I attended the Dallas Startup Happy Hour (sponsored by SpringStage) last night. This was the second time I attended but this one was especially great because I got to bring along one of my clients who is working full-time on his startup. He got a much-needed break from coding and was able to network and just otherwise talk shop with other startup entrepreneurs. Thus, if you are a current startup in the DFW area or maybe just thinking about it, consider attending a future Dallas Startup Happy Hour. It’s being held every other week at the High Tech Bar at the INFOMART Center in Dallas.

Here is the motivation for the event:

We are working to build a vibrant startup community here in Dallas every bit as interesting and dynamic as San Francisco, Boulder, Boston or Austin. The first step is engagement. If you are an entrepreneur (future, current or past) you should attend. If you are working for a startup you should attend.

I’ve had the pleasure of meeting many great people, including (but not limited to):

-Jason Hudgins of Droidworks
-Andy Chen and Andres Fabris of Traxo
-Brad Brawner of SportsJungle
-Bradley Joyce, web developer & entrepreneur and the newest member of the SpringStage team
-Lincoln Murphy of Morph Labs (who helped me with the correct pronunciation of “mysql” and explained what “the cloud” is.)
-Scot Duke of Innovate Business Golf Solutions

#5 - In your latest attempt to go viral, you call in to the Suze Orman Show and ask if you can afford to purchase your startup company, constantly letting her know how fantastic it is.

#4 - You start a blog about your blog about your startup company.

#3 - To get more street cred with VCs, you and your 2 co-founders change your names to Brad Feld, Paul Graham, and Dharmesh Shah, respectively.

#2 - Your startup company’s twitter account has less followers than I have.

#1 - You offer to pay your pizza delivery guy by issuing him common stock, and he counters with preferred stock and a 10x liquidation preference.

Many entrepreneurs begin their startup as a sole proprietorship. Eventually, some sole proprietors desire to incorporate so they can reduce their personal liability and protect their personal assets. But the act of incorporating a going business does not, by itself, transfer the current business being conducted as a sole proprietorship to the new corporation.

The 2 main issues when incorporating a sole proprietorship

The 2 main issues involve the transfer of assets from the going business to the new corporation and the tax consequences from such transfer. [This article will address the transfer and not the tax issues.] Since the assets of the sole proprietorship will need to be transferred, formal conveyances of such property must be made from the sole proprietorship to the new corporation.

The process

The first step is to incorporate the new legal entity. The next step is to execute various transfer documents by the sole proprietorship, by the new company, and some by both the sole proprietorship and the new company. In return for the conveyance of property to the new corporation, the owner of the sole proprietorship usually receives corporate shares of the new corporation.

You’re not done yet

While the transfer is now complete, additional administrative steps may need to be completed depending on the nature of the business:

-Transfer assumed name
-Handle workforce commission issues
-Close sole proprietor bank account and open account in new corporation’s name
-Make necessary changes to insurance policies
-Transfer permits and licenses
-Contractual obligations
-Apply for new federal tax ID number
-Make appropriate revisions in estate planning documents

Furthermore, while there’s no requirement to publish notices of the intent to incorporate, creditors should be notified of the sole proprietorship’s termination and the existence of the new corporation. This will help prevent liability if creditors continue to believe the business is operating as a sole proprietorship.

While incorporating a sole proprietorship may seem like a large and painful task, I believe the benefits such as reduced personal liability outweigh any headache from completing the transaction.

While the venture capital market becomes increasingly global thanks in part to Europe, China, Israel, India, and Canada, the United States remains the leader in venture-backed financing. Although some American venture funds are willing to invest in foreign startups, the lion’s share of U.S. venture funds are not going overseas.

Most U.S. venture capitalists believe ROI from domestic deals will be superior to foreign ones. Investing in a foreign company exposes the U.S. venture fund to a new set of legal rules, compliance issues, and risks, leading to increased uncertainty and transaction costs for the American venture fund. Additionally, trying to replicate typical American VC terms, such as anti-dilution and redemption provisions, can be difficult to accomplish in a foreign market.

Does this mean my international (i.e., Non-U.S.) startup will be shut out from a majority of U.S. venture capital funding or from being acquired by a U.S. company?

Potentially–unless your international startup performs a Delaware Flip Transaction.

What is a “Delaware Flip Transaction?”

A Delaware Flip Transaction is the process of creating an American holding company for an international company. The end result is that the international company will be owned entirely by the new American company. Thus, the U.S. venture fund will invest in the new American company.

What are the mechanics of a Delaware Flip Transaction?

The basic mechanics of a delaware flip transaction is to create a U.S. holding company and insert it above the international company. Next, the shareholders of the international company execute a share-for-share exchange by exchanging their shares of the international company for the shares of the U.S. holding company. (Note that this share-for-share exchange may require some additional legal maneuvering depending on the jurisdiction of the international company. For example, it will likely be necessary to use a “scheme of arrangement” or other court-approved process to accomplish the exchange in the UK and other jurisdictions.)

Why Flip to Delaware?

Delaware provides the most comprehensive set of corporate law in the United States. No matter which American state the venture fund is located in, such a fund will be comfortable with require Delaware law. Additionally, foreign companies are likely most comfortable with Delaware law, as Delaware provides a good neutral ground or “playing field.”

I previously wrote a post about why you should consider incorporating in Delaware here.

Final thoughts on Delaware Flip Transactions

Even if an American venture fund is willing to invest in (or purchase) your international startup, it still may be beneficial to perform the Delaware flip transaction. The reduction of legal uncertainty and the ability to replicate typical U.S. venture capital terms should dictate an increase in valuation and could facilitate a NASDAQ or other listing (although IPO exits for venture-backed companies are not very common). Alternatively, Delaware may provide neutral ground for funding or acquisition by a non-U.S. company or fund.

And finally, there are important tax implications that may result from performing a flip transaction, thus such a deal requires both U.S. and foreign accountants.

Thus, the Delaware flip transaction may not be for every international startup looking to be funded or acquired, but it should at least be considered.

Venture Capital Firms. They won’t grant you a meeting. If you do get a meeting they won’t sign your nda. And you’ll be lucky if your startup gets any funding. Making matters worse, they could be about to commandeer federal grant money earmarked for small businesses like your startup.

Federal agencies earmark 2.5% of their research and development budgets for grants to stimulate innovation among small businesses. To qualify, your company can’t have more than 500 employees and must be independently owned and controlled (51% owned by individuals). Thus, some Venture Capital-backed firms are locked out of the Small Business Innovation Research program (”SBIR”). Using the 2.5% set aside by the federal agencies, the SBIR offers about $2 billion each year in grants to high-tech firms. Currently, these grants are handed out in three phases. The first two phases are reserved for small businesses. In the final phase, applications from entrepreneurs funded by large Venture Capitalists and other corporations are accepted.

But that may all change. The Senate is now considering legislation that would change the definition of “small” business and expand access to set-asides now reserved for independent entrepreneurs. This bill is called the Small Business Investment Expansion Act (”SBIEA”).

In the SBIEA, VCs are trying to end the rule by which the SBA counts all employees of any company affiliated with the applicant - including the Venture Capital firm and other startups in the VCs portfolio - toward the 500-employee limit. This would allow VC-backed firms to compete for grants in all three phases of the SBIR, instead of just the final phase.

A new online marketplace for buying and selling companies officially launched this week: BizTrader.com.

I believe BizTrader will be a strong competitor to the current company marketplace juggernaut, BizBuySell.com. Both BizTrader and BizBuySell charge customers monthly fees to list their business for sale starting at $39.95 per month for BizTrader and $59.95 per month for BizBuySell. Both also offer ancillary services, such as valuation services and help finding financing opportunities.

BizTrader will compete with BizBuySell by taking a global focus and pushing its listings with broad search-engine exposure. For an extra $20 a month ($59.95), BizTrader will promote your listing to broader search services like Google, Oodle, and Craigslist.

BizTrader also looks to be a step ahead of BizBuySell when it comes to referring professional help to their customers, such as accountants and attorneys. BizBuySell referrals seem to be limited to business brokers.

Check out BizTrader and let us know what you think.

Many entrepreneurs worry that someone, whether a potential partner, a VC, or a boogeyman will steal their startup idea. If you are worried about having your startup idea “jacked,” I recommend you take a deep breath and relax a bit–your startup idea isn’t worth that much.

Paul Graham, in an essay derived from a talk at Startup School 2005 had this to say about the value of your initial startup idea:

I think people believe that coming up with ideas for startups is very hard– that it must be very hard– and so they don’t try do to it. They assume ideas are like miracles: they either pop into your head or they don’t.

I also have a theory about why people think this. They overvalue ideas. They think creating a startup is just a matter of implementing some fabulous initial idea. And since a successful startup is worth millions of dollars, a good idea is therefore a million dollar idea.

If coming up with an idea for a startup equals coming up with a million dollar idea, then of course it’s going to seem hard. Too hard to bother trying. Our instincts tell us something so valuable would not be just lying around for anyone to discover.

Actually, startup ideas are not million dollar ideas, and here’s an experiment you can try to prove it: just try to sell one. Nothing evolves faster than markets. The fact that there’s no market for startup ideas suggests there’s no demand. Which means, in the narrow sense of the word, that startup ideas are worthless.

You should still take precautionary steps to protect your idea even though Paul Graham (and I) don’t assign a lot of value to your startup idea. The best way to protect your startup idea is to keep it secret. Help prevent your startup idea from being stolen by being selective with both the amount of information you reveal and to whom you reveal such information. A nondisclosure agreement will help, but any piece of paper drafted by a lawyer like myself is only a reactionary document–it only benefits you after your idea has been stolen.

Sun Tzu is generally credited for coming up with the phrase, “Keep your friends close, and your enemies closer.” He obviously never launched a startup and got shafted by a co-founder.

Entrepreneurs often believe their startup company faces legal threats from only external sources. And that’s a big mistake. Instead of worrying solely about some 3rd-party stealing your business idea or a “slip and fall,” your startup company’s top legal priority should be the reduction of its internal legal threats: co-founder disputes.

You can start by examining every aspect of the co-founder relationship. Your startup company could be ultimately doomed by a co-founder dispute, as even small disagreements can systematically erode the core of your company. Therefore, at the earliest time possible, sit down with your co-founder(s) and talk about issues like:

• the goals each of you have for the startup;
• the goals each of you have for yourself;
• duties, job descriptions, and hour commitments;
• who pays for what;
• who gets paid first and why;
• what happens if one of you wants out;
• what happens if one of you wants to sell the company, raise capital, or end it;
• what happens if one of you gets disabled or dies;
• what happens if things take longer than expected;
• whether launching other startups, i.e. “moonlighting,” is ok; and
• how small, medium, and large decisions will be handled.

This is not an exhaustive list of topics and by no means whatsoever will their discussion be easy. If it is easy and everything sails through without a hitch, someone’s holding back and you’ve all wasted your time. And for the love of high-speed internet and all things Web 2.0, do not think being friends or relatives reduces the need for these difficult/awkward conversations. In fact, if your co-founder is a friend or relative, that should trigger even more issues and discussions. Because now you have more to lose than just a company and your (or someone else’s) money.

After you have discussed everything that needs to be discussed, DOCUMENT-DOCUMENT-DOCUMENT. Make sure your startup company documents reflect all of your discussions. Don’t leave anything out just because you and your co-founders already talked about it. Take nothing for granted because memories will inevitably differ.

Once you have discussed and properly documented your co-founder relationships and thereby protected your startup company’s core, then you can focus on external legal threats.

You need to customize your articles of incorporation and corporate bylaws if you are serious about doing things the right way at your startup company. But be careful how you customize these important startup documents. Don’t fall into a common trap where you think you are customizing your startup documents, but in reality, you are only tinkering with things of nominal importance. To avoid this trap, customize your startup documents according to the relationships within your startup company rather than to your industry.

For example, imagine you and a friend are launching a startup that will develop dashboard widgets for OS X. Both of you plan to put equal time and capital into the startup. While searching for corporate bylaws to help guide your drafting, you come across the following 2 documents:

Bylaws “A”, from a startup company in Mountain View, California that develops similar widgets for Windows Vista with 2 co-founders, one the software developer and the other the pure “money” person, and

Bylaws “B”, from a lemonade stand in Nome, Alaska with 2 co-founders, who put in equal time and capital to run the lemonade operations.

Which set of bylaws will be the better guide for you to draft your dashboard widget startup’s documents? Bylaws “B” by a pretty good margin, even though the Alaskan lemonade entrepreneurs are a long, long way from Silicon Valley.

While the Mountain View startup’s bylaws might at first seem like a great match, the relationship between the 2 co-founders, with one person contributing sweat equity and the other pure capital, makes this company’s bylaws practically irrelevant to your startup company. Sure, you both deal with tech stuff but your respective co-founder relationships drastically differ. On the other hand, the lemonade stand co-founders put in both equal time and money–just like your startup company. Since the lemonade stand co-founders (hopefully) framed their relationship issues in their bylaws, their bylaws will be a much better drafting guide for you. And your startup company will reap the rewards when something goes wrong and your startup’s bylaws are needed to help resolve a dispute between you and your co-founder. They will be on point and address issues likely to come up in your particular situation.

Bylaws should be drafted according to the relationships between co-founders, shareholders, and officers. They should not be overly concerned with your product or service. Therefore, by customizing your startup documents according to relationships within your startup company rather than your industry, you will end up creating valuable documents for your startup company.

If you can’t self-fund your startup company and must take on investors, keep the number of your investors as low as possible. A low number of investors will reduce your startup company’s transaction costs and headaches associated with raising funds.

I’d rather my client raise $90k from one investor than $100k collectively from ten based upon the transaction costs my client would suffer both during the fundraising process and in the future. My client might have to cut back on Aerons, but it’s much easier to keep one person happy than ten.

If you have no choice but to take on a large number of investors, request that your investors form their own LLC. Have the LLC be your startup company’s investor and therefore you only have to deal directly with one investor.