THE BUSINESS OF BUILDING BUSINESSES
By: Stephen E. Smith

Business lawyers today must not only excel in the areas of law that affect entrepreneurs, but they must have the people skills, the community contacts and the business insight to assist the entrepreneur in his or her overall business objective – to help make it happen.  Clearly, having a solid understanding of what those business objectives are and how they will be strategically accomplished are essential to providing legal services which add value to the enterprise.

With appropriate legal assistance, entrepreneurs must consider three fundamental business components:  People, Product or Service, and Capital Structure.  The following Dos and Don’ts in these areas will help you determine your readiness to build a business.

PEOPLE
DO take stock of your own capabilities and experience in operating a business.  Determine your strengths, where they can be best applied, and apply them there.  The most impressive part of a business plan is the description of the management team.  If those on your management team have never managed a staff or a budget, perhaps the best business judgment displayed to a potential investor is to acknowledge that fact.  Then present a carefully selected management team in the business plan.

DO NOT let egomania be the driving force.  The goal should be to build the business.  Content your ego in the knowledge that what you eventually do for the business will be done by you better than anyone else because there is no one with a greater incentive to succeed, and it will be within the framework of your training and experience.

PRODUCT OR SERVICE
DO make sure the product or service (technology) is yours to use.  Technology is created in various ways and can be acquired from various sources.  Technology is always created by an individual working alone or by a collection of individuals working as a group, either on their own behalf or on behalf of someone else.  The first order of business is determining the relative rights and interests of the various potential claimants to the technology.

DO NOT assume that simply because you discovered, created or invented the technology, it is yours; and
DO NOT assume that because you did not discover it, create it, or invent it that it is not yours, or cannot be obtained by you. 

Once ownership of the technology is determined, protecting it becomes the next problem.  Would it be wise to secure a patent?  Would it be wiser to not secure a patent, and to try to protect it as a trade secret?  Should a federal trademark or service mark be obtained now?  Every business must weigh the risks of not performing these tasks against the rewards and costs of doing so.

DO NOT assume that because the technology is wonderful and can perform unimaginable tasks, that there is a need, or market, for it.  It is very difficult to build a business around a technology that nobody wants or needs, no matter how ingenious it may be.

CAPITAL STRUCTURE
Business lawyers maintain an understanding of investor thinking and strategy and will not permit a business to endure the legal cost of attempting to sell one type of security when another type is what the market will bear.  We know, too, that savvy investors are very aware that the share price of today is not the share price of tomorrow, and that the share price of tomorrow in a new business often is less than it is today.  We are mindful of the risks of dilution in percentage ownership to the entrepreneur as well as to the investor, and therefore of the need to create a capital structure with a look into the future and a view towards appropriate awards for all persons involved.

DO NOT attempt to raise $1 million at $0.20/share when it is possible that $400,000 will enable you to reach a milestone in the business’ development which will allow you to raise the next $600,000 at $0.75/share.

And DO NOT raise only $400,000 if that is the amount you conclude will be sufficient for you to reach that milestone.  It often takes three times longer and five times as much capital to accomplish a milestone.  If you fail, your percentage position in the business will be diluted more than anticipated.

DO keep in mind the people you wish to attract to the business and establish appropriate stock option plans or other incentives.

And DO keep in mind the exit strategy.  Investors want a cash return on their investment.  So DO be prepared with an understanding of how and when that cash return will be realized.

Finally, DO NOT seek any investors or partners until, in your mind, you can easily refer to “our business” instead of “my business.”  If “our business” is not inherent in your mindset DO NOT attempt to build a business.  Instead, license your technology to someone else for a royalty, and let them build the business.

Sjoberg & Tebelius business lawyers assist in the formation, building and acquisition of many businesses.  We are proud of our legal expertise and of our keen awareness of our community and the resources within it, each of which is necessary to shape a realistic conclusion which is also legally and technically correct.  But our pride ultimately is in the business person and risk-taker, the bedrock of any society.  And so we are grateful for the opportunity to assist them in their many and varied ventures.

Stephen E. Smith, 651-738-3433, advises businesses on formation and capital structure, management compensation, arrangement and negotiation of debt and equity financing, merger and acquisition transactions, and the acquisition or licensing of technology.