Here’s what a typical Startup Weekend looks like:

6pm Friday: Everyone gets together; figures out who else is there; what would be interesting to build. 7pm: Pitches start (if you have an idea for a product you pitch it to the group). 8pm: Teams start breaking off (generally about nine teams will form during the weekend, creating nine products or companies). 9pm: Hopefully teams have solidified their concept and created an elevator pitch (even a simple one) by now. 10pm: Break off to a bar or coffee shop to continue the discussion and attempt to paper prototype out their application.

9am Saturday: Crowds pour in; work starts on development. Noon: Lunch.

3pm: More coding, business plan development, and a special guest (music, vc, sponsor etc). 6pm: Special guest drop-ins and pitches from the teams. 9pm: Gut check on the product; basic prototype building; group get-together for drinks and to talk about the products everyone is working on.

9am Sunday: The day’s work starts again. Noon: Projects are being developed; live website with signup is possibly set up; more special guests drop in. 6pm: Sink or swim time for those looking for a weekend launch. 9pm: Presentations from each company; what worked, what didn’t, what could go better and contacts are exchange for those continuing in the future.

What do Attendees get?

Startup Weekend provides an unprecedented level of networking, team building, learning, and life changes for its attendees and their communities. Don’t forget that there will be 6-7 meals and drinks provided. There is a reason that most attendees come back for every event – it’s just plain fun and provides amazing opportunities you can’t get anywhere else. Sometimes a company emerges, sometimes one doesn’t, but every time people leave with more experience, insight, knowledge, friends, and resources than they came with.

Buy tickets here, or find out more about the weekend event.

1. Spending Too Much Time Keeping Your “Unique” Idea Top Secret. Some founders attempt to have everyone within 25 feet of them sign an NDA. Instead of spending time drafting and then obtaining signatures on a NDA, a founder should use that time to implement the unique idea. It’s highly likely the idea isn’t unique, and a founder could turn off some good investors/partners/mentors by asking for a NDA signature.

2. Not Vesting Founders’ Shares. It’s easy to believe that vesting your own founder shares doesn’t help you, but take a look around the founder table. Now think how you’ll feel if your co-founder decides to try out for American Idol and take his 33% of his vested ownership with him to Hollywood while you and the rest of the founders pound keyboards all day and night.

3. Forgetting to Make the 83(b) Election. If you decide to vest your founder shares, don’t forget to make an 83(b) election with the IRS. You have 30 days to do so after purchasing your founder shares, but there’s not reason to wait more than 1 day post-purchase.

4. Issuing Preferred Stock to Minor Seed Investors Like Your Uncle Bob. Sure, Y Combinator and TechStars get preferred stock for their $18,000 seed investment, but your Uncle Bob (probably) is not Paul Graham or David Cohen, Uncle Bob is not running a startup mentorship program for your team, nor does Uncle Bob have a massive amount of relevant startup industry connections.

5. Concentrating Only On Valuation When Raising Capital. There’s a reason why term sheets are several pages long. Keep reading after you get halfway down the first page to “pre-money valuation”—there are many important terms on subsequent pages. Also, consider whether the investor or investor group is a good fit for your startup. Don’t choose an investor group solely by the highest pre-money number, if you are lucky enough to have a few term sheets in front of you.

Buy tickets here, or find out more about the weekend event.

Finding out whether you can reserve your desired corporate name in Delaware isn’t as exciting as landing a 5-letter domain with a domain registrar, but at least you don’t have to pay to search like other states.

What is Startup Weekend?

Startup Weekend is a 54 hour startup event that provides the networking, resources, and incentives for individuals and teams to go from idea to launch. Get connected with local developers, innovators and entrepreneurs. Build Community. Start Companies. No Talk. All Action.

Who should come to Startup Weekend?

Startup Weekend targets the top talent from all walks of life in the local entrepreneurial community and put them in a setting where anything is possible. In the past 2 years, 250+ startups have started, 9,000+ entrepreneurs have been inspired, many teams have started to generate revenue during the 54hr event. Others have even gone on to direct angel and VC investment. None of these stats take into account the amazing networking, ongoing professional relationships, and amazing experience that happens at every event.

Startup Weekend recruits a highly motivated group of developers, business managers, startup enthusiasts, marketing gurus, graphic artists and more to a 54 hour event that builds communities, companies and projects.

What’s Special about Startup Weekend Dallas?

Startup Weekend is excited to announce its partnership with The Kauffman Foundation as a featured event for Global Entrepreneurship Week (GEW) this year. Last year GEW orchestrated 25,022 events in 77 countries with 3 million attendees and hundreds of millions reached through PR initiatives. Only 10 of those 25,022 events receive “featured” event status. Those 10 are the ones GEW pushes through the mainstream media and their extensive social networks in 77 countries. Startup Weekend is proud to have been chosen as one of those 10 events! This is an amazing opportunity for the Startup Weekend Community and its partners to gain even more visibility worldwide.

For more information about Startup Weekend, visit startupweekend.org or for more information specific to Startup Weekend Dallas check out dallas.startupweekend.org. Or you can go ahead and buy your tickets now.

“We want to have 30% of the startup company at exit.”

-Anonymous Startup Founders

Occasionally, founders will plan out their startup’s lifespan to the point of pre-determining their final equity figure after all hires and investments have been made. Usually, a set of founders want to end up with a final equity percentage in the 25% – 51% range. I call this number founders (mentally) reserve for future issuance the “Issuance Pool.”

While an Option Pool is a key tool for a startup in order reaching the next level, creating an Issuance Pool is of no tangible benefit.

First, the Issuance Pool creates the potential hazard that founders will operate and make equity issuance decisions, whether for a developer or angel investment, as though the Issuance Pool is pre-authorized like an Option Pool. A common mistake made by founders is acting as though they own the 25% to 51% they plan on owning instead of the 100% they actually own as a group after incorporation and before any other equity issuances. Thus, there is the tendency for founders at future issuances to think “This 10% issuance leaves us with 39% left for our (planned) future issuances.”

Your startup could over-issue equity to consultants, advisors, employees, and investors simply because you believe there’s a large amount of equity left in your Issuance Pool. Alternatively, your startup could turn off new hires and investors if you attempt to under-issue equity because your Issuance Pool is running low.

Second, the Issuance Pool should not be used as a barometer of success. Is your startup any more successful because it only issued 75% of your Issuance Pool? Maybe. But the goal should be that all equity issuances work to increase the value of the startup and generate great returns– not that your equity percentage is greater than what you planned months, if not years, ago.

While the Issuance Pool doesn’t show up on your startup’s cap table, it can still be harmful to your startup. There’s nothing wrong with planning, but an Issuance Pool should be discarded quickly after incorporation.

Sometimes startups will run into a person who offers them assistance raising capital. This person is called a “finder.” The finder offers to help the startup find investors in exchange for a cash commission (usually in the 5-7% range) based on the amount raised through the finder. However, I’ve seen some pretty appalling finder commission structures, such as a 10% cash commission plus 10% warrant coverage.

My advice to your startup: Don’t hire a finder or broker for your startup, unless you have a compelling reason to do so. And “We can’t find investors on our own” is not a compelling reason.

But if your startup is still considering using a finder to help raise capital, I strongly advise you to vet this person or group:

(1) How successful has the finder been raising capital for emerging companies like yours?

A lot of finders may have experience raising capital for companies with a much longer track record and developed balance sheet (and of course, revenue & profit). These types of capital raises usually involve different investment structures and investors with different risk-tolerances when compared to your startup’s capital raise. For example, your finder’s network of investors may prefer investing in secured-debt deals rather than in unsecured securities of a startup. Thus, make sure the finder — and the finder’s investor syndicate — are both a match to your startup.

(2) Is the finder registered with FINRA and your state’s securities board?

Most likely, the finder offering to raise capital for your startup SHOULD be registered with FINRA (Financial Industry Regulatory Authority) and your state’s securities board. But the reality is, a tremendous amount of unregistered “brokers” (as defined by the SEC) are out there offering to raise capital for companies. FINRA offers an online broker check and so do most states.

Capital raising is hard, but finders are usually not life-savers for startups.

From Orrick’s site:

Orrick’s Start-Up Tool Kit is a comprehensive set of resources designed to aid start-ups and their founders on the journey from the “garage” to the global marketplace.

The Start-Up Tool Kit includes a Term Sheet Creator (hope you have Internet Explorer!) and a Start-Up Forms Library. Just like the recently released sample startup documents by TheFunded.com, the sample legal documents in the Start-Up Forms library seem to be for a California-based Delaware corporation.

The sample startup documents, located at docstoc.com, include:

- Bylaws
- Certificate of Incorporation
- Initial Stockholder Consent
- Invention Assignment Agreement
- Restricted Stock Purchase Agreement
- Indemnification Agreement
- Initial Board Consent
- Action by Incorporator
- Plain Preferred Term Sheet

My 3 quick caveats regarding the docs:

(1) Looks like they are set up for a California-based Delaware corporation.
(2) Don’t forget to send in your 83(b) election form in the Restricted Stock Purchase Agreement.
(3) Consider whether you have to file a 25102(f) notice if your startup has ties to California.

Via the written plan, a startup pre-authorizes a certain amount of the company’s common stock which will be issued by the plan’s administrator (usually the startup’s board of directors or a committee selected by the board). For example, if the startup has 5,000,000 shares of common stock outstanding, it may elect to authorize 1,000,000 shares to be issued pursuant to the plan.

A potentially confusing aspect of the option pool is how the option pool’s unissued portion is treated for financings relative to acquisitions. The unissued portion of the option pool is included in the fully-diluted capitalization of the startup, but the same unissued portion is not included in the outstanding share count upon an acquisition (or distribution). In other words, the entire option pool is included in a startup’s total share count at financings, but only the issued portion of the option pool is included in a startup’s total share count at acquisition.

Keep in mind that a startup’s original option pool will likely not be the last option pool the startup creates. The size of the option pool is typically negotiated at each round of financing, since at that time, the startup will likely need additional equity options to attract and motivate future hires.

TRANSFER THE INTELLECTUAL PROPERTY TO YOUR STARTUP COMPANY

In the episode, Coverplay Inc., was looking to raise about 350k from the show’s angel investors. A few investors made proposals and one particular investor offered Coverplay’s 2 founders 350k in exchange for 40% of their company. Coverplay countered with 350k in exchange for 30% of the company…and 10% of the patent. The show went to commercial and I said to my wife “Uh oh, their corporation doesn’t own the patent.”

After the break, all the investors pulled their deals off the table. Without the intellectual property, there was no business. The investors (rightfully) assumed the patent was owned by the company. In essence, Coverplay was asking for investment in something they didn’t own. (Side: This is happening often on the show. Many entrepreneurs are claiming they own the IP when they really don’t.)

Coverplay explained that Allison Costa, one of Coverplay’s founders, owned the patent. Then Allison further explained that her ex-husband also owned part of it as well. I can only assume that Costa had some type of patent license deal with Coverplay.

When starting a company involving intellectual property, you must transfer the IP to your startup. For example, if the intellectual property is developed prior to incorporation, you can transfer the IP via the founder’s stock purchase and tech transfer agreement.

This concludes my blog’s 70-day interlude.

Regular posting resumes tomorrow. In the meantime, check out these 2 posts from other great blogs:

The One Number You Should Know About Your Equity Grant (Chris Dixon)

Should Entrepreneurs Be More Like Teenage Girls (Seeing Both Sides)

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.)