Joint Intellectual PropertyDevelopment – Do’s and Don’ts
August 23, 2010
by Charles Brumlik
Introduction
Intellectual property (IP) brings value to their owner both from their right to use and their right to exclude others. Adding an outside partner to your IP development could offer big benefits, but also complicates how you determine your company’s (and your partner’s) ownership rights both now and in the future.
What you end up owning in a partnership depends on both your ability to create something valuable and your ability to prove what part is yours. You can save tremendous cost and time by thinking of IP before, instead of after you share information with outsiders.
Partnering
In a joint project we co-invest resources and IP with partners, expecting to share the resulting joint business. Partnering helps to more efficiently build value. This motivates us to share costs and risks with partners and leverage our respective strengths.
In a partnership, you are jointly sharing a mix of IP from your company, your partner’s company, and the work developed together. To maximize your ownership, you need to first categorize what to share both within and outside your company.
The effects of partnerships can last a long time. Partnerships often change or fail as the individual partners’ business goals and personnel change. What you do now can have repercussions 10-20 years from now. For example, if you let an outside partner have rights to your information, then your company may be limited in using its own information with other partners or customers.
Information’s Value
Most IP is in the form of know-how and other controlled information. Too much internal control stifles innovation. Too little control increases the risk of loss of your company’s and your partner’s secrets to the competition. Companies can maximize value by varying control of information depending on its value or sensitivity.
The four common levels of information ownership are:
1) Trade secret
- Form of IP that can be enforced in court in many countries.
- Access is strictly controlled by a few people and by numbered copies.
- Should be encrypted and marked as Trade Secret or Top Secret.
- Examples: customer list details, internal algorithms, methods of doing business.
2) Confidential
- Access is controlled by client or project, and on a need to know basis.
- Should be marked as Confidential to your company or a particular client.
- Examples: client information provided under a confidentiality agreement, patent applications before their 18 month publication.
3) Proprietary
- Minimum level for all your company and client information that is not public.
- Also includes valuable combinations of public information.
- Examples: databases, internal operations.
4) Public
- Information legally available to the public or your competitors.
- Can include gossip or other information you mistakenly disclosed.
- Examples: your public website, annual report, sales literature.
Since information can have a different value depending on the recipient, the same data can be treated in different ways. Partnering makes information sharing more complex due to distribution limits of your partners’ confidential information.
Shared value depends on how much value is created, and on who owns or can use the invention. In partnerships, ownership or right to use is not always given to the creator. Much depends on when it was invented, how well it was segregated, how well it was documented, etc. How will you help maximize your company’s share relative to its respective investment and innovation?
Sharing criteria are not fixed in time. Partnership timelines typically have three main phases:
1) Before the joint project
- File patent applications on information you need to keep for your company.
- Document inventions and information to prove that they are 100% yours.
2) During the joint project
- Compartmentalize the joint project from your related projects.
- File patents together with your partner where required and alone when possible.
- Share patent filing costs with your partner.
3) After the joint project
- Know which of your rights are limited by your partnership agreement.
- Maximize your remaining IP.
- Share patent maintenance costs with your partner.
- Review the impact of transferring IP to your partner when you are dropping patents in particular countries.
As shown by the following chart, IP can flow between parties and as a result
IP ownership can change during these three phases:
Joint IP Development - Do’s
- Share your IP internally to leverage innovation for your company.
- Use your inventions and knowledge of IP to build value for your company.
- Maximize the value to your company (1st) and the joint project (2nd).
- Document how you keep outside confidential information from your inventors who invent outside your joint project.
- Retain your rights by documenting any overlapping work before, during, and after the joint project with a provable date and author.
- File patent applications before starting the joint project.
- Maximize your company use of co-developed information in applications that your company has rights to.
- Ask yourself and your team what company information would benefit the joint project and what value your company would receive from sharing any of it.
- Know what limitations are imposed by the partnership’s contract terms.
- Develop an IP docketing database or other evergreen system to provide notices to your team managers and partners in enough time for them to act.
- Give your partner enough notice before dropping a patent to save fees.
- Know your partner and their project-related patents, publications, other partnerships, licenses, and motivations before, during, and after your project.
- Follow your internal controls so that everyone on the team knows what to share, what not to share, and when to notify your partner.
Joint IP Development - Don’ts
- Don’t engage in “Unprotected Sharing”.
- Don’t disclose trade secrets to outsiders unless you are sure that they must and will keep it secret forever.
- Don’t freely give away your company’s information.
- Don’t be so proud of your inventions that you tell your secrets to outsiders.
- Don’t publish or publicize before filing patent applications or identifying trade secrets.
- Don’t publicize details of much of your daily work life (your project timeline, project problems, IP practices, etc.) that could help your partner or competitors.
- Don’t use outside confidential information that could contaminate you, limit your ability to work without your partner, limit your patenting or publication, or limit your clients’ ability to buy from you.
Conclusions
Joint IP development is a necessary and useful part of creating highly complex products and businesses, although it has major differences from internally-created IP.
IP ownership rights can vary depending how you contribute and segregate information from both you and your partner. You must also remain aware of the contract’s requirements not only before and during the joint project, but also long after the project is finished.
7-Step Approach to “Surviving” Rapid Growth
July 25, 2010
by Avik Roy
Nothing pleases small company CEOs more than an oncoming wave of customer demand. When the wave hits they often discover the force can disrupt and derail their business. It can overwhelm overworked employees; push ad-hoc processes to the verge of collapse; and quickly exploit vulnerabilities of fragile systems.
Sustaining rapid demand growth requires flawless operations. Yet seemingly random choke points pop up, undermining important levers of performance. Product or service quality erodes. Timelines slip. Irritable customers complain about service and support. Renewal rates and repeat orders slow and maybe decline.
Human capital, the most critical resource in a crisis, buckles. Front-line employees are pulled concurrently in several conflicting directions without a coherent action plan, clear guidance, or essential resources. Stress levels rise. Collaboration and teamwork is frayed. Mistakes proliferate. Unless arrested quickly, this negative swirl spawns other challenges.
What should leaders do when rapid revenue growth is accompanied by rapid operational decline? I recommend focusing first on people and process to turn such moments of adversity into strength within a relatively short period of time. Here are seven steps on how to do just that.:
- Define Objectives and Pinpoint the Right Metrics:
Make explicit the business outcomes that will frame success. Translate business outcomes into 3 to 5 measurable performance endpoints. Ask what will delight the customer. Most small businesses either measure the wrong things, or pour through a “data-dump” in lieu of real performance yardsticks. - Embrace Transparency:
Share the right metrics up and down the organization. Everyone on the team must know where the “ship” is headed and important markers of progress. Metrics or performance data in most small companies is shared only by a few people at the top. - Make Simple Process Improvements:
Review existing operations quickly to identify improvement opportunities. First, use the 80-20 rule. Identify the few key tasks that use up 80% of employee time. Ask “How does this help achieve our performance metrics?” or simply “Why do we do this?” These questions will pinpoint opportunities for the organization to improve effectiveness. Second, focus on finding easily implementable changes to existing work processes that will improve operational efficiencies. Think faster-better-cheaper. - Review & Modify Job Design:
Identify jobs impacted by these process improvements. Think through, modify and document job design changes. Use “Before” and “After” snapshots. Sit down with each individual and make sure they understand what they need to do differently and how. Address skill gaps with training, mentoring or coaching. If staff needs to be reassigned or removed, this is the time to do it. - Personalize the Metrics:
Help each individual understand how their actions “move the needle” in achieving the targeted measures of success. Show how points of contact roll up individual action into teamwork, and impact other key metrics. This creates self-awareness, helps change behavior, and provides a framework each person can use to prioritize their actions. - Invest in Building Confidence:
Instill self-belief and restore lost confidence within your organization. Like in sports, an organization’s “mental game” gets dented in the face of questions and doubts about performance. Celebrate successes, use verbal persuasion, build positive imagery, and induce a state of “relaxed concentration”. Work from the individual up. - Track, Monitor & Tweak:
Build a self-reinforcing culture of performance. Not a one-time fix.
Small companies don’t have the time, resources, or temperament to apply classic Six Sigma, LEAN, or other rigorous techniques. This 7-Step approach will harness the positive energy of employees and associates to improve performance in ways that delight customers. It will also create strong alignment between what the business aims to achieve, and how the organization directs and manages its attention.
Five Mistakes to Avoid When Raising Capital
June 20, 2010
by Peter Tilles
Human and financial capital is the fuel that allows businesses to aggressively pursue their objectives. However, without financial capital, all too often, businesses can find themselves treading water or sinking altogether due to an inability to invest in critical value creating activities.
Being forced to bootstrap for a while can be a good thing because it forces entrepreneurs to be creative and to focus on what is truly important to move the business forward. That said, there comes a point in almost any business’ lifecycle where the business cannot be propelled forward on human capital alone.
Whenever I have had the opportunity to work with early stage entrepreneurs there has been one universal constant – the need to raise financial capital. Having participated in both successful and unsuccessful capital raises, as well as having observed others who have been on both sides of the fence, here are some key mistakes to avoid when seeking to raise capital.
- Underestimating the amount of time and effort it will take to raise capital:
Depending on whether you are looking to raise capital from friends and family, angel investors or venture capital, the time to successfully navigate a capital raise will vary. At a minimum, assume that it will take six months and more likely it will take a year of nearly full time effort to network, write a business plan, get introductions to potential investors, pitch, address follow-ups, secure term sheets, support due diligence, negotiate and close a deal. Too often, entrepreneurs wait until they really need the money to commence the capital raising process resulting in a loss of negotiating leverage. The best time to look for money is when it is not desperately needed.
Additionally, it is not unreasonable to assume that you could need to contact well over 100 potential investors to end up with one who will ultimately invest. As a result, it is never too early to reach out to potential investors (see “When do I…?” by Lou Wagman).
- Not being able to communicate your business’ value proposition in 30 seconds or less, in a manner that even a third-grader can understand:
No one knows the businesses better than the entrepreneur. Every entrepreneur wants others, particularly investors, to see what they see and to understand why they believe their start-up venture is so valuable. At the same time, many of them have difficulty boiling down the core of their business value proposition to one or two phrases. When you live with your business everyday it is easy to lose the ability to see the forest through the trees.
Investors, especially in the current market environment, receive so many business plans that they cannot possibly review them all at a level of detail necessary to make informed judgments. As a result, they don’t even try. When you get the attention of an investor, at most, you will have it for a few minutes and more likely it will be only a few seconds. As such, it is critical to be able to communicate what your business does and its value proposition in 30 seconds or less. If you are successful in doing this, you will significantly increase your chances of attracting legitimate interest in your business from potential sources of financing.
- Telling an investor that you know the answer to a question you really don’t:
One of the bigger mistakes I have seen entrepreneurs make is to answer every possible question that is asked of them whether they know the answer or not. The problem with answering a question you don’t know the answer to is that if and when it does become apparent to the investor that you’re “spinning” it is nearly impossible to regain the lost credibility that results. There is absolutely nothing wrong with saying “I don’t know, but I will find out and get back to you on that”. I believe that investors look for realism and some measure of humility in their management teams. For them, it’s a red flag when that’s missing. - Failing to identify and pursue “strategic” investors:
When you raise capital from “strategic” investors, i.e., those who not only understand your business but who are also deeply ingrained and connected to your industry and target market, you get a lot more than just money. Strategic investors can be immensely valuable and function as a catalyst to help your business get traction and grow in your target market. Conversely, “non-strategic” investors who do not have the depth of contacts or understanding of your business expect to take on a role in your business that is at best focused on oversight and at worst passive. They can often become an impediment to long-term success since they don’t fully understand the implications of decisions you might make and tend to react to circumstances, particularly negative ones, through a filter that can be best described as “protecting their investment”. That can lead to sub-optimal outcomes for your business. - Failing to raise enough capital to sustain the business for at least 18 months, if not longer:
Ideally, entrepreneurs would like to lead their businesses to success without the injection of outside capital. When a capital infusion becomes necessary, entrepreneurs often think they will need to raise capital only once to get to a point where the business becomes self-sustaining. Unfortunately, that rarely happens. It is difficult to anticipate a whole host of external and internal factors, e.g., where the next revenue generating opportunity will come from, that will change the capital needs of the business over time. It is rare that the initial “go to market” strategy of a start-up survives for very long.
Most businesses have to adjust and adapt to changing market dynamics and conditions as they mature thus requiring maximum flexibility. As I mentioned earlier (#1 above), it can take up to a year to complete a successful capital raise. The entrepreneur, responsible for raising capital, ends up dedicating so much time to the task that their ability to focus on the job of running the business takes a back seat. That slows down overall progress towards critical milestones. It is very important that each time you make the necessary effort to raise capital, you raise enough to give yourself ample time before the next capital raise to be able to focus on growing your business.
Raising capital can be a daunting task. However, being able to succinctly communicate your business’ value proposition, engaging potential investors with a degree of humility, targeting appropriate “strategic” investors while anticipating both the amount of capital you will need and the amount of time it is likely to take will significantly enhance your chances of completing a successful capital raise.
What Does Poor Quality Data Cost Your Organization?
June 14, 2010
by James Rouse
Most organizations today do not realize the impact and cost of poor data quality on the bottom line. Poor quality data impacts an organization’s ability to operate effectively and efficiently. The inability to get timely data or correct data impacts the decisions being made and negatively impacts business opportunities.
How do you know if you have a problem with data and information quality? There are a number of simple indicators to look for:
- First, how much time does the organization spend correcting inaccurate data, scrambling to compile information across multiple databases? Are you struggling to integrate disparate data or looking for missing data?
- Second, count how many different versions of the same information reside in multiple databases or locations. These can be in corporate databases, individual PC databases or MS documents like Excel and Word.
- Third, how often do you fail to find a given piece of information or find multiple versions of the same piece of data?
If your organization has experienced any of these conditions, you certainly have data quality problems.
Why do senior executives not know about the high cost of poor quality information within their organization? They are generally isolated from the business processes that utilize the poor data. When they ask someone to get information for them, senior executives do not personally see how much effort goes into acquiring and verifying the information before it winds up on their desk.
One major pharmaceutical organization did not realize how poor their customer database was until after several warning signs were ignored. A senior marketing leader commented about the difficulty they were having in making an impact on targeted prescribers. He reported that 25% of all their expensive, glossy marketing brochures were being returned by the postal service due to incorrect mailing addresses. Unfortunately, the 25% represents only what was being returned back to the company. There was an estimated 5% to 10% more that were simply being thrown away and not being given back to the postal service for return to sender. They had no idea how many were reaching their intended target. There was also a direct impact on the sales force following territory realignments. Frequently sales reps in new territories would take up to six months to identify and locate all of their new prescribers. Inaccurate customer data had a major impact on this organization and its bottom line.
There are well documented cases of companies with multiple customer data files. One national bank had over 250 different customer databases. A telecommunications company had over 800 customer databases. How much time and effort would it take to analyze a simple question like who is our best customer?
Most organizations today don’t monitor or analyze the quality of their data and information. Most do not have any formal processes to address quality issues with their data and information. In fact, most organizations cannot even identify who is responsible or accountable for the accuracy of the information utilized by their given business units.
Experts estimate that poor quality information cost organization’s between 20% to 35% of their operating revenue due to process failures and information scrape and rework. This number could increase up to 40% for organizations which are information intensive, such as banks, insurance and pharmaceutical companies.
Poor quality data has a significant impact on business processes, productivity and ultimately the bottom line. It is a threat to the enterprise. However, by creating a process to continuously improve data and ensure its accuracy the business will have established a competitive advantage.
- Hiring beyond founders
- Launch, market and
sell product or service
to initial customers - Hire or “rent” critical talent?
- Pay – individualized /market
based / at risk / equity?
- Values – which ones
are critical to your success? - Continue to market,
sell and service
existing customers;
grow customer base;
build volume
- Grow revenue,
keep costs low
- Develop workforce plan
for next 1 -2 years
- What talent do you
need for the long-term
vs. short-term? What skills?
How do you find them?
- Pay – begin to rationalize
& standardize.
- Supervision – create
some structure.
- Culture – what type of culture
do you want to create? - Continue to serve
existing customers;
add new customers;
maybe expand
offerings; juggle many
concurrent projects
- Grow revenue
- Manage cost/expense
issues – balance
with growth
- Develop and
implement talent and
performance
management strategy.
- Rationalize pay,
bonus structure.
- Introduce some benefits.
- Supervision—select & develop
the RIGHT people.
- Behaviors – what does
it look like to live the
culture, values and
achieve results here?
- Handle employee
relations, retention issues. - More work with
repeat customers;
more new customers;
more products
and/or services;
more customer
problems;
more competition
- Cost/expense
issues arising - Measure effectiveness
of existing programs &
processes, identify
opportunities, and adjust.
- Align talent & performance
management processes,
pay, benefits, engagement
programs—everything!
- Develop policies and
more formal processes.
- Implement more formal
communication processes –
for everything, not just HR stuff.
- Communicate, communicate,
communicate! - Incorporate HR as a key facet of your regular strategic and operational planning process. Manage “human” capital the same way you manage tangible capital. Plan to maximize utilization of human capital with a projected target ROI.
- In the early stages, use an experienced senior consultant to help develop the people strategy and plan. This can be reviewed and revised as your business grows. The consultant can also coach and mentor your HR manager – so you don’t “outgrow” this individual.
- Over hire an HR manager when you hit a size of 20 to 30 employees - someone who has the desire and potential to function as a REAL strategic HR business partner. Not someone who will just fill out forms, process paperwork and follow orders. You need someone who can grow with your business as well as anticipate and help manage people challenges as they get more complex.
- YOU own this – you the CEO, the COO, the CFO, the managing partner, the manager, the HR professional. You own this responsibility together.
- Develop New Clean Energy Sources: In order to wean the nation off wasteful petroleum products and to create new markets for U.S. energy products abroad, develop new and cleaner energy sources,
- Develop Next Generation Manufacturing Technologies: Create and install new manufacturing methods so America can again create its fair share of the products we use and to revitalize the domestic job market,
- Implement a networked system of Electronic Medical Records to lower healthcare costs and improve patient care,
- Connect the country with broadband networks that reach into every neighborhood and household, every school and library, and every hospital and public safety office through a combination of new investments, reform of the Universal Service Fund, better use of the nation’s wireless spectrum, promotion of next-generation facilities, technologies and applications, and new tax and loan incentives,
- Make Americans more safe and secure by moving away from antiquated 1970s and 1980s-based technology to modern interoperable public safety communication networks,
- Upgrade Education To Meet The Needs Of The 21st Century: Harness new technologies to transform the way teachers teach and students learn. Ensure all public school children are equipped with the necessary science, technology and math skills to compete and win in the 21st century economy.
- Expense Reimbursements – Where the Parent books revenues and essentially sub-contracts its Subsidiary to perform services on its behalf, the Parent should normally reimburse the Subsidiary for the expenses incurred in performing those services plus an appropriate profit margin or “mark-up,” in accordance with tax guidelines. The expense reimbursement is a permanent cash and profit transfer that reduces the cash and profits earned by the Parent and increases the cash and profits (or reduces the losses) of the Subsidiary by the amount of the cash transfer. In some foreign jurisdictions, Value Added Tax (VAT) or other indirect taxes may apply to expense reimbursement or sub-contracting transactions.
- Loans – A Subsidiary’s short to medium term funding needs may be more efficiently addressed with an intercompany loan than with a local bank loan for a variety of reasons. When an intercompany loan is extended, the Parent records an asset in its books (Loans Receivable) and the Subsidiary records an offsetting liability in its books (Loans Payable). In cases where repayment remains probable, the current P&L impact would be limited to the offsetting interest income/interest expense recorded by the Parent/Subsidiary as well as any unhedged currency related gains/losses which arise when the Parent and Subsidiary have differential functional currencies. Interest rates should be established based on “arms length” principles, in accordance with the term and currency of the loan, and tax guidelines. In some foreign jurisdictions, withholding taxes or other indirect taxes may apply to interest payments. If loan repayment becomes unlikely/improbable, a write-off may be required with the Parent absorbing the full adverse P&L effect.
- Cash Advances – Intercompany Cash Advances are normally short term in tenure and bear no interest income/expense. Some countries may not allow intercompany cash advances, and in those cases, an interest bearing loan may be the only interim intercompany funding alternative. The current P&L impact associated with a cash advance would exclude interest, but may include currency related gains/losses if the Parent and Subsidiary have different functional currencies. If a repayment risk arises in the future, the Parent may need to absorb the full adverse P&L effect of a write-off.
- Investment – When a Parent increases its investment in its Subsidiary to provide adequate working capital, capital asset or operating expense funding, it records a long term asset on its books and the permanent equity of the subsidiary is increased by the same amount. The P&Ls of the Parent and Subsidiary are not immediately affected by this investment. Depending on the country, equity increases may be recorded as “capital stock”, “paid-in capital”, “capital surplus” or “loss compensation”.
- Symmetry – With few exceptions, Parent and Subsidiary transactions must be recorded as proper mirror images in the statutory accounts; a Parent’s loan receivable must be offset by the Subsidiary’s loan payable, a Parent’s investment in Subsidiary must be offset by an increase in the Subsidiary’s equity account, etc.
- “Arm’s Length” principals in accordance with tax guidelines must apply to the establishment of “markups” or profits on expense reimbursements and interest rates on loans. The arm’s length interest rate will be influenced by both the currency in which the loan is denominated and the term of the loan.
- P&L - Immediate full P&L affects associated with fund transfers are largely avoided with loans, cash advances and equity investment alternatives, provided that the loan and advance repayments remain viable and the investments do not become “other than temporarily impaired”. If cash advance or loan repayments become unlikely and/or investments become “other than temporarily impaired”, the Parent’s P&L will be adversely affected by the amount of the required “write-off” or “write-down”.
- Currency - Where the Parent and Subsidiary have different functional currencies, foreign exchange (currency) related P&L impacts associated with expense reimbursements and loans/advances may occur without offset, unless the currency exposures are hedged. The transaction currency will dictate which party bears the currency risk.
- Indirect Taxes & Income Taxes – Indirect taxes such as VAT, withholding taxes, stamp duties, etc., together with income taxes, should be taken into consideration when assessing the total cost and efficiency of various funding alternatives for the Subsidiary.
- Consolidated Accounts – In accordance with US GAAP rules, the financial statements of majority owned and controlled subsidiaries (with few exceptions) must be consolidated with the Parent Company financial statements. Intercompany transactions that are reflected on the statutory books of both the Parent and Subsidiary are “eliminated” in the “consolidation” process. The profits and losses of Majority owned or controlled Subsidiaries are reflected in the Parent’s consolidated accounts.
Help! I Need More HR
June 6, 2010
by Iona Harding
I am often contacted by CEOs of small or mid-sized businesses with a plea that sounds something like this: “Help, I need more HR.” In every case, they had two things in common, regardless of their industry. First, their company had hit an inflection point. These are points where people problems arise as a natural by-product of company growth and development, resulting in loss of engagement, turnover, frustration, employee relations issues (usually because of poor supervision), pay and benefits costs and complexity. Second, they had NO HR professional on staff or, had an administrator with the title HR Manager, who basically processed paperwork.
In all my years as an HR executive and consultant, I have rarely seen a start-up “start” with an HR strategy or an HR professional on the founding team. I’m not suggesting that they always should. However, I am suggesting that they can anticipate and think strategically about a people and talent strategy and bring on HR expertise earlier rather than later. Companies that do this will have a true strategic advantage in the marketplace.
The table below outlines some inflection points for small businesses and a few of the HR opportunities and challenges that business leaders can anticipate and plan for.
Inflection Point | | Number of Employees | | Some HR Management Opportunities and Challenges |
| Conception to Inception | | 10 – 12 | | |
| Inception to Initial Growth | | 12 - 20 | | |
| Early Growth | | 20 - 30 | | |
| Ongoing Growth | | 30 - 50 | |
So, HOW is this done and WHO does it?
Economic Stimulus – Fact or Fiction?
October 19, 2009
by John Marinho
Clients often ask about the economic stimulus funds made available by the federal government, and whether they may be eligible to apply for some of the funding in order to support their business initiatives. More often than not, the answer is yes, and indeed clients that align with the objectives of the economic stimulus act are very likely to get favorable treatment – the key is to apply for the funding.
The American Recovery and Reinvestment Act of 2009 (ARRA) was passed into law by Congress and the President in February of 2009. The Act appropriated $787 Billion Dollars to promote economic recovery, job creation, and entrepeneurship so as to transform the US’ economy into a model for the 21st Century. The Act looks to establish key investments in critical sectors and next generation technologies in energy, healthcare, telecommunications, transportation, construction and manufacturing.
The guiding principles of the Act are based on economic innovation to drive growth and solve national problems by deploying 21st Century technology and infrastructure. The Obama Administration and the Office of Science and Technology Policy has stated that they are committed to advancing a comprehensive technology and innovation plan that will:
The act requires that all of the ARRA funds be allocated and spent by September of 2010. As shown in the chart below from the Recovery.gov website, one can see the change in spending focus over time through 2012. While all the funds must be spent by September 2010, per the statute, the project implementation horizon allows for a two-year period.
Private firms and public sector institutions are on relatively equal footing in applying for the ARRA funding. The actual funds are managed and distributed through various federal agencies such as the Department of Commerce, Department of Energy, Department of Transportation, Health and Human Services, Department of Agriculture, Treasury, etc. Each federal agency is responsible for its portion of the ARRA funds and they manage programs to distribute the funding in three basic formats: 1. Grants, 2. Loan Guarantees, and 3. Tax Credits, or payments in lieu of tax credits. Each agency provides for and manages an application process whereby private firms, states and local municipalities can apply for the funds based on the schedule and guidance documentation that each agency provides in support of the Act. Such information can be found on the agencies website under the heading of Recovery.gov.
As of October 2009, the federal government has announced and committed $309 Billion Dollars and spent slightly over $110 Billion Dollars in paid out funds. It’s anticipated that the bulk of the ARRA funds will be spent between now and September 2010. So indeed the opportunity for Stimulus Funding is a Fact, but act quickly because the time is now to consider whether a project, technology or start-up initiative fits within the ARRA funding opportunity.
When do I … ?
October 9, 2009
by Lou Wagman
I am often asked by clients who are early-stage technology entrepreneurs “when do I start contacting potential investors and strategic partners”. My answer is that it is never too early. Even if a company is not ready for angel or venture capital financing, it’s never too early to start establishing relationships with potential funders. If you have selected funds or angels who are interested in the technology sector you are playing in, who invest in the geographical area you are located in, and who have an appetite for earlier stage companies, they may want to learn what you are doing and start tracking your progress. Remember that venture funds and angels are always interested in learning where technology is moving so that they can be at the head of the pack rather than the rear. It takes little effort on their part and yours to stay in touch – perhaps as little as a conversation every three months. And when you start to approach their investment threshold, they already know a lot about you, especially how well you do in meeting your business goals and how credible you are.
The same holds for strategic partners. But here one needs to be very selective so that you do not waste their time and yours. Identifying your appropriate potential strategic partners requires careful research. It’s not only the obvious fact that your product or service may be important to their business. It’s also how they do business. Do they go outside for new technology and products? Are they an active acquirer? If so do they have a good reputation for working with outside companies? Are they a leader or a laggard in their field? But don’t forget that sometimes it’s the laggards who are most open to new products and services that will get them out front of their competitors. Once you have done this screening, you need to determine where to make contact within the organization, especially if it’s a large company. You need to identify the person who will become your champion.
So why have I come down so strongly on it being never too soon? The reason is that more times than not, by the time the entrepreneur starts his quest for funds it’s too late. Entrepreneurs typically become mobilized about six to twelve months before they run out of cash believing it’s ample time to get additional financing and establish strategic relationships. Unfortunately, the process often takes longer than a year and being desperate is not the time to be seeking and negotiating financing. This plays to the advantage of the funder, not the entrepreneur. So err on the side of starting too soon, not too late.
If you’d like to comment, please visit the “When Do I? ” Discussion as part of our Res Partners Group on Linkedin. If you are not a Res Partners Group member on Linkedin, please request a membership.
Pay Now or Pay Later?
September 7, 2009
by Carol Stuckley
Avoiding the Pitfalls of Intercompany Funding
Nascent private US companies are often lured into overseas expansions, before they fully comprehend the consequences of the capital structure and operating decisions associated with each of the foreign legal entities they establish during the expansion process. The initial temptation may be to finance foreign subsidiaries via a series of short-term intercompany loans or cash advances. If the private US company does not prepare consolidated US financial statements, any losses by the foreign subsidiaries will not be reflected in the stand alone US financial statements, at least not in the short term.
There are many considerations when evaluating alternatives for “funding” foreign subsidiaries. Expense reimbursement alternatives will affect the P&Ls of both the Parent Company and Subsidiary immediately. In contrast, loan and investment alternatives will predominantly inversely affect the balance sheets of both companies, normally without an immediate or substantial P&L affect. The following discussion will focus on a Subsidiary obtaining funding from its US Parent which does not prepare consolidated financial statements.
Intercompany Funding: Alternatives & Implications | Permanent Cash Transfer? | Permanent Profit Transfer? | Permanent Capital Change? | Immediate and Direct P&L Impact? |
| Expense Reimbursements | Yes | Yes | No | Full, FX |
| Loans (1) | No | No | No | Interest, FX |
| Cash Advances (1) | No | No | No | FX |
| Investments (2) | Yes | No | Yes | No |
Notes:
(1) Assumes repayment of loans & advances remains feasible.
(2) Assumes investment is not “other than temporarily impaired” & written-off.
FX = Foreign Currency related gains & losses due to transaction exposures.
Care must be taken in the selection of the permanent capital investment account as many countries charge stamp taxes or other duties/fees when capital stock is increased and many require that certain actions be taken when capital stock is eroded by operating losses beyond a specific percentage. Investments via the “Paid-In Capital” or “Capital Surplus” accounts (vs. the Capital Stock Account) are normally more flexible and normally do not attract stamp taxes and other duties. In accordance with Fair Value concepts, a P&L charge could become necessary if the Parent’s investment in Subsidiary became “other than temporarily impaired” as evidenced by eroded local equity (i.e. fair value less than value on the Parent’s books) and projected ongoing operating losses.
A few guiding principles regarding Statutory Accounts:
In summary, a non-consolidating US private company may be able to maximize US profits in the short term by funding foreign subsidiaries via loans, cash advances and/or investments in its Subs, without the immediate reduction in US earnings that would result from the direct reimbursement of the Subsidiary’s expenses. If over the medium to longer term, however, the Subsidiary continues to incur chronic losses so that cash advances/loans cannot be repaid, and/or the investment in Subsidiary becomes “other than temporarily impaired”, the non-consolidating US Parent company will at that time need to recognize an appropriate P&L charge on its statutory books. The P&L charge will reflect the “write-off” of the loan or cash advance and/or the “write-down” of the impaired investment in a Subsidiary.??
The adage “Pay Now or Pay Later” therefore applies when the foreign Subsidiaries of a non-consolidating US Parent Company are not able to earn profits and maintain positive net equity in the medium to longer term. The previously deferred P&L charges on the US Parent company books will eventually appear as a “write-off” of the loan or cash advance and/or a “write-down” of the impaired investment in Sub. In contrast, the consolidating US Parent company has no “Pay Now or Pay Later” flexibility, beyond its statutory accounts.
Hidden Money Trees
August 7, 2009
by Carol Stuckley
Many small business CEOs actually wear multiple functional hats at various levels of their organizations. In addition to being the Chief Financial Officer, VP of Sales and Chief Marketing Officer, these multi-tasking CEOs are also likely to fix the plumbing and empty the trash bins before locking up at the end of the day. Because of the numerous competing demands for their time and talent, cash generation or cash flow optimization may not always receive a high priority focus. As viable financing opportunities become increasingly challenging to locate in this economy, CEOs increasingly look for help with meeting their cash requirements via efficiency improvements, but often miss underlying cash generation opportunities.
Our focus is to help clients “harvest cash from their hidden money tree”, by tapping into concealed or underappreciated sources of cash that may have been overlooked. As a consequence, we have been able to achieve meaningful cash position improvements, often with modest efforts. Cash generation can be achieved via improved balance sheet management in some cases while in other circumstances operational solutions may provide greater impact. Operational solutions for service companies may include contract revisions that increase the percentage of total contract due upon signing, accelerate the timing of payment milestones, and reduce the payment terms granted with each milestone achievement, all without diminishing competitive advantages.
In the balance sheet management arena, the collection of past due receivables may constitute a prime source of newly found cash. Since collection efforts are often subordinated to more strategic priorities, the collection of past due accounts may prove a rapid source of newly found cash for many small companies. In other organizations, cash flow may be enhanced via improved inventory management processes and/or lengthened payment cycles.
Working directly with each business to understand their unique circumstances, we help “harvest cash from hidden money trees” by customizing cash generation solutions that ensure that there is more cash-on-hand to support business needs, both today and in the future.
Marketing - Taking Aim
July 28, 2009
by Ilene Chunko
In this economy, almost every business is either struggling to stay “even” or looking for new customer segments, or new sources of revenue. What they want is “more sales”, and therefore look for salespeople to deliver.
What they often overlook, especially in the business-to-business environment is marketing. Marketing is not only advertising, nor is marketing creating pretty brochures, websites or other forms of collateral . . . those activities to develop awareness and create communications across multiple channels are the result of the essence marketing. True marketing is both an art and a science.
The science is the research, analysis, and synthesis of market trends, unfulfilled customer demand, competition and how your product(s) or services(s) are positioned in that environment. The outcome of the analysis is tactics and key messages that can be used to help sell your product.
The art of marketing comes from the creative ways to “package” your product or service by branding, advertising, image, catch-phrases and communicating that through the myriad of possible channels.
Sales on the other hand is looking at each customer, and determining how they can persuade them to sign on the dotted-line. Marketing is an assist to open the doors, create awareness, and arm Sales with information. In the B2B space, many times a sale is made because of the perception of a salespersons’ credibility and trustworthiness, rather than the product alone. Sales has to get close to a potential customer account, understand the customers’ decision making process, and the key pain points or opportunities the product or service might resolve. In the salesperson’s world it’s all about the specific account and helping a potential customer see a benefit. Marketing is also often used on an account by account basis, but only after the broader analytical foundation has been established.
For consumer companies, where a product or service can often be purchased from many different outlets, that same perception of value or trust that a salesperson creates in the B2B space must be created more robustly by marketing for the brand.
I find more and more companies are asking for more marketing but are really referring to new websites, campaigns or collateral to help them increase sales. The error I see repeated is that they want these marketing communication tools without the prerequisite of the research, analysis and synthesis of market opportunities or threats. These creative activities are a waste if not properly informed and directed by the analytical-side of marketing …it’s like firing a gun when you don’t know the target.
Especially in these economic times, if you want to use your marketing dollars effectively, never skip the analytical tasks. Once you know where to aim you lower the risk and improve the outcome; whereas firing without tends to miss the intended target.