…the “Talk”…

Recently, I just about drove my truck off the road after hearing my daughter’s pre-adolescent voice, all the way from the back seat, direct “the question” to me. The question was, you know, the question that many parents dread because you have to talk about. It’s awkward, frustrating and frankly, it’s a coming of age that reminds you that your kids are no longer innocent and are getting older.

Many of you reading this can remember where you were when you had “the talk” with your parents. Some kids figure it out on their own; other more responsible parents (innocent of this charge) take the issue head-on by sitting down and talking with their kids. I’ve heard that some parents use charts and some even go to a class (with their kids!). I haven’t checked, but I’m pretty sure there must now be “an app for that”—parenting made easy, courtesy of Steve Jobs. 

After collecting myself, we pulled into a parking lot and the talk ensued—quick, succinct and to the point. I didn’t have much time and I was going to do a brief overview with the full talk to occur later that evening with her mother who really has some strong feelings about the topic. “Do your friends talk about it?” I quickly asked, and sensing the concern in my voice, she politely said “no.” Thank goodness, I thought to myself, but she went on. “I heard you and mom talking about it last night” (uh-oh) “and mom was talking about it with the neighbor on the phone too.” (WITW!) “I think I heard her talking about it out loud after watching the news, too.” I was slack-jawed. 

As you can imagine, this parent was overcome by youthful awareness and the pressing questions surrounding taxes.

Since that fateful ride in the truck and the parking lot crash course in taxation, I have been strafed with questions about why adults pay taxes, who made taxes, how are they collected, what are they used for, do we ever get them back…and the list goes on and on and on. Curiosity has also spread through the family. We have what is referred to in the world of geese as a gaggle of children. They are inquisitive and the conversation migrates quickly (and at times resembles honking), is painfully direct, and typically not restrained by common sense. Although my wife and I are affectionately referred to as “tax hawks,” I struggle to explain all the nuances of the how’s and why’s of taxes, especially the rates. 

About the time of the initial “talk”, my state was in the throes of a tax bill that would not only raise taxes, but would introduce new taxes on professional services (since that time, the professional services tax has been stricken from the proposal). I was explaining what that meant as a lesson since one of the children is learning percentages in math class. We did the math and it was interesting to hear the banter back and forth between siblings.

The part my children thought was really fun to listen to was my explanation of personal income and tax rates. You can image the stunned look on my daughter’s face when she said, “Uh dad, you mean some people pay half of their income in taxes?” (Take that percentage of a weekly allowance in exchange for basic “services” provided in the house and watch the reaction.) “Yes,” I said, “but it’s different for you because you wouldn’t have to pay tax because you fall below the state and federal limit.” Without flinching, her response was classic. “But when I get older and I get a good job, will I pay half?” I gave my typical (non-classic) response—“Its depends.” 

Recently there have discussions about revenue increases in a proposed California state budget. This is combined with a recent case which challenged the 50% exclusion on QSBS corporations, meaning that they pay only half the regular California tax rate on the gain (about 4.5 percent instead of 9 percent). This would be a crippling retroactive tax for business generators (read “job creators”) that are a vital piece of California’s economy. What’s even more troubling is that many entrepreneurs go for years foregoing market income (and in some cases, any income at all) and will have a massive tax event upon exit (think liquidation event, sale, merger, IPO, etc.) I have no idea what the current status of this situation is as it will likely be subject to litigation for some time as well. Even if you think that you have your tax structure in order, that isn’t necessarily the case. (Anything that has the word “retroactive” in it has to be looked at with some suspicion.)

It’s never too late to have “the talk.” As a matter of fact, if you haven’t had a review on your existing and future tax outlook, there is no better time. Many changes are on the horizon for you and your business regardless whether you are an entrepreneur in a pre-revenue company or an existing company that is facing new government mandates for health insurance. Or you could be thinking about selling your company in the near or distant future. Guess what? Planning now, even if a sale is not in the forefront of your mind, may be the best thing that you ever did for yourself, your company, your employees, your shareholders, your stakeholders—and maybe even that youth in the backseat of your truck who asks, “Dad, I have another question….”

Spring, Time for Some Real Competition?

As detailed by my colleague and fellow poster, Max Bremer in his post about this time last year, one of the great competitions that commences in March (in addition to that minor basketball tournament happening about now—sorry for the reminder Gopher fans) is the Minnesota Cup.

In case you’re new to the startup scene in Minnesota (or have been living in a cave the last seven years), the Minnesota Cup is a business plan competition that identifies the top Minnesota-based start-up businesses in each of six different divisions: High Tech (a division sponsored by this blog’s favorite entrepreneurial service law firm), LifeScience and Health IT, Energy & Clean Tech, General, Social Entrepreneurship, and Student. You can submit your application to be named a top Minnesota start-up company beginning today and continuing through May 17th. For more information about the Minnesota Cup and this year’s event details, visit the competition’s website.

There are lots of reasons to enter the competition, and as Max detailed last year in his post, it isn’t just about the $25,000 in prize money. If you’ve been thinking about that next great “breakthrough idea,” maybe it’s time to do something about it. Who knows, you could be the next Florida Gulf Coast University...

The Book: Randall Robinson, Quitting America: The Departure of a Black Man From His Native Land (Plume Books, 2004)

Why: From the pen of a self-exiled American, some thought-provoking insights into American culture. Do we drive progress or are we driven by it? 

This time of year—and especially this year—a Minnesotan’s thoughts turn to warm and sunny places. The urge to get away from the ice and snow is nearly irresistible. Here in the northland, as soon as the last week of March or first week of April arrives signaling spring break time, offices empty out as we seek a preview of the summer weather that is—we hope—to arrive in just a few short months. (At this time last year, the high temperature in Minneapolis was 80 degrees so we didn’t really need to travel for such a preview.)

My reading this month concerned a leaving of a more permanent nature. At one point in my life, I lived abroad for a while as an expatriate. This was a wonderful experience, one that I would recommend to anyone (and, in fact, one of my children has opted for this life, at least for a year or so). But for me, this temporary experience was just that—a sojourn abroad followed by a return home. 

I have always been intrigued by people who, for one reason or another, decide to abandon their native lands. Randall Robinson is a Harvard-educated lawyer who left the United States for life in the small Caribbean island country of Saint Kitts and Nevis.  The reasons stem mainly from what he perceives as the pervasive racism of American society, but many of his observations about American culture generally are interesting and, for some people, may hit a little close to home.

Robinson bemoans, in particular, what he views as the “commercialization of everything from school to pew.” From this, he extrapolates that “everything about America is big except its people, who, unbeknownst to most Americans, are mere human beings, no bigger or smaller than human beings any place in the world.” He asks, “Could it be that in America, the unexcelled bigness of all things material has resulted in the concomitant relative smallness of all values nonmaterial?”

Alas, these views are nothing new, and have been with us for a long time, long before Eugene Burdick and William Ledererat wrote The Ugly American.  Robinson is clearly disaffected, and condemns the United States with a broad brush. He does, however, leave us with something to think about: we Americans, he says, should “be more thoughtful about how we define progress and development, not just in terms of broadened material wealth but also with an understanding of how indispensable social arrangements are compromised when the market becomes the only voice listened to, its barometer the only measure of a nation’s health.”

One might argue that, without the market, progress and development is impossible, but the question of what should come first—progress or people—is a central tension within our culture, one we all encounter almost on a daily basis.

Random Thoughts About The World’s Youngest Billionaires

I happened upon this recent list of the “World’s Youngest Billionaires” (yes, there are 29 under the age of 40, 11 of whom are from the US) in Forbes Magazine.  It made me contemplate what an incredible world we live in where young “hoodie-wearing” tech entrepreneurs can (at least on paper) be worth more than a BILLION dollars—or, in the case of Zuckerberg, $13.3 BILLION, but who’s counting?

I didn’t bother scouring the list to see if I was on it—after all, I am a few years over 40. However, I had remembered during a recent Las Vegas journey to sample the fine cuisine at In-N-Out Burger (without even ordering off the "secret" menu), that (at least according to The New York Daily News and Huffington Post) Lynsi Torres, the heiress to the chain who is only 30 years old, was a billionaire . But she isn’t on the list. 

Turns out that, according to this other recent Forbes article, she’s probably only worth about a half a billion dollars. That’s because she doesn’t yet own the entire company under some trust arrangements. The complicated case surrounding the ownership and related family intrigue detailed in the article is something I’ll challenge my fellow entreVIEW author, Anne Bjerken, to analyze for readers in a future post.

Once I stopped daydreaming about all the things I would do if I had a billion dollars (not to be confused with the Barenaked Ladies classic song about a sum with three fewer zeroes), it was time for me to attend Tuesday evening’s “Entrepreneurs Rally,” an event put on by the local chapter of EO, an organization for entrepreneurs. I had agreed (along with a few colleagues, two of whom are fellow entreVIEW authors) to serve as a mentor at the event, which is structured like “speed dating.” A group of 2-3 mentors and 7-8 entrepreneurs are paired up for 30 minutes to discuss issues and try to offer insights, ideas, and contacts to help the entrepreneurs with pressing issues.

As with the event last year, I was struck by how varied and vibrant the participating entrepreneurs (and mentors) were. Whether it was the guy “pedaling” kits for turning regular bikes into recumbent ones or the woman looking to “sew up” SEO for her online embroidery business, you can imagine the energy in the room with over 200 driven and engaged entrepreneurs talking about their business plans. 

Wouldn’t it be great if a couple of the attendees ended up on the Forbes list in a year or two? There should be room for a couple more because Larry Page and Sergey Brin, co-founders of Google each worth about $23 billion, will be turning 40 soon….

Are You Ready for the Race to the Patent Office?

On March 13, 2013, under the America Invents Act, the United States patent system will change from a “first to invent” to a “first inventor to file” system. This represents a dramatic shift in approach because when a patent application is filed becomes critical, as opposed to when the invention was conceived or reduced to practice. 

While it is a significant change for US patent law, it harmonizes US law with most other patent systems around the world.

Under the new law, if you are seeking patent protection you should file a patent application (if even only a provisional one) as early as possible. You should do this even before any public use or attempt to commercialize the products embodying such inventions.

ON YOUR MARK-------- GET SET-----------------GO!

But, wait a minute. Before you rush off to file a patent application and start the sometimes expensive process of patent prosecution, make sure you have a business strategy and understand why the patent is relevant to that strategy.

Here are some lessons learned from a lawyer who has practiced intellectual property law for over 25 years (me). Be strategic and targeted in how you invest in the development and protection of your intellectual property.

• Not all patents are alike.

• Under the rule of deformation professionnelle, most patent lawyers will find something patentable in your invention.

• Patents are the gift that keeps on taking (through patent prosecution and maintenance fees).

• Patents do not give you the right to do anything except to prohibit others from doing something.

• Copyright, trademark, trade secrets, and contracts/licensing are often equally important elements in any well-developed IP strategy.

So, as you get ready to rush off to the United States Patent and Trademark Office with your application, take a deep breath and make sure that you have a business strategy that includes all forms of intellectual property and that this patent application fits within your plan.

Then again, you might have something as valuable as the Snake Walker, Motorized Ice Cream Cone, Sealed Crustless Sandwich, Gerbil Display Clothing, or Baby Tush Art.  If you have any invention like these, run--don’t walk--to your nearest patent lawyer’s office and get that application filed before someone else beats you to the punch...

Thoughts on Raising Capital

I was recently going through some old articles and cleaning out my office (it still needs a lot of love), when I found this article in a hard print copy of the Minneapolis/St. Paul Business Journal. I read almost nothing anymore that I can’t access online, but I don’t mind reading the Minneapolis/St. Paul Business Journal in hard copy form. It’s small enough that it’s easy to read on the bus (my preferred mode of commuting), and I usually get through it very quickly (there’s something very satisfying about finishing the paper, recycling it, and then crossing it off of my “to do” list).

Apart from the paper in which it was published, I like this article because it highlights that there is more than one way to raise capital and fund operating costs for startups. As a lawyer for entrepreneurs, I get asked frequently about how to raise capital. The short answer is that it’s hard, and it depends on your circumstances and what you need. Articles like this reinforce that raising capital isn’t always easy, but there are many ways to do it. For example, bootstrapping won’t work for every business, as some businesses are just too capital intensive to fund through founder resources and working capital. But, for the right business, bootstrapping is an ideal way to build value to the enterprise without diluting the founder’s (or founders’) ownership, especially if it doesn’t come at the risk of stifling growth.

I thought a couple of interesting things from this article were worth noting. Luke Shimp, the owner of Red Cow, who obtained SBA funding to help launch his restaurant business, describes the importance of having a business plan. Having a good business plan is certainly important for businesses that intend to obtain debt financing from a sophisticated financial institution. I also think the process of developing a business plan is important for entrepreneurs, whether or not you are seeking debt capital. It forces you to think through issues, such as go-to-market strategy, operating capital requirements, customer acquisition timing and costs, management skills, and other critical business factors in a way that you aren’t required to do if you aren’t trying to articulate them on a piece (or several pieces) of paper. 

But, as my colleague and fellow entreVIEW author, Dan Tenenbaum, noted in a prior post, investors (as opposed to lenders) don’t really want to review a full blown business plan anymore. Investors expect that you’ll know the answers to the questions that might otherwise be described in your business plan, but they are not interested in reading through a lengthy plan. For companies looking to raise equity capital, I find that they have much more success using a short pitch deck to help identify potential investors. While the business plan is a useful tool for developing your actual business, it may not be quite as useful for attracting investor capital as it once was.

The story about Interrad, which raised money from several angel investors, offers an insight into a possible problem with raising money from too many investors. If you need to raise capital, and small investors are the only sources that are interested in your opportunity, then that’s who you will likely partner with. It would be silly to set some artificial number of investors that you won’t exceed. If you need the money, then you take it wherever you can get it. 

But having lots of small investors can be a distraction and divert the CEO’s time. While the Interrad CEO doesn’t seem to complain about the quarterly communications he has with his shareholder base, it undoubtedly takes time to prepare those communications (and answer phone calls) that could be used adding other value to the company. The more investors you have, the more people you need to answer to. If your investors don’t have a lot of resources, the investment they made in your business could be very important to them. As noted in this prior post (also by Mr. Tenenbaum), having proactive and frequent shareholder communications, as the Interrad CEO does, is a good way to maintain positive relationships with your investors. Of course, successfully growing your business is an even better way to maintain positive relationships with your investors.

The Code 42 piece highlights the importance of running a lean operation. It also highlights the importance of identifying the right partners to take on as investors. The right investors bring more value than just the checks they write. They also bring connections and industry expertise that can be invaluable to helping your business grow. They should be vested in the success of your business, as they ultimately stand to benefit from that success.

All these stories highlight that there are many ways to raise capital and fund operating capital needs for early stage businesses. However you decide to fund your business, know that it takes hard work, patience and discipline (and a little luck) to get it done. If you are willing to put in the work, and can be patient and disciplined throughout the process, your chances of success will be significantly increased.

“Silicon Prairie”: The Increasing Entrepreneurial Draw of the Midwest

A few months ago, my mother forwarded me a link to an article in our very own Minneapolis Star Tribune entitled “Tech New Frontier: Silicon Prairie.” (Yes, my mom may be overly engaged in what I do for a living, but I do owe her for inspiring this entreVIEW post.) The article described the emerging high-tech startup community in the Midwest, emphasizing the home-grown roots of entrepreneurs in the area and the increasing attention – and money – paid to these businesses over the past few years. 

The moniker “Silicon Prairie” intrigued me, so I decided to dig a little more deeply into the origin of the phrase. It turns out that our nation embraces a few different prairies of silicon nature – an area in Texas north of Dallas, an area in Wyoming, an area surrounding Chicago, and our very own “Midwest,” which loosely encompasses Iowa, Nebraska, Kansas, North Dakota, Minnesota, Missouri, and South Dakota – the states bordering I-29. Each area boasts somewhat of a different start-up focus, with Texas named chiefly for the concentration of information technology companies in the area, Illinois centering on research companies, and Wyoming being mentioned for its Web 2.0 startups. 

But as the Star Tribune article emphasized, the Midwest has historically been known “more for its barns than its bandwidth,” and many of the burgeoning businesses in this space relate to agriculture, biotechnology, and manufacturing. Though the region currently reflects only about 6% of the country’s angel investment transactions, it is one of only two geographic areas that exhibited an increase from 2011 to 2012 based on a report prepared in connection with the Angel Resource Institute, Silicon Valley Bank and CB Insights. Because the history of the area reflects a “like on the farm” work ethic, those paying attention believe the region only has more room to grow. 

There’s even a publication called Silicon Prairie News dedicated to recognizing and supporting the area’s “entrepreneurs, creatives, and investors through an emerging model for grassroots entrepreneurial ecosystem development.” I’m not sure how I missed this one, but will be adding it to my regular reading list, as well as paying heightened attention to how this Silicon Prairie we live in continues to make headlines. 

Post by Karen Wenzel, Guest Blogger

New Minnesota Income Tax Developments—Is Everyone and Anyone Going to be Considered a Minnesota Resident?

There is a new proposal from Governor Dayton that would change the landscape of how many people view their residency status. This is not official; I repeat—THIS IS NOT OFFICIAL. I don’t want everyone to panic and start driving south, but it is possible and we should discuss it. 

The new proposal would make every person that spends 60 days (whole or partial) in Minnesota, and has a residence that is suitable for year-round use, whether owned or rented, a Minnesota resident and subject to Minnesota income tax. Currently, there are a number of factors that determine residency, the major one being the requirement that you spend at least 183 days in Minnesota. There is a major difference between spending 183 days in Minnesota and a mere 60 days (123 days, if my elementary school math skills are still working). The traditional “snowbirds” spend the summer here, and then migrate South for the rest of the year. A change to 60 days would mean less than half the “nice” months in Minnesota (not to be confused with “Minnesota Nice“).

What does this mean? Other than the expected outcry from those who love their lake homes and treasure the summer months they spend here, but also love the no income tax environments of Florida, Texas, Arizona, and others, this means major changes to our local economy. Well, at least in my opinion—I guess if you assume that everyone who currently does so will continue to spend more than 60 days in the state and pay additional taxes, then it may not be such a big deal.

Take one example: country clubs.  Not that I think we need protective legislation for country clubs, but it serves as an easy example. The way country clubs collect membership dues to pay for the upkeep of the buildings and golf courses are broken up between food and beverage minimums, and monthly dues relating to peak season expenses. Peak season is usually April through October. Dues typically increase up to ten times during this period, and this is also the time members use their food and beverage minimums because they are using the facilities. Also, I would guess that the demographics of country club members are made up of quite a few snowbirds. If this new residency requirement goes through, a typical snowbird can only spend 60 days on Minnesota soil, and it won’t necessarily all be during peak golf season. I think country clubs may have a hard time keeping members, let alone getting them to pay for 5 or more months of peak golf season that they aren’t using.

Use the country club example and expand that to restaurants that cater to the summer months, rental summer homes, lake homes in general, and the local economies of the cities that our lake homes are located near (Brainerd, Duluth, Alexandria, and others). If it is going to require that snowbirds sell their lake homes, apartments, or other seasonal homes, the real estate market will be flooded and diminish values.

I don’t mean to be advocating a particular political position. I simply want to point out the major change that could be around the corner and get people, may even the state legislators who will need to take up this issue, thinking about it. After all, we are nearly 60 days in to 2013 now…