Entrepreneurship Chapters 13-16

nascent entrepreneurs

who are individuals who have set up a business they will own or co-own that is less than 3 months old and has not yet generated wages or salaries for the owners.

stakeholders

who are the people or groups affected by or involved with the achievements of the social enterprise's objectives. Stakeholders include employees, volunteers, investors, customers, suppliers, and manufacturers, leaders in nonprofit organizations, community leaders, the government, sponsors, board members, and other entrepreneurs. By identifying your stakeholders, you will be able to better understand the impact of your enterprise's activities on others; give your stakeholders a platform to provide feedback, information, advice, and direction; and allow them to raise any concerns or obstacles that may stand in the way of achieving your objectives.

venture capitalist

who is a professional investor who generally invests in early-stage and emerging companies because of perceived long-term growth potential.

16.7 Explore audacious ideas being pursued by social entrepreneurs today.

The Audacious Project: Collaborative Philanthropy for Bold Ideas is an initiative launched by media organization TED that provides social entrepreneurs with a platform to present their ideas to some of the most well-respected names in philanthropy.

equity financing

which is the sale of shares of stock in exchange for cash. It gives entrepreneurs capital, which are financial resources to run the business including producing and selling the product.

people

which refers to the people responsible for every aspect of sales and marketing

new business owners

who are former nascent entrepreneurs who have been actively involved in a business for more than 3 months but less than 3.5 years

potential entrepreneurs

who are individuals who believe they have the capacity and know-how to start a business without being burdened by the fear of failure

How to build a brand

-Choose a name -design a logo -know your customer -become your brand

Creating content that drives sales

Make your content about them, not you. Develop a fresh point of view. Pick your battles. Be authentic. Use your gut.

C Corporation

Stockholders, directors, officers Limited Taxable entity Potential double tax on dividends

convertible debt

(also known as a convertible bond or convertible note), which is a short-term loan that can be turned into equity when future financing is acquired. Convertible debt is a middle ground between debt and equity financing.

Why VCs Might Say No

-Negative founder or team dynamics -The team is missing a key skillset -The founders don't have a clear mission -The team demonstrates a lack of focus (trying to do too many things at once) -Founders display negative behavior (racism, sexism) -Dishonesty -The founding team works in different locations -The VC receives negative references about the founding team -Investment needed is too much for the VCs -Poor-quality presentation or pitch -Licensing or IP issues -Unclear value proposition

benefits of convertible debt

-One of the main advantages of issuing convertible debt is that it removes the need for valuation—in other words, you don't have to spend lots of time trying to figure out how much your company is worth to establish a stock share price. -Another benefit of convertible debt is that if your company succeeds, your investors may be entitled to a discount off the share price or bonus when converting the debt into equity, which can provide an incentive for your investors to commit. -Finally, by issuing convertible debt, you the entrepreneur will remain the majority stockholder, with no interference from your lenders. Depending on the terms, they will have no control, no voting rights, nor any say over how you run your company.

14.6 Describe the common IP traps experienced by entrepreneurs.

-Public disclosure of an invention or innovation; -Failure to protect products, processes, brands, and so on; -Inability to determine originality; -Failure to allocate ownership; and Failure to protect IP in global markets

Slogan or Tagline Approaches

-Stake your claim Death Wish Coffee: "The World's Strongest Coffee" -Make it a metaphor Red Bull: "Red Bull gives you wings." -Adopt your customer's attitude Nike: "Just do it." -Leverage labels Cards Against Humanity: "A party game for horrible people" -Describe it literally Aritzia: "Women's Fashion Boutique"

Getting the most from social media

-Start With Research -Think About Your Goals -Design Your Strategy -Post Regular Updates -Monitor Your Social Media

Disadvantages of convertible debt

-bt: Early lenders may not want to take the risk of having their money tied up until the debt is converted into equity. They may also be wary of losing money if the conversion event doesn't happen -Accumulating debt before the company takes off can be significantly risky. Similarly, if entrepreneurs fail to pay back the loan, they could be sued by the lenders.

Ten Steps to Setting up a Payroll

1. Get an Employer Identification Number (EIN) 2. Find out whether you need state or local tax IDs 3. Decide if you want an independent contractor or an employee 4. Ensure new employees return a completed W-4 form 5. Schedule pay periods to coordinate tax withholding for IRS 6. Create a compensation plan for holiday, vacation, and leave 7. Choose an in-house or external service for administering payroll 8. Decide who will manage your payroll system 9. Know which records must stay on file and for how long 10.

Table 16.1 Conklin's Defining Characteristics of Wicked Problems

1. The problem is not understood until after the formulation of a solution. 2. Wicked problems have no stopping rule. 3. Solutions to wicked problems are not right or wrong. 4. Every wicked problem is essentially novel and unique. 5. Every solution to a wicked problem is a "one shot operation." 6. Wicked problems have no given alternative solutions

Top Angel Groups Ranked by Number of Deals

1. Keiretsu Forum 2. Houston Angel Network 3. Y Combinator1 4. Central Texas Angel Network 5. New York Angels 6. St. Louis Arch Angels 7. Desert Angels 8. Golden Seeds 9. Ben Franklin Technology Partner, Launchpad Venture Group2 10. 500 Startups, Pasadena Angels

Guidelines for Finding the Right VC for Your Startup

1. Look for a reputable brand of VC; securing investment from a credible company will encourage other investors to fund your startup. 2. Identify whether they are a good fit for your industry and have the connections to help grow your business. 3. Check their track record by taking three things into account: (1) their history of providing follow-up funding; (2) how they manage exits; and (3) how they treat their founders. 4. Find a VC partner that really believes in you and your business; getting mental and emotional buy-in is essential for a successful working relationship. 5. Make sure your goals are aligned with theirs in terms of building a brand, scaling a company, and planning a timeline. 6. Establish the levels of autonomy and availability; although you may value your independence, you will also need to check whether the VC will invest time in you when you need it. 7. Make sure the VC partner is someone you get along with who personally believes in what you are trying to achieve. 8. Carefully assess the agreement for fair terms; more VCs are tweaking agreements to benefit startups, so it pays to shop around for the best terms. 9. Check the location of your VC; keep in mind that a far-flung location can mean spending lots of time and money on travel to attend important meetings.

Guidelines for When to Use an NDA

1. When talking to your competitors In some situations, you will likely find yourself in conversation with your competitors. Without an NDA in place, they could copy your business and you could copy theirs. Signing a mutual nondisclosure agreement is the best way protect both parties. 2. When disclosing patent information If you have invented something and patented the information, never disclose the patent information to outsiders until after the NDA has been signed by all parties involved. 3. When discussing trade secrets Always use an NDA to protect your trade secrets, and even then, make sure that you only disclose them on a need-to-know basis with people you trust the most.29 4. When taking on a partner or an investor When you're considering taking on a new partner or investor, make sure the information you share, such as business financials, personal information, and so on, is protected by an NDA. Bear in mind, however, that most investors will refuse to sign NDAs for startups in the very early stages. 5. When discussing the sale or licensing of a product or technology When in discussions about licensing or selling your product, you need to make sure that the potential buyer does not disclose the details of your product or, indeed, any information about your company to a competitor. A signed NDA will protect all sensitive company information. 6. When employees have access to confidential and proprietary information Without a strong NDA in place, there is nothing to stop your employees from accessing valuable information (client lists, supplier agreements) and using these data to set up a competing business after they have left your company. Make sure that every employee signs an NDA at the time of hire. 7. When sharing business information with a prospective buyer If you are considering selling your business, then you will need to disclose every single detail of your financial and operations information to that acquiring company. An NDA will ensure all your information stays protected

C Corporation

A C corporation (sometimes known as a "C-corp") is a separate legal entity created by the state government and owned by an unlimited number of shareholders. This means that the corporation, not the shareholders, is legally liable for its actions. The most money that shareholders can lose is their personal investment—the value of their stock.

brand strategy

A brand strategy is a long-term plan to develop a successful brand. It involves how you plan to communicate your brand messages to your target customers. This brand message can be channeled through your advertising, distribution, and packaging.

U.S. Small Business Administration

A comprehensive site for entrepreneurs that offers free guides for legal compliance in starting and running a business. https://www.sba.gov/

Limited Liability Company

A limited liability company (LLC) is a business structure that combines the pass-through taxation aspects of a partnership with the limited liability benefits of a corporation without being subject to the eligibility requirements of an S corporation.

patent

A patent is a grant of property rights on inventions through the U.S. government. It excludes others from making, using, selling, or importing the invention without the patent owner's consent. In order to be granted a patent, the product or process must present a new or novel way of doing something, be nonobvious, or provide some sort of solution to a problem.

quora

A question-and-answer website on thousands of topics but also a good place to ask legal questions. There is an area devoted to startup law. https://www.quora.com/topic/Startup-Law-1

Trade secret

A trade secret is any confidential information that provides companies with a competitive edge and is not publicly known or accessible, such as formulas, patterns, customer lists, compilations, programs, devices, methods, techniques, or processes. Trade secrets last for as long as they remain secret; they are protected from theft under federal and state law. Companies can protect their trade secrets by having their employees and contractors sign nondisclosure, work-for-hire, and noncompete agreements or clauses. Famous examples of trade secrets allegedly include the recipe for Coca-Cola's beverages, KFC's ingredients, and the formula for WD-40.23

the difference between Angels and VCS

ANGELS -Individuals worth more than $1 million -Invest from $25k to $100k in personal funds -Fund seed or early-stage companies -Carry out informal due diligence -Responsible for own decisions -Exit with returns on personal investment VCS -Funds consisting of limited partnerships -Invest from $500,000 upwards in VC funding -Fund from early- to late-stage companies -Conduct formal due diligence -Decisions made with committee -Exit with returns to fund's partners

S Corporation

An S corporation (sometimes known as an "S-corp") is a corporation whose stockholders elect special treatment for income tax purposes. For all other purposes, it is identical to a C corporation. In order to qualify as an S-corp, the corporation must be a U.S. domestic corporation. In addition, it must have no more than 100 shareholders, who in most cases must be individual U.S. citizens or legal immigrants (not corporations, partnerships, or trusts), and all of whom must own only one class of common stock (ordinary shares).

initial public offering (IPO)

An initial public offering (IPO) is a company's first opportunity to sell stocks on the stock market to be purchased by members of the general public. Smaller companies are often bought by larger companies through acquisitions, which are ways for bigger companies to increase their profitability and, in some cases, swallow the competition.

Describe angel investors and how they finance entrepreneurs.

Angel investors are typically high-net-worth individuals who are accredited investors investing their own money in startup ventures. Other types of angels include corporate angels, professional angels, enthusiast angels, and micromanagement angels, each characterized by distinct goals and value-added capabilities

accredited investors

Angels are eligible to invest as long as they are accredited investors, which means they earn an annual income of more than $200,000 or have a net worth of more than $1 million. Research shows that startups that have received angel backing are more likely to survive.

Trademark

Any word, name, symbol, or device used in business to identify and promote a product is a trademark; its counterpart for service industries is the service mark. Although the law affords some limited protection to trademarks without registration, a federally registered trademark generally lasts 10 years and, if still in use, can be renewed every 10 years thereafter. Trademarks and service marks are the legal basis of most branding campaigns.

Failure to Protect Product and Processes

As Robert Kearns learned, it is easy for innovations to be copied by others. This is why it is important for entrepreneurs to ensure their products and processes are fully protected. Some inventors and other scientists protect their products by building unique markers into them; for example, a unique chemical "thumbprint" can reveal through a simple test whether someone else has copied their product. Another option some entrepreneurs use is to license their innovation to a larger organization that has all the tools already in place to protect and commercialize the invention. The inventor then profits through a stream of royalties.

Definitive Stakeholders

Definitive stakeholders are the only ones who possess all three attributes of power, legitimacy, and urgency. These stakeholders have a significant role to play in your organization and must be given priority when it comes to handling their claims. In the case of CEO, the most definitive stakeholders are the foundations that fund CEO—the Kauffman and Coleman foundations.

Tips for Building Your Personal Brand

Be authentic: Be honest about your attributes and qualities. Think about your strengths, passions, values, and beliefs and use them to promote a strong brand foundation. • Be visible: Focus on increasing your visibility internally and externally. In addition to publishing content on your own online platform, increase your exposure to more people by guest speaking on podcasts, guest blogging, and applying to speak at conferences. • Build a brand vision: Think about what you want to be an expert on; what you want to be known for. • Write down your brand mission: Note why you want to build a personal brand, the people you want to influence, and what you want to accomplish. • Consider your brand personality: Think about the personal characteristics you can draw on to build your brand. For instance, do you want to be seen as quirky and humorous or more formal and businesslike? • Learn to influence: Draw on whatever personal power or network you have and use your influence in a positive way to promote your personal brand. • Be unique: Don't be tempted to copy someone else's personal brand, even if it is someone you admire. Remember, it is your uniqueness that will differentiate you from your competitors

Employer Identification Number

Before you hire your first employee, make sure you get an employer identification number (EIN). You will need to use this on documents and tax returns for the IRS. It is also necessary when reporting employee information to state agencies. There is also a regulatory requirement to register your newly hired employee with your state directory within 20 days of the hire date. You can apply for the EIN online.

15.3 Describe branding and the importance of building a brand.

Branding is the process of creating a name, term, design, symbol, or any other feature that identifies a product or service and differentiates it from others. Branding is important because people are more likely to invest in brands that they have an emotional connection to, are trustworthy, are worth spending money on, are fashionable, and are adept at meeting their needs.

branding

Branding is the process of creating a name, term, design, symbol, or any other feature that identifies a product or service and differentiates it from others. Your brand is a promise to your customers, letting them know what they can expect from your offering and how it differentiates you from among your competitors. The face of your brand is your logo, which should also be integrated into your website, packaging, and promotional materials to communicate your brand message. People are more likely to invest in brands that are trustworthy, are worth spending money on, are fashionable, are adept at meeting their needs, and that they have an emotional connection to.

Demanding Stakeholders

Demanding stakeholders possess the urgency attribute. They have no power or legitimacy and may be the only dissenting voice in the room. For example, persons protesting outside the CEO national conference because they believe entrepreneurs create income inequality in the economy, but they do not have the power to enforce their claims. These stakeholders don't really impact CEO, and not a lot of time and energy should be devoted to them.

Copyright

Copyright is a form of protection provided to the creators of original works in the areas of literature, music, drama, choreography, art, motion pictures, sound recordings, and architecture. It is important for tech entrepreneurs to be aware that computer code is classified as a literary work for purposes of copyright protection.20 Another crucial thing to remember is that copyright does not protect ideas; it protects the tangible expression of the idea, such as written materials or recordings. Generally, U.S. copyright lasts for the duration of the author's life plus 70 years.

corporate angels

Corporate angels are individuals who are usually former business executives, often from big multinationals, looking to use their savings or current income to invest. Although they primarily seek profit, many corporate angels want to play a larger part in the company, often seeking a paid position in the venture. Because of their experience managing bigger corporations, corporate angels can often become frustrated with working in a small company with limited resources. As a result, corporate angels may be very controlling; in some cases, this can result in a clash of cultures, even leading ultimately to a breakdown of the investor-entrepreneurial relationship.

16.6 Distinguish between corporate social responsibility and social entrepreneurship.

Corporate social responsibility and social entrepreneurship differ in one critical sense: the primary objective of the enterprise. Corporations seek to incorporate social initiatives into broader strategic and tactical objectives, while social entrepreneurs put those social issues front and center. To many corporations, social responsibility causes may just be another means to a successful business end.

15.5 Practice marketing yourself.

Creating a strong first impression is essential to building a sustainable personal brand. Successful entrepreneurs build a personal brand based on trust and authority, attract more customers, gain more media exposure and attention, and create a lasting platform that secures a loyal following of people that they want to impact most.

Dangerous Stakeholders

Dangerous stakeholders possess both power and urgency but may use this power to coerce or even resort to violence. Social issues can be emotive, and power and urgency exercised against your objectives can be a significant hindrance. For example, a competing organization may emerge that could use false advertising or slander to get members from CEO to move their membership to the new organization.

Dependent Stakeholders

Dependent stakeholders have both urgency and legitimacy but lack the power to influence. These stakeholders are the most passionate, and their passion is likely to attract dominant stakeholders. For example, the student members of CEO are the most enthusiastic and passionate stakeholders connected to the organization, but they may not have the power necessary to effect change with the leaders of the national organization.

Discretionary Stakeholders

Discretionary stakeholders have no power to influence and no urgent claims, but they have legitimacy. They may come in the form of philanthropists who donate to your organization and are willing to support social causes. For example, CEO provides visitors with the opportunity to donate money on its website to support the organization.

Dominant Stakeholders

Dominant stakeholders have both power and legitimacy, which gives them strong influence in your organization. Dominant stakeholders of CEO include college presidents or deans of business schools where CEO chapters are located. Communicating with them regularly and responding to queries efficiently and accurately will help you maintain a good relationship with these stakeholders and keep the chapter on campus!

Dormant Stakeholders

Dormant stakeholders are "sleepers"—they hold power but do not tend to use that power unless they are given a reason to do so. However, dormant stakeholders may become significant when they begin to utilize their power; for example, a disgruntled member may complain about CEO on social media. The key to ensuring these stakeholders are satisfied is to be transparent and keep them informed at all times. Just because they are "sleeping" doesn't mean they will never wake up.

earned-income activities

Earned-income activities involve the sale of products or services that are used as a source of revenue generation. For example, American retailor nonprofit ABLE sells women's clothing and accessories manufactured by women living in impoverished conditions in deprived countries.9 By empowering women with new skills, ABLE provides a new opportunity to break the cycle of poverty in their communities.

Equal Employment Opportunity

Employers in the United States need to be aware that federal laws prohibit discriminating against employees on the basis of race, sex, creed, religion, color, national origin, or age. Workers with disabilities are also protected, though employers can refuse to hire on the basis of a disability if it prevents the worker from fulfilling job tasks. Some states forbid discrimination on the basis of sexual orientation.

Enterprising Nonprofits

Enterprising nonprofits are a form of social entrepreneurship in which both the venture mission and the market impact are for social purposes. This means that any profits made must be channeled back into the organization. Unlike social purpose ventures, profit may not be distributed to the owners of the enterprising nonprofit. There are more than 1.5 million nonprofit organizations in operation in the United States today, including charities, foundations, and others (see Table 16.2).

enthusiast angels

Enthusiast angels are independently wealthy retired or semiretired entrepreneurs or executives who often invest their personal capital in startups as a hobby. They tend to invest in several different companies and rarely take a role in active management.

entrepreneurial investors

Entrepreneurial angels are entrepreneurs who have already successfully started and operated their own businesses, which they may or may not still be running. Either way, they generally have a steady flow of income that allows them to take higher investment risks. Entrepreneurial angels are the most valuable to early ventures—not only are they knowledgeable about the industries in which they invest, but because of their personal experience, they are in a great position to advise and mentor entrepreneurs.

15.1 Discuss entrepreneurial marketing and explain how it is different from traditional marketing.

Entrepreneurial marketing is a set of processes adopted by entrepreneurs based on new and unconventional marketing practices to gain traction and attention in competitive markets. In the past, marketing was largely based on interruption and coercion. Today's marketing is really about building relationships, engaging with people, and creating a community. The new marketing rules focus on participation and content to build a successful business

Environmental Defense Fund

Environmental Defense Fund (EDF) is a nonprofit environmental advocacy group that aims to reduce methane, a powerful greenhouse gas responsible for global warming. Although it is commonly known that the oil and gas industry is a major contributor to the tons of methane in our atmosphere, there hasn't been a way to measure the level of methane on a global scale or its original source.

Define equity financing for entrepreneurs and outline its main stages.

Equity financing is the sale of ownership stake within the company in exchange for funding. Seed-stage financing, startup financing, and early-stage financing describe funds in support of different early-business objectives. As the organization grows, it may then seek out second- or later-stage financing through subsequent rounds of financing. Businesses may also choose to undergo an IPO, opening the firm to general market funding and offering an exit to early investors.

Key Questions for Investors

Factor Key Questions Market conditions Is the market ready for your product/service? Is the market size big enough? Is the market reachable? Competition Who are the competitors in your industry? How does your product compare with similar items in the market? Is there a unique and compelling competitive advantage? Market opportunity What is the opportunity for your product? How many customers? What is the proof that there is a market? Founders Are they experienced in the industry? Have they done startups before? Can the investor work with them? Are they coachable? Social proof Is there evidence that others believe in the founders' vision as much as they do? Does the company have a board of advisors? What are their customers saying about the business? Value add How much value can investors bring to your business through their expert advice and guidance? Potential for return If an investor puts in $1 today, what will they get in 5 years? 10 years? Does the potential return match the potential risk?

place

Finally, place is where the product is actually distributed to your target market: trade fairs, retail stores, catalogs, mail order, online, and so forth. You can always revisit where you sell your product. For example, if you're selling retail products, you might start off selling online and then also decide to rent a retail space in order to make your company more visible to your target market. Ask yourself where else you could sell your products and what changes you need to make in order to reach your target market. Wherever you choose to sell, it is essential that your customers receive the best buying information on your product or service to help them make a buying decision.

What Makes a Country Entrepreneurial?

Financial resources: Entrepreneurs need access to appropriate financing such as grants and subsidies, loans, private equity, angel investors, VC funds, and so on. Support from government: Entrepreneurs need support from government policies that incentivize entrepreneurship by tax incentives, lower interest rates, loans, and the like. Some countries also offer government entrepreneurship programs that provide entrepreneurs with access to tools, mentors, and educational resources. Entrepreneurship education: Certain countries provide entrepreneurship courses and training at primary and secondary levels and at higher education such as colleges, business schools, and other institutions. Research and development (R&D) transfer: The extent to which scientists and research will pass on their knowledge to entrepreneurs involved in innovation. Many SMEs do not have their own R&D department so it is important that they have the opportunity to access knowledge from other resources.[Page 452] Commercial and legal infrastructure: Entrepreneurs should be supported by a secure commercial and legal framework assisted by experts and advisors in property rights, accounting, law, investment banking, and technology. Entry regulation: Entrepreneurs should be able to meet the regulatory costs of starting a new business as well as undergoing administrative procedures. The extent of these costs and procedures is dependent on two factors: market dynamics—the annual rate of change in markets; and market openness—the degree to which new businesses have the freedom to enter new markets. Physical infrastructure: Entrepreneurs should be able to easily access or purchase at a reasonable price vital resources in the areas of communication, land, office space, and transportation. Cultural and social norms: Entrepreneurs tend to thrive more in an environment where they feel encouraged enough to start a business or have the confidence to choose entrepreneurship as a career path.

Docracy

Free, open-sourced site for contracts and other legal documents. Documents are free to download and edit. https://www.docracy.com/

GirlTrek

GirlTrek is a health movement with a goal to improve the health and well-being of African American women through daily walking. Because of underemployment, lack of community safety, and chronic poverty, African American women are more likely to die of preventable diseases and at younger ages than any other groups of women in the United States.

Startup Company Lawyer

Good sources for answers to frequently asked legal questions such as "When do I need to incorporate a company?" and "What state should I incorporate in?" and "What type of entity should I form?" http://www.startupcompanylawyer.com/

Rocket Lawyer∗

Helps you draft legal documents to start a business, manage employees, or rent property. https://www.rocketlawyer.com/

Not-for-Profit Entities

Not-for-profits are not technically a different form of business entity. Not-for-profit is a tax status available to corporations, LLCs, trusts, and other structures that meet specific criteria set out in the Internal Revenue Code. Exempt from income tax on their profits

NOLO

Offers low-cost DIY kits for setting up business entities. https://www.nolo.com/

One Acre Fund

One Acre Fund is a nonprofit social enterprise working to provide African farmers with the opportunity to grow more food by offering access to agricultural training, tools, and asset-based financing. By learning the techniques to increase their produce, the farmers will be able to earn a higher income to support their families.

Table 16.4 Features of Venture Philanthropy

High Engagement Venture philanthropists have a close, hands-on relationship with the social entrepreneurs and ventures they support, driving innovative and scalable models of social change. Some may take board places on these organizations, and all are far more intimately involved at strategic and operational levels than are traditional nonprofit funders. Multiyear Support Venture philanthropists provide substantial and sustained financial support to a limited number of organizations. Support typically lasts at least 3-5 years, with an objective of helping the organization to become financially self-sustaining by the end of the funding period. Tailored Financing As in venture capital, venture philanthropists take an investment approach to determine the most appropriate financing for each organization. Depending on their own missions and the ventures they choose to support, venture philanthropists can operate across the spectrum of investment returns. Organizational Capacity Building Venture philanthropists focus on building the operational capacity and long-term viability of the organizations in their portfolios, rather than funding individual projects or programs. They recognize the importance of funding core operating costs to help these organizations achieve greater social impact and operational efficiency. Nonfinancial Support In addition to financial support, venture philanthropists provide value-added services such as strategic planning, marketing and communications, executive coaching, human resource advice, and access to other networks and potential funders. Performance Measurement Venture philanthropy investment is performance based, placing emphasis on good business planning, measurable outcomes, achievement of milestones, and high levels of financial accountability and management competence

14.4 Define IP and how it affects entrepreneurs.

IP is intangible personal property created by human intelligence, as a result of creativity such as inventions, trade secrets, slogans, logos, and processes. The four main types of IP are copyright, trademark/service mark, trade secret, and patent. It behooves entrepreneurs to understand IP because startups are, by definition, innovative and likely to involve the creation of IP. One way for a startup to protect its IP is through a nondisclosure agreement (NDA) or confidentiality agreement, which is a legal contract that outlines confidential information shared by two or more parties.

The Founders' Agreement

In addition to formal agreements, entrepreneurs may also sign a shorter, less technical contract call a founders' agreement, which is a clear agreement between founders on a number of key issues that their business might face.11 The founders' agreement usually comes before the formal written agreements and helps founders answer the tough questions before entering into legal contracts. Although the founders' agreement may not be legally binding, it provides a useful overview of how your cofounder relationships will work, how the business will be structured, and how you and your cofounders intend to tackle problems in the future.

venture philanthropy funding

In contrast to the earned-income model, venture philanthropy funding combines financial assistance such as grants with a high level of engagement by the funder. Venture philanthropists share their experience with nonprofit entrepreneurs to help grow and scale the company to drive social change. This might take the form of marketing and communications, executive coaching, human resources, or providing access to other contacts and potential funders. Typically, financial support is provided for 3 to 5 years, with the goal of enabling the nonprofit to become financially independent by the end of this period (see Table 16.4).

wicked problems

In the 1960s, scholars coined the term wicked problems—large, complex social problems where there is no clear solution; where there is limited, confusing, or contradictory information available; and where a whole range of people with conflicting values engage in debate. More recently, Jeffrey Conklin, director of the Cognexus Institute, provided broader and more practical applications of the term

Illustrate the basics of business valuation.

Investors use a variety of factors to come to valuation proposals, including market conditions, opportunities, competition, comparables, and how much value a given venture can add to the mix.

Compensating Employees

It is often the case that a startup's need for additional employees outstrips the company's ability to pay in cash. When faced with this resource constraint, entrepreneurs often come up with alternative ways to compensate employees, such as giving them flexible hours, additional days off, and small perks such as gift cards or a lunch paid for by the company.

14.7 Explain the legal requirements of hiring employees.

Legal requirements related to hiring employees include registering employees with the state labor department, keeping records of employee tax history, preparing the appropriate legal documentation, and complying with safety regulations.

VCs

Like angel investors, VCs are often former or current entrepreneurs, but unlike angels, they are mostly professional money managers. Like angel investors, VCs look for opportunities that are likely to return 10 times their investment in 5 years.25

Employee Forms

Make sure you set up personnel files containing important documents for each employee that you hire. Each employee must fill out a W-4 form that lets you, as the employer, know how much money to withhold from their paychecks for federal tax purposes. You can ask employees to fill out this form every year if they wish to change the withholding amount. This form does not have to be filed with the IRS. The Form 1-9 is another form you need to complete within 3 days of hiring your new employee; this requires employers to verify the new employee's eligibility to work in the United States. In addition, you must file IRS Form 940 every year to report federal unemployment tax, which provides payment of unemployment compensation to employees who have lost their jobs.

micromanagement angels

Micromanagement angels are entrepreneurs who have achieved success through their own companies and want to be involved in the ventures they invest in. Many micromanagement angels demand directorship or a position on the board of advisors and expect [Page 313]regular updates on the running of the company. They will intervene in the running of the business if it does not perform to their expectations.

14.5 Assess the global impact of IP theft.

Millions of people all over the world violate IP laws every day by ignoring copyright. IP theft costs the United States between $250 and $600 billion every year.

Guerrilla Marketing

One form of entrepreneurial marketing is guerrilla marketing, which is a low-budget strategy that focuses on personally interacting with a target group by promoting products and services through surprise or other unconventional means. A successful guerrilla marketing campaign enhances the customer's perception of value, inspires word of mouth, and increases sales.

total entrepreneurial activity

One of the main focuses of the GEM study is the level of Total Entrepreneurial Activity (TEA) in different countries, which is the percentage of the population of each country between the ages of 18 and 64 who are either nascent entrepreneurs or owner—managers of a new business. For example, the early-stage TEA in the United States is just over 15% (Table 16.7). This means that just over 15% of the U.S. adult population from 18 to 64 years old is involved in some type of entrepreneurial activity, such as being in the process of starting a new business or owning and managing a business less than 3 years old.

Sole Proprietorship

One owner Unlimited Pass-through

Nondisclosure Agreement

One way for a startup to protect its IP is through a nondisclosure agreement (NDA) or confidentiality agreement, which is a legal contract that outlines confidential information shared by two or more parties.27 This means that neither party has the right to share this information with competitors, the general public, or anyone else outside those involved in the agreement.

exits/harvesting for VCs

Part of the due diligence process involves the discussion of exit options. When VCs and business angels invest in a business, there is an expectation that they will receive a return on their investment when the firm exits the investment, within a certain time period, usually in around 5-10 years. Typically, this money is repaid through one of three types of exit strategies: an IPO, mergers and acquisitions, or buyback.

professional angels

Professional angels are doctors, lawyers, dentists, accountants, consultants, and the like, who use their savings and income to invest in entrepreneurial ventures. For the most part, they are silent investors, but some of them (the consultants, for example) may wish to be taken on by the company as paid advisors.

LegalZoom

Provides legal services to help start and run a business as well as file trademark applications. https://www.legalzoom.com/

Unemployment and Workers' Compensation

Register with your state's labor department to pay state unemployment compensation taxes, which provide temporary relief to employees who lose their jobs. Depending on the size of your business, most states will require you to register for workers' compensation insurance to protect against any work-related injuries. (Some states make exceptions for very small businesses.)

Sightsavers

Sightsavers is a UK-based nongovernmental international charity working to prevent avoidable blindness with a goal to combat the bacterial infection trachoma, which causes [Page 448]irreversible blindness. The charity aims to eliminate the disease by promoting the SAFE strategy (surgery, antibiotics, face-washing, and environmental improvements) endorsed by the World Health Organization (WHO), largely targeting people living in impoverished countries.

Social Consequence Entrepreneurship

Social consequence entrepreneurship describes a for-profit venture whose primary market impact is social. A good example of a for-profit venture with a social impact is Sword & Plough, a startup founded by sisters Emily and Betsy Núñez. Sword & Plough hires army veterans to recycle surplus military materials such as parachutes, sleeping bags, and tents into fashionable bags and accessories. The company was launched in 2013, benefiting from $312,000 in funding, thanks to a powerful Kickstarter campaign. It donates 10% of its profits to veterans' organizations.

16.4 Explain how social entrepreneurs can use capital markets to fund their ventures.

Social entrepreneurs can seek funding from social venture capitalists (SVC) and community-funded VC to support operations. Microlending is another source of capital available for social entrepreneurs.

16.2 Explain how social entrepreneurship can help resolve wicked problems around the world that are connected to the United Nations Sustainable Development Goals.

Social entrepreneurship can help resolve wicked problems such as those related to water shortages, education, health care, poverty, energy, forced migration, and global warming by creating innovative solutions that make a real impact on the lives and livelihoods of others.

16.1 Describe the role social entrepreneurship plays in society.

Social entrepreneurship is the process of sourcing innovative solutions to social and environmental problems. Many companies strive simply to maximize shareholder value, but social entrepreneurs are often more committed to causes centered on preserving and protecting future generations.

16.5 Identify the primary attributes of stakeholders and how stakeholders can help or hinder a social entrepreneur.

Stakeholders are all those involved in and affected by the activities of a social venture. Building relationships with key stakeholders is typically important for any entrepreneur, social or otherwise, but often social issues need additional support to gain traction with the majority of stakeholders.

[Page 377]14.3 Outline the most common legal errors made by startups.

Startups may make some common mistakes that could be expensive. The most common mistakes they make are in choosing the legal structure of the venture, not having a written agreement defining the many parameters of their relationship, and not paying close enough attention to drafting the right vesting schedules. To protect their business ideas, entrepreneurs can also sign a founders' agreement, which is a clear agreement between founders on a number of key issues that their business might face.

the bail project

The Bail Project is an organization set up to address the injustice of automatic imprisonment for those who can't afford bail, which typically affects low-income communities, women, and minorities. With the support of The Audacious Project, The Bail Project aims to post bail on behalf of 160,000 people over the next 5 years by working with public defenders and the impacted community members. The bail returned at the end of each case will be used to fund other affected people. If it proves successful, this idea could help to end mass incarceration and combat racial disparity.

What Goes in a Founders' Agreement?

The Basics • Name of cofounders • Name of the business • How long the agreement is valid for The Business • What business are you in? • What products do you offer? • What are your goals? • What are the company's values? Roles and Responsibilities • What is each founder responsible for? • What is the unique contribution of each? • What is each called (his or her title)? • How do decisions get made? Ownership Breakdown • How are you splitting the equity? • Is there a vesting schedule? Salary and Compensation • What's the baseline for all involved? • How can founders use company money? • Who approves investments or debts? Termination • What happens when a cofounder underperforms? • What happens when one wants to leave the business?

Social Purpose Ventures

The aim of social purpose ventures is to resolve a social problem and make a profit. Koe Koe Tech is a good example of a social purpose venture: It was founded by Michael Lwin, a Myanmar American lawyer, in response to the shockingly high infant mortality rate in Myanmar. Lwin created the Koe Koe Tech app to help mothers track their pregnancies and learn how to take care of their children for the first 2 years of life. Within 3 months of launching, 40,000 people in Myanmar had signed up to the app.

splitting the ownership pie

The idea behind equity is similar to splitting a pie. When you are the only owner of the company, you own 100% of a small pie. When someone invests in your company to enhance growth, then your pie becomes bigger. As you need to give away equity in exchange for the investment, the company is no longer fully yours. However, if the company does well, then your smaller slice of the bigger pie will be much larger than the original smaller pie.

14.2 Explain the most common types of legal structures available to startups.

The most common types of legal structures are sole proprietorship, general partnership, C corporation, S corporation, limited liability company (LLC), limited partnership, limited liability partnership (LLP), and benefit corporation. In addition, most of these business structures can be run as a not-for-profit provided the company complies with IRS section 501(c).

price

The price covers the amount that the customer is expected to pay for the product, its perceived value, and the degree to which the price can be raised or lowered depending on market demand and how competitors price rival products. Again, get into the habit of continually examining the pricing structure of your products and services to ensure it is appropriate for your target market. Depending on changes in the market, you may need to raise or lower your price. Make a point of frequently examining competitors' pricing in order to price your products accordingly.

product

The product is anything tangible or intangible (such as a service) offered by the company. This includes the features, the brand, how it meets customer needs, how and where it will be used, and how it stands out from competitors. A good way of assessing your product is to look at it objectively—as if you were someone seeing it for the first time. Then ask yourself some critical questions, such as, "Is this product or service suitable for my target market?" and "Is this something today's customers will want or need?" and "How can I market this product better than my competitors?" By repeatedly asking these questions, you will have a better understanding of your product or service and how it fits into the marketplace.

15.2 Explain the principles of marketing and how they apply to new ventures.

The right product, in the right place, at the right price, at the right time. For entrepreneurs, this extends to identifying needs, serving those needs, communicating the value proposition, supplying the product or service, and supporting the customer relationship from then on.

promotion

The third element of the marketing mix is promotion: all the ways in which companies tell their customers about their offering. This may involve advertising online, through social networking, direct mail, in the press, or even on TV if you have the budget. It also includes public relations such as being featured in blogs, newspapers, magazines—all free aspects of promotion. Both large and small companies need to continually experiment with finding ways to promote their products and services in order to find out what works and what doesn't. A promotional tactic that works one day may not work the next, so continuous development of new strategies is essential to retaining and increasing your target customer base.

16.8 Illustrate the global diversity of entrepreneurship.

There are hundreds of millions of entrepreneurs worldwide. Known as one of the most entrepreneurial nations on the planet, the United States is eclipsed by many world regions in terms of the percentage of the population engaged in entrepreneurship. Though entrepreneurs may be born out of necessity or to exploit opportunities, they all benefit from education, financial resources, accessible knowledge, and government support providing infrastructure that will enable the fledgling businesses to achieve success.

How Venture Capital Works

There are many types of venture capital firms investing in businesses at different stages and across many sectors. Though there are about 1,000 active venture capital firms in the United States, they all operate very similarly.34 So, let's take a look at how venture capital generally works. Today's VCs do not readily invest in seed-stage ventures as they once did, given the higher risk level. Yet there are many types of VCs out there, and the lines between informal and professional investors are blurring. It remains true, however, that professional VCs have the ability to catapult your venture from seed to high growth, so it's important to know how they operate.

16.3 Identify the different types of social entrepreneurship.

There are three primary types of social entrepreneurship: social purpose ventures, social consequence entrepreneurship, and enterprising nonprofits.

15.4 Discuss the different types of marketing tools available to entrepreneurs.

There is a wide range of entrepreneurial marketing tools available to budget-conscious entrepreneurs. Some of these tools include: building a brand, guerrilla marketing, social media marketing, designing a website, and building a fan base.

angel investor

They are investors who use their own money to provide funds to young startup private businesses run by entrepreneurs who are neither friends nor family

Describe how investors carry out due diligence processes.

To ascertain the prospects of any potential investment, angel investors and venture capitalists alike conduct due diligence processes of the firm under consideration. Essential to this process is identifying a method and timing for the investors to recoup their capital at exit, such as completing an IPO.

Withholding Taxes

To comply with IRS regulations, you will need to withhold part of your employees' income and keep records of employment taxes for at least the most recent 4 years. You will need to report these wages and taxes every year. There may also be a requirement to withhold state income taxes, depending on the state in which your employees are located.

General Partnership

Two or more partners Unlimited Joint and Several Pass-through

VCs

Typically, these venture capital money managers form a venture capital limited partnership fund that earns money through ownership of equity in different companies. The fund usually goes through a 10-year cycle before it dissolves and the assets are distributed to each of the partners. In terms of investment in early-stage to late-stage ventures, VCs investment generally starts at $1M, but in 2018, there were a number of "megadeals" in excess of $100M.26 Unlike angel investors, VCs are not really interested in smaller, seed-stage investments because it takes as much effort to monitor a small investment as it does a large one.27

14.1 Discuss how legal considerations can add value to entrepreneurial ventures.

Understanding the legal considerations applicable to the business is as important as understanding user needs. Taking legal considerations into account may add value to the firm. Whether it is a lawyer, free website content, or some form of legal expert, obtaining competent legal advice will certainly help improve the performance of the venture.

VC Finance

VCs assess how a startup is going to make money by investigating key financial drivers: • How will the company sell its product or services? • How will the customer perceive value? • Are there comparable companies to benchmark? • Who are the key market influencers that the company needs to target? • What are the financial requirements, e.g., capital investment, cash? • Is the business model scalable? • What is the potential for recurring revenue? • What are the anticipated margins? • What is the exit strategy? Is it feasible?

VC market

VCs may conduct rigorous market analysis to establish the existence and size of the market for the product: • Who are the users of the product and how many of them are there? • What are the drivers that are fueling the growth? • How is the company positioned against competitive threats? • Describe the competition. • Is the customer, the supplier, and/or the competition fragmented? • Are there attractive substitutes? • What regulations govern this market space? • What are the barriers to entry? • What is the distribution channel and who controls it? • What are the market boundaries?

VC Product/Service

VCs will analyze the product or service by asking a number of key questions: • What customer problem is being solved? • What unique technology and/or knowledge does the company have? • How does this technology and/or knowledge create value for the customer? • Why is this product or service superior to the competition? • Are there any strategic relationships? • Does this product exhibit scalability? • What are the barriers to enter? IP protection?

Explain the role of venture capitalists and how they finance entrepreneurs.

Venture capitalists differ from angels in the sense that they are professional money managers. Entrepreneurs should also exhibit at least as much caution as venture capitalists when seeking VC funding; the owners are likely to concede a significant ownership stake in the venture, and need to be certain of both why venture capital is absolutely necessary and which firm would provide the best guidance.

Vesting

Vesting is the concept of imposing equity forfeitures on cofounders over a certain period of time on a piecemeal basis should they not stay with the company. Without a formal vesting schedule in place, it is possible for a cofounder to walk away from the company at any time with a chunk of the equity, leaving the remaining cofounders working to increase the wealth of a noncontributing owner.

United States Patent and Trademark Office

You can learn about patent and trademark basics, search existing patents, and register trademarks. https://www.uspto.gov/

Publicly Disclosing Your Innovation

You might be bursting to tell the world about your discoveries, but don't. Disclosing your new product or service in public before you have filed a patent application means that in most countries you will not be permitted to patent it at all. (We've mentioned [Page 371]the 1-year grace period in the United States.) For example, a professor at Imperial College London, Robert Perneczky, discovered a protein that had the potential to significantly improve the chances of spotting the onset of Alzheimer's disease. However, Perneczky failed to qualify for a patent because of a detailed article he had written about his discovery that had been published in an academic journal. Because Perneczky's idea had been disclosed to the public, he was prevented from patenting it.

marketing mix

a framework that helps define the brand and differentiate it from the competition. This framework helps companies crystalize their offering and how they intend to take it to market.

credit rating

a poor credit rating will get you turned down immediately, but even a good credit rating is no guarantee you will get a loan.

capacity

a track record in business to prove the entrepreneur has the capacity to generate income to make loan payments.

necessity based entrepreneurs

are individuals who are pushed into starting a business because of circumstance. Layoffs, threat of job loss, and inability to find a job are some factors that drive people to start a new business

opportunity based enrepreneurs

are individuals who make a decision to start their own businesses based on their ability to create or exploit an opportunity, and whose main driver for getting involved in the venture is being independent or increasing their income, rather than merely maintaining their income.

true fans

are people who will buy anything you produce; they will wait in line for your products, drive for hours to attend one of your events, and preorder your next product without even knowing what it looks like. For instance, more than 400,000 Tesla fans have signed up for the much-anticipated Model 3 electric car, most of whom ordered it sight unseen

capital

assets that can be used to create product that can then be sold and converted to cash to pay back the loan.

early-stage financing

consists of larger amounts of funds provided for companies that have a team in place and a product or service tested or piloted, but as yet show little or no revenue.

Hybrid Models of Social Entrepreneurship

describes an organization with a purpose that equally emphasizes economic and social goals. To further explain the hybrid model, let's take a look at two organizations with the same goal: to solve the problem of poor eyesight in developing countries. The first organization is the Centre for Vision in the Developing World, a traditional nonprofit that channels donations toward self-refraction glasses that enable the wearer to make simple adjustments at a low cost to increase vision quality. The product eliminates the need for an optometrist or prescriptions.

Corporate social responsibility (CSR):

describes the efforts taken by corporations to address the company's effects on environmental and social well-being in order to promote positive change.

marketing

for entrepreneurs still involves showing how a product meets customer needs, pricing the products in a way that accurately represents the value perceived by the customer, promoting products in innovative ways to reach customers, implementing delivery of the products, and maintaining the relationship with the customer even after the sale is made

General Partnership

involves two or more people who have made a decision to comanage and share in the profits and losses of a business. Like a sole proprietorship, setting up a general partnership is relatively low cost and straightforward. As each partner reports profits and losses on individual tax returns rather than corporate returns, a process called pass-through taxation, taxes are also paid at your personal income tax rates (after the previously mentioned 20% deduction).

Sole Proprietorship

is a business owned by one person who has not formed a separate entity to run it. This is the simplest and most inexpensive form of legal structure for startups, but it is rarely the correct choice. It means the business is completely managed and controlled by you, the owner, and that you are entitled to all the profits your business makes.

due diligence

is a rigorous process carried out to evaluate an investment opportunity prior to a deal being finalized. When considering an investment opportunity, both angel investors and VCs conduct a due diligence process, but typically, angel investors and groups do not carry out as much due diligence as VCs due to time, resource constraints, and a general lack of information given the early stage of the venture.

entrepreneurial marketing

is a set of processes adopted by entrepreneurs based on new and unconventional marketing practices to gain traction and attention in competitive markets.1

unicorn

is a tech startup company that has received a $1 billion valuation, as determined by private or public investment.10 Although unicorn startups are rare (there is a less than 1% chance of startups becoming one after raising venture capital), they are becoming more common. So far there are 35 unicorn companies in the United States.

Intellectual property (IP)

is intangible personal property created by human intelligence, such as ideas, inventions, slogans, logos, and processes. IP law includes the copyright, trademark, trade secret, and patent protections for physical and nonphysical property that is the product of original thought and that can, in some sense, be owned.

startup financing

is the money provided to entrepreneurs to enable them to implement their idea by funding product research and development;

debt financing

means borrowing money to start a business that is expected to be paid back with interest at a designated point in the future.

collateral

personal assets (such as a home) to borrow against, so if the entrepreneur cannot pay back the loan, the bank can take the home and sell it in order to recoup the loan.

microloans

small short term loans

established business owners

those who have been active in business for more than 3.5 years

seed-stage financing

usually consists of small or modest amounts of capital provided to entrepreneurs to prove a concept

positioning

which is a marketing strategy that focuses on how customers think or talk about your product and company relative to your competitors.6

packaging

which is a process that explores every single visual element of the external appearance of an offering through the eyes of your customer;

VC Founders

• Who are the founders and what are their backgrounds? • Do they have relevant experience? • How well do the individuals function as a team? • Do they have a track record of success? • What critical resources do they have access to? • How well do they evaluate risk? • Are they detail oriented? • Do they exhibit a capacity for a sustained effort