There is a great deal of venture capital that is coming back into the economy. Luxury applications abound as money flows into the tech scene for businesses that help people find a valet or a home delivery for their laundry. However, one of the biggest critiques of the new money in the industry is that it is going to the top one percent.
The Number One Critique of Modern Venture Capitalism
Venture capital is somehow not finding its way down into the rural and underrepresented areas of the world. Although there is plenty of money flowing into luxury services, there is very little money that is going into keeping staples around four the people who need it. There is a great need for water and sanitation in some areas, but there is no venture capital going into these places at all.
Companies that put poor people first are always dismissed as charities or non-profits. Neither of these descriptions necessarily appeals to the top shelf investor who is looking to showcase profit to his social circle. However, companies who deal in social impact work are now proving to be profitable quantifiably. This may be changing the course of many businesses when it comes to traditional financing options, but the current class of venture capitalists seems not to have caught on quite yet.
The Money in Silicon Valley
Silicon Valley is a worldwide phenomenon. Businesses from poor countries in Africa and Asia routinely petition Silicon Valley for the money that they hold there. These businesses are successful in their areas; however, they do not receive the same support from venture capitalists as businesses of the same success in first world countries. This has left many of these companies in poor countries unable to scale their businesses in order to provide more service for their area.
Peter Scott, CEO and founder of BURN, is an entrepreneur who sells cleanburning stoves to families in Kenya. Although Scott was given funding for his successful idea from the impact investing firm Acumen, these kinds of firms simply do not have the same kind of funding that venture capitalists on Silicon Valley have.
The Payback Silicon Valley is Looking For
Many social impact companies that are successful do not have the numbers that Silicon Valley is looking for. For instance, although BURN is quite successful, it definitely does not have the profitability of a company like Uber. This ensures that the smaller companies will not receive the same kinds of benefits, because venture capitalists are not only looking for a profit: They are looking for bigger profits than their competitors.
Even with this attitude firmly ensconced in Silicon Valley, there are some people who are breaking through. There are some venture capitalist investments into companies in the United States that are working on water purification, toilets and hygiene, rural agriculture and new stove technology. The amount of money that went into companies who were specifically looking to bring technology to poor and rural areas has gone up over US$100 million from 2010 to 2014, according to the Dow Jones data from the San Jose Mercury news. However, there is still quite a long way to go before these social impact companies will receive anywhere near to the funding that they need to truly expand their efforts.
Non-competition agreements are sometimes used by businesses to protect themselves in the area of their relationship with their employees. They are basically an agreement secured by the employer from the employee that they will not compete with this employer after their employment with that particular firm ends. The more high stakes the type of business or industry in terms of the harm competition from recently discharged employees could do, the more likely such agreements will be commonplace. They are also likely to be obtained when someone sells a business, including their client or customer list. The person who buys that business will need to know that you can’t set up shop down the street and continue selling to that same client list.
The Enforceability of Non-Competition Agreements
There is some variability in state laws as pertains to these types of agreements. In California, for instance, they are illegal except for limited situations having to do with selling a business or dissolving a partnership or LLC. In most states, however, they are generally enforceable as long as they are considered reasonable by the courts in terms of the three criteria of time, distance and type of business. In order to be considered valid, the length of time that such an agreement restricts a former employee from engaging in a similar type of business needs to be seen as reasonable and only what is minimally necessary to protect the company’s vital business interest. Similarly, geographic area restrictions also may come into play. If someone is working for a law firm in Miami, for example, then they quit and move to Jacksonville nearly 350 miles away, a court may find an attempt to enforce a non-compete agreement on that relocated former employee to be an unreasonable restraint of trade because they are now too far to be reasonably competing for the same clients. These agreements also only come into play, of course, if the former employee is going into the same type of business as the former employer.
Protections Afforded By a Non-Compete Agreement
A business spends years and untold dollars of advertising revenue building up a customer or client list. The law sees this as an asset that is worthy of legal protection. This is why one of the most common uses for these types of agreements is to keep an employee from simply leaving after a few months working somewhere and taking the Rolodex of clients or customers with them to open up a competing shop down the street. An employer may also invest a lot of time and money in specialized training for an employee to work for them, and this would simply be lost to no return for the company if they quit and immediately went into business for themselves. In addition to training, company’s will also have certain trade secrets that they don’t want employees learning only to leave and start using them to their benefit.
They are Not a Panacea
Non-Compete agreements are not a magic bullet but rather another tool in any businesses’ arsenal to legally protect themselves and retain valuable employees. A company still has to prove in court that a former employee used some trade secret of theirs in their business or any other legal claim made against them. Non-compete agreements are a vital instrument in helping a business protect its investment in its confidential information, employees and customer lists, and as long as they are carefully worded in terms of reasonableness of time and geographic restrictions, they can be an enforceable and effective tool.
After losing a job (or even quitting a job), the thought of how fulfilling and satisfying owning and running your own business would be tends to cross your mind. While taking on self-employment can be the most rewarding decision of your life, it can also be a costly one. Here are some questions to consider before you decide to forego applying for new jobs in exchange for starting your own business.
- Do you have passion and motivation?
- Starting your own business is going to have several ups-and-downs, if you do not have the passion or motivation to roll with the punches, then you will sink with your business. Having passion means that this business may have been on your mind for several years now. Your idea should not only be something that you believe in, but something that you think others will want to be a part of. Once you recognize your own vision for the future of your business, you have to take action. Your motivation will give you the strength to overcome obstacles because as a new business owner, you are the one responsible for its success or failure.
- Do you have a business plan?
- All the passion in the world means nothing if you do not have the right business model, plan, and skills to get the job done. Do the research and master your understanding of the field that you want to enter. Many models have been tested and proven, but now you have to develop your own business plan that will be able to standout and compete in the market. Take classes in business management or teach yourself how to read and understand financial reports, best practices, legal requirements, and marketing. All of these skills will help you to be better prepared in business meetings, employee interviews, and any court situations that may arise (lawsuits or patent-filing).
- Do you have financial resources?
- Having the right financial backing is key to getting a start-up off the ground. You may already have some savings for the venture or a great credit score/history, but money goes fast. It is hard to find people that will recognize your vision and be willing to work for free, so you be will have to give your employees their paychecks, pay for all of your resources, and probably start paying rent or developing a store location. If you think your family or friends are willing to contribute, don’t be afraid to ask. Some of them might even want to form a partnership. If you do form a partnership, be specific on the terms and thoroughly explain the role you want to have and the role you want them to have.
- Do you have an exit strategy?
- Whether your business becomes a huge success or it doesn’t quite reach its potential, you are going to want to have an exit strategy. An exit strategy will help you to better understand your goals and aspirations, which in turn will help you to make important decisions. For example, if you want to keep it a family business and exit on your own one day, you will have to choose and train your protege. If you plan to sell if for a large profit, you have to document everything to back its history, have signed and valid contracts, and keep good relationships with customers and clients. Most importantly, if your business is not turning the profit you expected, you have to have a strategy in place that keeps a roof over your head.
With billions of people flocking to the Internet for shopping, news, entertainment and communication, users have taken to the Web at an incredibly fast pace. This technological revolution has changed the way people work as well. Many Internet users have found ways to make money with their websites and create businesses of their own.
Making money with blogs and web videos
Websites who are successful have been creating a slew of great content that compels readers to come back every time they update their site. This type of content is valuable and useful to the reader of the site. It can be easily shared and distributed amongst a network of friends, family members and colleagues.
Readers of these successful websites tend to consume useful and entertaining content on a regular basis. By giving content away for free, the owner of the website is building an audience who digests and expects more content in the future. There is a relationship between the content consumer and the content creator that is strong and secure. This can quickly turn into a string of revenue if the website owner knows what to do.
Successful websites that begin collecting revenue tend to have advertisements on their site. They will also try to use affiliate links. The website owners may recommend specific services or products to their audience. When the reader buys the product, the website owner will receive a cut of the profits.
Website owners who monetize their business will also create their own products and services for their audience. Since the readers already know and trust the website owner, they are more likely to buy from them.
Making a sustainable business
Bloggers and website owners who make their living this way plan their strategy carefully. Creating a balance between free content and paid content, they give back to their readers generously before asking them to buy a product or service.
These creators pursue partnerships with businesses, and businesses ask to partner with them as well. From large to small corporations, the website owner takes their relationships with companies seriously. They tend to partner with companies their readers will like.
Website and blog owners who are successful will also go on to sell books, membership sites and high-end services. They may also be featured in blogs, magazine and television shows.
Websites that create revenue
With this business model, many websites have found a way to make the projects they’re passionate about into a lucrative company. Here are a couple of websites that made their hobbies into a business.
The blog “Oh Joy!” has made its own success with partnerships and products that celebrate color and artistry. Joy Cho is a graphic designer, author and blogger, and posts free content regularly on her blog and video channel.
Collaborating with companies, she creates products, recipes and party ideas for them. She sells items like bowls, serving plates and cake platters for celebrations. She has also written the books, “Blog, Inc.” and “Creative, Inc.”
Pemberley Digital is a digital media company. It produces popular web video series on their website like “Emma Approved” and “The Lizzie Bennet Diaries.” Allowing the videos to be free online, these videos have gained an incredible amount of attention from their avid fan bases.
Now both of these web series shows are featured on larger sites where fans can buy episodes of the series whenever they want. Pemberley Digital also gains money by selling merchandise affiliated with their web shows.
The term “corporate inversion” has been in the news, with the recent announcement of Burger King buying a Canadian company called Tim Horton’s. The deal brought to light the corporate tactic of purchasing another company to acquire its favorable tax status, and has provoked considerable discussion about whether the practice should continue to be permitted.
Understanding Corporate Inversion
Corporate inversion sounds like an exercise practiced in the company gym, but in fact, it is a financial term than is used to describe the process of purchasing a company in a foreign country to access that company’s favorable tax status. The “inversion” aspect can occur when a larger company buys out a smaller firm and changes its headquarters to the country of the smaller firm. Generally, in a corporate inversion, one company purchases a smaller company in a country that has a lower corporate tax rate. Although the practice isn’t currently illegal, many people feel that corporate inversion smacks of a lack of patriotism, at best, and a slick method of tax evasion, at worst.
History of Corporate Inversion
The practice of corporate inversion has gone on for at least thirty years. It is believed that McDermott was the first company to engage in the practice, announcing it would become a part of a Panamanian corporation. It subsequently re-incorporated in Panama and moved its headquarters there, allowing the company to avoid paying U.S. taxes. Since that time, the number of U.S. companies that chose to implement the practice has steadily increased. As many as 76 companies have employed corporate inversion since 1983, and 19 companies have announced their intentions to re-incorporate overseas since January 2013 alone. This exodus of American companies to foreign countries has prompted the U.S. Treasury and U.S. Congress to consider revising the laws governing corporations to limit the practice.
Why Corporate Inversion Is Bad
As a result of these companies changing their incorporation to other countries, less tax is collected, increasing the burden on other U.S. taxpayers. Meanwhile, these corporations reap the benefits of lower taxes and higher returns on investment. The Congressional Joint Committee on Taxation estimates that these inversions would have brought in an estimated $19.5 billion to the U.S. Treasury over the next decade. In addition, tax experts note that the corporate inversion process itself causes a taxable event that could affect shareholders. Even holders of mutual funds that include stock from the company could take a sizeable tax hit. These problems have prompted the U.S. Treasury to begin looking into corporate inversions.
The Crackdown on Corporate Inversions
In September of 2014, the U.S. Treasury, in cooperation with the Internal Revenue Service, announced steps targeting the practice of corporate inversion. They hope to eliminate the specific techniques that allow companies to make the inversions, as well as diminish the ability to avoid taxes by doing the inversion. They intend to strengthen the requirement that former owners of the U.S. company own less than 80 percent of the new, combined entity. These actions will make inversion less financially lucrative.
In his budget for 2015, President Obama included a legislative plan to help curtail the practice of corporate inversion and make such inversions much more difficult to accomplish. Recent efforts by the Democrats in Congress have initiated legislation to stop the practice, but it is unclear whether Republicans will support such legislation.
The best way to complete a discussion of how to buy a business, is to discuss how to sell a business. If you have not yet read my blog post about buying a business, I recommend you do so for reference.
Representations & Warranties in the Sale of a Business
There are aspects in selling a business which are in direct conflict with what a buyer wants when buying a business. This situation calls for a negotiation of the extent to which Representations and Warranties are made: are they to be thorough, or limited in scope? You need an attorney with experience in drafting purchase and sale contracts, and, even better, who has experience in litigating the consequences of alleged violations of the Representations and Warranties.
When a buyer inspects a business to determine whether to buy, the buyer will address many of the same circumstances that are covered by the Representations and Warranties. Typically, the buyer will ask questions about the business. While the seller will tell the truth, it is also important that the seller is careful to give complete answers. Sellers should not be tempted to conceal negative facts about the business. Otherwise, the seller may find himself or herself in the midst of a lawsuit. Of course, the buyer wants broad Representations, to catch what the seller did not mention, and to get what the seller said in writing. On the opposite side of the coin, the seller wants narrow Representations, as the more the seller says, the great his or her chance is for unintentional error.
There is some safety, however, in adding a certain provision to the purchase and sale contract. These provisions may state that the buyer may not rely on anything said or written before the contract was signed. The Representations and Warranties are the sole basis for litigation. What is in the contract is enforceable. What is a different, pre-contract representation, or omission, is unenforceable. This is especially important when the buyer alleges that the seller committed fraud in the pre-contract representations.
My next post will discuss other aspects of selling a business, such as covenants not to compete, not to solicit, and not to disclose.
If you want to buy a business, there is no substitute for a thorough, detailed inspection of every matter related to the business in question. Parts of the inspection will be to review written materials; parts of the inspection will be visual; and parts of the inspection will be conversational.
However, do not completely rely on what the seller of the business tells you. If you are given access to the employees of the said business, talk with them about it. The seller’s goal is to make his or her business look as good as possible to potential buyers. As a buyer, your goals are entirely different — you want to find out the flaws of the business.
Representations and Warranties in a Contract
However, for any flaws that you do not find, there are ‘representations and warranties’–the heart of your purchase contract. The representations and warranties in your contract guarantee that there are no flaws (other than those disclosed in writing) with respect to each aspect of the business. A good lawyer will see that you have the seller make solid representations and warranties in your contract.
That said, representations and warranties are no substitute for your initial inspection of the business. You really should complete a thorough inspection before signing a contract. You want to discover any negative aspects or flaws before signing the purchasing agreement.
Buying a Business with Prohibitive Covenants
You should also get prohibitive covenants when buying a business, such as: a covenant not to compete, a covenant not to solicit, and covenant not to disclose, from the seller. I have discussed each one of these covenants in preceding blog entries; click the links to read the corresponding entry.
I will have more on buying a business in my next post.
Covenants not to disclose are frequently used in conjunction with covenants not to compete and covenants not to solicit. (Please follow the links to read my previous blog entries on these topics). Typically, in a circumstance in which all three covenants are used together, there is an individual who is either a key employee hire, or a key employee leaving.
Unlike a covenant not to compete or a covenant not to solicit, a covenant not to disclose can be open-ended and remain in effect as long as the information remains confidential. In my prior posts, I have pointed out the fact that these other covenants must be limited in term to a certain number of years. A covenant not to disclose is the only true way to prevent others from competing with you; it denies others the opportunity to share confidential information and use it to compete against your business.
How is a Covenant Not to Disclose Used?
Still, covenants not to disclose may be used alone. For example, “nondisclosure agreements” (a type of covenant not to disclose) are used in certain circumstances in which a potential buyer is inspecting a business for sale. In this situation, confidential information of business is passed on to the potential buyer for the purpose of the inspection. This is crucial because companies do not want confidential information shared with competitors; the covenant not to disclose is an agreement which prevents such a thing from happening.
Trade secrets provide another example for the use of a covenant not to disclose. Trade secrets provide only partial protection of information. Under the law, this status (that of a trade secret) can only be conferred in certain circumstances. A covenant not to disclose can include a more substantial amount of information that is to be kept confidential, even if it cannot be treated as a trade secret.
Of course, in some circumstances, a company selling their business may also want to acquire a covenant not to solicit and a covenant not to compete from a potential buyer. However, when used in conjunction, the covenants not to compete and the covenants not to solicit are typically not as comprehensive.
Let’s say that you are an employee at a company and you have signed an employment contract. Either in your contract or in a separate document that was signed and dated on the same day, you have agreed to not compete with your employer’s business. Then, you decide you want to leave your current job to start your own business. However, your new venture would breach your employment contract since it is in the same area of business as your former employer’s company.
In a covenant not to compete, a court will first consider the area in which you cannot compete. It must be reasonable. Usually this includes the area in which the former employer currently does business and perhaps the immediate surrounding area. If your former employer has drafted the area in an expansive fashion, it will become void in court and a smaller area will be decided upon. However, if your business is in the same city as your former employer’s it is unlikely that the court will side in your favor.
The next consideration is the length of time in which you cannot compete. Once again, a court will only enforce what is reasonable. If the length of time is unreasonable, the court will decide what is reasonable. The longest I’ve seen is five years, but that is unusual. Typically, this would be judged as unreasonable. What if the length is one or two years? Should you wait to start your business? Or can you proceed, with the odds on your side?
Well, the definition of the business with which you cannot compete may hold the answer. Perhaps this definition is too broad. What is reasonable? Well, the answer is similar to the same issue in anti-trust matters. What is the market where the employer competes? If your employer manufactures, but does not retail, toys, does the market include toy retail, or just the toy manufacturing business? This also is a matter of the court’s judgment. If a judge or jury is likely to rule that your product is not covered by the covenant’s definition of business, the employer will probably not pursue you, even if you fall within a reasonable area and time.
Of course, your employer may attack you, even if the covenant will probably not apply to you. The pursuit could drive you out of business, by making you spend a lot of money on attorney fees. Then again, your employer would have to spend a lot of money, too. Consult a knowledgeable and experienced attorney to decide whether you are going to have a problem with your covenant not to compete, and what can be done about it.
Once again, the City of Austin has shown that it is a major player in the tech world. Apple Inc now receives vital iPad and iPhone components from a factory right here in Austin – further illustrating what countless companies already know, Austin is one of the best places to start or transact business.
Texas Tech Businesses
Apple has historically used manufacturers located in Asia as its source for components, but Reuters recently reported that a 1.6 million square foot factory in Austin now makes their A5 processor – which is a critical component in the popular iPad 2 and iPhone 4S.
The massive factory, owned by the Korean company Samsung Electronics, is dedicated to manufacturing the Apple chips, according to a Reuters’ source familiar with the operation. Reaching full production in early December, the $3.6 billion production line now manufactures the A5 processor.
In a statement to Reuters, a Samsung spokesman said the company has added 1,100 jobs to support their new production line. The spokesman added that the remainder of Samsung’s total 2,400 workers in Austin produces NAND flash memory in another nearby factory.
In total, Samsung has invested about $9 billion in their businesses in Texas according to the Austin Chamber of Commerce. However, Samsung is not alone as Austin is a popular destination for both new business start-ups and relocated businesses. Many tech companies are attracted to Austin because of an ample supply of educated tech employees from the University of Texas, as well as cheaper real estate and lower taxes – making Austin one of the hottest places in the nation for job growth.