The Portland Startup Tax – Bad Entrepreneur Behavior

Last week at Immix Law Group’s PowerUp Event on fund raising we discussed the Portland “startup tax” that local entrepreneurs pay when raising capital. My last post looked at the tax entrepreneurs pay due to lack of local capital. Now I want to look at bad entrepreneurial behavior that makes building well-funded scalable businesses harder. Too often Portlanders get in their own way.

Growth capital is looking for companies that can scale to a big exit. To attract capital, companies need to structure for investment and scale from the beginning. There are several best practices often missed by Portland Entrepreneurs:

Delaware C Corp

Half the early Portland startups I see who are looking for early funding are Oregon LLCs. Another third are S Corps. When raising money, optics is important. An LLC communicates that you’re not sure what you want to be when you grow up. An S Corp is even worse. Oregon needs to get past a well-deserved reputation for no-growth life style companies. An S Corp tells me the entrepreneur is running the company to maximize their personal tax benefits. A C Corp, in Delaware provides the optimal accommodation and protection for investors. It says from the beginning that you are in it to grow a big company and make money for all involved.

Get Lawyers and Accountants that work with Silicon Valley VCs

There are well established, hard won “rules” for high-growth startups; best practices that have evolved over decades. Some corporate lawyers are fluent in this game. Unlike many legal situations, they know optimizing their client’s position means staying within norms and providing balanced documents; not trying for client advantage in the short term. It means playing for a five to ten year growth curve. I’ve had multiple capital raises where we minimized cost by convincing the investors to go bare and just use company lawyers in drafting and executing documents. This was possible because they trusted the lawyers were operating within comfortable norms.

Entrepreneurs can easily get up to speed on the High Tech Growth game through blogs and sites that lay out best practices and model legal agreements. Portland has several Law firms facile with Silicon Valley Venture investing. If you want access to VC capital use one of these firms. In fact, they generally charge very little (if anything) to get a company set up and on this path because they understand the cost of early money and how large potential fees will be when a company finds scale successfully.

Structure your Cap Table by working backwards from your exit

An entrepreneur building a $100 million plus company should be able to layout what the company cap table looks like at $100 million: founders shares, a couple rounds of financing, employee options, a few shares for advisers, and warrants for banking and other partnerships. An entrepreneur that lets a Seed or Series A valuation be driven solely on a handful of beta customers and a MVP is not setting up for growth. Early validation and traction should be accompanied with a vision for a large addressable market and a credible plan for scale.

More than once I have found myself as an early investor in a Portland startup struggling to find capital because of a cap table messed up with low valuation early financings.

Vesting for all Founders shares

Founders and investors need protection against a founder or early employee leaving and taking too many shares. Four year vesting ensures everyone is in it for the long hall and if there isn’t a fit, the company can recover shares to adjust. Starting a four-year vesting day one protects the founders, communicates the right thing to investors and prevents a painful reset of the vesting clock later.

Intellectual Property discipline from day zero

Track every line of code from day one. Establish proprietary rights agreements with every contributor. Track open source licenses carefully. Getting IP assignments after the fact is always hard and expensive. Take it seriously and behave like your effort is valuable from the beginning. This makes it far easier for an investor (or acquirer) to take it seriously and value it later on.

Too often Portland entrepreneurs don’t do these out of ignorance or neglect. You already have to explain to potential investors why you’re in Portland and how they can make money here. Showing you understand drill can minimize a painful Portland startup tax.

The Portland Startup Tax – Lack of Local Capital

Last week I presented at Immix Law Group’s PowerUp Event on fund raising. It gave me the opportunity to discuss the Portland “startup tax” that local entrepreneurs pay when raising capital.

It’s no secret that raising capital in Portland is harder than in the Silicon Valley or even in Seattle. Portland has so little native investment capital. Check any credible source, like the NVCA Year Book, and you’ll see that Oregon has double digit millions under professional management. These numbers barely register on the same graph as Washington, which has single digit billions. You can’t even get Portland’s amounts to show up on a graph when compared to California’s nearly triple digit billions, even with a log scale; California has over 4 orders of magnitude more capital under management relative to Oregon.

This means Portland entrepreneurs have to raise money from elsewhere and pay a tax in the form of: time, valuation, and lower levels of support. Fund raising outside the area takes more effort than fund raising down the street. And because it’s harder to get investor attention, fewer investors result in lower valuations. This means Portland companies give away more company for less money.

Plus once they get VC money, Portland entrepreneurs receive less benefit than companies local to a venture group’s networks and support. CEOs outside Silicon Valley constantly bitch about VCs only investing in companies in easy driving distance. But this is a real practical consideration. Not only does it require less partner time, but support in the form of mentoring, introductions, and educational sessions are higher return with tight nit groups of local companies. Portland entrepreneurs get fewer opportunities for help at a higher cost than their Silicon Valley based sister companies in the same VC portfolios.

This part of the startup tax will never entirely go away. But it will get better as Portland’s many successes attract more capital at a lower cost, and Portland companies represent a higher density in VC portfolios.

I think the more interesting contributor to the startup tax is our own bad behavior. In my next blog posts I’ll discuss how we need to get out of our own way. Our own bad behavior, by both Portland entrepreneurs and investors, contribute significantly to the tax we pay.