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Category: Colorado

What Startup Accelerators Do

Published October 25, 2018 by E/N

Background Reading:

When most people think of the core value of top-tier universities, they think it’s obviously to educate top students. While that may be true, there is a strong argument that education is actually secondary to top universities’ “sorting” function; in other words, by credibly filtering out and selecting the most elite among millions of students, universities help employers and other people find those students more easily.

Sidenote: there’s empirical evidence suggesting that students who get into the ivy league but don’t attend do just as well as those who do attend, lending backing to the idea that top universities are far more about sorting and finding talent than developing it.

Top-tier accelerators are the elite universities of startup ecosystems. As “doing startups” has become more of a thing and the number of entrepreneurs has gone up (correlating inversely with the drop in cost of starting companies), business ecosystems have become far more “noisy.” More pitches, more teams, more ideas, make it much harder for interested investors to sort through and find the cream. It’s the exact same problem employers have with students.

Here in Colorado, Techstars is clearly the most notable accelerator, although there are others here and throughout the country. Ask entrepreneurs about the value of the educational content of these accelerators, and feedback will vary; but almost universally founders will say that the top ones pay for themselves simply from the network they open up for you by putting their stamp on your startup; just like a Harvard or MIT.

Are accelerators necessary for startup founders to succeed? Absolutely, positively not. The large majority of successful companies we work with never touched an accelerator. But for entrepreneurs lacking strong connections to investors and other key players early on, they can dramatically accelerate a startup’s ability to find capital, advisors, etc.; and should be strongly considered.

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Must Colorado startups hire lawyers in Denver or Boulder?

Published September 20, 2018 by E/N

Background reading:

In short: no, and anyone who says otherwise is simply lying in order to cut off competition from potentially better fit lawyers with broader geographic footprints.  Virtually every serious corporate lawyer (startup lawyers are corporate lawyers who specialize in early-stage) with a well-deserved brand has clients across city and state lines.

Because the vast majority of startups are incorporated in Delaware, Delaware corporate law governs 99% of the issues they’ll deal with. The 1% will be labor/employment issues, which will typically be governed by the location of their employees (often multiple states), and local labor boutiques are easily engaged for that. 

In fact, when you’re navigating negotiations with potentially influential local investors whose ‘reach’ covers a lot of the local legal market, there can be benefits to having counsel from someone more detached from the local community. See: How to avoid “captive” company counsel. 

Go through the above-linked checklist to ensure you are engaging counsel that is the right fit for what you’re building – in terms of specialization, cost structure, culture, etc. – regardless of where they are physically located. 

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Formation options for Colorado Startups

Published September 19, 2018 by E/N

Background reading:

The following are a few points that any startup entrepreneur needs to keep in mind in terms of forming their company from a legal perspective.

First, formation is not the same thing as incorporation.

Incorporating a company is literally the act of filing a document in Delaware (or another state). It achieves 1% of what needs to happen in a proper startup formation. A full formation involves forming a Board of Directors (or if an LLC, Managers), issuing equity with vesting schedules, assigning IP, forming an equity plan, and a number of items. When comparing offerings from different firms, pay very close attention to what is actually included in a package, because it’s easy for firms to leave things out in order to appear to offer a lower price.

Second, don’t assume you want a “standard” Delaware C-Corp.

If you read info from Silicon Valley – and most content out there is from SV – you’d think 100% of tech startups are C-Corps. That’s not true. Yes, most are, but your particular business model and growth trajectory may make it a less obvious choice. See: More Tech Startups are LLCs. 

Be aware of fully automated options.

There are fully automated and safe options like Clerky, if you are comfortable with no customization and a very standard structure. If keeping legal costs to an absolute minimum is a top priority, Clerky is far safer than a DIY project with templates.

LegalZoom and RockeyLawyer are not appropriate for a startup, because they are designed for small businesses, which have much simpler/less complex needs.

Most startups hire law firms. Hire one right-sized for what you’re building in the next 5 years.

See: Checklist for Choosing a Startup Lawyer and Why Startups hire law firms, not a lawyer.   Most startup-specialized firms have fixed fee packages for formations that will allow for more flexibility/customization (and guidance) than a fully automated approach, without incurring excessively high costs.

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Why startups hire law firms, not a lawyer.

Published September 19, 2018 by E/N

Background reading: When a startup lawyer can’t scale. 

When navigating startup legal issues, it’s very important to learn the distinction between “startup” and “small business,” because it’s not always clear, given that both start out small.

When someone says “small business” they are referring to something like a coffee shop, or a restaurant. For the first several years, the customers will be geographically local. If it takes any investment at all, it will likely be 1-2 local “partners” putting in money. Equity likely isn’t used much for compensation purposes, because the much slower growth of its value means it won’t incentivize employees as much as cash will.

“Startup” on the other hand, refers to a company that (naturally) starts out small, but whose customer footprint will likely be more national and international, and is likely to scale faster than a small business. Startups still differ in their types of growth trajectories, with Silicon Valley being well-known for building / emphasizing hyper-growth “Unicorn” startups. See: Not Building a Unicorn for our perspective on how smaller startup ecosystems often build companies that behave differently from what SV produces.

But the main point here is that startups face much more complex legal issues, and a higher volume of them, than small businesses do. And that requires a different type of legal infrastructure to get the work done.

The legal market can be separated largely into 3 categories: solo/tiny firms, boutique firms, and very large firms (BigLaw). BigLaw is structured for billion-dollar companies, and startups on that path; and is priced accordingly. Solo/tiny firms are well-designed for small businesses, including small apps likely not looking for much scale.

Boutique firms are designed for the “middle market” – higher complexity and volume than small biz, but much leaner and lower overhead than BigLaw. E/N (our firm) is a boutique firm. 

At any given time, a seed or Series A stage client of mine will have a commercial agreement being drafted, a few option grants in process, an NDA to be reviewed, and perhaps 1-2 other projects in play. If they were waiting on me, personally (a Partner) to handle all of it, they would be waiting far longer than they can afford to. Expecting a Partner (who has many clients) to do all of that work is also ridiculous and inefficient; the law equivalent of asking a Neurologist to check your temperature, treat a cold, and give you a simple vaccine. Overkill.

So firms designed for scaling startups have paralegals, junior lawyers, senior non-partners, word processing professionals, and technology – an infrastructure to get different levels of work done efficiently and on time, with Partner oversight. That’s necessary for startups, who often operate on compressed timelines, and can’t wait very long. 

If you’re a startup, and not a small business, make sure you hire a firm with the right infrastructure to get things done efficiently and promptly. Otherwise, when you need your lawyer most, you’ll be faced with a several week (or month) wait that could kill a crucial deal.

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How Colorado startups are often different from Silicon Valley startups

Published September 18, 2018 by E/N

Background reading: Not Building a Unicorn. 

The growth path you intend to take for your company dramatically impacts the legal structure you implement on Day 1.

Silicon Valley is known for serving as a magnet for entrepreneurs going after huge, billion-dollar markets, and the entire ecosystem there – including Silicon Valley startup lawyers and firms – has been built around those kinds of companies. In smaller ecosystems like Denver-Boulder, Austin, etc., there are also many firms with great “business lawyers,” but who lack the specialized knowledge of technology and venture capital that startups need.

Hiring a small business lawyer to work on a “true” startup raising angel and eventually venture capital will produce huge errors and long-term cleanup costs, due to that lawyer’s lack of knowledge of both market norms and legal precedent to work from. 

We’ve felt this “bifurcation” of the market – small business or billion-dollar unicorn path – has a huge gaping hole. What about startups for whom a $50 million or $100 million exit is a perfectly acceptable goal? “Small business” people can’t scale for them, but the unicorn ecosystem is overkill. 

The truth is that Colorado emerging tech startups usually look a whole lot more like that (successful, but deliberately not unicorns) than the kinds that Silicon Valley builds and promotes.

The fact that states like Colorado, Texas, and Washington produce a lot more successful, but non-unicorn, startups means that the legal structures of those companies often look very different from the “standard” Silicon Valley approach. This includes:

Colorado entrepreneurs need to ensure they’re getting advice that works in their particular context. That often means working with people, including lawyers, advisors, and investors, who aren’t necessarily in the same city, but also aren’t dominated by Silicon Valley’s unique way of doing things. 

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Why so many Colorado startups incorporate in Delaware

Published September 18, 2018 by E/N

Background reading: Should I incorporate in my home state or in Delaware?

Why does so much of the international business world speak English? Because it is very efficient to have a common underlying language for people in various places to communicate with. 

Delaware is the english language of national business law in America. 

The same is true with law. Regardless of what your feelings are about federalism in the United States, expecting American companies to learn and navigate 50 different states’ laws would be a nightmare. So the business community has, over time, coalesced around Delaware as a kind of uniform standard for companies with some level of cross-state scale. 

The vast majority of angel and VC-backed emerging tech startups in the U.S. are incorporated in Delaware, regardless of where they are geographically located. And for that reason, all serious startup lawyers across the U.S. know Delaware corporate law, often better than their local state law. 

There are of course other reasons why Delaware is preferred by so many companies and investors, much of which are explained in the above-linked post. But the main point for founders to understand is that scaling Colorado startups have good reasons for starting out in Delaware.

Delaware can save you money long-term.

You will hear from some Colorado lawyers that incorporating in Colorado will save you money, and that you should strongly consider it until your investors make you convert to a Delaware corp. This advice usually comes from lawyers who work with a lot of “small businesses,” who typically operate for years without ever taking on investment. Small biz works very differently from what most entrepreneurs call “startups.”

Because so much of the startup ecosystem is built on Delaware corporations, all serious startup lawyers have large sets of form documents and processes built around Delaware law. Taking advantage of those forms and processes will save you legal fees.

So, yes, you will pay a few hundred dollars more a year to state agencies if you incorporate your Colorado startup in Delaware instead of Colorado. But you will make up for it in reduced fees charged by your lawyers, who’ll be able to lean on the well-developed Delaware-based infrastructure of documents, templates, processes, etc. 

Both in the short term and long-term, Colorado founders intending to build companies looking to scale faster than a typical small business should strongly consider Delaware. 

Sidenote: See also: Not Building a Unicorn for a discussion on how, while being a “startup” means going after some amount of scale, it doesn’t have to mean a Silicon Valley-style hyper growth trajectory. 

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