INVENTUS LAW BLOG

Month: July, 2014

5 startups that caught our eye from 500 Startups’ Batch 9

MOUNTAIN VIEW, Calif. — Because no demo day would be complete without a roundup of what caught our attention, here’s what stood out today at 500 Startups’ demo day for its ninth batch:

Stitch

Stitch is a dating service for the over-50 crowd, and while I’m not the biggest fan of dating apps, Stitch has not only thought very carefully about the design of its service, but it also has some great numbers to show for it. In fact, Stitch is not so much about “dating,” but rather about “companionship,” in whatever form it comes from — romance, friendship, and so on. Since launching in April, Stitch has amassed more than 3,000 users, half of whom have joined since it opened in the Bay Area last month. The company also says that it has only half of the user acquisition cost of other dating services, and the founder of JDate is an advisor.

Pop Up Archive

This startup makes sound searchable, and as it said during its presentation, data means page views, which mean monetization. Using translation and language modeling, Pop Up Archive indexes audio, making it searchable. It already has several customers, including NPR and KQED, and has been seeing a 50 percent month-over-month growth rate. It has a 70 percent margin, and its translation is so accurate that it catches things that Google Translate doesn’t, according to co-founder Anne Wootton.

Lumific

Lumific takes care of what you’d normally spend a lot of time and energy doing after taking a bunch of photos: sorting, fixing, and curating them. Simply connect your Dropbox account to Lumific, and using fancy imaging technology, it will catalogue, enhance, and crop your photos. The company has been in a private beta so far, and is now opening up a private beta for its Android app. So far, Lumific has processed more than 250,000 photos from about 7,000 beta testers.

Sport Hold

Sport Hold works like this: You, and a crowd of sport lovers, make predictions on sports matches, Sport Hold comes up with a “super prediction” from crunching all your numbers, and then it sells that prediction back to you to do as you wish (presumably betting, or the sort). In sports betting, one needs a 52.4 percent accuracy rate to be profitable, though professionals aim for 57 percent. Sport Hold, on the other hand, is at 60.5 percent accuracy so far — imagine the edge you would have. And while this is all boring to me and others not into sports, the real gold here is that the startup’s modeling can really be applied to other things such as predicting public companies’ quarterly earnings, forecasting sales figures, and so on.

Neuroware

Bitcoin is taking off, and you want to catch the wave and build an app for it. Only problem is that Bitcoin apps are really hard because you need to interact with the block chain, the database of Bitcoin transactions. Neuroware is essentially providing APIs and a framework to build Bitcoin apps without having to deal with all of that, and it’s also open source. Whatever happens to Bitcoin, reaching mainstream will in part depend on people being able to make applications for it, and Neuroware seems to have caught on to that.

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Why should companies incorporate in the US from Day 1?

Companies should start thinking about incorporating in the United States (U.S.) from Day 1 if any one or more of the following applies to them: if their product will be sold in the U.S.;if the Company is looking to raise funding outside India; if the Company is looking to bring on-board strong management with experience in growing technology companies at a fast pace; and/or if the potential acquirer or exit is likely to be in the U.S. Large U.S.companies have a very strong preference for the intellectual property located in the U.S. Almost all U.S. based customers will require certain representations as to ownership of the Intellectual Property and most will be comfortable with such representations provided by a Delaware Corporation. On the other hand, many U.S. based customers will be circumspect in having to enforce any I.P. related claims in Indian courts and the U.S. customers are less likely to work with companies where intellectual property is not located or owned by a typical Delaware Corporation. As long as the U.S. Company owns the I.P. rights, U.S. customers will not care about whether or not the actual development and creation of the I.P. takes place by a team in India. Non-India investors have a very strong preference for investing in a Delaware Company for several reasons. Firstly, structuring that investment is fairly easy since there is great familiarity with a Delaware “C” corporation and general corporate laws and court system in Delaware. There are a lot of apprehensions in non-Indian investors when it comes to investing in Indian companies because of lack of familiarity with Indian Companies Act. For example, the requirement that V.C. investors are issued both equity shares and preference shares as part of their investments. Secondly, they are concerned about regulatory issues, the arbitrary application of the existing tax and corporate governance rules and regulations and the fear of having to litigate in front of tax tribunals or lower courts in India. Foreign investors are also concerned about repartiration of the funds after an exit event. For example, if the India company that they invest in gets sold or goes IPO in India, they still get rupees for it and then converting the rupees back into dollars is a big challenge. Whereas, the U.S. has zero restrictions on investors from outside investing in companies and selling those shares. Similarly if you look at exits, if you look at Facebook or Google, they have the same concerns over IP rights, and they do not want to deal with tax issues elsewhere. From the perspective of founders sitting in Bangalore, nothing changes. All that changes is that you incorporate in Delaware and have that Delaware Corporation set up a wholly owned subsidiary in India. All the employees, consultants, founders and advisors in India still remain engaged and employed by the India entity. Founders and management team can continue to develop the business the way they would with an India corporation, with a U.S. holding structure on top. Structuring the venture as a Delaware Corporation allows the founders the flexibility of setting up a structure from day 1 which is similar to what their larger and more successful competitors have, and present themselves with the greatest opportunity to raise money as any other Silicon Valley based startup on similar valuations and terms. Furthermore, the structure in the U.S. allows anyone from anywhere to invest in your company such that your India based investors can also invest directly in the U.S. Corporation without taking any risk of currency repatriation in the event of an exit. There are some regulatory requirements in India relating to the ability for Indian residents to invest in non-India companies, but most of those can be addressed by careful structuring to remain within the regulations. Taxation and costs Unlike Singapore or anywhere else, the U.S., especially in Delaware, is the easiest jurisdiction to do business since there is no requirement that the management be based in that place, although for variuous reasons the ideal structure would allow for one or more founders to either relocation or travel to the U.S. as much as possible. By the way, it is also the easiest to shut down. The maintenance cost is very limited in Delaware.All a pre-funded and pre-revenue corporation has to budget for is to pay approximately $350 every year for filing fees, plus relatively lower legal and accounting fees as needed. In terms of the overall structure, the India entity will be owned by the U.S.company. The India company will then enter into a services agreement with the U.S. company such that all the work done in India is assigned to the U.S. company, subject to compliance with transfer pricing norms in India and the U.S. The U.S. company will effectively hire the India company to develop this technology.Then the India company will hire the founders and others and assign them the work; in exchange for providing services to the U.S. corporation, the India company will receive service fees from the U.S. which the India company will use to pay for its operating expenses and pay taxes on the net income. Regarding taxes, the existing India-U.S. tax treaty allows for structuring the business such that the net overall impact on the business, taking the consolidated India and U.S. company tax positions, is effectively close to the net tax impact of running the business as a sole India private limited company. Founders moving If the founders are Indian citizens, and they do not have a green card, the U.S. Company would either file anH-1 visa for the employees, or look to transfer them on an L-1 Visa. In the initial stages, founders can also travel to the U.S. on their B-1 visas which allow for them to travel for valid business purpose, including setting up operations in the U.S.. After the company raises its initial round of financing, the Company can then file for the H-1 for the founder to move to the U.S. The other option is an L1, where the U.S. company can hire employees of its subsidiary, as long as the founder has been an employee of the Indian subsidiary for at least one year. The employees of the Indian subsidiary also have the opportunity to be granted employee stock options in the U.S.parent company. Right now per year, we see about 100 companies are incorporating in the U.S. from India. We see about 30 companies per year moving to Singapore as well, but my guess is that it will not increase. Facebook and Google in the history of their lives have never bought Singapore based companies, and honestly, Singapore is not as friendly as people make it out to be. The corporate laws and the entire ecosystem in Singapore is not yet ready for setting up an early stage startup company, which is why we haven’t seen any global technology company emerge out of Singapore. Same can be said for most of the other tax favorable jurisdictions like Cayman Islands, Ireland, Mauritius and others. Does your long-term plan include moving to the US? If yes, then you need to incorporate it there from day one. DISCLAIMER: THIS ARTICLE IS MEANT AS A GENERAL GUIDELINE FOR INFORMATION PURPOSE ONLY, AND NOT MEANT TO PROVIDE ANY LEGAL ADVICE.

View the orginal blog post here.

VC Kent Goldman wants to give startups a cut of the upside with new fund

Kent Goldman wants to give founders backed by his new Upside Partnership a piece of the action in the whole portfolio. The former First Round capital investor plans to give founders a piece of the carry — the extra share of gains VC partners get on their portfolio investments. The amount they get depends on the size of the initial investment Upside makes in them. This isn’t the first time that funds have offered to cut founders in on the action of the rest of the portfolio. But it’s apparently the first time it is being offered without requiring founders to contribute any money or equity. San Francisco-based Upside reportedly has three deals in progress, expected to be between $300,000 and $600,000 per company. It will focus on a wide range of companies in both consumer and enterprise tech. At First Round Capital, Goldman’s investments included hotel booking app developer HotelTonight, real-time analytics platform MemSQL and commercial drone developer Airware. Click here to subscribe to TechFlash Silicon Valley, the free daily email newsletter about founders and funders in the region.

500 Startups’ newly released fundraising documents will keep you from ‘getting screwed’

Free things are great, and they’re even better when they save you, your startup, and your investors a boatload of money and drama. And lucky for you, startup accelerator program 500 Startups is releasing one of those magical gifts today.

The program released today a set of free legal documents for startup founders it calls “KISS,” or “keep it simple security” — it’s attempt at a play on the “keep it simple, stupid” mantra.

The documents are actually for convertible notes, either for debt or equity, and are designed to keep founder from “getting screwed” — a technical term, of course.

500 Startups is not the first to create and release such documents. Series Seed, created by Ted Wang, a partner at top tech law firm Fenwick & West, originally came out in 2010 and have since been revised a few times. In 2008, Accelerator program Y Combinator has also released its first openly available document template, a set of Series AA Preferred Stock financing documents for early stage equity fundraising. It later released its SAFE (“simple agreement for future equity), a alternative to the traditional convertible note.

In its announcement of KISS, 500 Startups admits that the “YC SAFE docs in particular were a big step forward in creating a true industry standard (we have used them on several occasions since we are a frequent investor in YC companies).” The SAFE documents became so well-liked that in January, Los Angeles-based accelerate StartEngine announced it will be officially switching to SAFE.

Nevertheless, the 500 Startups group said it’s created its own documents to better strike “the right balance… a balance between the interests of the founders as well as those of the investors.” Apparently, there are sometimes cases where smaller angel investors get cornered into signed deals that don’t do them any service, despite the fact that historically, investors have had more power in deal negotiations.

And of course, use the documents at your own risk — 500 Startups won’t be held liable if you do get screwed in a deal.