Your First Contract! Now What? (Ownership of Your Work)

Issue: Ownership of Intellectual Property

In nearly every B2B agreement, there is a confidentiality section that spells out the intellectual property that each company is trying to guard. However, have you thought about the data and intellectual property that has yet to be created?

You may assume that because you created it, you can do whatever you want with it. However, your client could be thinking the opposite. Typically, you will see language here start with the word “assign”, as in you agree to “assign” all rights, title, and interest in the created intellectual property to the client.

If as a company you are planning to make use of works produced from your interactions with your client, or even if you just want to be able to use some part of the base code again, this language could get you in major trouble.

How to Manage: 

Negotiate a perpetual license. One option is to negotiate a license with your Client. You can first try to negotiate ownership and a license for the Client, but if that doesn’t work, you should try to negotiate a license for yourself.

Ask exception for aggregate or unidentifiable data. If you have a desire to use the aggregate information, but have no need for the specific identifiable information that is created, you can negotiate for this as well. That way, the client feel protected and you can get what you need as well.

Negotiate exception for Publicity. One likely piece of language important to you will be the use of the client company’s name for promotional purposes. And why not? You are a new startup and other prospective clients will want to know who you are working with. Many startups have gotten in trouble by marketing their partnership with clients without receiving the right permission. Asking ahead of time will save you future headache, and keep your clients happy with you.

Your First Client Contract! Now What?

It took a few weeks of back-and-forth, but eventually, finally, there it was — our first client contract draft. Fewer things make an entrepreneur happier than seeing that first agreement in place. Little did I know that this isn’t where the finish line. Instead, we were just getting started.

When you get that agreement, your excitement is usually followed by a million other questions. Chiefly among them: “What do I do now?” Fortunately for us, I have had a few years experience negotiating agreements. But for many startups, they are either left staring blankly at the stack of papers or simply sign blissfully. As you know, bringing an attorney to the table is the ideal response. However, as a startup you may realize that this is much easier said than done in the beginning.

So many people try to go it alone.  If you are one of those people, you are likely going to have to negotiate certain terms. You may be nervous to counter with anything, for fear the contract may go away. However, clients are typically used to negotiations and if they have a contract to pay in front of you, you have already convinced them of your worth. So here are some ways to manage

If you are trying to go it alone, here are some things to look out for in agreements you are asked to sign:

Issue: Payment Terms

When you receive your first agreement, the first unfamiliar things you may say is “Net-#” (e.g. Net-60, or Net-30). This is important, because it tells you when your invoice will be paid. Some new B2B (business-to-business) entrepreneurs may not realize that, unlike in the direct-to-consumer market, businesses don’t always pay immediately and upfront. Net 60 means that the customer has 60 days from receipt of the invoice to pay. In the beginning, you may be thinking, “They can pay me whenever. I’m just happy to have the contract!” But remember that the longer it takes for you to receive payment, the longer you have to service their contract using your own funds. For many companies, this becomes a difficult cash flow issue, because you can have tens of thousands of dollars in receivables and still potentially be bankrupted.

At the same time, the client needs to manage its expense and risk expectations as well (after all, you are a new startup!). So there must be a middle ground for both of you.

How to Manage:

(1) Negotiate a smaller net. Push for a net-15, but typically it will be net-30 at the lowest.

(2) Invoice more frequently. The net terms clock doesn’t begin until your client receives your invoice. Therefore, if you deliver your entire product/service, and then deliver your invoice, you could be waiting for months or even up to a year to receive payment on something you have already expended costs on. Instead, break your product/service into milestones along the way that you can invoice for. For example, rather than one $20,000 invoice for a SAAS product that is a year in length, you can invoice $4k for initial setup, $4k for the in-person orientation, and $1k per month for license to the SAAS product.

(3) Offer incentives for earlier payment. At times, companies have been known to offer a discount on pricing for upfront payment. This strategy is really dependent on your costs of foregoing that payment. For example, some contracts for good will say 2%/10 net 30, meaning that there is a 2% discount if paid within 10 days. The reason why it’s cost-dependent is because you are in effect giving an annual discount of 36.7% to your client if you go this route (read more here: http://www.smbiz.com/sbspec385.html).

(4) Offer discounts for upfront payment. At the same time, upfront payments can be one of the best ways to finance your company’s growth. And that growth is something both you and your clients (who are investing their time in your product as well) want to see occur. In this case, it would be ideal for you to negotiate an upfront payment.

 

 

Finding a Good Accelerator or Incubator

It was one of the hardest decisions to make of my life. And we were running out of town to make it. My co-founder and I were seated together in a room getting increasingly dark as the sun set. We had been making great strides as a two-person team. We had clients, revenue, and had even gotten a little investment.

But we knew we needed something different. We were falling into a rut, and were seeking out inspiration beyond just the two of us in our small, leased out space. And we needed funding. Enter stage left, an acceptance offer from one of the top accelerators in the country — but it was halfway across the country. There were two options on the table: on the one hand, we could stay put, nurture our current clients and — who knows — possibly generate enough revenue to support our runway needs. On the other hand, we could take our chances, drop everything, pack the car and make the two-day drive to a place neither of us had been. My co-founder looked out the window. We both took in the gravity of the moment: Before the sun comes back up, we could be gone. He then looked back at me. “You got a coin?”

Choosing the right accelerator/incubator (or choosing to do one period) depends upon a lot of scenarios. And it’s important for you to know the important ones. Hopefully, this post will help you think through the decisions keenly:

* Can you dedicate 3 months to this? Many people are interested in the funding, without considering the workload as well. To fully get the most out of your experience, you have to be willing to put in long days and nights. This can be on average 16 hours or more. The reason why is because while in an accelerator, you now have two roles — the first is to run your company like you’ve been running, while the second is to make the most out of the accelerator’s resources. This could be pitching investors, searching for advisors, adding team members, or looking for clients. This all-day affair means you don’t get a chance to actually run the business until after hours.

* How strong is the accelerator’s network? This factor is more impact than even the funding. While funding is obvious, the network allows your business to truly branch out and thrive. This network can help you find clients, serve as legal/financial advice, and even contribute to your company’s funding.

* What are the terms? While the funding should not be the most important consideration, it should be a consideration nonetheless. You want to at least come out of the accelerator in the same position as when you came in. At the end of the day, it is about runway.

* What is their reputation? Do they provide sales and marketing advice? Will they help you make pitches? Do they have contacts you can leverage? Or is it simply a desk you sit at for three months?

Once you have an idea for these questions, begin searching for accelerators to apply to using Angel List or F6S. Both have an abundance of resources available, and make it quite simple to find the accelerator that fits your needs.

 

How to “Get Out of the Office” (Part 2)

It was my first “GOTO” (get out of the office) meeting with a potential client. The contact, an influencer inside one of the largest colleges in the state of North Carolina. And I was there to pitch him — with no product, no sales experience, and, as I would soon find out, no Internet reception. Walking into that room, I couldn’t help but think: I’m going to get chewed up and spit out.

Some people struggle with the GOTO mantra because they struggle to find people to reach out to. But others, struggle with what to say when they are in the meeting. After all, no one decides to start a company to get into sales. But that’s the beauty of the GOTO approach: you are still in learning mode. So how do you get a conversation started?

CONNECT: First, start by finding a connection with the person on the other side. Maybe you all are alums of the same school. Or, maybe you share similar interests in technology. Getting the conversation started is an effective way to ease the tension for you, and make the prospect interested in hearing what you have to say.

SET THE TONE: Next, set the tone of the meeting. You want to talk with this person to get a better understanding of their needs regarding X. That is all you are there for. To listen and to learn. Now, depending on how things progress, you may be able to start introducing concepts for them to react to. (i.e. “How would X, Y, or Z, help your company?”). Once again, you are trying to understand their needs, not push features onto them.

ALWAYS HAVE A FOLLOW-UP: This is important for every future meeting you have. Always have a follow-up activity. In this case, you can mention that you would like to reach back out to him/her in a few weeks to see their thoughts on a product prototype. Or it may be to ask for a connection to the right person, if it turns out that this was not the right contact (Remember, the fact-finding mission isn’t always about building the product. It’s also about finding the key decision-maker).

Your first meeting will definitely be a bit rocky, no matter how much you prepare. However, the rockiness are learning points. For example, in one meeting I had we were asked about FERPA compliance. I had no idea what FERPA was. And although it felt terrible to not know at the time, it prepared me to know FERPA inside and out for my follow-up meetings. But although it will be rocky, make sure you prepare nonetheless. If they want to know information about you, be sure to come with a concise story about yourself, or a resume. If they want to know what you are trying to develop, make sure to have at minimum some screenshots or PowerPoint slides to share.

These things will let them know that even if you aren’t done building your product, you are serious about it.

How to “Get Out of the Office” (Part 1)

If you have decided to venture on this rollercoaster called the startup journey, you have likely thought in general about your idea, imagined what success looks like for you and your company, convinced close friends and family of your idea, and maybe even started certain iterations of it.

At this point in your startup’s early lifecycle, you have likely heard repeatedly that you need to “get out the office.” As the saying goes, early entrepreneurs suffer from iterating, and not actually speaking to customers. All of this has proven true to us, but we struggled with the same question you may be thinking: how do I get out of the office? I remember literally thinking, “Where in the world would I drive to?”

This is how I started (remember, we are B2B so it would differ in a B2C environment):

(1) Think about who your target customer is. This not the person, but the organization. Maybe they are startups. Or maybe colleges. Or perhaps advertisers.

(2) Reach the highest approachable, relevant person on the food chain. This takes some intuition, as well as a bit of luck. Don’t search for the President if you are trying to offer a new cleaning solution. But don’t reach out to the janitor either. When you reach a bit over the level of the ultimate decision-maker, sometimes you will hear crickets. But other times you will get a forward, or even a response with the right person copied. Once this happens a few times, you will have a better idea who your actual target customer is.

(3) Don’t mention the sell. As much as you want to, don’t mention the sell to this person yet. Instead, focus on saying you are trying to get feedback or advice on a tool to help improve their (fill in the blank). You will be surprised how often people don’t mind sitting down to offer advice. It will also increase the chances of a response.

(4) Email. Then, Call and Email. (Obviously, this is if you can find their information) First start with your introductory email. Keep it concise and to the point (remember you are just one of a million emails they will get). Then hit send and wait a few days. You may start to worry that they won’t respond. Don’t worry. They won’t, but it sets the stage for warmer interactions later. A few days later, call the contact (they won’t answer) and leave a voicemail referencing your earlier email and interest in getting coffee. Tell them you will email them too to ensure they got your message. Finally, send another follow-up email right after you leave your voicemail — of course, referencing your earlier contacts. This will be the email they respond to.

You now have someone you can “get out of the office” and connect with. That is, unless you don’t have a phone number or email. This used to be a problem, but now it’s much easier. Take the title you want to reach out to, and add it into LinkedIn (along with the company name). You should then begin to see these contacts. If you purchase a Premium LinkedIn account, you can even email them through there. One thing I’ve found is that LinkedIn messages tend to be responded to much more often than emails.

In Part 2, I’ll talk about what to do once you’re in the meeting.

Your Company’s Logistics Part 3B: Financials

(continued from earlier post)

In the last post, I listed a few things that you want to make sure to keep in mind. Here we talk about how to keep track of these things.

When we first started, we used an excel spreadsheet. It made since in the beginning, but I quickly realized this was not a good idea. There are too many potential issues at stake including: rounding, human input error, improper categorizations. Finally, it is harder to manage the tax responsibilities you have using a spreadsheet. Here is how to bootstrap your startup and manage your finances at the same time:

(1) Choose a business bank account (see my earlier post for more info here)

(2) Choose a credit card account you will use (once again, you can read my earlier post for more info)

(3) IMPORTANT: Setup an account using Wave (url: waveapps.com). Why use Wave? It’s not because it’s the best software interface out there (though it is pretty darn good). It’s because it’s FREE, and as a bootstrapper you care about runway, remember? Wave automatically pulls all of your charges and purchases into one easy-to-view transaction list. This is the first step towards ensuring your books are sound.

(4) In the future, everytime you need to infuse your company with funds (be it through a personal line of credit, cash infusion, or if you are lucky, an investment), deposit it into your company’s business bank account before doing anything else. Early on, it will be tempting to, for example, pay that contractor from your bank account. RESIST that urge. Make everything go through your bank account before doing anything else.

And that’s it (at least for now). You will eventually need a bookkeeper/accountant to manage all of these incoming transactions. But those things cost money you don’t have right now. Fortunately, however, because you are keeping record of all of your transactions, your accountant will be able to easily work with you to ensure your transactions are appropriately categorized.

P.S. Note of Caution:

If you are a startup that accepts credit cards or other third party merchants, many of them make your life a million times easier, but can make the books a bit more difficult. That’s because a lot of them don’t merely facilitate the transaction, they also can act as a quasi-bank. For example, let’s say someone pays you $1,000 for 10 of your widgets. Let’s say subcontractor A charges you $100 to create component A and subcontractor B charges you $300 for component B. They both use PayPal and so do you.

This scenario can create financial issues, because the $400 expenses aren’t recorded anywhere, and even the fees PayPal charged you aren’t available (in this case, about $30). Once you withdraw your remaining amount to your bank account, you are left with $570, which is hard to go back 6 months later to remember.

Fortunately, Wave allows you to pull in PayPal transactions, but not all bookkeeping services do. So make sure to use one that does allow for this type of information.

 

Your Company’s Logistics Part 3A: Financials

There I was. Sitting across the table from a group of investors in charge of performing due diligence on our company. I had just passed the 4th hour of questioning on everything from sales strategy and pipeline to our team make-up. I was tired, but feeling good.

Then came the final section: financials. To be sure, we thought we were more than prepared. We spent countless hours working on projections and talking through if-then scenarios. But suddenly, I found myself having to talk through a different type of financials conversation.

“You said you raised X in funds so far. Why is Y showing up on your balance sheet?”
“Your stated contract revenue doesn’t precisely match your Sales revenue.”
“Why don’t you have unearned revenue as a category here?”

As I thought through these questions, one answer came to my mind: I should have been more prepared.

Financials is one of those things that is hard to place a priority on day-to-day. However, not staying on top of them can mean a huge blow to your company. Unfortunately, for us bootstrappers, there just isn’t enough money early on to focus on this problem. So what are some ways to sole for it?

Here are some of my suggestions among various categories:

1099s and W2s:

Before February 1 of the new year, you have to provide a W2 to each of your employees, as well as a 1099 to each of your contractors. This allows them to file their own taxes. This is a requirement by the IRS. There are several websites that can automate the entire process for you. Search on Google and select one that works best for you, including the more popular ones like TurboTax.

Income Taxes:

Regardless of what happens throughout the year (even if you don’t make any money), you want to start your company off on the right foot. That means, you have to file your company’s taxes. Fortunately, you are in luck. Tax preparation is typically a deductible expense, meaning that you could receive the cost of that preparation back. So which tax prep service should you use? I tried using the box ones (TurboTax, TaxSlayer), but unlike for Individuals, the box solutions for corporations were way too complicated.

Important – Keep in mind that tax deadline is not April 15 for Corporations! In 2013, the deadline was March 17.

Payroll Taxes:

This is where many people who go on their own get caught off guard. You cannot pay payroll without paying payroll taxes. This bears repeating(but since this is a blog, you can just reread the last sentence). Each time you pay an employee, you will withhold from her paycheck taxes that they must pay, and taxes you must pay on their behalf. Typically these taxes have to be paid at the end of every month — though some can be quarterly or annually. Figuring out how to pay everyone is even more complicated. Keep it simple by reading what we decided to do in Part B of this column (or if you know a better option, feel free to comment!)

Your Company’s Logistics Part 2: Credit Cards

Most articles, blogs, and financial advisers will tell you that unless you are trying to build you credit for a house purchase of some sort, you shouldn’t touch credit cards. In most instances this is of course a smart argument. One of those exceptions however, is when you are building you startup.

As I have mentioned before, when you first begin your startup process, runway is key. Unfortunately, if you are like most startups out there you have no access to capital to help build that runway. The reasons why are clear: as a startup (especially a tech startup), there isn’t very much to secure investments. Unlike mortgages and car loans, banks cannot simply repossess a URL.

This takes us back to credit cards. If you manage the process appropriately, they can be a Godsend. Let’s say you quit your job today. You are your founders have now evaluated that you have $20,000 in savings to spend on the business. If your burn is $3k per month (because you’re smart and not taking salaries in the beginning), you only have 7 months of viability. Inserting short-term financing in the mix can extend this to a year or longer — finally getting you to a point where you are either (1) generating revenue or (2) finding some initial investments. So how should you manage the process?

Pretty much focus on the same process as when you were first building your personal credit. You can look for two types of cards: (1) those with starter programs and (2) those that allow you to co-sign personally. Even if you are starting with some savings to get your company, I would still suggest this route as it extends your runway and can help build your company’s credit. If you are at the point where you are comparing company credit cards, I suggest NERDWALLET. It does a great job of comparing the different benefits. One thing to keep in mind: you will have a while before you need to really travel, so look for cards with the lowest interest rate — not awards like airline points. Remember, you are in the “Runway by any means necessary” phase.

My preference? The Chase Spark Card for Business. I unfortunately had the opportunity try out several different cards, and the Chase Spark Card was by far the easiest to setup and use. They also did not require me to cosign personally. As a result, the starting limit is much smaller, but after 6 months of paying on time, they steadily increase your spending limit.

FINAL NOTE OF CAUTION: There is a point where incorporating credit cards into the mix can change from a savvy investment to a terrible crutch. Remember, you are at the phase where you are trying to extend your company’s life long enough to prove viability and potentially bring in investment. So while you are relying on this form of payment, only do so knowing you can pay the monthly charges and be sure to stay frugal at this point in time. For example, salaries shouldn’t be put on your credit card. In short, make smart decisions!

(next: file systems)

Your Company’s Logistics Part 1: Banking

If you are successfully growing your business, there is one thing you will quickly find out: most of what you are doing has nothing to do with what your business does. This is a frustrating realization for many virgin startup owners. You signed up to take your vision and execute the hell out of it. You psyched yourself up to put everything on the line to fulfill the idea you had in your head. And you read all of these books, and they taught you to how to create a Lean Startup or create a Business Model Canvas.

What no one told you when you first started?

How to handle the logistics.

There are a ton of things to think about when starting your company: how should you manage documents? what is the most affordable way to keep track of contacts? which bank do you use? how do you handle expenses?

I don’t profess to have the right answer for all of these questions, but I can tell you what I have learned in hopes that you make fewer mistakes.

Handling Expenses

When you first start your company, it is easy to take out your personal credit card and just begin swiping to pay for things. RESIST THAT URGE. From the beginning, you want to separate your personal and company expenses. This doesn’t mean that you won’t have to lend the company money. But keeping that barrier makes it easier to do taxes and ensures you have limited liability (in the case of LLCs and Corporations).

So how do you do so in the first few days as a startup? Your startup has no money. Well you want to do 3 things: (1) setup a bank account (2) find a credit card to apply for and (3) agree on an amount with your founders to fund the company. (Each of these things are addressed in future blog posts) Part number three is most important. Otherwise, what happens is eventual arguments over how much each person is spending on company items. So it makes sense to determine how you will fund the company ahead of time. Then, at the determined time, make those payments.

Deciding on a Bank

My company has been around for less than two years, and we have already used 4 different banks. This is to show that either I am really experienced, or just terrible at picking. At any rate, I’ve been able to learn some things along the way:

* Startup Banks – There are a few banks that pledge to be great for startups. These include Square 1 Bank, and Silicon Valley Bank. Both are very popular, and SVB has a cache among many investors that may be worth choosing them for. As a bootstrapped startup, you are looking for some key attributes: (1) you need to easily deposit checks, (2) you want to easy access to your account wherever you are, and (3) you don’t want to pay any fees. The great thing is that both banks offer #1 and #3. So you may find that they are great for you to begin with. However, don’t expect them to be able to support you in the one thing you need most – money. They know that most startups fail as well, and as a result, are unlikely to lend any funds or allow contacts into their network. So as you choose a bank, think about whether #1 and #3 matter more than #2. If the answer is no, try a more traditional bank

* Traditional Banks – Traditional banks (Bank of America, Chase, and PNC Bank) may not seem like a good place to begin. But you may be surprised. Many of the banks offer services for those trying to startup. PNC Bank, for example, allows you a free account for your first year. Bank of America has a free account as long as you make minimum deposits. And both accounts have really easy to use mobile apps, so that you can do the banking you need from anywhere you are. You can even talk to them about payroll, wire transfers, and even taking payments online.

* My pick: For my company, it was much easier to use the traditional banks. While I applaud some of the efforts of the startup banks, the few things they did offer for startups of my size weren’t worth the lack of features I had with more traditional banks. PNC was great for me to start with because I had a free account for a year. As we grew however (and moved), we quickly recognized new services we would need. So we switched to Bank of America, which is available in our new location, and has a very user-friendly way to cash checks through mobile (up to $25,000) and send and receive wires easily.

(Part 2: Credit Cards)

Staying Humble

It would seem like an easy thing to do. But for so many entrepreneurs, and especially CEOs, it is very, very difficult. Part of it is because of human nature for wanting power and respect, while part of it is because it’s not the characteristic portrayed in the media.

In fact, it is hard to find a famous CEO out there who people would describe as humble. But here is the difference: just as you wouldn’t look at Facebook, and naturally think the rule to building a company is to simply put it out there, you shouldn’t look at asshole CEOs and think that’s the way to lead.

What I’ve learned is that the key to every new hire, every new contract, and building a team of advisors who really are willing to do anything for you, is to keep your humility. This is exceedingly important if you are not an entrepreneur with money – and if you are reading this blog that likely describes you.

Why is it importance to do so? Professor Dan Ariely  highlights that what motivates people at work is not the money, it’s the acknowledgement.  What I’ve found in my short time running my business is that this goes to extraordinary lengths, and pays great dividends. People who see your humility are more likely to see you as human. And when you appreciate – genuinely appreciate – what they have to offer, they are much more willing to want to do more things, not just to earn your respect, but also because they feel accomplished in what they have done. Ariely does a good job of showing how money is not the best way to align incentives. It’s also about creating a common goal, and a sense of importance.

So how do you keep your head grounded while touting a company that is statistically likely to fail? For me it has come down to 3 simple things. And these things are not very hard to do, but many of us innately forget to pursue them  among the day-to-day things we already pursue. Well as a boostrapped company, anything you can do to increase value without increasing money spent is almost imperative. So make a habit of doing each of these things:

1) Genuinely thank each person for the tasks they have performed for you. Even if they are small tasks, or those that should have been expected of them. That simple acknowledgement goes a long way.

2) Ask each person on your team something each day that has nothing to do with work. This is true for co-founders, and especially true for CEOs. People are more likely to want to work with you, if you show a genuine, human interest in them.

3) Be (or seem) spontaneous. Yes, just like in a relationship. Whether they are your clients, your coworkers, or your investors, people love random acts of kindness. But there’s am additional effect as well – it cause you to think about the other important people on your team. Too often, as a co-founder or CEO, you spend most of your time at the helm of the ship looking outward to the sea. This is important, but can also be disengaging. Your team is on the ship as well, and acknowledging that in itself can be a massively humbling experience. And it has the side effect of increasing not only employee retention (which equals much needed cost efficiency for boostrapped companies), but also company morale.