So you want to launch a business...

Who owns your website?

This could happen to you!

After several years of increasing activity on his website, Dave decided to move it from a local hosting company to the "cloud."  He didn't want to take a chance on downtime disrupting the lucrative online arm of his import business.

He made all the necessary arrangements with one of the big cloud hosts and then instructed his local host to transfer everything.  Then the hammer fell.  "No problem," they said, "as long as you pay us $100,000 for the copyrights to the site."  "Wait," replied Dave.  "I paid you to develop that site.  It's mine."  "Yes, you paid for the development, but not for the copyright."

Mad scrambling followed to no avail, and very shortly Dave heard his lawyer say these fateful words.  "The work you paid for does not fall under any of the "work for hire" provisions that automatically transfer copyright.  Your contract with the developer/hosting company does not contain any transfer of ownership language.  They are correct.  Since there is no separate licensing agreement that signs the work over to you, they own the copyright."

Dave had to pay up.

How might your business be damaged if somebody else "owned" your website?

If your contract with your web developer is missing one short, but very important, paragraph, you probably do not own the copyright.  I checked this out with The Creekmore Law Firm PC.  They confirmed this hidden business risk.

You might want to check with your attorney, too.  And you might want to read your web development deal document.

And never forget - everybody is your friend until there is real money involved.

Don't pay bills with equity!

Equity for services is a risky deal for everybody.

Bootstrapping is a trendy topic right now because early stage investment is hard to find, particularly for businesses that do not promise extraordinary growth potential.  One of the bootstrap financing techniques often suggested is the trading of stock in the enterprise for products or services needed by the start-up.  I have a strong opinion on this practice. 

It's a terrible idea.  Here's why...

As I have pointed out in other posts, equity is forever.  Swapping shares in your company for one-time needs might be compared to paying for an oil change by giving the mechanic partial ownership of your car.  Without the oil change, your car might eventually grind to a halt; but do you really want to enter into a long-term relationship with the mechanic?

Let's get specific.  Suppose you offer an attorney a share of your company for preparing incorporation  papers, and she accepts.  Now, as a shareholder, the attorney has permanent access to your corporate records and the right to participate in all ownership activities.  The dream, of course, is that the company is on a fast track to outside investment and on to liquidity.  The lawyer will get to draw up all the financing documents and then the merger or IPO papers for a healthy fee; and the tiny share of ownership that you gave her will be insignificant to the fortune you will make when you sell the business. 

Here's what really happens most of the time.  The company, if it survives beyond its first year or two, grows nicely, but slowly.  It doesn't need, or warrant, serious outside investment.  The best way for you to make real money is not through a liquidity event, but through handsome personal compensation.  You have occasional need for a lawyer, but you try hard to avoid those inflated fees whenever possible.  They are, after all, money right out of your pocket.  The lawyer now has a marginally profitable client relationship and a meaningless share of a company that will not be sold.  BUT she also has all those pesky rights I mentioned earlier.  If she gets grumpy, she is in a position to create some real pain.  This is not a good deal for you, and its also not a good deal for the lawyer.

Now suppose, instead of trading for legal services, you trade for a salesperson, as proposed by more than one author.  The dream this time is that the salesperson will be a huge success and a liquidity event will occur on schedule.  The reality, more often than not, is that the salesperson has some early success, but not enough to foster venture capital or an early liquidity event.  Then the company's growth settles in to the typical modest upward trend, and the commissions earned by your minority-shareholder-salesperson do not meet his financial needs or aspirations.  The bloom is off the rose.  You're unhappy with the results.  He's unhappy with the results.  You part ways.  BUT he still owns a piece of your company and has all those pesky rights, including the right to assert that you are over-paying yourself to the detriment of minority shareholders.  Does this still sound like a good deal?

Jim Flowers (that's me) has said this before:

Cash is the recommended medium for acquiring products and services that are not strategic to the business.  Bestowing equity on any entity in lieu of cash payment amounts to paying forever for products or services that may not even remain relevant a short time into the future.

The use of equity in bootstrapping is sometimes very smart, and it is sometimes unavoidable.  It is, however, always risky.  I strongly recommend that it be employed only as a last resort and only for strategic requirements, not commodities. 

Four ways to make sure your startup flops

"Fail fast.  Fail cheap.  Live to fight another day."

- Anonymous

Well, these four tips, if you follow them carefully, can almost guarantee that your startup business will fail.  Fast and cheap are always relative.

• Come late to the party.  It's scheduled for 8.  8:30 or 8:45 should be no problem.  You have plenty of time to wash the car before you get cleaned up.

You've probably managed to arrive late for a party at some time in your life.  I have.  What was it like?  See if this sounds familiar.

First, nobody notices that you have arrived.  The host is no longer hovering by the door to greet you.  All the timely guests have formed closed groups and are engaged in earnest conversation.  The best hors d' oeuvres are gone.  And everyone is at least one drink ahead of you. 

Palm Pre was late to the smartphone party.  Need I say more?

• Copy the most successful competitor.  It's the music that sells, not the band.  I have hundreds of CDs by bands I've never seen in person.

See if this is who you want to be.  I just grabbed it off the web.

"Almost Famous is one of the best cover bands around today. That's a bold statement, but it's exactly what you'll be saying after you experience one of their shows. With a completely fired-up & kickass stage show, Almost Famous combines pure hedonistic rock & roll debauchery with some of the most talented musicians in the NY Metro Area...the majority of whom have been signed to major labels or recorded & toured with major acts around the globe."

And now they're almost famous.  I'll bet they're almost rich, too.

And don't forget the all the rich Elvis impersonators.

• Don't sweat the details.   Attorneys and accountants are always crying wolf, just to grab some big fees.  Charge ahead.  You can always clean up any small messes later.  Right?

OOPS! 

"BlackBerry maker Research in Motion agreed to pay $612.5 million to patent holding company NTP to settle a long-running dispute that had threatened to shut down the popular wireless e-mail service for its 3 million users." Their PR team tried to spin that as a reasonable licensing fee.  Um hm.

And there was Enron, etc, etc.

• Don't try very hard.  After all, the libraries are full of biographies of famous people who became incredibly successful by dabbling in things on a part-time basis.

Yeah, right.

OK, I'll re-state the obvious, just in case. 

• Find a Market you can enter early, so you can ride the growth wave.

• Create some Magic that sets you apart from the ho-hum competition.

• Enlist a good batch of Mentors who can point out all the possible not-so-obvious pitfalls.

• And bring along enough Moxie to see you through the tough times that always come.

How big is big?

Question from a reader: A big company wants to sell my flagship product under private label.  How can I be certain that I'm getting a fair deal?

Short answer - you probably can't.  But - it doesn't have to be a fair deal to be a good deal.  That is a useful distinction that is often overlooked.

I'm reminded of the good old story of Steve and Charlie haggling over the price of a fish.  (I love good old stories.)  "I'll give you $5", said Charlie.  "Not a penny less than $9," replied Steve.  "$6," said Charlie.  "$8," Steve replied.  And, of course, they settled on $7.  As they parted Charlie called out, "Ha, I would have paid $10."  Not to be outdone, Steve's response was, "Ha, yourself.  I would have let it go for $3."

So, how hungry was Charlie?  How badly did Steve need fast money?  How much pride was at stake?  Was it Steve's first sale of the day or his last?  Was the fish really fresh?  Aaagh.  In the face of so much uncertainty, how can we ever define fair?

Only one thing is totally clear from the story.  Once Charlie offered to pay $5, the price was never going lower.  If Steve had spoken first and offered to sell at $5, the price would never have gone higher.

The various surrounding circumstances are not clear in the fish story; but in your own story you have the opportunity, in fact a personal obligation, to ferret out as much information as possible about the marketplace and your prospective customer.  Why, for instance, the big company wants your product is a key determinant of deal goodness to them.  They may be adding it for strategic positioning, rather than for the direct profit it might generate.  If so, they will likely pay a premium.

The same logic holds on your side of the transaction.  If you're doing fine without the proposed deal, you are in a position to hold out for a higher price.  But if that drives the big guy to do a similar deal with your chief competitor, you might be in serious trouble later.  Hmmm.

It's easy to say that it's all about the money.  But others say that timing is everything.  Etc.  Etc.  And so on.

You may never know whether a deal is fair.  But there are plenty of ways to make reasonably certain that the deal is good, at least for you and your business.

I recommend Jim Camp's book on negotiating - Start with No.  Go to the web, or to a bookstore.  Look it over.  If it's a good deal, buy it, whether it's a fair deal or not.

NOTE:  If you have a question, just email it to me, Jim Flowers, jimflowers@startwithmoxie.com. 

                                                                                                                                                   

How to deal with lawyers

Question from a reader:  I just got a $3,000 bill from my lawyer that I wasn't expecting.   What should I do?

Above all, remember this.  Good legal advice is a good investment.  Time and again I hear sad stories of good companies seriously damaged, or even destroyed, by the fine print.  We all wear seat belts when we drive.  Your attorney is one of the seat belts of your business.

Unfortunately, unlike seat belts, attorneys are not simple to operate; and they do not come come with owner's manuals.  The good news is, however, that they are like computers.  They will do what you tell them to do - quite literally.  Clear and precise instructions are crucial - in writing.  And the instructions have to be clear to them, not just to you. 

If you tell your attorney to protect you from any possible danger, you will get a document for the ages, and a bill to match.  Seat belts do not protect us from infectious diseases.  Likewise, complex contracts cannot remove all business risks.

Here's what I do.

First, I do my homework.  The business deal belongs to me, not to my lawyer.  It's my responsibility to get it right.  So, I rough out the agreement I think I want, usually just with bullet points.  Then I ask my lawyer to review the points, to let me know whether they are reasonable, and whether there are any specific issues I may have overlooked.  That doesn't take long and doesn't cost much.  Sometimes I even specify the number of hours I want her to devote to the review.

Once the review is complete, and I have a complete list of bullets, I ask how long it will take and how much it will cost to create an appropriate legal document incorporating all the bullets.  I do my best to avoid open-ended work assignments for my lawyer.

Any request I make to an attorney is a work order.  Attorneys sell time.  The hourly price depends on the experience level of the particular attorney.  I try to remember that I am buying hours of work, just as if I were hiring a teenager to do odd jobs around my house.  So I set boundaries, in writing.

If I have a surprise, like an unexpected bill, I remind her of the boundaries.  Her firm can make a client service mistake, and they can also correct it.  But, if it turns out that I was the one who inadvertently modified the boundaries, because I gave bad instructions, I pay the bill.

My lawyer wants my business.  I want reliable legal counsel.  We work together to create a relationship that is mutually comfortable and sustainable.

You and your attorney can do the same.

Stop mental mildew - NOW!

"Molds that cause mildew flourish wherever it is damp, warm, poorly lighted and/or where air is not circulated."

University of Missouri Extension Service

Some of the most common Mistakes committed by entrepreneurs are the direct result of mental mildew.  Sad, but true.  And mental mildew forms easily.  It's spores are first planted early in life, and regularly replanted, each time curiosity is stifled by some "proper" demand for dogmatic acceptance.

All brains are damp and warm - mildew heaven.  That's physiology, and there's nothing we can do about it.  But we can certainly light them up and circulate fresh air on a regular basis. 

So, you might ask, what are the most readily available sources of bright light and fresh air?  There are at least two dependable options.

First, the lunatic fringe.  That's right.  Carefully and deliberately consider the raves, rants, fashion, science, and art of the avant garde.  Explore the world of "too much."  There is a very, very fine line between goofy and prophetic.

Remember when a T-shirt under a sport jacket was really edgy?  And now it's trendy.  Older readers can remember when the Beatles were shocking.  Now they're classic.  Not that long ago viewers were amused when Star Trek characters communicated through absurdly tiny chest-mounted pins.  Now we have Bluetooth ear pods.

Pablo Picasso put it this way, "Good taste is the enemy of creativity."  Steve Jobs was even more direct.  He said, "Don't be trapped by dogma."  Dogma is an expression of certainty; and certainty, true certainty, is in very short supply.  (See Heisenberg Compensators.)

Nobel Prize winner Ilya Prigogine said this, "The future is uncertain... but this uncertainty is at the very heart of human creativity."  The ability to deal with uncertainty, and to flourish in its presence, is one of the defining characteristics of successful entrepreneurs.

Of course, it is a bit risky to drive a long way down that road.  Your traditional clients and colleagues, not to mention friends and family, will tolerate, or even enjoy, a little bit of envelope pushing.  But most of them will promptly distance themselves from an apparent nut case. 

Still, if you're going to make something important happen, you have to take the leap.  The others may just be dead wrong, or at least unfortunately ignorant.

Another piece of insight on this topic - "The greater the ignorance the greater the dogmatism." - Sir William Osler.  

Don't let that ignorance be yours.

The second, and most reliable, great source of bright light and fresh air to combat mental mildew is the opinion and dogma of everyone who disagrees with you.  I know.  It's hard to believe those idiots even have functioning brains, let alone some true insight.  But they might just be 100% right, and what would that make you?

So, if you nibble at the edges of the lunatic fringe and seriously consider the possibility that the idiots are right, you can probably keep mental mildew at bay.  But remember, it's insidious and persistent. And once established, it grows very quickly.

Your baby is ugly!

"The great tragedy of Science - the slaying of a beautiful hypothesis by an ugly fact."

Thomas H. Huxley

"In reality, just about all start-ups are ugly in the early days."

Dharmesh Shah

Encouraging entrepreneurs is a tricky business. 

It's a lot like parenting, as condescending as that may seem.  I say this because parents are advised to maintain clarity regarding the difference between the child herself and certain annoying, embarrassing, non-productive, and even anti-social behaviors. The child is not "bad."  The child is "naughty." I love you, sweetie, but that behavior has got to go, period.

The challenge for any parent or adviser is to encourage course changes without damaging the student's Moxie... and also to preserve your relationship at all costs.

For things to change in any real sense, the difficult child must be presented with information that leads her to draw a fresh set of conclusions about the results of behaviors on her own.  

So much for my challenges as an adviser to entrepreneurs.  Here's one for you Mr. Entrepreneur. 

Please ask yourself, regularly and honestly, "Is my baby ugly?"  Have I dreamed myself a Market opportunity instead of actually finding one?  Does my response to the perceived Market need really constitute Magic?  Or is it just a me-too?  Which of my fundamental assumptions carries the lowest confidence factor?  What simple tweak in my plan would gain me the most leverage?

Every swan, said Hans Christian Andersen, begins as an ugly duckling.  And Dharmesh Shah counsels,

Accept That Your Baby Is Ugly:  Just like most parents think they have beautiful babies, most entrepreneurs think they have beautiful start-ups.  In reality, just about all start-ups are ugly in the early days.  Don’t spend time trying to explain to others why your start-up baby is beautiful.  It’s not.  Instead, spend energy explaining why your baby is going to grow up  into something that’s beautiful. 

So, if you're feeling adventuresome and self-confident, try something new today.  Re-visit every one of your key assumptions about market size, end-user needs, competitive behavior, advertising effectiveness, contracting systems, manufacturing quality control, raw material costs, and so on.  Assume that at least part of your baby could benefit from some plastic surgery.

Ask yourself: how much of my plan's beauty is in only the eye of this beholder - me?

Three deadly temptations

"I can resist anything but temptation."

    Oscar Wilde

Three deadly temptations, indeed.  There are, of course, many, many more.  But three is a good number in a headline - enough to matter, not enough to scare people away.

So which three has Jim Flowers selected for today's sermon?  Well, I recently re-read the Book of Pride and found several variations on that time-honored theme that bear directly and regularly on start-up businesses.  Succumb to these temptations and you risk serious damage or even failure.

Deadly Temptation Number One: attack on too many fronts.  When your product may be reasonably applied across a variety of markets or industries, it's really easy to lose focus and spread yourself too thin.  Example, suppose you invent a uniquely effective point-of-sale advertising device.  Such an item might be valuable to any business that sells something in a face-to-face mode.  That would include at least book stores, restaurants, and real estate agents.  Just imagine the variations required in your pricing models, promotional schemes, distribution channels, and even niche-specific product features to address all those markets.  One set of Magic tricks simply can't mystify all audiences.

Deadly Temptation Number Two: underestimate your competition.  I've talked about this before.  How many times have you heard someone say "We really don't have any competitors.  Our product is truly revolutionary."  Ha!  If you really have no competition, then there may well be no market at all.  At a minimum your prospects have the option to take no action whatsoever, leaving you with a great product, but no sales.

Deadly Temptation Number Three: believe your own hype.  There are fine distinctions between and among appropriate self-confidence, pride, and vanity.  The first is about reliably knowing that you are good by some independent set of measures.  The second is about personally valuing your "goodness" above that of others. The third is about valuing the opinions of others above your verifiable worth.

There is, as you might expect, a vast library of thoughtful commentaries on pride and its close relatives.  Here is a sampling...

"Pride is a powerful narcotic, but it doesn't do much for the auto-immune system."

      Stuart Stevens

"Swallow your pride, you will not die, it's not poison."

Bob Dylan

"Pride grows in the human heart like lard on a pig."

                    Alexander Solzhenitsyn

Heisenberg Compensators - On Sale NOW!

"The future is uncertain... but this uncertainty is at the very heart of human creativity."

    Ilya Prigogine

Three common traits of successful entrepreneurs are: 1) the ability to accept uncertainty; 2) a voracious appetite for additional information; and 3) creativity.  Business winners are seldom rigid, except in their tight focus on their vision.  They are generally committed to action, but seldom to a particular action.  Instead, they devise and select actions that are appropriate to each new situation as the world evolves about them.  And they learn from their mistakes.

My friend Matt told me that we would save a lot of time and trouble if we simply told all fresh entrepreneurs just to go out and buy Heisenberg Compensators.  That would remove all the risk from their startup ventures, he said.  They would all get rich, and fast.

I agreed with Matt, then ran to my computer to find out what in the world he was talking about.

In case you are uninitiated, like me, it turns out that a Heisenberg Compensator is a critical component of the Star Trek transporter system.  It adjusts for the fact that we cannot know both the location and the momentum of a sub-atomic particle simultaneously (Heisenberg's Uncertainty Principle). Without the compensator, the objects or people being transported would arrive scrambled at best, and more likely not at all. 

From my point of view, a successful entrepreneur is, in fact, a walking, talking Heisenberg Compensator, constantly assessing the locations and directions of the various components of his business world and making tiny, but regular, adjustments to his action plans.  There's no need to buy one, after all, if you can be one.  Besides, late model compensators are definitely in short supply, which makes them absurdly expensive.  (I checked on Craig's List - couldn't find one anywhere.)

Learn to bend and you won't break.  Bend in just the right direction, and you'll be a huge success.

Besides, there is seldom a way simply to force a positive solution anyway.  Turning up the power on the transporter cannot remove the need for the compensator.

So, as my other friend, the Earl of Chesterfield, once said,

"Prepare yourself for the world, as the athletes used to do for their exercise; oil your mind and your manners, to give them the necessary suppleness and flexibility; strength alone will not do."
 

The inconvenient truth about competitors

Competitors are generally smarter than you wish they were.

If you haven't seen the movie Butch Cassidy and the Sundance Kid, picture this. 

Two intrepid, highly creative entrepreneurs of the late 19th century have annoyed their competitors.  The entrepreneurs are, in fact, notorious train robbers; and the competitors are professional security agents engaged to bring them to justice.  The entrepreneurs are trying to outrun their pursuers in the high desert of the American Southwest.  They just can't shake the skillful and persistent agents.  They are cornered.

Butch Cassidy: They can't track us over rocks.

Sundance Kid: Tell them that.

Butch Cassidy: I couldn't do that. Could you do that? Why can they do it? Who are those guys?

                                                Butch Cassidy and the Sundance Kid, 1969

When Butch and Sundance concocted the business plan for their gang, the Wild Bunch, they fell into a very common trap.  They underestimated the competition.  They thought they were up against small town sheriffs and civilian deputies.  With the element of surprise, strength of numbers, and better horses, they could swoop in, rob the train or the bank, and be practically un-catchable.

Then the railroads changed the game.  They hired the Pinkerton Agency to destroy the Wild Bunch.  The Pinkerton professionals could ride the best horses, hire expert trackers, and assemble awesome firepower.

By some accounts, Butch and Sundance stole over half a million dollars before they were forced to flee to South America.  There are differing versions of their final days; but they most certainly did not die peacefully.

A sadly pervasive startup Mistake is the presumption that a market leader will not react forcefully or cleverly to the entry of a fresh competitor - or that there will not be yet another entrant, complicating the situation even further.

The initial Market advantage provided by your Magic can evaporate almost instantly as a result of defensive action by the previous owner of your customers, or by the appearance of something even more magical that defeats you both.  Failure to consider this inconvenient truth can easily result in your untimely demise.

Ouch!

P.S.

The movie is really worth watching, by the way.  Here's one reviewer's comment.

"Calling Butch Cassidy and the Sundance Kid a great Western is like calling Dom Perignon a really great bottle of grape juice. Yeah, that's correct, but you're missing the point entirely."

Christopher Null, 2006

Mistakes

"Experience is the name everyone gives to their mistakes."  

                                                         Oscar Wilde

But some experiences are best avoided in the interest of time, money, and pain.  I suggest you consider avoiding some of the most common mistakes made by entrepreneurs.

DO NOT...

• Ignore market information that does not conform to your preferred view of the world.The Market is always right.

• Crash ahead in spite of strong and obvious reasons to stop, or at least to review strategies.  Sometimes the Magic just doesn’t work.

• Think too small. Some businesses just won’t work below a certain critical mass.Review your Model, both Market-wise and Money-wise.

• Think too big.  Companies like Microsoft and Google only come along once every 20 years.  Modesty is always in vogue.

• Insist that a product be perfect.  Excellent is good enough, requires less Money,and may actually get to Market.

• Hire a résumé instead of a person.  Teamwork is essential to success.  Perhaps the most critical Management skill is hiring.

• Fail to get professional assistance.  You wouldn’t remove your own appendix.  Don't try to practice law.

• Compromise your principles.  Your self-respect follows you everywhere.  And you can only lose your reputation once.

• Lose track of your Motivation.  Your business should be an extension of your needs and wants, not the other way around.