Thursday, September 25, 2014

What: Professor X, In the Basement of the Ivory Tower: Confessions of an Accidental Academic (Viking, 2011)

Why: Qualification inflation is rampant. On a purely utilitarian basis, are we forcing people to obtain costly postsecondary qualifications that are unnecessary for the tasks they perform? 

Readers of my posts will know that I am a fan of David Brooks, whose writings I have come to admire notwithstanding certain differences in political outlook. Close friends will also know the great influence my father’s views on education have had on me and the course of my life. Let’s just say he saw education as the key to unlocking potential, a world view he successfully imprinted on his children.

So, when I saw that David Brooks had awarded a Sidney Award to Professor X for an essay on higher education that appeared in The Atlantic a few years ago, I made a mental note to track the piece down. Later, to my delight (sometimes it doesn’t take much to delight me), I found that it had been expanded into this book. Cracking it open, I immediately discovered why this was published under a pseudonym.  

Professor X has the somewhat controversial opinion that too many people who do not belong in college and don’t need a college education to do what they do are being told they need to get a sheepskin. They are incurring huge amounts of debt (in excess of $1.2 trillion) in what for many of them has become a failing enterprise.

Professor X tells us there is a social disconnect here. He identifies, as a typically American trait, the use of a meat-axe where a scalpel would serve nicely:

                    The United States of America does a few things extremely well. It is
                    unmatched at completing a certain species of task requiring a relentless 
                    approach….We’re not the best at figuring out why we’re doing any 
                    particular task, but we are a people who can get stuff done….
                    We are, if nothing else, thorough.

We have, he suggests, been much too thorough in pushing people into postsecondary education and in requiring qualifications for occupations that may be gainfully pursued without an education unrelated to the tasks at hand.

I personally believe that education is its own reward, and that education can lead to the discovery of potential that might otherwise remain untapped, but on a purely utilitarian level Professor X makes an important point—one that I suspect most entrepreneurs know or soon discover as they pursue their dreams.

Think of Bill Gates dropping out of Harvard to build what has become the leviathan we know as Microsoft. He learned what he needed, but knew that a liberal arts degree wasn’t necessary for him to achieve his vision. And that, at the end of the day, is the conclusion Professor X reaches: “Let’s start judging based on skills and experiences and talent, and save failing students from a mountain of unnecessary debt.”

Wednesday, September 24, 2014

Estate Planning Tips from the Loss of a Hollywood Icon

A very notable woman in the entertainment industry (other than Joan Rivers) passed away recently—Lauren Bacall. Lauren, born Betty Joan Perske, left a true legacy in the entertainment world, as well as a couple of good reminders for those of us crafting our own estate plans. 

Lauren Bacall was the famous co-star and eventual wife of Humphrey Bogart, and she died this August at age 89. Lauren left an approximate estate of $26.6 million.  Of the $26.6 million, about $10 million represents the value of her apartment on the Upper West Side of New York City.  There is about $1 million of personal property and only $100,000 of cash. Lauren also possessed a general power of appointment over the trust that Humphrey Bogart left for her.

Lauren presumably died a New York resident, so there will be both federal and New York state estate taxes due on her estate value and the value of the trust. With only $100,000 of cash, her estate has a serious liquidity problem.


Her will directs that the real estate be sold, but depending on the market and other factors, that might not be practical. Her estate has nine months from the date of her death to pay any estate taxes.  The chances that there will be a closing on a $10 million property within nine months are pretty remote, and it will likely cost more than $100,000 to maintain a property of that size until it is sold.


What about the other assets? Lauren asked in her will  that her personal effects, letters, and memorabilia not be sold. This may be some very valuable property that (assuming the family is willing to part with some of it) the estate could use to pay taxes.


Anything else? Well, Lauren gave the rights to her “likeness” and other intellectual property to her children. If this property is valued anything like the similar property owned by the estates of Marilyn MonroeMichael Jackson, or Elvis, its value is fairly significant.  And the IRS can argue they are owed taxes based on that significant value, even though the family hasn’t yet begun to profit from any of it. Even if valuation isn’t a problem, issues relating to whether and how the estate markets her likeness or how the estate divides royalties and other proceeds can leave families in litigation for years.


These two major issues—illiquidity and problems arising out of the management of valuable intellectual property—can be headed off by a carefully crafted estate plan.


Usually life insurance is the simplest way to assure there is a bucket of liquid assets available to pay taxes and other expenses, and it is also possible to borrow against illiquid assets (such as Lauren’s apartment) to pay expenses. These are relatively simple solutions that usually do not otherwise disrupt the plan.


As for the management of future profits from her likeness, a family entity or trust might be created to hold and manage the assets in order to avoid conflict and govern decisions regarding the use of the assets going forward. A family can agree to put this in place after the fact, but many individuals in similar circumstances choose to establish the entity, select the ownership interests and associated rights (think voting and non-voting shares, for example), and perhaps even a board of directors outside the family to make decisions.


Friday, September 19, 2014

The parade of NDAs

Non-disclosure agreements have been a regular part of my practice because so many of my clients have technology at the core of their businesses. Lately, however, it seems like I’ve been dealing almost daily with clients who are haggling over NDAs. Maybe it’s a sign that the entrepreneurs I work with are in an active state of deal making and wanting to engage in other strategic conversations – or maybe it’s just a sign of increased paranoia!

The interesting thing about this trend in my inbox is that it runs counter to a broader trend. A decade ago (or more, at the risk of showing my age), NDAs between entrepreneurs and potential investors weren’t that unusual. Today, in Silicon Valley and elsewhere, many (if not most) sophisticated investors refuse to sign them. 

While it is unusual for an investor to steal an entrepreneur’s idea (although allegations of theft are sometimes made) and the anti-NDA trend may not be ideal for individuals trying to protect their trade secrets, it is a reality they face. Investors claim they don’t want to expose themselves to potential risks because they may see “related” deals; they also claim that the lawyers (why does everyone always blame the lawyers?) get in the way and stall the dealmaking.

So what’s an entrepreneur to do? Well, you can’t just clam up and not talk about what you’re up to. You need to figure out how to talk about your business, the opportunity, and your technology. It’s about finding a way to talk about what’s interesting about the business and the opportunity without revealing the “secret sauce” that you’ve got.

Finally, remember that potential partners and investors are likely more interested in you and your team than they are in your idea. I’m not claiming as some do that your ideas have no value, but I do think that most investors are concerned more about the team and the “execution risk” than they are about the idea.

A decent idea with a great team is always a better investment than the best idea ever with an average team.

Wednesday, September 17, 2014

10th Year of Minnesota Cup Another Success

This past Wednesday, I had the privilege of attending the final awards event for the Minnesota Cup. The awards event concluded the 10th year of the Minnesota Cup, which is a statewide competition for early stage businesses in Minnesota. Gray Plant Mooty has been a sponsor of the Minnesota Cup for most of those 10 years, as we’ve found it to be an excellent supporter of Minnesota’s entrepreneurs and start-up community.

At the event, which I thought was the best yet, they provided some interesting statistics. During the 10 years of the event:

Over 9,000 businesses have participated.
Greater than $1,000,000 in prize money has been awarded.
Division winners have raised in excess of $160 million in private capital!

This year’s event, like the last few years, was hosted at the McNamara Alumni Center on the University of Minnesota campus. The room was filled with past participants and winners, entrepreneurs, students, business and political leaders, and others interested in Minnesota’s entrepreneurial community. Even our state’s two US senators sent video congratulations to the winners and participants.

Each of the seven division winners and runners-up gave one minute “elevator” pitches of their businesses.  The pitches were great, and displayed a variety of interesting business ideas. Among the elevator pitches by the division winners, the audience liked the presentation from Jonny Pops the best, and voted for them to win an extra $1,000.  Jonny Pops, which makes all natural smoothie-sicles on a stick, was also handing out samples of their product at the event. I thought they were quite good and will plan to buy a box soon for my kids to try.

At the end of the evening, the judges selected 75 Fahrenheit (75F) as the grand prize winner of this year’s Minnesota Cup. In addition to receiving $50,000 for being the grand prize winner, 75F also won $30,000 as the clean tech/water division winner, and received a $25,000 grant from the Southern Minnesota Initiative Foundation – total prize money of $105,000! 75F has developed an interesting technology that allows users to regulate building temperatures in an environmentally friendly way by using wireless zone controllers to monitor airflow temperatures in building zones.  

The other division winners were equally as impressive as 75F. I imagine the judges had a very difficult decision in picking a winner.  

For any aspiring entrepreneurs who were not able to participate this year, I suggest that you give strong consideration to participating in next year’s competition. Just by submitting an application, you are forced to think through some issues in your business plan that you might not otherwise consider. If you are chosen to be a semi-finalist in the competition, you will have access to mentors, advisors, investors, and others in the entrepreneurial community who can help you further refine your business strategy.  Even if you don’t win any of the prize money, the Minnesota Cup provides a great opportunity to make valuable connections for your business that you might not otherwise have. 

Congratulations to all of this year’s participants, and especially to the winners.  We’ll be looking forward to next year’s competition.

Friday, September 12, 2014

Wikimedia makes monkey out of photographer (or is it vice versa?)


Last month, Wikimedia (the operator of Wikipedia) again refused the request of British photographer David Slater to remove a picture of a monkey from the Wikimedia Commons database of publicly available photographs. Wikimedia’s refusal was based on its position that the photograph is not subject to copyright.  


The photo is a “selfie” of a crested black macaque taken in 2011. Slater was in Indonesia on a wildlife shoot and preparing to photograph – or in the process of photographing – several of these animals when one borrowed his camera. The camera was recovered/returned with “tons” of pictures, most of which were out of focus, but with a couple, such as the one above, looking very professional. Slater posted the photo online and it became very popular.
  
Earlier this year, the photo was posted to Wikimedia Commons. Slater reports having made several requests for the photo to be removed from this public database, but only last month received an explanation as to why his requests were refused. Wikimedia denied Slater’s request, claiming that the photograph was not subject to copyright because it was the work of an animal.  

Wikimedia is not making this up. Believe it or not, the U.S. Copyright Office expressly states in its Compendium of U.S. Copyright Office Practices,Third Edition that it will not register works produced by nature, animals or plants, and it doesn’t appear that other countries have gone on record with contrary policies. Experts agree that since this photo was taken by the monkey, the photographer does not own the copyright. If there is no copyright owner, it seems logical that the photo is in the public domain.  

This makes perfect sense – at least to me.  

The photographer, on the other hand, is claiming that he should own the copyright because he had creative input and direction over the photograph. There might have been some validity to such a claim had the photographer intentionally set out to shoot monkey “selfies”  and made creative or technical choices regarding such things as the setting, the lighting or the lens before handing the camera to the monkey.  But that banana has been peeled.  Slater himself — at least in initial reports — suggested no such planning or involvement on his part, and certainly no control over the photography work performed by the monkey.

There are others who say that Slater should own the copyright because he paid for the trip to Indonesia and owned the equipment used by the macaque to take its own picture. But would these same persons make that argument if they used their friend’s phone (having left their own at the hotel) to take a perfect picture of a cathedral that their friend later sold for commercial use? Probably not. While many aspects of copyright law can be complex, there are certain basic rules. The creator – the person actually creating the original work – owns the copyright effective automatically upon creation, unless it was created in the scope of their employment (in which case copyright belongs to the employer), or they have entered into a written agreement for creation as a “work for hire” or expressly assigning the rights to another party. Ownership of equipment, payment for services, or even payment for a particular outcome does not transfer copyright ownership. You need the employment relationship or the written agreement.  

And then there are those who think this is just another big business (the nonprofit Wikimedia?) or government (Copyright Office) conspiracy to… to…to…what? Enrich Wikimedia? Steal from the individual to benefit the masses? Or my favorite – take rights away from the monkeys?

Wednesday, September 3, 2014

Should You Consider Forming A Public Benefit Corporation?

Did you form your business to benefit the public and is it designed to operate in a responsible and sustainable manner? Does your business focus on pursuing a net material positive impact as well as making a profit? If so, you may want to consider forming a public benefit corporation, which is a business form that accommodates both a public mission and private commercial ambition (e.g., TOMS or FEED Projects).

The Minnesota legislature recently enacted legislation that allows for the formation of public benefit corporations. The Minnesota Public Benefit Corporations Act will become effective on January 1, 2015, and the Minnesota secretary of state’s office will not accept filings of organizational documents for a public benefit corporation until then. An entity organized as a Minnesota corporation can elect public benefit corporation status and a Minnesota limited liability company may merge into a newly created public benefit corporation at the beginning of the next calendar year.

Types of Public Benefit Corporations

There are two types of public benefit corporations: a general benefit corporation and a specific benefit corporation. A general benefit corporation is a public benefit corporation that elects in its articles to pursue a general public benefit, and it may state in its articles a specific public benefit purpose that it elects to pursue. A general public benefit means a net material positive impact from the business and operations of a general benefit corporation on society and the environment. A specific benefit corporation is a public benefit corporation that states in its articles a specific public benefit purpose that it elects to pursue. A specific public benefit means one or more positive impacts–or a reduction of negative impact–on specified categories of natural persons, entities, communities, or interests other than shareholders.

Requirements

Each public benefit corporation that is organized in Minnesota is required to file an annual report with the secretary of state that details how the corporation pursued its general or specific public benefit goals in the previous year. The annual report must refer to an independent third-party standard selected by the board of directors (although no audit or certification is required from the third party that created the standard). The Act authorizes the secretary of state to revoke a corporation’s public benefit status if it fails to file an annual report. 

The Act does not set forth a uniform standard or set of standards by which public benefit corporations must operate, nor does it create a standards board or any other review body to evaluate a public benefit corporation’s compliance with its stated mission.

Board of Directors

In making decisions on behalf of the corporation, the board of directors of a public benefit corporation must consider the public benefit purposes set forth in the corporation’s articles, the interests of shareholders, and the interests of non-shareholder constituencies. The Act provides that shareholder profits are not to be given presumptive priority over the other considerations.

Tax Status

A public benefit corporation will be taxed as a regular business corporation, either as a C corporation or–if it qualifies and makes an election–as a Subchapter S corporation. 

Shareholders’ Right to Enforce Compliance

The Act does not grant any government body or third party the right to enforce a public benefit corporation’s compliance with its stated public benefit purposes. However, shareholders have a right to bring an action if the corporation fails to pursue its public benefit purposes, and the annual report filed with the secretary of state is subject to penalties of perjury if it is not accurate. 

Summary

In traditional corporations, prioritizing a public benefit over profits would violate the fiduciary duties owed to the company’s owners. A public benefit corporation modifies this, allowing the board of directors and officers of the company to prioritize a social benefit over profits. If the purpose of your company is to have a positive impact on society, then forming a public benefit corporation may be the right entity form for your business.

Thursday, August 28, 2014

Small Business Certifications: Where Do I Start?

For many small, privately held businesses, navigating the world of small business certifications can be a daunting task.  Certification options abound for women, minority, veteran-owned, and small disadvantaged businesses.  What does it all mean, and where does one start?

The website of the U.S. Sm
all Business Administration (SBA) explains it well: “Small business certifications are like professional certifications; they document a special capability or status that will help you compete in the marketplace.”  Here, I address women-owned business certifications, a topic on which our office receives frequent inquiries.

Women-owned businesses may seek certification through both governmental and private entities, and while certification requirements vary, both generally require that one or more women own at least 51 percent of the business and manage the business.  In other words, a woman holding a 51 percent or greater ownership interest in a company in which her husband is CEO isn’t going to cut it.  She must be responsible for both the long-term decision making and day-to-day management of the company.  

Typically, a business primarily focused on serving as a supplier to governmental entities will want to become certified by a governmental agency, whereas a business that primarily works in the private sector and with large, publicly traded companies should seek certification from a third-party certifier.  For Minnesota businesses, governmental certifiers include (i) the SBA, (ii) the State of Minnesota, and (iii) the City of St. Paul.  Third-party certifiers include the Women’s Business Enterprise National Council (WBENC) and the National Women Business Owners Corporation (NWBOC).  

The SBA administers the Women-Owned Small Business Federal Contract Program, which authorizes federal contracting officers to set aside certain federal contracts for eligible women-owned small businesses.  

The State of Minnesota and its agencies administer the Targeted Group/Economically Disadvantaged Small Business Program (the TG Program) and the United States Department of Transportation Disadvantaged Business Enterprise Program (the DBE Program).  Upon certification under the TG Program, the business is added to the state’s vendor list, and the TG may be eligible for up to a 6 percent preference in selling its products or services or bidding on construction projects to the State.  The DBE Program is a federally-funded certification program intended to help disadvantaged people, including women, participate in the planning, construction and management of the country’s transportation system.  The Minnesota Unified Certification Program (MnUCP) makes certification decisions with respect to participation in the DBE Program.
   
The Central Certification Program (CERT) is a small business certification program administered by the City of St. Paul and recognized by Hennepin County, Ramsey County, and the City of St. Paul.  Certification makes you eligible to participate in activities specifically designed for certified vendors.    

Two of the most prominent third-party certifiers are the WBENC and NWBOC.  Each certification provides women-owned businesses with access to supplier diversity and procurement executives at major corporations and federal, state and local government entities.  The application fees for these certifications start at $350, and certifications are usually valid for just one year.  

This is merely a high-level overview of the reasons companies may seek certification and the types of certifications available to Minnesota companies.  As you consider whether certification may be right for you, keep in mind that the process is lengthy and rigorous.  Numerous document requests must be fulfilled and on-site visits may be required.  Recertification may also be required on an annual basis, but the numerous benefits that accompany certification may make it all worthwhile.