Founding a company is tricky business — just ask college buddies Mark Zuckerberg and Eduardo Saverin, whose struggle for control of their creation, Facebook, was detailed in the popular 2010 film “The Social Network.”
Had Zuckerberg and Saverin used attorneys to help start Facebook and built a legally-bound base for their company, perhaps they’d still be business partners.
Lucky for Wisconsin entrepreneurs, there are plenty of local attorneys helping clients launch businesses every day. And even attorneys that don’t concentrate in business law can offer clients informal help in launching their enterprise.
Seed money is the key to any new business, but the question is, how to help clients get it.
Timothy Crisp, an attorney with Foley & Lardner LLP in Madison, said debt financing is attractive to some because of its relatively low cost, coupled with the retention of ownership and control.
Though lending markets are starting to loosen up a bit, debt financing isn’t always available these days, however. Crisp said many banks are open to the applications of entrepreneurs with assets that have a steady value, or who have an additional, reliable income stream other than the money they hope to generate from the new venture.
Entrepreneurs should consider banks of all sizes, Crisp said, to enhance their odds of success.
“They need to not just look at the three biggest banks in their market and talk with them, but also talk with community banks,” he said. “They need to be more flexible. Start out on the process of examining options earlier, because it might take time — a lot of time. Lenders will ask to see how things go for a longer time before they commit to making a loan.”
Loans from state and local groups such as the Madison Development Corporation, the Wisconsin Department of Commerce and the Wisconsin Housing and Economic Development Authority are also options, Crisp said.
And Wisconsin entrepreneurs are fortunate to have additional resources available, such as the Wisconsin Technology Council, an independent board that helps entrepreneurs in the science and technology fields land money, among other aid, said Madison attorney Gregory Lynch of Michael Best & Friedrich LLP.
This past year, one of Lynch’s clients, Don Noskowiak, won first place in the Governor’s Business Plan Contest, which is administrated by the Technology Council. Noskowiak landed $50,000 for the new business as a result.
On the federal level, Lynch said, Small Business Innovative Research loans through the U.S. Small Business Administration are another potential resource. They’re available for research and development in areas of interest to a handful of federal agencies, such as the departments of Agriculture, Energy, Education and Homeland Security, among others.
Entrepreneurs can also look to their own retirement accounts, said attorney Kevin Eismann of Epiphany Law LLC, Appleton.
“Most people don’t understand that you can get money out of your IRA if done the right way,” he said.
The next steps
As demonstrated in “The Social Network,” venture capital, or VC, was what ultimately took Facebook past its initial success to become a billion-dollar phenomenon.
VC firms fund startups, anticipating rapid growth and success. The investors tend to do independent, extensive due diligence on the entrepreneur and the budding company, Lynch said.
“They’ll ask a lot of questions,” he said, “and they may hire outside consultants to analyze the market and to independently review the intellectual property.”
Kathleen Swan of Quarles & Brady LLP in Chicago said VCs are typically looking for enterprises that will succeed quickly, and they then sell their equity when the business goes public or is acquired.
“Not only do they bring money and their own expertise to the company, but they bring a rolodex of people that can help bring the company to scale and will be invaluable as the company grows,” she said.
“The best venture capitalists that I’ve worked with look very closely at the management, the ability to absorb new ideas, and the ability to see danger ahead.”
Angel investors can also help provide capital, Swann said. Angels generally don’t provide the large amounts of money VCs can, but they also don’t seek the same level of control in the business, she said.
“Angels don’t just say, ‘Here’s the money,’” she said. “It’s heavily negotiated how the money will be used and identifying the milestones that the business is expected to reach.”
Whether the equity funds come from VCs or angels, what’s agreed upon should be memorialized in documents outlining the rights and privileges the investor receives, some of which are conferred by state statute and others that have been negotiated.
Attorneys can also help prepare disclosure documents, ensuring there’s no outright fraud or simple miscommunication, Swan said.
“The onus is always on the entrepreneurs to disclose all — the good, the bad and the ugly,” she said. “You’re selling an investor a secured right, whether you’re talking about $100 or $100 million, and as such, you’re subject to the rules and regulations of your state securities commission, as well as the federal SEC.”
Jane Pribek can be reached at [email protected].