wifi and you provide your laptop and yourself.
Where: 1950 Stemmons Freeway, Suite 2022, Dallas, Texas 75207
When: 9am-5pm
Cost: $0

June 12 – SparkStart
What: SparkStart is a full day of business and technology discussion (open format) and learning event for startups (“startup bootcamp”).
Where: Microsoft Technology Center, 7000 State Highway 161, Building LC1, Irving, Texas 75039
When: 10am-4:30pm
Cost: $0

June 18 – DallasBlue Startupaganza!
What: Startupaganza celebrates our local entrepreneurs. 10-15 presenting companies get five minutes to talk about their venture and what they need to continue moving forward.
Where: Swan Court Banquet Room, 2435 N. Central Expressway (between Campbell and Renner), Richardson
When: 11:30am-1:30pm
Cost: $30

If you know of any other events, ping me or leave a comment and I’ll update the post.

It is usually expressed as a percentage of the original purchase price of the preferred, such as “2x.” Thus, if the purchase price of the preferred is $5 per share, a liquidation preference of 2x will be $10 per share.

Alternatively, the liquidation preference can expressed as a per share amount, as seen in this generic liquidation preference clause:

The holders of the Series A Preferred Stock shall be entitled to receive, prior and in preference to any distribution of any of the assets or surplus funds of the Corporation to the holders of the Common Stock by reason of their ownership thereof, the amount of $10 per share (as adjusted for any stock dividends, combinations or splits with respect to such shares) plus all declared or accumulated but unpaid dividends on such share for each share of Series A Preferred Stock then held by them.

Let’s take a simple scenario to see how the math works:

(1) Series A Price = $5 per share
(2) Series A Shares = 500,000
(3) Series A Equity Stake = 33% (i.e., they are investing at a $5MM pre-money valution)
(3) Series A Liquidation Preference = 2x (i.e., $10 per Series A share) = $5,000,000
(4) Startup Company is sold for $6,000,000

While the Series A investors paid $2,500,000 total for their shares for 33% of the startup company, the 2x liquidation preference will ensure that the Series A investors receive $5,000,000 of the $6,000,00 purchase price of the startup. Thus in this scenario, the 2x liquidation preference gives the Series A investors 83.3% of the total sales price of the startup (even though the Series A equity stake is 33%) and the common stock holders will receive the remaining 16.7% pro-rata in accordance with their common stock ownership.

(This example assumes that the Series A preferred shares do not participate with the common in the remaining 16.7%. I’m also leaving out the possibility of conversion-to-common to simplify this example.)

This situation arises when a startup company offers stock to a lawyer in exchange for legal services. I’ve derived the following 2 postulates to explain why startups and lawyers agree to this setup:

1. Startups are broke.
2. Lawyers are expensive.

For the same reasons that your startup lawyer should not be on your board directors, stock for fees may affect your startup lawyer’s ability to give unbiased legal advice. Furthermore, Rule 1-8(a) of the ABA Model Rules of Professional Conduct provides that a lawyer may not enter into a transaction with a client unless:

(1) The transaction and terms on which the lawyer acquires the interest are fair and reasonable to the client and are fully disclosed and transmitted in writing to the client in a manner which can be reasonably understood by the client;

(2) The client is given a reasonable opportunity to seek the advice of independent counsel in the transaction; and

(3) The client consents in writing thereto.

Thus, if your startup agrees to a stock for fees representation, you will likely sign a conflict of interest waiver from the firm stating that you were advised and had the opportunity to seek another lawyer about the stock for fees deal (along with other stock for fees conflict language boilerplate).

The most common stock for fees legal work is (a) incorporation & other related “getting launched” issues, and (b) financings. Incorporation stock for fees deals are usually set up as an agreed to amount of legal work (e.g. “$10,000 of legal fees billed at $400 hourly”) in exchange for an equity percentage of the startup. Startups that are about to go after funding or maybe even have a term sheet in front of them may offer a small percentage of stock in exchange for the law firm deferring legal fees until the financing closes.

In my practice, I have yet to do a stock for fees deal. The main reason I haven’t thus far is that I don’t want to add “GP of Early-Stage Fund” to my job description. That is, before agreeing to a stock for fees deal I would have to conduct a due diligence evaluation just like a VC would. (Of course, having a couple term sheets from VCs might preclude such a due diligence investigation.)

I may not be contributing cold hard cash to the startup, but my time is worth something. Instead of working for equity, I could be working on another paying client’s deal, blogging, or riding Tony Hawk’s Big Spin with my son. Plus, malpractice liability doesn’t go away if I don’t receive cash consideration for legal services.

In any event, both startup and lawyer should be prudent before agreeing to a stock for fees deal. And a startup should never take it personal if a lawyer or firm won’t do a stock for fees deal.

The Class F Common offers founders various protective provisions such as:

-2 to 1 Board votes per founder relative to non-founder board members
-10 to 1 share votes relative to regular common shares
-Monthly vesting with no cliff
-Approval rights on new investments, liquidity events, increases to Board size, etc.

Why did the Institute create Class F? They answer this question on their website (www.founderinstitute.com):

Since the internet bubble burst, a number of enhanced protective provisions have been introduced into preferred stock. As an example, “participating preferred” has become commonplace since the last crash. Meanwhile, there have been comparatively few advances to protect founders, who are forced to accept historically bad investment terms and being terminated from their companies by investors in the current economic environment.

They also go on to claim:

Class F is [the] most founder-centric shares created to date, including more generous than the infamous founder agreements of Larry and Sergey at Google. Companies in the Institute also have a warrant that requires permission from the Institute when a founder is removed from the Board of Directors, or the company will suffer a financial penalty.

The set of startup documents include the Certificate of Incorporation and the Stock Purchase Agreement, along with Institute-specific Founders Agreement and Warrant. Check them out here.

This tool will generate a venture financing term sheet based on your responses to an online questionnaire. It also has an informational component, with basic tutorials and annotations on financing terms. This term sheet generator is a modified version of a tool that we use internally, which comprises one part of a suite of document automation tools that we use to generate start-up and venture financing-related documents.

Furqan Nazeeri at altgate.com seems to have the scoop on the evolution and future of the term sheet generator in his post here.

I’ve only had a few minutes to check out the term sheet generator, but like most other open sourced legal documents, I think it’s great.

I’ve always felt introductions, whether to an accountant, potential co-founder, or investor is just part of the benefit of hiring a startup lawyer. And while I heart FINRA, I’m not sure I want to register with them or the Texas State Securities Board.

If you want to hook your lawyer up for an introduction, send him a box of your startup’s t-shirts. Even better, rave about him or her to your network. And if you are an investor (angel or VC) and happen to read this blog, reach out to me so I can increase my electronic rolodex and get more t-shirts.

In most states (I haven’t done a survey all 50), a startup lawyer can simultaneously represent a corporation and serve on the corporation’s board of directors. In order to do so, the lawyer must take careful steps to prevent ethical dilemmas from arising when acting as a lawyer-director. Regardless, the startup lawyer’s duties to the corporation can, and likely will on many occasions, conflict with the lawyer’s duties as a board member.

Your startup lawyer represents your startup company (board of directors). If your startup lawyer joins your board, he or she ends up indirectly advising himself or herself. It is difficult for the startup lawyer-director to provide impartial advice if he or she is both advisor and advisee.

Another negative of having your startup lawyer on your board of directors is that communications between the startup company and a lawyer who is a director may not be entitled to the attorney-client privileged communications rule. Is your lawyer providing legal or business management advice?

Thus, I recommend that founders and startup companies do not have their startup lawyer (or any other lawyer that provides counsel to the startup) sit on their board of directors.

Reports are that Google will commit about $100MM to the fund. According to their blog post, they plan on investing in other sectors than just Internet and software:

We’ll be focusing on early stage investments across a diverse range of industries, including consumer Internet, software, clean-tech, bio-tech, health care and, no doubt, other areas we haven’t thought of yet.

During the rumors in July 2008, Fred Wilson wrote a great piece about why Google SHOULDN’T launch a venture capital arm. It’s a great read about why venture capital returns aren’t fit for large corporations like Google.

Check out the new Google Ventures Website here.

My day job has kept me busy, but that’s not why I haven’t been posting. In lieu of writing, I’ve been planning the evolution of this blog which for now is comprised of 2 main things:

(1) Complete re-design of the blog. I know what you’re thinking, pretty brave considering all the hate mail I got after my last attempted re-design (thanks to all those who wrote/called, btw). This time I am doing it right, so expect a cleaner and more content-accessible blog. More resources. New logo, too.

(2) I am joining the SpringStage Network, as I feel it will increase the open source & collaborative nature of the blog.

Thanks for reading.

LegalZoom just doesn’t offer the documents a typical startup needs: Shareholders Agreement? Nope. Stock Purchase Agreements? No. Tech transfer agreements? Nada.

What about the quality of LegalZoom documents? Robert Shapiro, co-founder of LegalZoom, explains the quality of LegalZoom documents in a 2004 interview:

“And everything we do at LegalZoom is an original document. We’re not a form-filling service. Our documents are first-rate.”

Look, I’m sure they have some great documents, but I’m calling bullsh!t on every document at LegalZoom being an ‘original’ document. For those that don’t remember, Shapiro is the dude that represented O.J. Simpson. Take that for what it’s worth.

If you don’t have the resources to hire a startup lawyer (or just don’t want to), then simply don’t hire anyone to incorporate your startup. Not your accountant, not your financial planner, and definitely not LegalZoom.

Instead, do it yourself and save even more money. If you need help, I think you’ll find that employees at the Secretary of State are very helpful. They will not be able to help you draft your documents, but they will answer your questions about incorporating. And some states will have template articles of incorporation you can use.

(1) Fort Worth Startup Happy Hour tonight at the Flying Saucer. Starts at 5pm. (I hope you don’t have to speak Klingon to get in.)

(2) Vote for Big In Japan in the Mobile Monday event in Spain.

I’ll also have another announcement about this blog soon…and a real post, too.

The model seed funding documents include:

Term Sheet. This sets out the terms of the proposed seed investment into your startup and alsos include the proposed cap table (reflecting the seed investment).

Amended and Restated Articles of Incorporation. Your startup will need to restate, i.e. re-do, the charter it originally filed with Delaware now that your startup will have more than one class of stock.

Bylaws. Think of this document as your startup’s Constitution. You may already have a set of bylaws, but consider upgrading to something like this now that your startup has an outside investor.

Subscription Agreement. While the term sheet is an outline, the subscription is the definitive agreement where your seed investor purchases the securities (preferred shares in the model docs) from your startup. It will contain various reps & warranties from both seed investor and startup company, along with transfer restrictions.

Board Member Election Consent. The model documents anticipate that the preferred shareholders will have the right to select 1 board member. The preferred shareholders elect this board member with this election consent.

If you are considering using these documents on your own, David Cohen, co-founder and Executive Director of TechStars, gives the following proviso:

Please feel free to use these documents, but please do so responsibly only after retaining your own legal cousel. Don’t use these documents blindly. All of the figures in them are made up, and are not necessarily accurate or consistent. We’ve made best efforts to call out the places that need to be edited based on the situation using brackets. But still, using these documents for a real financing and without good legal advice is just plain foolish. Think of them as a good starting point that can save you some time and money.

Also note that the model documents assume your startup is a Delaware entity and is issuing equity securities.

TechStars is a mentorship-driven seed stage investment fund located in Boulder, Colorado. Learn more about TechStars here.

But today my iPhone is playing beta tester because the team at Big in Japan Inc. installed ShopSavvy, their wildly popular shopping assistant application, on my iPhone. Check out the screenshot of my iPhone:

Screenshot of ShopSavvy Icon on the iPhone

I met Jared Retkofsky in the fall of 2008. Jared is the long snapper for the Pittsburgh Steelers. Rather than tell you Jared’s story, I believe these 2 articles do a fine job:

Special Skill Gives Steeler a Moment To Savor (NY Times)

Pittsburgh Steelers’ Jared Retkofsky took long road to Super Bowl (Chicago Tribune)

The articles fail to mention that after Jared spent his work day moving furniture, he would head over to a local practice field and practice his snaps late into the night. And Jared practiced even though the NFL season was halfway over, team rosters were set, and no try-outs were scheduled.

But thanks to those nights, he was ready when opportunity arrived at his doorstep.

So here’s a guy who, in less than 12 hours from now, could be hoisting the Lombardi Trophy. That’s 3 months from moving furniture for $12/hour to being at the pinnacle of the NFL. And all because he chose to stay ready when no opportunities were in front of him.

Regardless of the outcome of today’s game, he’s a great example of how opportunities are only realized if we are ready for them.