Wednesday, June 29, 2011

Can Successful Entrepreneurs Use Incentive Trusts To Help Their Kids?

In his article, "Should You Leave It All to the Children?," Richard Kirkland quotes Warren Buffett for having said, “The perfect amount of money to leave children is enough money so that they would feel they could do anything, but not so much that they would do nothing.” In that same article, Minnesota native and famous entrepreneur, Curt Carlson, was quoted as saying, “There’s nothing people like me worry about more—how the hell do we keep our money from destroying our kids?”

Incentive trusts are a type of trust, often for the benefit of children, that make distributions or allow for withdrawals based on defined incentives. For example, if a child graduates from an Ivy League college, they can withdraw 10% of the trust principal, or if a child earns up to $100,000 per year, the trust will match that income.

Often, first generation wealth holders—or, in many cases, the entrepeneur that built the business—want to use incentive trusts to protect the money they intend to pass on to their children and impose some kind of control after their deaths. Incentives may seem like a good way to inspire your children to act and participate in society the way that you would want them to after your death, but often incentive trusts don’t work or may even backfire. Evidence suggests that money is helpful in controlling people, but not necessarily internally motivating people. Individuals subject to incentives will rarely go beyond the incentive benchmark.

For example, if you match income up to $100,000, very few people would ever strive to earn more than $100,000 or would ever start a business where the earnings may be more uncertain or less than $100,000 for a period of time. In addition, what might seem like a good incentive, like attending an Ivy League school, doesn’t actually ensure that the child will graduate or do anything with the degree. Some children may view the incentive as impossible, so they never try. In other cases, the trustees end up spending years in litigation with the child who demands distributions from the trusts that are outside of the incentives. This may be good for lawyers like my colleagues who handle these types of claims, but it is rarely good for the child or the family. Finally, drafting a trust agreement that perfectly insulates the trustee, yet makes the incentive clear and enforceable, is difficult if not impossible in most circumstances.

The bottom line is this: Trusts don’t develop values on their own. Incentives don’t usually work in the way we want, and may unintentionally cost the child ambition and potentially drain the trust in litigation fees. Try your best to impose good financial habits, charitable inclinations, and financial sense during your child’s life. If you can’t, and you are worried about how your children may spend their inheritance or manage a business in their trust, limit the amount they receive or ask your estate planner to give a professional trustee (a non-family member) unfettered discretion to make and withhold distributions.

Monday, June 27, 2011

Founder: A Portrait of the First Rothschild and His Time

The Book: Founder: A Portrait of the First Rothschild and His Time, by Amos Elon (Penguin Books, 1997).

Why you should care: Quite possibly the ultimate entrepreneurial “lemons into lemonade” story

Today, the name Rothschild is synonymous with international high finance, encompassing multinational investment banking, merchant banking, and other business ventures throughout Europe. Some 250 years ago, there was only one man, Mayer Amschel Rothschild, and his coin and money changing business, which he operated out of the confines of Frankfurt’s Jewish ghetto, the Judengasse. This one man laid the foundations of the modern capitalist colossus. How did he do it?

He wasn’t born into wealth or even freedom. He was born into a society that by law allowed people like him to engage in only a handful of businesses—most were pawnbrokers, moneychangers, or dealers in second-hand goods. They were also required to live and work in the Judengasse, which they were only permitted to leave on rare occasions. He was born into a lower middle-class family. But he was born ambitious, and, in a society in which most people were illiterate, his culture valued education. It didn’t escape his notice that the most successful businessmen he knew were also the most learned Talmudic scholars.

Rothschild started with a small business selling collectible coins and medallions. His wares attracted the attention of Crown-Prince Wilhelm of Hesse, a collector of such things, who came to trust him in business dealings, got him started discounting bills of exchange, and soon appointed him a Court-Factor. With Wilhelm’s blessing, Rothschild went into business on his own on the side. Leveraging connections he made at court, his first major capital accumulation came from his profits as a military contractor in the early years of the Napoleonic Wars.

The rest, as they say, is history. The business ultimately became a family affair, with each of his five sons taking up residence in a separate European capital. As for consolidation of family wealth, it is perhaps notable that, through marriages between first cousins, two-thirds of Rothschild’s grandchildren were married to each other!

Taken out of its historical context, his story has a familiar ring to it. He devoted himself to learning. He started small. He shunned conspicuous displays of wealth. He made contacts and leveraged his business connections. And many a modern entrepreneur might do well to heed his instructions to his sons: “A man has to think before he acts, but after having thought matters over, everything else has to be left to God.”

Thursday, June 23, 2011

A Government Shutdown…What Does It Mean for Entrepreneurs and Angel Tax Credits?

Much has already been written about the possible impact of the looming state government shutdown in Minnesota if a budget deal isn’t reached between the governor and the legislature. Of course, we have been thinking about what it may mean to our entrepreneurial clients as well. We know a shutdown will eliminate access to the office of the Secretary of State and its services. This will make it impossible to make filings on behalf of new or existing entities in this state. It also means a whole host of other services having a direct potential impact on businesses (detailed here) will be suspended.

So what does this mean for the state’s relatively new Angel Tax Credit Program?

The program gives a 25% refundable tax credit to individuals and funds that invest in qualifying technology businesses. There were some recent amendments made to the program in an attempt to make it easier for companies and investment funds to participate.

In a recent email to businesses certified for angel tax credit, the Minnesota Department of Employment and Economic Development (DEED) indicated that the Angel Tax Credit Program would be suspended during a shutdown. Our experience is that DEED has been working hard to make the program work and, typically, has been delivering notices far in advance of the deadlines required by the law. In the email, DEED has promised to use its best efforts to process all allocation requests received by June 24 before the threatened shutdown occurs next week.

Since the program requires an allocation prior to making a qualifying investment, entrepreneurs and investors should either act quickly to make their allocation requests or be prepared for a wait while the gridlock at the state capitol gets resolved.

Tuesday, June 21, 2011

Is Spider-Man Version 2.0 an Improvement…and What Can Entrepreneurs Learn from this Saga?

As detailed in my first post on this subject, I continue to be interested in the development of "Spider-Man: Turn Off The Dark." The $70 million production finally opened last week after the longest preview period in Broadway history.

The most obvious question is whether Version 2.0, launched after a three-week hiatus in late April to implement changes, is an improvement over Version 1.0 (the Julie Taymor version). Version 1.0 was universally hated by critics back in February. While many critics still didn't embrace the new version, they all seem to agree that the new version, reworked by a team of “outsiders” brought in to fix the show after Taymor was removed from the helm, is an improvement.

I saw Version 2.0 over Memorial Day weekend (along with seven other new musicals…I know, it’s an illness). While it wasn’t even in the same universe as my favorite of the group, recent Tony Award winning Best Musical "The Book Of Mormon," I have to admit that it was OK. This may seem like faint praise but, given that the New York Times had called Version 1.0 “amongst the worst musicals ever made,” I assume it’s an improvement.

Most telling to me is that the plot, which had been called everything from muddled to incomprehensible, was linear and easy to follow. While the score is unmemorable and the story predictable, it has some positive attributes, including the sometimes incredible and sometimes distracting flying sequences and other special effects.

The less obvious questions are what happened to make it better and what could an entrepreneur learn from it?

In an interview on ABC’s “Good Morning America,” composers Bono and The Edge (of rock band U2) surmised that Taymor (who over the weekend commented on the experience of creating the show) had gotten too close to the production to see its flaws. While Taymor was working around the clock for months immersed in all aspects of the production, Bono and The Edge were off on tour, thereby allowing them to intermittently return to see the work with a fresh set of eyes. They basically admitted that they had some of the same concerns as the February reviews, but they and others couldn’t get Taymor, who clearly had creative control, to listen.

Sometimes I see the same problem with entrepreneurial ventures. Too often, the founder or CEO, who is immersed in the business 24/7, can’t see the flaws, recognize a changing landscape, or identify new opportunities. This is why it is so critical to foster a diverse work environment that is open, values fresh perspectives, and encourages questioning. Outside advisors and a strong and inquisitive Board can also certainly help.

Of course, it’s also important to be a good listener, something it appears Taymor couldn’t do. Her inability to see through the web of obstacles to a successful musical could have made Spidey come crashing to earth. With a dose of fresh perspective from the new creative team, he may continue swinging on the Great White Way for a while.

Monday, June 20, 2011

Sadly, Trademark Fight Will Not Obtain “Justice for Caylee”

About a month ago, I was reading an article about the difficulties a Florida court was having in selecting a jury for the trial of Casey Anthony (a woman charged with the murder of her young daughter). This is a subject that fascinates me—not the alleged murder, but the difficulty of identifying a sufficient number of people who have not already been tainted by the media to serve for an indeterminate time in potential sequestration without suffering substantial business and personal hardships. The article did not say much about the specific reasons that they were having trouble selecting jurors, but noted that during the lengthy selection process, significant public attention focused on the upcoming trial.

The article ended with a note that the grandparents of the murdered child were seeking “to obtain trademarks” for their granddaughter’s name and the phrase “Justice for Caylee” in order to prevent others from selling merchandise using her name and likeness. The grandparents’ attorney was also sending a demand letter, “the first step in filing a claim for libel,” to an online retailer that was marketing such products.

This sounded like a strange (and even nonsensical) approach to trying to protect what I would consider a right of privacy or publicity—the right of an individual or the individual’s heirs to control the use (or non-use) of one’s name and likeness for commercial purposes. Laws on this subject vary from state to state, but more than likely, the attorney could have found some applicable law for such a claim against those who were using Caylee Anthony’s name and likeness for the sale of t-shirts and buttons. Or maybe they have a copyright claim if the pictures of Caylee used by these third parties came from family photos (which they most likely did).

Instead, the attorney’s advice was for the grandparents to “obtain trademarks.” Trademark rights are based on use. Yes, the grandparents could apply for registration of a trademark before it is used, but in order to complete the registration, or enforce any statutory or common law rights, they are going to have to establish use—as a trademark.

The records of the United States Patent and Trademark Office show that on May 17, 2011, applications were filed to register CAYLEE ANTHONY and JUSTICE FOR CAYLEE for use in connection with t-shirts, stickers, underwear, and buttons. The applications were filed on an intent-to-use basis, meaning that the grandparents do not claim any current trademark use in connection with such products. The applications have not yet been assigned to an examiner, but if precedence means anything, the applications should be rejected as the proposed use does not support use as a trademark. It is generally held that material that merely decorates a t-shirt, button, sticker, mug, etc., does not establish use as a trademark. The trademark is the name on the label—the brand of the product. For decorative material to qualify as a trademark, the marks must first operate as a brand.

Sadly for these people, who have endured the loss of a granddaughter, they are not going to stop others from exploiting her based on a claim of trademark infringement. At least not based on their current use/non-use or the pending applications for registration. Even if it were a good legal theory, the applications were filed not in the name of the grandparents, but Lippman Law Offices, P.A., the attorneys for the grandparents. An application must be filed by the owner of the mark, or in the case of an intent-to-use application, by the person who is entitled to use the mark in commerce. If an applicant is not the owner, or entitled to use the mark at the time of filing, the application is void and cannot be amended to name the correct party, as the applicant has no rights to transfer for various reasons under trademark law. Even if the attorneys filed in their own name with the best of intentions, these applications for trademark registration are not going to give the grandparents any rights to obtain justice for Caylee.

Wednesday, June 15, 2011

Project Skyway—Episode 1: A New Hope

Tech incubator Project Skyway, welcome to Minnesota. What took you so long? When will all of your friends arrive?

Project Skyway, the new Twin Cities tech start-up incubator, held its inaugural bootcamp this past weekend at CoCo in St. Paul. As a member of the local tech start-up community, I was honored to be asked to participate in the bootcamp and given the opportunity to listen to aspiring tech entrepreneurs and teach them a thing or two.

On Friday night, the Project Skyway team, including visionary Cem Erdem and mover and shaker Casey Allen, mingled with all of the prospective Skywalkers (that’s what they call participating companies/entrepreneurs) and the glitterati of the local start-up tech scene. No, Cem did not wear a Darth Vader suit or claim that he was anybody’s father. However, Casey does remind me a little of C3PO, and one of the potential Skywalkers was kind of big and hairy like Chewbacca.

On Saturday morning, the Skywalker wannabees pitched each other’s deals. In the afternoon, the entrepreneurs participated in small group sessions with local start-up experts. Although I’m not bald, green, or pointy eared (yet), I played Yoda to a bunch of wide-eyed entrepreneurs, teaching these young Jedis the ways of the law. I was able to meet with all of the entrepreneurs from the 25 companies vying to be included in the final 10, and they didn’t have to travel to Dagobah. On Sunday, the start-ups were treated to advice about presentations and raising capital in the morning, and spent the afternoon pitching their deals.

The top legal issues for start-ups were abundantly clear—protecting equity and protecting intellectual property.

As novice entrepreneurs are prone to distribute equity like cocktails at the Mos Eisley cantina, much of the discussion addressed how to divvy up stock, how to force founders to earn that stock, and how to get the equity back into the company if one of the founders turns to the dark side and becomes a venture capitalist.

The intellectual property discussions centered on whether or not a software-based tech start-up should seek patent protection (always check with a patent attorney, but it’s probably not going to be worth the time and expense), and how to ensure that code developed by employees and consultants is, in fact, owned by the company. This discussion highlighted the tension between independent contractor software developers (whose tools are often incorporated into customer solutions or constitute proprietary platform technologies) and start-up companies, who are constantly drilled by lawyers, investors, and venture capitalists to own the technology.

Jedi mind tricks don’t work on VCs—“you will accept a $20 million pre-money valuation and non-participating preferred stock.”

The start-up teams were mostly comprised of men, in their late 20s, and based in Minnesota. Many of the business ideas were truly novel, and others provide solutions that are leaps and bounds ahead of their competitors.

I’m not sure how Cem, Casey, and their team are going to be able to narrow the 25 teams down to 10. Perhaps an inter-galactic battle looms. Cem, Casey, and the Project Skyway team have done their part. Now we all need to support Project Skyway and all of the Skywalkers. May the force be with them.

Monday, June 13, 2011

Why Dare to Be Different?

When I first built my own law firm, I often was asked what it felt like being “different.” Funny, I did not think of myself as different, but I am. I am brown. Not just a light caramel, but a nice chocolate brown. When I walk into a board meeting for the first time I really stick out since often I am the only “brown” person there.

My first partner in my law firm was Jewish and refused to wear a suit. We often laughed at what a pair of “odd” people we were to be building a firm in Minnesota—a Jew and a Hispanic American Indian. I remember approaching young partners at the big firms to join us. They all turned us down, even though I could show them how they could make more money and had a chance to help build something great.

Since we could not recruit any senior lawyers, we decided to hire people right out of school and train them. It turned out that every person we hired to work with us (both lawyers and paralegals) was a woman. This was at a time when there were still relatively few female corporate lawyers, yet nine out of eleven of us were female. I would like to say it was because we were forward-thinking and egalitarian, but in all honesty, it was probably because we were just different enough to attract people out of the mainstream.

We were the crazy guys in the suburbs with the office located through a client’s back door (or, later, above the day-care center). Our job interviews—almost an embodiment of the idea that we weren’t out to hire anyone too normal—even involved taking candidates to the local bowling alley with the group to see how the social dynamics worked.

In the end, though, I honestly believe our differences allowed us to compete with firms that were much larger and had bigger marketing budgets. We had no allegiance to old ideas and prejudices. If anything, we had a bias toward being different from the rest. We didn’t need a strategic plan to help us find subtle distinctions between us and our competitors—we were distinct from them in so many ways. We were smart and driven to succeed and it did not matter that we were young, Jewish, Catholic, men, women, whatever. It became almost a religion to ask “why” and “why not.”

When I teach students in my entrepreneurship class, I talk about one of the universal traits of entrepreneurs—the belief that they can do something better, their willingness to do things differently. These days, people talk about diversity, but I think they forget about the benefits of hiring people with diverse ethnic, religious, or social backgrounds. One of these benefits is the infusion of new ideas that different cultural and economic experiences can foster. The other benefit is willingness to try different things. Even large organizations can benefit from diversity, but not just to meet some quota so they can say they are diverse or get priority on contracts. The real benefit can be that diversity increases the chance for genuine innovation and creativity that often is lacking in a large organization.

A Post by Frank Vargas, Guest Blogger

Wednesday, June 8, 2011

What Can You—and Entrepreneurs in General—Learn from a Famous Custom Golf Club Maker?

One of my readers recently asked me, “Who is your favorite golf industry entrepreneur and why?” My answer is easy. Remember the two propositions from this blog post? First, entrepreneurs tend to be successful because of their energy, focus, creativity, efficiency, and, perhaps, a little luck. Second, THE KEY TO HAPPINESS IS REASONABLE EXPECTATIONS.

With this in mind, the answer can only be Karsten Solheim, founder of Karsten Manufacturing, the maker of Ping® golf clubs. Solheim, while working as a mechanical engineer at GE, played his first round of golf at age 42. After being dissatisfied with the putters available on the market, he designed his own putter based on solid engineering and the scientific principle of perimeter weighting (that is, moving the club head weight to the outside of the club head to promote stability, rather than just following the styles of the day). His putters weren’t chrome-plated or fancy looking. Barney Adams, the founder of Adams Golf, has said that, to Solheim, “…it was performance that made clubs beautiful, not the other way around.”

Solheim went on to use the same principles (perimeter weighting, scientific design methods, and function over form) to commercialize the custom-fitting of irons for the regular golfer. He didn’t offer fully customized sets to the masses but he did recognize that golfers came in different sizes and physical capabilities, and he offered custom-ordered iron sets at reasonable prices, thus opening the floodgates for current large brand manufacturers who are following in his large footsteps by offering custom-fitted clubs.

Who more than Solheim is a better role model for entrepreneurial energy, focus, creativity, efficiency, …and probably some luck (but, in my opinion, more solid design skill than luck)? Did he have reasonable expectations? Before he died in 2000, he did seem to be a pretty happy guy to me. Check out “Custom Fitting” and “50-year Anniversary” for more information on Karsten Solheim and his custom clubs.

Next: More on custom golf clubs, major manufacturers, and independent club fitters.

Friday, June 3, 2011

Ohio State’s Football Coach Offers Lessons In Leadership (or Lack Thereof)

If you’ve been following this blog, and read my last post, you’ll recall that I wrote about leadership, using Bo Ryan, the University of Wisconsin men’s basketball coach, as an example. At the risk of being labeled a Big Ten one trick pony, this story about Jim Tressel, Ohio State's former head football coach, is too timely and interesting to pass up.

In summary, Mr. Tressel recently admitted to failing to pass along to his superiors information he had obtained about potential NCAA rules violations committed by his players. His failure to share that information itself was a significant violation of NCAA rules. His admission came after an investigation which uncovered several prior similar incidents that occurred under Mr. Tressel’s watch, tarnishing the coach’s previously stellar reputation. At best, Mr. Tressel seems to have been intentionally ignorant of his player’s transgressions, so as to shield himself from their improprieties. At worst, Mr. Tressel was the conduit through which some of the transgressions were arranged. In either event, he was not running the tight ship he professed to be running, apparently in an effort to attract top recruits to his football program.

My intention here is not to attack Mr. Tressel or his character. I don’t know enough about Mr. Tressel or these events to make those judgments. Rather, following up on my last post, I’d like to focus on leadership again, and how Mr. Tressel’s lack of leadership appears to have destroyed his once unblemished reputation and program.

Either explicitly or implicitly, Mr. Tressel created a culture where his players did not feel obligated to respect certain NCAA rules. Any organization, such as Ohio State’s football program, is a reflection of its leadership. If the leadership insists that things will be done a certain way, and imposes consequences for failure to follow the organization’s rules, then the members of the organization will respond accordingly. Either they will fall in line, or they will move on.

Here, it seems clear that Mr. Tressel did not have control over his players, or at least they believed that there would be no or nominal consequences for their failure to follow team and NCAA rules. He either permitted or tolerated his players’ cheating. That lack of leadership brought him to the point where he had to resign in disgrace.

This whole saga reminded me of a conversation I had with an entrepreneur friend a few weeks ago. He mentioned, without complaining, that he was having difficulty finding the right employees for his business. He runs a successful web design company, with fewer than 15 employees. He is completely maxed out on capacity right now, and is starting to turn away projects because he doesn’t have enough employees to meet the demand.

He is not, however, willing to hire just anyone so that he can begin accepting additional work. He is methodically networking with and interviewing potential candidates to find the right fit for his company. He even suggested that he may be getting a bit too picky in his effort to find the right person, but that he would rather be too picky than not picky enough. To him, what distinguishes his company from his competitors is his company’s culture. He is not willing to risk that by bringing in an employee who is not a good fit, even if it would result in increased revenue in the short-run.

His leadership is setting a tone for the organization, and establishing that the company’s culture is a significant priority and will not be diminished to satisfy short-term goals. His employees will understand and appreciate that, and to the extent they don’t, they shouldn’t be surprised when they find themselves among the unemployed. Presumably, that should not be a problem, as it was his leadership that attracted the employees he has today, and who make up the culture of the company he values.

When leadership sets the right priorities, employees and the organization will follow suit. Similarly, when leadership sets the wrong priorities, or fails to set priorities, employees will also respond accordingly. Mr. Tressel’s failure to establish a culture of accountability set the stage for his resignation this past week.

Thursday, June 2, 2011

The FDA Pivots to Regulate Apps?

In a move that will surely send waves through the health care and medical device communities, it has been reported that the FDA's Center for Devices and Radiological Health plans to issue guidelines on mobile medical applications later this year.

If the FDA indeed moves in this direction, the move raises a myriad of questions about when an app steps within the realm of the FDA. As noted by those who watch the otherwise deliberate and methodical FDA try to adapt to rapidly changing technologies, the potential impacts and challenges are staggering. Moreover, even once the FDA guidelines are issued, questions will remain about what falls within FDA purview and how will the FDA regulate it?

Perhaps there is an app for that...?

Wednesday, June 1, 2011

Nature or Nurture?

I suffered through psychology classes in college because, for a brief and painful semester, I thought the study of psychology might be a pathway to gainful employment and happiness.

Adding misery to pain, my psychology prof seemed to believe that the Socratic method of teaching makes for a better learning experience. I can remember the exact moment when my prof asked every psychology prof’s favorite question: “Who am I?” This was followed, of course, by the second favorite question: “Are you the person you are because of ‘nature’ or ‘nurture?’”* I immediately fled to the comfort of the history department, and I can still recite most of the list of Egyptian 18th dynasty kings…

Anyway, we’ve all asked the same thing about ourselves. Maybe even more predictably, when we see someone else’s kid at the playground, we immediately pick his parent(s) out of a sea of other parents and say to ourselves, “that kid is going to be a [insert your favorite career stereotype].” In most cases, we just know that the child’s environment will be dominant in shaping who he will be when he grows up.

So, what’s the answer to the question of “nature vs. nurture?” Well, according to The Wall Street Journal, an insurance study has found no particular correlation between entrepreneurs and their upbringing, education, or other socioeconomic factors. There are certainly environmental influences, particularly within predominantly capitalistic economies. However, not all entrepreneurs are created equal, nor are they all “nurtured” in the same way. For example, perhaps counterintuitively, entrepreneurialism can even thrive in socialist states.

Stay tuned. I’m sure the search for the entrepreneurial “gene” is right around the corner.

* This question is not to be confused with any reference to “they are who we thought they were…”)